Private Placements 101
Sources: U.S. Securities and Exchange Commission, Indiana Secretary of State
What is a private placement?
A private placement, also sometimes known as an unregistered offering, is a way for companies to raise money from investors without having to conduct a public offering. Many of the companies that raise money this way are privately held startups. Private placements are not subject to some of the disclosure requirements and other regulations that public offering are.
Who can invest?
Generally, private placements are restricted to accredited investors. Accredited investors are individuals who meet one of two criteria: they earned more than $200,000 (or $300,00 together with a spouse) for the past two years and can expect to earn the same in the current year. Or, they (either alone or with a spouse) have a net worth of more than $1 million, not including the value of the individual’s primary residence. Private placements are sometimes available to non-accredited investors who are financially sophisticated – those with enough knowledge and experience to evaluate the investment.
Why might an investor want to invest?
Returns can be higher than with other types of investments.
What are the risks?
- It can be difficult for investors to learn about the company when deciding whether to invest.
- The investments are risky: if a company you invest in fails, you can lose all your money.
- The investments are illiquid. Generally, private placements tie up an investor’s money for years. Investors usually only get their investment back if the company is sold or goes public.
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