Private Placement Offerings versus Publicly Registered Securities

  • Under the US federal securities laws, all securities offered for sale to investors(both debt and equity) require registration with the Securities Exchange Commission (SEC) unless the securities qualify for one of the exemptions from registration which are specified in the Securities Act of 1933 (the “Act”).  The manner of offering a privately placed security falls under Section 4(2) of the Act.


  • Publically registered securities, which are issued by larger, more established companies, enable issuers to raise larger amounts of capital at a lower cost of funds, or in the case of equities, a typically higher company valuation.    


  • Public registration enables secondary market for the securities whereby investors can unilaterally sell the investment at their discretion following their initial purchase.  Public offerings of securities require sponsorship from a FINRA registered broker dealer that underwrites the initial offering and commits to make a secondary market in the security.


  • Private securities, on the other hand, are often issued by relatively small and much younger companies and in amounts and on terms providing the issuer the maximum flexibility.  Because there is no SEC approval required, offerings can be arranged relatively quickly.  


  • Private placements must be held to their maturity in the case of debt, or if equity securities, until the company is sold or publically registers its stock. Because of the “illiquidity”  (i.e. the investor’s inability to sell the investment to a third party until it has matured or has been otherwise been redeemed by the issuer), privately placed securities involve a cost premium versus publically registered securities.


  • Private offerings of securities can be conducted directly by the issuer or through an agented, “best efforts” process (i.e. non-underwritten) using a FINRA-registered broker dealer as a “placement agent”.  Under US law, only registered broker-dealers can conduct private placements as third-parties and receive compensation for such services. 


  • All publically registered securities are filed with the SEC, which has approved the breadth and manner of the information disclosed by the issuer.  Importantly, the SEC does not approve an issue on its investment merits, only to the degree that the disclosures meet the standards for public registration (audited financial statements, length of operating history, etc.).  


  • Private placements offered in conformance with Regulation D of the SEC must also file with the SEC, but the offering is not approved by the SEC, rather a history of the offering is kept on file.  Disclosure standards are not specified for private placements, but if they ultimately prove to be fraudulent or misleading it could lead to criminal prosecution for the parties involved with the offering.