Private Placement Investment Considerations

  • Private offerings can be purchased directly from the issuer of the security during the offering period or through an agented, “best efforts” process managed by a FINRA-registered broker dealer acting as a “placement agent”.  Under US law, other than the issuer, only registered broker-dealers can conduct private placements as third-parties and receive compensation for such services. 
  • Any type of company can raise capital in the amounts they need through a private placement of securities.
  • Virtually any type of security can be offered to investors through a private placement including debt (such as promissory notes) or equity interests (eg. common stock, preferred stock or membership interest in a Limited Liability Company).
  • Investment in privately placed securities offers investors a significantly expanded universe of investment alternatives, but investors must also be aware of the greater increase risks associated with these securities.   Additional risks include:
    1. Illiquidity – Private placements are “buy and hold” investments.  Secondary trading (i.e. selling the security before its maturity) is not allowed and so broker dealers do not make secondary markets in private placements.
    2. Unaudited financial statements – There is no requirement that issuers of private securities have their financial statements audited by an accounting firm, though some do.
    3. Inconsistent pricing of similar securities – Since there are no trading markets, the pricing of private placements carrying similar risk can vary significantly.
    4. Difficult to determine the ongoing value of the investment – The lack of secondary markets makes it more difficult to independently determine the ongoingvalue of the investment, which is necessary for valuing personal financial statements and for estate-related transfers.
  • Private placements are subject to all federal and state securities regulations, including those related to misrepresentation or fraud.