What Is a Private Placement? A Guide for Investors

A private placement is a sale of securities directly to a limited group of investors without registering the offering with the SEC. Most rely on Regulation D, usually Rule 506(b) or 506(c). Buyers are mostly accredited investors, receive restricted securities that are hard to resell, and get less disclosure than public-market investors, so their own due diligence matters more.

Someone has sent you an offering document for a private fund, a real estate deal or a growing company. It promises access you cannot get through a brokerage account, and it asks for a check, a signed subscription agreement and proof that you are accredited. Before you decide anything, it helps to know what kind of deal this is, what the law requires of the company, and what it does not.

How does a private placement work?

A company raises money from selected investors under an exemption from SEC registration. Instead of filing a registration statement and selling shares on an exchange, it offers securities (stock, LLC units, notes or fund interests) through its own documents. The investors sign a subscription agreement, wire the money, and receive securities that usually cannot be sold on a public market.

The legal foundation is Section 4(a)(2) of the Securities Act, which exempts "transactions by an issuer not involving any public offering." Because that phrase is vague, most companies use Rule 506 of Regulation D, which the SEC calls a "safe harbor" with objective standards.

What is the difference between Rule 506(b) and Rule 506(c)?

The two rules differ mainly on advertising and on who may invest.

	Rule 506(b)	Rule 506(c)
Public advertising	Not allowed	Allowed
Non-accredited investors	Up to 35 in any 90-day period, if financially sophisticated	None
Verifying accredited status	Investor can self-certify	Issuer must take reasonable steps to verify
Amount that can be raised	Unlimited	Unlimited
Form D notice to SEC	Within 15 days of first sale	Within 15 days of first sale

Those details come from the SEC's pages on Rule 506(b) private placements and Rule 506(c) general solicitation. If you saw the deal advertised online or on a podcast, it should be a 506(c) offering, and you should expect to send documents proving your status. Our guide to accredited investor requirements explains the income, net worth and license tests.

What documents should you receive in a private placement?

Expect a small stack of paperwork. Each piece answers a different question.

Private placement memorandum (PPM)

The PPM is the offering document. It describes the business or strategy, how your money will be used, fees, the people in charge, conflicts of interest and risk factors. Accredited-only offerings are not legally required to deliver a specific disclosure document, but most serious issuers prepare one, and you should be wary of any deal that will not.

Subscription agreement

This is the contract you sign to buy in. It usually includes representations that you are accredited, that you understand the risks, and that you are buying for investment rather than resale.

Operating or partnership agreement

For funds and LLCs, this document sets out how profits are split, when you can withdraw, how the manager is paid and what voting rights you have. It often matters more than the marketing materials.

Financial statements

Ask whether they are audited, reviewed or simply prepared by management. When non-accredited investors take part in a 506(b) deal, the SEC requires specific financial statement information to be given to them.

How can you check a private placement?

You can verify more than most people realize. Start with these steps.

Look up the Form D. Companies must file a Form D notice within 15 days of the first sale. Search the issuer's name on SEC EDGAR full-text search. A Form D shows the exemption claimed, the amount being raised and the names of executive officers. It is a notice, not an approval.
Check the people selling it. If a broker is involved, look them up on FINRA BrokerCheck. Our guide on how to choose a financial advisor walks through BrokerCheck and the SEC's adviser database.
Read the risk factors first. They tell you what the issuer's own lawyers think could go wrong.
Confirm who holds the money. Ask which bank or custodian receives your funds and who audits the books.

What are the risks of investing in a private placement?

Private placements carry risks that public stocks and bonds mostly do not.

Illiquidity. The SEC notes that buyers receive "restricted securities." You may have to hold for years, and there may be no buyer when you want out.
Limited disclosure. No SEC staff review the offering. You rely on what the issuer chooses to tell you.
Valuation uncertainty. There is no daily market price, so the value you see on statements is often an estimate.
Concentration. High minimums can push a large share of your savings into one company or manager.
Fraud risk. The anti-fraud rules still apply, but bad actors favor offerings with little oversight. Read our warning signs of investment fraud before wiring money anywhere.

Private placements also include legitimate, well-run businesses and funds; the point is that the work of checking them falls on you. Freedom Merchant Exchange, for instance, offers its merchant cash advance investments to accredited investors through a PPM, and the same checks above apply to it as to any issuer.

Frequently asked questions

Can a non-accredited investor invest in a private placement?

Sometimes. Rule 506(b) allows up to 35 non-accredited investors in any 90-day period, but each must have enough financial knowledge and experience to evaluate the deal, and the issuer must give them extra disclosure. Rule 506(c) offerings are open only to accredited investors.

Is a private placement approved by the SEC?

No. The issuer files a Form D notice, but the SEC does not review or approve the offering. Anyone who says the SEC has approved a private placement is misstating how the exemption works.

Can I sell my private placement investment later?

Usually not easily. Private placement securities are restricted, so resale is limited by law and often by the offering documents. Plan on holding until the issuer offers a redemption, sale or other exit.

Do states regulate private placements?

Partly. Rule 506 offerings are exempt from state registration, but the SEC notes that states can still require notice filings and collect fees, and state anti-fraud laws still apply.