A Primer on Private Placements – Regulation D and Liquidity Issues

A Primer on Private Placements – Regulation D and Liquidity Issues

Sometimes spoken of as Regulation D investments, unconventional investments, or unregistered offerings, private placements investments usually all have similar risks and characteristics. Some examples of private placement investments include notes, preferred or common stock, bonds, interest in limited liability companies or partnerships, and debentures.

Regulation D Rules
One of the major characteristics of private placement investments is that as security offerings they are not subject to the standard requirements for registration with the SEC. This is unlike what is required with other investments such as mutual funds, and stocks. The 1933 Securities and Exchange Act and its Regulation D, via Rules 504, 505 (now integrated with 504) and 506, give permission to companies to offer securities for sale without registering them with the SEC.

Simply put, private placements are not required to adhere to the rules and regulations which were initially instituted to protect investors from the general public. Some of these regulations, for example, required certain disclosures to be made.

Lack of Liquidity
A key feature that characterizes private placements is that they are not very liquid. As opposed to mutual funds and stocks, private placements are not offered through an exchange. Investors must take this into account when considering the use of these instruments. It is advisable to expect to hold these securities for the long-term, or even an indefinite period of time. You should not necessarily expect to be able to sell your interests and private placements within a certain period of years. In fact, there are restrictions on transfer with Reg D offerings, so that transfers must be done only in compliance with strict rules.

Just as you would do with any investment opportunity, it is important that you and your investment advisor evaluate whether or not a private placement is beneficial to add to your portfolio. This is a serious decision to make and should be done with the appropriate amount of thorough research and investigation of the issues and possible benefits and/or drawbacks.

It is best for investors and their financial or investment advisers to collaborate together in order to achieve a thorough understanding of the risk/reward calculus involved with any type of Regulation D offering. If any doubts arise about the benefits of investment, it may be best to pause and not move forward at this time, or simply decide not to participate. Reg D private placements are some of the best investments one can make, but you’ll have to be ready to be in it for the long haul without any expectation of liquidity.

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