November 16, 2018

Beyond Traditional Funding: Private Placement of Securities

by Shweta Chaubey, Brennan Manna & Diamond LLC

Private placement of securities has become a popular funding option for new and emerging businesses to meet their capital needs. For instance, Uber has raised over $3 billion through this route. In a private placement, a company offers its securities to a select group of investors. Such securities are not available for sale in public markets (such as stock exchanges) and may be subject to resale restrictions.

Generally, all securities offered in the U.S. must either be registered with the Securities and Exchange Commission or qualify for an exemption. SEC registration is a cost- and time-intensive process and exposes a company to several compliance requirements. To allow businesses easier access to capital, federal securities laws exempt certain securities offerings from registration requirements through a process called “exempt private placement”. The optimal capital raising option for a company depends on its capital requirements, the type of investors targeted in the offering, and the associated compliance requirements.

Rules 506(b) and 506(c) of Regulation D of the 1933 Securities Act provide the most commonly relied upon exempt private placement options:

  • Rule 506(b) permits unlimited capital raise from any number of accredited investors* and from up to 35 non-accredited, sophisticated investors; however, advertising the sale of securities is prohibited;
  • Rule 506(c) permits advertising the sale of securities, which may only be offered to accredited investors.


These options allow businesses to raise capital without the burdens of SEC registration and compliance. Further, the company’s founders can retain management control by structuring the security offering such that decision-making authority is not ceded to investors.

Besides private placements, businesses seeking alternative funding options to traditional loans may also explore crowdfunding, micro-loans and small-business loans. These funding channels are ideal for small businesses, new and emerging businesses and established small businesses looking to undertake new ventures, offering them flexibility and a more tailored approach to their financing needs. These approaches, in conjunction with traditional financing channels, offer businesses a wide range of sophisticated options from which to select a best-fit.

* Defined under Rule 501 of Regulation D.


Chaubey