A Private Placement is a capital transaction between an issuer, the entity seeking to raise capital, and an investor, or group of investors. When discussing a private placement, its usually in the context of a private company raising capital; however, public companies will also seek to raise capital using a private placement. In the latter case, this type of transaction is known as a “PIPE,” which stands for private investment in a private entity.
Private placements fall under what is know as Regulation D, or Reg D of the Securities Act of 1933. Private placements are also sometimes called Reg D offering. Reg D is what provides for the registration exemption under the Securities Act requirement that any offer to sell securities must either: 1) be registered with the SEC, or 2) meet an exemption. The exemptions provided under Reg D are known as Rule 504, Rule 505 and Rule 506.
Private placements can be used to raise many different types of capital, including equity, preferred equity, membership units, debt, subordinated debt, and partnership units. It is important to note that all of these instruments are securities as far as the SEC is concerned.
Private equity funds, mezzanine funds and real estate funds all raise money using a private placement. These funds, which are also known as “blind pools,” raise private capital for their investing activities with an offering memorandum.
Other types of transactions that can raise capital through a private placement include start-ups and early-stage companies looking for capital; indie film producers seeking funds to finance their film project; business owners seeking capital to grow or to finance an acquisition; franchisees seeking to acquire a new franchise; all sorts of real estate transactions, and the list goes on.
A private placement is a viable method for raising capital to finance a transaction. Whether its filling in a hole in the capital structure, replacing a traditional source of capital like a lending institution, or leveraging other people’s money, the next time you’re thinking about raising capital, consider using a private placement.