Private Placement: Hit or Miss?
Understanding Private Placements
What are Private Placements?
Unlike traditional stocks or mutual funds, private placements are securities offerings that are exempt from the common registration requirements of the Securities and Exchange Commission, or SEC.
They can be referred to as:
- Non-conventional investments
- Regulation D investments
- Or simply, private offerings.
Regardless of how they’re called, all generally have the similar characteristics and risks.
One major key aspect of all private placements is the Regulation D of the Securities and Exchange Act of 1933, this regulation contains three rules (Rule 504, 505 and 506), that lets companies sell their securities by an alternate registration with the SEC.
Private placements, depending on the nature of the securities offered, can be exempt from some of the common regulations that govern public investing.
Another important characteristic of private placements is their common lack of liquidity. Since they, unlike traditional stocks and mutual funds, are not sold on the stock market and they’re not easily liquidated. And you as an investor should pay close attention to this.
More often than not, if you’re investing in a private placement, is expected that you treat the securities as a long-term investment that might be held indefinitely.
What is Form D?
“Form D” is a document filed with the Securities and Exchange Commission by any issuer who is relying on a Regulation D exemption. And it represents an alternate registration that governs private placements allowing public advertising and solicitation of offers to accredited investors.
What is a Private Placement Memorandum?
Also called an offering memorandum, is a document provided by an issuer that discloses information about a Form D offering and it describes the company selling the securities, the terms of the offering, and the risks of the investment, amongst other things.
A Private Placement Memorandum is primarily a disclosure document that is:
- Descriptive but not persuasive in its style.
- Allows the investor to decide on the merits of the investment.
- Its presentation is more factual and concrete.
- Addresses external and internal risks facing the company.
But regardless of a Private Offering Memorandum’s content, an investor together with their broker or financial advisor, should feel comfortable asking any question to the sponsor.
And if your questions are unanswered or inadequately answered, should consider this a red flag.
Which leads us to the following point:
Beware the White Elephant
What’s a White Elephant project?
A white elephant is a project which its investors cannot liquidate of and whose cost, particularly that of maintenance, is out of proportion to its usefulness or higher than its returns. Basically, a business venture considered expensive or risky but without use or potential value.
How to spot a White Elephant
How do you avoid trouble? Just like we told earlier you’ll need to ask questions or find an independent fiduciary such as a lawyer, chartered financial analyst or certified financial planner to review them before you invest. But there are some key elements you should definitely look closely.
Here’s what you need to know:
- The liquidity of the securities
Under what conditions can you sell and how much will it cost you?
- The risk factors
The offering memorandum should tell you this, but you also need to have a working understanding of how much you can lose and you should read the offering’s “Form D.”
- Form of payment return of capital
Check if there are regular distributions. Check if they have to sell something (a product, service or real estate) in order for you to get paid. How do they plan to profit and pay investors?
- Is the placement intent on going public at any moment?
Finally, if the private placement is done in a company that has no intention of going to the public stock market (i.e. a development project) then the risk can be related to company’s rate of success and its shares’ liquidity.
Is there any advantage to Private Placements that justify the risks?
It all depends on the numbers, the business plan and the management team of an individual project, but there are some general characteristics that make private placement enticing to venture capital firms and investors.
Higher return of investment
Generally, private placements imply lower expenses in commissions and advertising. Additionally, once the company starts trading its shares publicly, they tend to increase their price considerably, which would allow the investor to sell their shares at a greater price and therefore getting a greater return of investment.
Dividend payouts can also apply to Private Offerings
Some private placements offer dividend securities. There’s nothing better than getting paid for doing nothing. And that’s what dividend investing is all about – getting a steady stream of payouts as return of investment from simply owning shares of stock.
So, are they a hit or a miss?
In many cases, private placement offers come with certain sales restrictions, sometimes specific conditions are imposed for the share’s sale forbidding it for days or even years after the company begins its participation in the public stock market.
In consequence, if the company decides to participate in the stock market, the value of its shares may rise when the owners (who don’t share these restrictions) make the shares’ sale.
The best Private Placement around
Nonetheless, there is an investment avenue out there that can represent a better and safer choice for you, a mix between:
- The liquidity of a publicly-traded stock
- The advantages of private equity.
We’re talking about a New Asset Class introduced by Konzortia Capital, a holding company for a fintech consortium that -with its private sale of preferred stocks- aims to redesign the financial world that everyone takes for granted.
The best part? You still have a chance to participate on their private sale phase, which means they’re offering to visionary investors the opportunity to participate at their ground-floor level with special advantages and preferences that raises its return of investment potential. Click on the link below and find out why this private company is your best investment option.