Private Placements (Regulation D Offerings)
Private placements are investment offerings limited to a small pool of
investors, and not open to the general investing public. In the United
States, private placements must comply with the disclosure requirements
of the Securities Act of 1933 (Securities Act). However, securities offered
do not have to be registered with the SEC if the issuance of the securities
conforms to an exemption from registration set forth in the Securities
Act and SEC rules promulgated thereunder. Thus, instead of a prospectus
which is part of a registration statement filed with the SEC, private
placement securities are typically offered through a Private Placement
Memorandum or "PPM." Most private placements are offered under
SEC Regulation D and are sometimes called "Reg. D" or "506"
Private placement offerings include shares of common stock or preferred
stock or other forms of membership interests, including interests in hedge
funds, warrants or promissory notes (including convertible promissory
notes), bonds, and debentures. Purchasers are often institutional investors
such as banks, insurance companies or pension funds and high net worth
individuals. Private placements are widely used in venture capital investing
with various "rounds" of offerings of restricted securities
in the venture company. (See article "
Venture Capital Investing and the JOBS Act.") Another common use of private placements are PIPE offerings which
are private investment in public equity. PIPEs are used by public reporting
companies that for whatever reason are unable to access the public equity markets.
In making an investment in a private placement you should receive a PPM
before making your investment. The PPM is required to disclose all material
facts about the investment and any misrepresentation of a material fact
or omission of a material fact necessary to make the statements made in
the PPM not misleading may make promoters of the private placement responsible
for financial losses caused by the false statements. Claims arising for
a misleading PPM include violations of federal securities laws (Securities
Act of 1933) and violations of state securities laws (also known as Blue
Sky laws). State law claims based upon the common law such as fraud and
breach of fiduciary must also be considered. You will also be asked to
complete a "Subscription Agreement" prior to making a private
placement investment. The Subscription Agreement should include an accredited
investor questionnaire used to establish whether you are an "accredited"
investor as defined under SEC rules.
On April 4, 2012, President Obama signed into law the Jumpstart Our Business
Startups Act. The so called JOBS Act is a congressional attempt to force
the SEC to adopt less restrictive rules on the raising of money through
private placements or exempt offerings. (See article "
Venture Capital Investing and the JOBS Act.") The impact of this new law is uncertain since many of its provisions
require adoption by the SEC of new rules before such provisions are effective.
What is likely is that advertising private placements including solicitation
on the Internet will be allowed and smaller companies will have the ability
to raise up to $1 million annually through "crowdfunding" offerings.
Despite the JOBS acronym, the Act is likely to lead to a number of new
private placement investment scams. As one convicted securities fraudster
commented about the JOBS Act, "I wish legislators would consult with
people like me before they write something like this. I could tell them,
I know what your intent was with this wording, but we can get around it
so easily, it cracks me up." Over the Internet and through crowdfunding
portals, investors should expect to see an explosion of private placements
offerings directed at the small investor.
As with investments in hedge funds, securities fraud claims arising from
a private placement investment can take many forms. Fraud in the PPM (the
making of a material misrepresentation or omission) as well as wrongdoing
in the day-to-day operations of the company or investment fund can give
rise to federal and state securities law claims as well as claims under
state law for breach of fiduciary duty, negligent or intentional misrepresentation
and breach of contract. If you have suffered a loss from a private placement
investment, you may have a right to sue to recover your losses.
If you have questions about your investment in a private placement offering,
or if you believe you have been the victim of wrongdoing, please contact
Pearson, Simon & Warshaw, LLP's senior securities litigation counsel,
George Trevor, for a confidential evaluation of your investment. You may
contact Mr. Trevor by e-mail at
firstname.lastname@example.org by telephone at (415) 433-9000.
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