What Is a Private Placement?

A private placement is a sale of securities that is not conducted as a public offering, such as an IPO. Instead of registering the securities with the SEC in the way a public company does, the issuer relies on an exemption from registration. Private funds, startups and other companies commonly raise capital this way.

In the United States, many private placements rely on Regulation D. Rule 506(b) does not allow general solicitation, meaning the issuer generally cannot advertise the offering broadly. Rule 506(c) allows general solicitation, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify that status.

Many private placements are open only to accredited investors under SEC Rule 501(a). Categories include individuals who meet certain income or net worth tests set out in the rule, holders in good standing of Series 7, 65 or 82 licenses, and knowledgeable employees of a private fund. They also include spousal equivalents when applying the joint tests, entities and family offices with over $5 million in investments or assets, and registered investment advisers and exempt reporting advisers. Any offering is made only by the issuer through its own offering documents.

Traditionally, people have learned about private placements through existing relationships, such as their attorneys, accountants, wealth advisers or business networks. Because these offerings are not publicly marketed in the usual way, access has often depended on who someone knows.

Investors have typically reviewed an offering document, often called a private placement memorandum, along with a subscription agreement and the fund's governing documents. Many people have these materials reviewed by their own licensed attorney, tax professional and financial adviser before deciding anything.

Private placements are generally illiquid, meaning it may be difficult or impossible to sell your interest before the issuer allows it. Many investors have traditionally treated them as one small part of a broader plan, and have thought carefully about time horizons, diversification and their own circumstances.

The right independent fund manager may help you understand how a particular type of private fund is structured, what the strategy is meant to do, and what risks come with it. A good conversation is usually about learning, not about being pushed toward a decision. No outcome is promised or guaranteed.

A first conversation is often a general introduction. The manager may describe their approach, the kind of investors they typically work with, and how the fund is organized. You can usually expect them to ask whether you are an accredited investor and to explain whether the offering is under Rule 506(b) or 506(c).

Useful questions include: How are fees and expenses structured? How long is my money likely to be locked up? What are the main risks? How is the fund reported to investors, and will I receive a K-1? How does the manager handle conflicts of interest? Past performance does not guarantee future results, so it is also worth asking how a manager talks about it.