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Private Placements

What is a private placement?

A private placement is the private sale of restricted securities to qualified buyers. These securities are equity shares or debt instruments, are not tradable on the open market, and are not registered with the Securities and Exchange Commission. You privately place securities by filing SEC Form D and supporting documents.
Private placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors.[1] In the United States, although these placements are subject to the Securities Act of 1933, the securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated thereunder. Most private placements are offered under the Rules known as Regulation D. Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), and purchasers are often institutional investors such as banks, insurance companies or pension funds. The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

Since a private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities and Exchange Commission. In many cases, detailed financial information is not disclosed and a the need for a prospectus is waived. Finally, since the placements are private rather than public, the average investor is only made aware of the placement after it has occurred

How can you benefit from a private placement?

Private placements are a cost-effective alternative for small businesses to acquire funding without resorting to an initial public offering. An equity or debt private placement saves time and money as you solicit capital from a limited number of investors. Private placements are useful for a young company that has not yet established itself. They appeal to a broad spectrum of investors and allow you avoid the expense of a public offering. Private placements do not require underwriters, so they are quicker and cost less. Additionally, private placements may be the only way for risky ventures or start-up firms to access capital.

With a private placement, you can select your investors that have compatible objectives. And unlike public stock offerings, you are not forced to give up your firm's private status. The bottom line: private placement offerings are cheaper and less complicated than issuing publicly-traded securities.

How does a private placement work?

The SEC's Regulation D (Reg D) specifies how certain securities can invoke "safe-harbor" exemptions to avoid registration. Sections 504, 505, and 506 of Reg D describe these exemptions. These exemptions explain how to privately sell securities without registration by filing a number of Form D documents with the SEC. Our skill in preparing and filing these documents allows you to raise capital without going through the costly and slow SEC registration process. The following is a summary of the Reg D exemptions offered by the SEC:

Section 504: Pertains to the Small Corporate Offering Registration, or SCOR. SCOR offers an exemption to private companies that receive no more than $1 million in any one year via the sale of stock. There are no limits on the number or types of investors and the stock can trade publically. It is not available in Delaware, Florida, Hawaii, or Nebraska. Section 505: Permits a small firm to offer up to $5 million in stock during a one-year period to an unlimited number of investors, so long as no more than 35 of the investors are non-accredited. An accredited investor must have enough assets or income to make such an investment. The SEC specifies that individual investors must have either $1 million in assets or $200,000 in net annual personal income, while institutions must hold assets of at least $5 million. The securities exempted under Section 505 cannot be freely traded. Section 506: Permits a company to offer an unlimited amount securities to any number of investors, provided that no more than 35 non-accredited investors. Section 506 investors must be sophisticated. The securities exempted under Section 506 cannot be freely traded. Privately-placed real estate deals are usually filed under this exemption.

Is it complicated assembling the information necessary for a private placement filing?

Quite! For example: The amount and type of financial and non-financial reporting required will vary depending on the size of the offering. Different requirements pertain to offerings up to $2 million, between $2 million and $7.5 million and above $7.5 million. Offerings of up to $2 million need disclosure of the type used by Item 310 of Regulation S-B. Those between $2 million and $7.5 million need distribution of the kind of information required in Part I of Registration Form SB-2. If Form SB2 is not available (e.g., if the issuer is a reporting company), the company must provide the kind of information "required in Part I of a registration statement filed under the 33 Act on the form

the issuer would be entitled to use." (For most companies this is Registration Form S-1.) Companies offering more than $7.5 million worth of securities must supply information of the type specified in Part I of a registration statement. PrivatePlacements.org understands this gobbledygook! Our senior legal team is conversant with all filing requirements. Bear in mind that only qualified professionals can assure management that a company's security sale will not create significant jeopardy for the company and its management. A Private Placement Memorandum (PPM) is the most important part of an SEC Form D filing. It is a prospectus that discloses pertinent information about the offered securities to potential buyers, including the deal terms, allocation of funds, risks (company- and industrybased), and other material data. The PPM is a dense document filled with highly technical material. The following is an abridged checklist of its contents:

Cover Page Securities Legends Suitability Standards for Investors Summary of the Securities Offering Risk Factors Capitalization of the Company Use of Proceeds from the Securities Offering Dilution Plan of Distribution of the Securities Selected Financial Data Analysis of Financial Condition and Results of Operation The Business of the Company Management and Compensation Certain Transactions (transactions between the Company and its shareholders, officers, directors or affiliates) Principal Shareholders Terms of the Securities Offered Description of Capital Stock of the Company Tax Matters Legal Matters Experts Documents Available for Inspection Financial Statements Projections Exhibits

Don't feel that assembling all of this material is a good use of your time? We agree! PrivatePlacements.org does all the difficult work for you. Our long experience creating and filing PPMs allows you to concentrate on your business rather than on administrative details.

What can PrivatePlacements.org do for you?

PrivatePlacements.org One Stop Shop Program offers a full array of services to address all aspects of your private placements needs:
1. We will consult with you about your financing needs and advise you as to your alternatives. This is essential because many of our competitors take a "one size fits all" approach to Private Placement Memoranda, using a generic template that is frequently noncompliant with SEC and/or state requirements. We tailor each offering on an individual basis, giving you a customized solution that complies with all related legal requirements. 2. Our network of financial specialists to optimize the structure of you private placement deal, evaluating market demand, fees, pricing, liquidity, and risk sensitivity. We advise you on the mix of equity and debt obligations that are optimal for your offering. We help you frame the terms, rates, and fees of debt offerings. The resulting deal will maximize your return given current market constraints, and will satisfy the risk/reward requirements of investors. This is necessary because issuers often come back to the private placement market from time to time, and need to establish a reputation for fairness in order to successfully offer another private sale. 3. You will meet a group of qualified potential investors, including hedge funds, private investor groups, and prime brokers. 4. We provide website development services to help you sell your private securities to the qualified investor community via the Internet. 5. We prepare the Form D legal documents you require, and file them with the SEC. PrivatePlacements.org will create and file the following documents: o Private Placement Memorandum There are several different forms of the PPM. We always prepare Form 1A, which has the highest standard of disclosure to the SEC. We also make sure that all required exhibits are included, such as contract obligations, financial statements, and other important information. If the offering is debt, we also include data regarding the note structure and the promissory note provisions. o Subscription Agreement - a contract for the exchange of a specific face value of securities at a specific price. It includes an investor statement acknowledging the receipt and review of the PPM, assumption of risks, and suitability to invest in the securities. o Promissory Note Agreement the terms of any debt that is to be privately sold. o Investor Questionnaires - information about the purchaser's background and business experience. The questionnaire shows that the investor is qualified to buy the securities and has sophisticated knowledge of the risks in doing so. o SEC Form D Federal Compliance Filing: - an 8-page SEC compliance filing, having instructions for completion of the filing, the filing timetable, and other pertinent information. 6. We handle any state-required filings, including state blue-sky filings, (state statutes that detail the methods by which securities can be sold within the state). These statutes prohibit companies from offering securities unless the

sale is registered with the state's securities commission or complies with one of the exemptions from registration specified by the state's blue-sky statute. Issuers must be certain that the sale will comply with the laws of the state in which the company is incorporated and in the states of residence for each offeree. Failure to comply with the requirements of applicable blue sky laws can create a substantial liability. PrivatePlacements.org ensures that our clients have complied with all relevant state laws. 7. We offer any accounting, legal, and administrative services you will need. This gives smaller firms access to the same professional services provided to larger issuers. One example: many privately-placed stock certificates are to be stamped with a legend that identifies the stock as restricted. The legend states that the securities cannot be transferred unless pursuant to an effective registration statement or to an exemption from the registration requirements. The issuer should instruct its transfer agent not transfer the securities without the issuer's written approval. After a specified period of time, the securities become unrestricted, and the certificates must have the legends deleted so that they can be publically traded. Keeping track of the status of certificates and maintaining their proper labeling them is one of the many administrative services PrivatePlacements.org offers to the private placements community.

PrivatePlacements.org prepares Real Estate PPMs under Regulation D Section 506. Any amount of principal is OK. This private placement vehicle is arranged as a capital pooling fund and allows investing in multiple projects simultaneously. Many real estate professionals use Real Estate PPMs to raise equity funding and then utilize the additional balance sheet assets to qualify for real estate loans. Rule 144A A 1990 SEC rule that facilitates the resale of privately placed securities that are without SEC registration. The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities. An administrative rule under the SEC allowing, under certain circumstances, for qualified institutional investors to trade certain securities with other institutional investors without registering the trade with the SEC. The rule requires that the private placement be for investment purposes and not for resale to the general public. These securities are traded on the NASDAQ Portal Market; only NASDAQ members who are qualified institutional investors have access to it. Some firms may trade under Rule 144A as a prelude to an IPO. SEC rule allowing qualified institutional buyers to buy and trade unregistered securities 144a is an SEC rule that modifies the two year lockup requirement on private placement securities. 144a allows debt or equity private placements to trade to and from "QIGs" or qualified institutional investors with above $100 million of investments. Banks must pass a $25 million minimum net worth test to qualify as QIG for 144a trades. 144a securities are often called

"restricted securities." 144a dramatically increases the liquidity for private placements. The SEC's 1990 adoption of Rule 144a plowed new fields for expanded private debt markets to something more like the public bond market than strict 144 placements. Unlike what the current Rule 144a allows, private placements had two year lockups until 1990. Many investment banks have dedicated 144a desks or "private placement" trading desks. These 144a desks specialize in issuance and trading of Rule 144a private issuer securities with 144a registration rights. 144a specifies that buyers at issue may buy with intention to trade. 144a exclusions prohibit circumvention: securities that, at private placement issuance "comparable" with other current U.S. listed or NASADAQ securities of the issuer are ineligible Rule 144a resale. Smaller companies without public markets seasoning find Rule 144a attractive: with 144a institutional market liquidity is added without the cost of going public. Larger companies with debt issued to the public find Rule 144a attractive: they can fill in rates and maturity ladders with smaller amounts. Investment banks like 144a availability: 144a securities add flexibility to their issuer funding and investor offerings. Rule 144A. Rule 144A of the Securities Act of 1933 makes it easier for private companies to raise money in US capital markets and for institutional investors to trade restricted securities not registered with the Securities and Exchange Commission (SEC). Specifically, the rule allows private companies, both domestic and international, to sell unregistered securities, also known as Rule 144 securities, to qualified institution buyers (QIBs) through a broker-dealer. The rule also permits QIBs to buy and sell these securities among themselves. To be a QIB, the institution must control a securities portfolio of $100 million or more. The NASDAQ Portal Market is an electronic trading platform for Rule 144A securities. Only NASDAQ members and QIBs have access to this platform. Companies issuing unregistered securities may raise enough capital in the 144A market to remain private. They may also use a 144A offering as an intermediary step toward an initial public offering (IPO). While Section 4(2) and Regulation D provide issuers with exemptions from 1933 Act registration, they do not provide exemptions for resales by investors in and underwriters of securities purchased in a private placement. Rule 144A provides a non-exclusive safe harbor exemption from 1933 Act registration for resales of eligible securities to U.S. qualified institutional buyers, known as AQIBs,@ which generally include institutions that own and invest on a discretionary basis at least U.S. $100 million in securities of non-affiliated issuers. This resale exemption increases the liquidity and marketability of the Rule 144A eligible securities but is only available for resales to the relatively narrow universe of QIBs. Resales of restricted securities among broader groups of potential purchasers in the U.S. may be made in private transactions under the so-called A Section 4(12)@ exemption, discussed below. Resales of the securities of certain issuers may be made to the U.S. public under Rule 144, which provides a non-exclusive safe harbor for resales of restricted securities and securities held by affiliates of the issuer. Resales outside the U.S. may be made under the somewhat less

restrictive provisions of Regulation S, Since its adoption, Rule 144A has proven to be extraordinarily popular, both as an exemption for the immediate resale by underwriters of securities which they purchase from issuers (sometimes called underwritten private offerings) and as an exemption for resale transactions that facilitates a secondary market among substantial U.S. institutions. Since Rule 144A provides an exemption from 1933 Act registration for resales among institutions, it increases the liquidity of those securities and reduces or eliminates the discount typically associated with resales of restricted securities. Most Rule 144A offerings are conducted on an underwritten basis, with investment banks initially participating in the negotiation of the terms of the offering and purchasing the Rule 144A securities for immediate resale to QIBs A Rule 144A debt offering may also require the issuer to execute an indenture with a trustee for the holders of the debt securities. The purchase agreement and indenture will contain standard representations and covenant protection. QIBs generally will not be represented by individual counsel, and transactions will be effected by confirmations rather than by individually negotiated agreements. Frequently, institutional accredited investors that are not QIBs will be permitted to purchase a portion of the securities in reliance on an exemption other than Rule 144A. Due Diligence in Rule 144A Offerings. Despite the popularity of Rule 144A offerings, foreign issuers may find the accepted practices involved in a Rule 144A offering to be onerous, such as allowing extensive due diligence by investment banks, which is typically similar to that employed in a public offering, and providing information required under Rule 144A to facilitate secondary market transactions. The due diligence required by Rule 144A underwriters will vary depending on the credit quality and reporting status and seasoning of the issuer. In general, however, the underwriter will wish to conduct a comprehensive document review with a focus on financial information, meetings with officers and site visits. The underwriters may also require a comfort letter from the issuer=s accountants. Despite these substantial due diligence requirements, many foreign issuers generally find Rule 144A offerings to be a useful means to raise substantial amounts of capital from institutional investors, and foreign reporting issuers have increasingly structured Rule 144A offers using securities that are subsequently exchangeable for freely tradeable securities that are registered with the SEC (a so called A/B exchange transaction).

Requirements of Rule 144A

Resales to QIBs. Rule 144A does not apply to offers or sales by issuers (except indirectly through underwritten private offerings). It provides a safe harbor only for resales made to QIBs. Thus, an issuer will need to use another exemption from 1933 Act registration, typically Section 4(2), for the initial offer and sale of the Rule 144A eligible securities to underwriters or other initial purchasers Rule 144A defines a QIB to include the following institutions that own and invest on a discretionary basis at least $100 million of securities of issuers that are not affiliated with the institution: (i) any insurance company as defined in Section 2(13) of the 1933 Act;

(ii) any investment company registered under the 1940 Act or any business development company as defined in Section 2(a)(48) of the 1940 Act; (iii) any small business investment company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; (iv) any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees; (v) any employee benefit plan within the meaning of Title I of ERISA; (vi) any trust fund whose trustee is a bank or trust company and whose participants are exclusively plans of the types identified in paragraphs (iv) and (v) above, except trust funds that include as participants individual retirement accounts or Keogh plans; (vii) any business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940 (the AAdvisers Act@); (viii) any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation (other than one described in paragraph (x) below), partnership or Massachusetts or similar business trust; (ix) any investment adviser registered under the Advisers Act; (x) any U.S. or foreign bank or savings and loan or equivalent institution with an audited net worth of at least $25 million as of a date not more than 16 months (domestic entities) or 18 months (foreign entities) preceding a Rule 144A resale; and (xi) any entity all of the equity owners of which are QIBs, acting for its own account or the accounts of other QIBs. AReasonable Belief@ Requirement. To qualify under Rule 144A, the securities must be offered and resold only to QIBs or entities that the seller reasonably believes to be QIBs. In most cases, the seller=s Areasonable belief@ may be based on certain published financial information or on an officer=s certificate. In marginal cases, reliance on published sources may be problematic since financial statements generally do not disclose whether investments include excluded investments, or whether investments of consolidated subsidiaries are managed by the purchaser. Notice Requirement. Rule 144A requires the seller to take reasonable steps to ensure that the buyer is aware that the seller is relying on the rule. This requirement is typically met by including language in the private placement memorandum and the confirmation that the purchaser may rely on Rule 144A. The following legend has been used in a number of offerings: AWE HEREBY NOTIFY EACH PURCHASER THAT THE OFFER AND SALE OF THE SECURITIES OFFERED HEREBY MAY BE MADE IN RELIANCE UPON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 ACT PROVIDED BY RULE 144A.@ Purchasers are often required to confirm in writing their awareness that the sale to them is being made in reliance on Rule 144A. Non-Fungible Securities. Securities that are eligible to be sold under Rule 144A are debt or equity securities other than securities of a class listed on a U.S. securities exchange or

quoted on Nasdaq or securities Afungible@ with those securities. This non-fungible securities requirement effectively limits the Rule 144A market to securities of foreign issuers whose primary trading markets for those securities are outside of the U.S. See also below under ARule 144A Registered Exchange Offers.@ A security=s Rule 144A eligibility is determined as of the date of issuance. Listed or quoted ADRs are considered fungible with the underlying securities on deposit. Convertible securities are fungible with the underlying security where the conversion premium is less than 10%. Warrants are deemed fungible with the underlying security if the effective exercise premium is less than 10% or the exercise period of the warrant is less than three years. In general, equity securities will not be considered to be of the same class as outstanding securities if the securities differ as to dividend, liquidation or voting rights. Information Requirement for Non-Reporting Issuers. For resales of Rule 144A eligible securities of reporting issuers and foreign private issuers that furnish the SEC with home country information pursuant to Rule 12g3-2(b) under the 1934 Act (see Chapter 1), there are no information furnishing requirements beyond the notice requirement discussed above. For foreign non-reporting issuers that are not exempt under Rule 12g3-2(b), the holders and their prospective purchasers of Rule 144A securities must have a right to obtain, upon request, certain information concerning the issuer of the securities. The information must include a Avery brief@ description of the issuer=s business, products and services, and the issuer=s most recent balance sheet and profit and loss and retained earnings statements, and similar financial statements for such part of the two preceding fiscal years as the issuer has been in operation (the financial statements should be audited to the extent reasonably available). No General Solicitation. Since Rule 144A offerings are deemed to be private placements, general solicitation of offerees is not permitted. Any publicity-related announcements should be made within the safe harbors of Rule 135c or Rule 135e under the 1933 Act.

Additional Considerations in Rule 144A Offerings

Debt Offerings Using Rule 144A. Rule 144A debt offerings are generally underwritten transactions and the investors are typically mutual funds, money managers and insurance companies. These investors often make an investment decision based in part on the rating of the issuer, so ratings from two major rating agencies are often required. Rule 144A debt offerings usually require a minimum issue size of $100 million since a large issuance is needed to create secondary market liquidity. A Rule 144A debt offering may also require the preparation of an indenture in respect of the debt instrument. Rule 144A Registered Exchange Offers. In a Rule 144A registered AA/B@ exchange offer, a technique that is available for offerings of both debt and equity securities of a foreign issuer,20 securities are offered and sold to institutional investors in a Rule 144A private placement, and then the 144A securities are subsequently exchanged for more or less identical Form F-4 registered securities that are freely tradeable. The investment bank involved is usually referred to as the initial purchaser and is not subject to liability as an underwriter under the 1933 Act. To use the technique the investors may not be affiliated with the issuer, must acquire the securities during the ordinary course of business and may not have an arrangement to distribute the securities received in the exchange.