Nathan Lee

Private Placements For Investor by Nathan Lee

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In general, private placements for investor by Nathan Lee are a way for companies to sell securities without going through the Securities and Exchange Commission (SEC) registration process. Private placement refers to offerings that do not involve a public offering, and that comply with an exemption to the registration requirements of the securities laws. Private placements must comply with various rules and regulations specific to the exemption (type of private placement) that is used. Private Placements that are exempt from federal securities regulatory requirements may still be subject to various state regulatory requirements such as notice and filing obligations. The rules and regulations covering individual states can be verified with that state’s security administrator.



There are many rules and regulations that need to have adhered to that surround fundraising. In general terms, it is against the law to offer or sell stock/securities unless you are licensed to do so or qualify for an exemption, and stock/securities must be registered with the Securities Exchange Commission (SEC) prior to offering or sale unless a qualified exemption is used. It is ill-advised for a company to make an offering of securities or bring capital into an entity without competent legal and other advisors having structured the transaction in compliance with the pertinent regulations. All securities transactions are subject to the antifraud provisions of the federal securities laws.


Generally, there are two documents that experienced purchasers of private placements expect 1) Subscription Agreement 2) Private Placement Memorandum (PPM). Subscription agreements are documents that spell out the various details of the purchase and are signed by both the purchaser and the company. A PPM will describe the company and the associated risks of investing in it. The required filing and delivery of disclosure documentation depend on the specific exemption used and the regulatory requirements of the related states. In general, subscription agreements should always be used, and in many cases, a PPM will also be needed.

There are several exemptions available, and a general summary of the more popular exemptions is provided below.


Private Offering Exemption:

This exemption is permitted under Section 4(2) of the Securities Act of 1933 and exempts from registration “transactions by an issuer not involving any public offering.” This exemption is also known as the general exemption.


Highlights Include:

  • Purchasers must agree not to distribute or resell any of the securities purchased in the offering to the public.
  • Purchasers must be able to bear the investments economic risks or be considered a “sophisticated investor.” A “sophisticated investor” possesses the knowledge and experience in business and finance matters to evaluate the risks and merits of the investment
  • Purchasers must have access to information (the type of information that is normally found in a prospectus)
  • Public solicitation or general advertising is not allowed.
  • No clear-cut limits for the amount of money that can be raised. It is more difficult to qualify for this exemption as the number of purchasers increases. If a company offers securities to even one investor who does not qualify for this exemption, the entire offering may be in violation of the Securities Act of 1933. Because of the ambiguities involved with this exemption, “the general exemption,” a number of more clearly defined “safe harbor” exemptions were created and are discussed more fully below.
  • Rule 506 of Regulation D, one of the additional “safe harbor” rules, provides objective standards that can be relied on to meet the requirements of this exemption.


Intrastate Offering Exemption:

This exemption is permitted under Section 3(a)(11) of the Securities Act of 1933. This exemption is specifically intended for the financing of local business operations. It is the responsibility of the company to ensure that every purchaser is a resident of the sole state the offering is conducted in. A single share sold out of the state during the distribution period may result in the offering being considered a violation of the 1933 Act.


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Highlights Include:

  • The offers and sales must be made only to residents of a single state, and it is the company’s responsibility to determine the residence of each purchaser.
  • The company must be incorporated in the state where it is offering the securities.
  • The company must carry out a substantial amount of its business in that state (Usually, the company must derive at least 80% of its revenues from the state and have 80% of its assets located in the state)
  • Purchasers may not resell any of the securities to any person who resides outside that state until the distribution is complete, or the entire transaction may be found in violation of the Securities Act of 1933 (Usually, the test is nine months but can be longer)
  • Procedures must be followed to make sure that purchasers are not purchasing the securities for resale. One example is that certificates must have a “restrictive legend” stating the resale restriction.
  • No required limits on the amount of capital raised, number of purchasers, or financial sophistication of the purchasers
  • Rule 147, a “Safe Harbor” rule, may be used as a guideline to ensure compliance, but the offering may still be in compliance even though it does not meet all the requirements of Rule 147
  • No required SEC filings, but state laws must be adhered to


Regulation A Exemption:

This exemption is permitted under Section 3(b) of the Securities Act of 1933. Generally speaking, all companies that do not report under the Exchange Act of 1934 can use this exemption, but there are some exceptions, such as blank check companies, investment companies, and others. Reg A offerings are similar to registered offerings in that an offering statement must be filed with the SEC for review, the securities issued are free trading, the securities can be offered publicly, and purchasers must be provided with an offering circular that is similar in content to a prospectus.


Highlights Include:

  • The company must file an offering statement consisting of a notification, offering circular, and exhibits with the SEC for review (Form 1-A)
  • In most cases, the company must provide purchasers with an offering circular (similar in disclosure to a prospectus). There are three formats a company can choose from in preparing the offering circular. One form is in a question and answer format and is known as a SCOR or ULOR form.
  • The shares sold under this exemption are freely tradeable as opposed to being restricted.
  • Audited financial statement is not required, but two years of unaudited financial statements are required to be filed with the SEC (However many states will require audited financials)
  • There are no Exchange Act of 1934 reporting requirements after the offering unless the company has more than $10,000,000 in total assets and more than 500 shareholders.
  • The company may “test the waters.” This means that the company can circulate information to the public to determine if there is enough interest in the company before undertaking the expense involved in filing with the SEC. The company may not actually solicit or accept money until the SEC has finished its review of the offering statement and the required offering materials have been delivered to investors.
  • No restrictions on the number or sophistication of the purchasers
  • This exemption contains “bad boy” provisions and is not allowed for companies that are closely associated with individuals that have been potentially engaged in certain acts of misconduct related to the securities laws. The SEC can waive this misconduct disqualification, but legal counsel should be sought if there are any questions related to this subject. Section 252(c)-(f) of Regulation A contains more detailed information on this subject.


In conclusion, there are several exemptions available for companies that want to raise capital without going through the SEC registration process. The securities laws of the individual states that offers or sales are made in may have additional requirements that need to be adhered to. The complexity of the state and federal securities laws and the severe penalties for non-compliance makes qualified legal and other advisors critical for companies wishing to raise capital.