What it is:
How it works (Example):
Companies issuing stock in the U.S. public capital markets must register their offering with the SEC. With a registered offering, companies may solicit any investor publicly, and they must file quarterly reports. These filings are available to the public, and provide guidance about the company's performance.
Companies may decide to avoid these requirements and issue a limited amount of stock privately to a limited number of qualified investors only. If they choose a private placement instead of public offering, companies may issue stock privately under an exemption (Regulation D) provided by the Securities Act of 1933.
Private placements are documented with a private placement memorandum (PPM), which discloses the characteristics of the business, the business plan, and the terms of the securities being offered.
Why it Matters:
Private placement securities are sold to accredited or sophisticated investors only. They involve a specific business activity with specific personnel that can be analyzed through disclosure documents, such as the private placement memorandum. Avoiding the filings and disclosure requirements of a public offering can mean significant savings for a company.
Companies choosing a private placement must still file disclosure forms with the SEC, although the forms (Form D) only include the names of the principals of the company after they close on the sale of their securities.