A private placement is the sale of a security to a small number of investors. Issuing entities are interested in private placements because these transactions avoid the time-consuming process of having securities registered for sale to the general public through the Securities and Exchange Commission. Examples of the types of securities that may be sold through a private placement are common stock, preferred stock, and promissory notes.
Many of these transactions are covered by the Regulation D exemption from the normal reporting rules, which limit these placements to investors having a high net worth or income, as well as experience in or knowledge of financial reporting. By implication, Regulation D eliminates sales to investors that may not have sufficient knowledge to understand the level of risk they are undertaking.
The type of investor that usually participates in a private placement is a wealthy individual or a well-funded buy-side firm, such as a pension fund or hedge fund.
An investor may be offered an inducement to participate in a private placement. For example, this could involve a price that is discounted from the market price, or perhaps the addition of warrants to the securities.
A private placement differs from a public offering, where securities are offered for sale to the general public via an underwriter. A public offering requires that a detailed prospectus be issued, which is not the case for a private placement.