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What Is a Private Placement Offering?

Investors are always seeking new opportunities to bring riches or, at the very least, secure a lucrative and comfortable retirement income. Private placement offerings are gaining some traction among investors in recent years. However, many questions remain about the potential risks and rewards of these investment options. The better you understand the basics about private placement offerings, the more informed choices you can make when investing your hard-earned cash.

What Is a Private Placement Offering?

Simply put, private placement offerings are initial offerings of unregistered securities that are only available to a limited number of investors (either private individual investors or institutions). The U.S. Securities and Exchange Commission regulates private placements through a series of rules known as Regulation D. Within the scope of these regulations, companies are allowed to issue varying amounts of securities without registering them with the SEC. In other words, unlike securities traded and sold on the open market, private placement offers are largely unregulated.

These types of “offerings” are increasingly common, especially among start-ups in various industries and have become popular tools for companies to secure start-up capital. Additionally, some companies desire the ability to raise funds for expansions and other purposes while remaining private. Regardless of the reason, many businesses are opting for private placement offerings rather than traditional trading which invites greater regulatory actions, increased reporting obligations, and a loss of autonomy for business owners that private placement does not represent.

One thing investors need to be aware of with private placement offerings is that these are, by nature, long-term investments. They are not easily traded or bought and sold if you find yourself in need of fast cash. In fact, there are several distinct advantages and potential disadvantages to investors when it comes to private placement investing.

Private Placement Advantages for Investors

Perhaps the biggest advantage to investors when it comes to private placement offerings is the fact that you can demand a higher rate of interest than you would expect from a public offering. In fact, savvy private placement buyers will not buy a bond unless there is specific collateral securing the investment.

Another huge benefit for investors is that you are able to generate capital with fewer costs involved in doing so. By costs, we’re talking about the many fees that go along with traditional trading.

One additional benefit for investors with means who prefer some degree of privacy in the process is that private placement is, at its core, a private agreement and not a matter of public disclosure – unlike public offerings.

Private Placement Disadvantages for Investors

It’s not all sunshine and roses, though, when it comes to private placement offerings. In fact, many investors find the disadvantages of these types of investments to be sufficient deterrents. They include the following:

  • Increased risks. Because these investments do not have the same regulations as public offerings, investors are shouldering the burden of the risk if things do not work out.
  • Illiquidity. Secondary trading is not allowed on private placement securities, so investors are required to buy and hold until the securities reach maturity. Depending on the private placement offer, this could be a lengthy investment.
  • Inconsistent pricing and difficulty in valuation. It is nearly impossible to determine the ongoing value of your investment in the interim since there are no secondary markets to help determine that value.

The bottom line is that not all investors are comfortable with the uncertainty that goes along with private placement offerings. That doesn’t even cover the risks of fraud and misrepresentation that could be problematic with these types of investments. Especially with companies maintaining the ability to raise substantial funds through these offerings.

How Much Can Companies Make from Private Placement Offerings?

According to FINRA, the Financial Industry Regulatory Authority, Regulation D allows companies to issue up to one million dollars in unregistered securities, annually to any number and type of investor. However, it is possible, in certain circumstances, for businesses to use Rule 506 to raise an unlimited amount of money provided certain criteria are met. Disclosure requirements are also relaxed for private placement offerings provided they are selling to non-accredited investors. This places the onus on investors to perform due diligence and research businesses before investing in what could become an investment that is difficult, at best, to liquidate.

The Schwartz Law Firm understands that not everyone has escaped private placement offering investments unscathed. We are here to help you recover your losses in the aftermath of a loss due to fraud or misrepresentation. Contact The Schwartz Law Firm today to discuss your case and see if we can help you recover some of your losses from a private placement offering gone wrong.

Matthew Schwartz

Matthew Schwartz is a Shareholder at Schwartz, P.A. where he serves as the practice group leader for their securities litigation and professional negligence practice group. His practice is focused on plaintiff-side securities arbitration and litigation, representing individual investors and institutions in claims against brokerage firms, investment advisors, commodities firms, hedge funds and others. He also represents plaintiffs who have been damaged by their insurance agents, lawyers, accountants and other professionals. He is an accomplished commercial litigator who has handled a variety of business disputes and other consumer claims.

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