Private placements are, in contrast with public offerings, investsments in privately held companies, generally available only to accredited investors of a certain net worth or income level. While such offerings are not subject to the same level of public scrutiny as say an IPO, general solicitation- that is offering or advertising of the securities to the public- is prohibited. Of course the JOBS Act is set to change the nature of such private placements, and make is much easier for companies to privately raise capital from investors who are not necessarily accredited.
Q. There’s so much commotion about these right now, especially with the new JOBS act… let’s get a reset of where the rules are.
A. Let’s do. Historically, these kinds of securities offerings were between operating companies and a few select, sophisticated institutional investors. A whole pile of laws and regulations were created that limited the kinds of securities that could be sold this way, and also the way in which they were sold…. for example, there could be no “general solicitation” of the securities, no advertising. Unless you complied with these very narrow rules, the securities sale had to be conducted in a real public offering, with all the trimmings.
Q. And so what’s changing now?
A. Well everyone’s talking about the legal changes, but as usual, the internet itself is perhaps the biggest culprit. It allows sellers of non-public securities to reach a huge array of investors in a way that doesn’t depend on brokers’ individual relationships. So groups like SharesPost and SecondMarket realized that maybe you could conduct traditional private placements via the web. Now, there are all sorts of these “private placement platforms,” and not just for operating companies: they cover everything from real estate to hedge funds.
Q. Right, but what about those legal changes? The JOBS act has huge implications for the whole world of private placements, right?
A. Oh, yes. Let’s put crowdfunding completely aside here — that’s a whole separate subjet — and look at the more general private placement market. JOBS killed the rule there cannot be “general solicitation” of these things. So you could now see general advertising for, say, hedge funds. That’s a true sea change, and the SEC is due to put out the implementing regulations on that very soon.
Q. But that sort of raises a basic question, doesn’t it? If a private placement is no longer private, what really distinguishes it from a public offering?
A. The biggest one is: who can purchase. After the rule change, private placements can be advertised, but still only *bought* by accredited investors (+$1mm of net worth). Public offerings, which can be bought by anyone, will still have a huge pile of investor protections built in. So, moms and pops won’t be buying hedge funds, even after the rule changes.