Did you know that most real estate partnerships that look for broader participation have to follow the SEC (Securities and Exchange Commission) regulations, which outline as well as control the process of raising finance through solicitation? The Securities Act of 1933 provides exemptions for a private placement or private offering from federal securities registration. And both public companies and private companies are increasingly using this in order to raise capital during times of market uncertainty and market downturns.

Private Placement Market and Prospectus 

Did you know that the private placement market is also called the “exempt” market? This is because companies who use it do so under the various exemptions from securities laws. These laws govern public markets as well as companies. Also, it is worth noting that when a company raises funds in a public market, it has to file a prospectus with the SEC in every territory or province where the company intends to sell its securities, such as shares or bonds. 

You probably know that the prospectus is a financial document that has detailed information about the business offering the shares or other securities, its financial situation, and the risk factors that can impact its business. 

A private or public company can offer a private placement investment to investors in order to raise money for its operations or expansion by issuing securities without a prospectus. 

However, you have to keep in mind that these securities, such as stocks or bonds, do not trade on a public stock exchange. The great news is that issuing a private placement is a cost-effective and practical means by which an organization can raise finance for its operations. However, keep in mind that the process involved is not as popular or well-known as many other public market alternatives. 

Benefits of Private Placement

There is no doubt that private placement is beneficial as it is usually more affordable and less time-consuming compared to public offerings while offering an excellent source of income for your company. 

How you can Complete a Private Placement 

The following are the main steps that are involved in issuing a private placement.

Determine the Amount 

First, a company or syndicator determines how much money it wants to raise from the placement. You have to choose one potential deal and then design an equity offering around this deal. Note that deal launch is the process that initiates the window of time from which this issue is offered to investors, to the time a decision has to be made. This is typically one to three weeks.

Meet with an Attorney

The next step involves meeting with an attorney that specializes in private placements. Their help can be invaluable if this is your first private placement. Discuss with the attorney what you would like to do. Some of the aspects you should consider are:

  • Number of investors
  • Amount of capital planned to be raised 
  • Number of non-accredited investors if doing a Reg D 506 b offering
  • Unlimited accredited investors if using a Reg D 506 c exemption 
  • Voting rights, if any, of investors 
  • Fees the syndicator will charge 

The negotiations step will also kick-off, and discussions will take place between the investor and issuer on the specifics of the investment. And it is worth noting that negotiations will usually continue to take place until the closing.

Keep in mind that the cost of entry is quite high. For example, initial syndication documents and guidance from a reputable attorney may cost from $8,000 to $20,000. However, the good news is that you will get financial and legal documents for future deals at a considerably lower cost. You can also use eVest and its Reg D 506 c platform as it eliminates the need for expensive attorneys and use its subscription and operating agreement “templates” and it’s unique digital PPM. eVest digitizes the entire syndication platform and organizes and facilitates your capital raise.

Choose the Type of Investors

In most cases, your attorney will likely recommend that you work exclusively with accredited investors. Did you know that Rule 505 and Rule 506(b) allow up to 35 non-accredited investors?  And if you are a syndicator who is just starting, then this can be tempting for many reasons. 

For example, note that working with accredited investors only (Reg D 506 c) is usually less time-consuming and more affordable than their non-accredited counterparts. You can also utilize the General Solicitation exemption under 506 c.

And that is not all; usually, it is believed that accredited investors can afford to lose their financial investment without financial or economic ruin. This is why unexpected losses and delays are less stressful for these individuals. And, note that this, in turn, makes the process less stressful for you, which is excellent. 

On the other hand, there are more stringent reporting standards and legal requirements when you work with non-accredited investors. You will also have to provide audited financial statements and other information as per Rule 502(b).

Pricing

The next step is the pricing stage. During this critical stage, the investor will determine what interest rate is suitable to compensate for the risk. 

Also, it is worth noting that private placements are priced quite similarly to many public securities, and pricing is usually determined by adding a spread (or credit risk premium) to the corresponding Treasury rate in the US.

Draft the Documents 

You will need to develop draft documents with your private placement attorney. This often includes the following:

  • An offering memorandum (outlines the risks and size of the offering) 
  • A subscription agreement (how potential investors can invest) 

You will have to prepare a draft proforma along with tested terms, costs and timing.

Send the Draft

Now it is time to send the draft to all investors who have indicated an interest in your offer. Then you should request their feedback. Keep in mind that you cannot solicit investors with whom you don’t have a prior working relationship unless utilizing Reg D 506 c which is the eVest preferred platform.  If you receive positive feedback, go out and put the deal under contract.

Disclosure Requirements

While you may know that the 1992 SEC revisions eliminated the need for companies to prepare and file a Private Placement Memorandum for investors, keep in mind that experts suggest that it’s still a good idea. However, you can use eVest’s Digital PPM data room as an alternative to a Private Placement Memorandum. 

Note that the memorandum describes the business, provides background information on company management, outlines the organization’s capital structure both before and after the sale of securities, and discloses the opportunities as well as risks involved in the investment. Overall, the level and type of disclosure should be in line with applicable federal and state securities laws, and consistent with the sophistication of potential investors.


About the Author

Dan Summers

Dan is the Founder and CEO of eVest Technology

Dan is a 30+ year practitioner syndicating in excess of $2B and subsequently underwriting its own IPO. As such, he built along with his team of analysts and programmers a one-of-a-kind seamless and comprehensive platform than manages and organizes an entire capital raise. Summers has built a national reputation for integrity, transparency and approachability. Truly, one-of-a-kind.

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