A private stock offering—sometimes called a private placement—is when you sell securities in your business without an initial public offering—usually called an IPO.
In other words, a private placement is when you sell your company's stocks or bonds to private investors.
For example, if you run a start-up shopping site, you might offer private stocks to a private investor. This investor gives you money to fund your burgeoning start-up in hopes that he or she will see a large financial return on their investment.
There are numerous ways to find investors that might want to purchase securities in a private stock offering. Bankers, small business attorneys, and your personal business contacts are a good place to start. But it's important to remember that not everyone qualifies as a private investor. While private offerings are governed by less strict rules than IPOs, the Securities and Exchange Commision (SEC) still has guidelines your business will need to follow.
(Do note that you will not need to file anything with the SEC, however. In other words, a private placement allows you to get funding for your business without dealing directly with the SEC.)
Who can invest in a private stock offering?
Private placements must come from what the SEC terms an "accredited investor." Our article, "What are Accredited Investors and How Can They Help Finance Your Small Business?" lays out a fuller picture, but know for starters that accredited investors are generally wealthy individuals or organizations.
For example, for a single person to be classified as an accredited investor, they must have a net worth of $1 million or a yearly income of $200,000. Trusts, banks, investment and insurance companies also qualify.
What documents you should have to hold a private stock offering
- Operating Agreement: First and foremost, you need to make sure your company is incorporated and that you have an Operating Agreement. Legal status and a plan that shows how your business runs will be crucial in securing the sort of savvy investors your small business will want.
- Private Placement Memorandum: A Private Placement Memorandum outlines the terms and conditions upon which you are offering interests in your business. You can think of it as a brochure for your business, where you alert potential investors to the facts they'll need to know about your company. You can set the amount of stocks you're offering overall, the price for each, how many an investor can purchase, when that investor will receive stocks, and pertinent information about your company (such as its founders, age, projected profit, etc.).
- Subscription Agreement: A Subscription Agreement is just that: an agreement. When a private investor decides to purchase securities in your small business, a subscription agreement is the contract you use to put the investment in writing. It should note the price and amount of stocks being purchased, in addition to information about the company itself.
- Accredited Investor Questionnaire Form: An accredited investor questionnaire is used by companies and individuals to validate that they are in fact an accredited investor, as defined by the SEC. Making sure your investors are accredited investors can save you a lot of hassle down the road, when your business is growing even faster. Rocket Lawyer provides this form as part of our Subscription Agreement.
While it might sound like a lot of paperwork, it's not as bad as it seems. You're simply showing potential investors how great your company is (via a Private Placement Memorandum) while they prove that they're legally allowed to invest (via an accredited investor questionnaire form). When you agree, you both sign a contract (the Subscription Agreement) and you receive the funding you need to push your small business to the next level.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.