What are Private Securities?
Private securities are investments that are sold to a limited number of investors instead of being traded on public stock exchanges. They don’t have to be registered with the U.S. Securities and Exchange Commission (SEC), provided that they are issued and traded on an exemption.
A company might want to sell private securities to raise capital without having to complete a large amount of regulatory requirements.
But, how do they work? Read the rest of this article to explore private securities in greater detail, such as how they differ from public securities, and how a lawyer can help you navigate private securities in a legal way.
What are Differences Between Public and Private Securities?
Public and private securities have some important differences. Public securities enable companies to raise capital via public exchanges or markets. The companies must disclose extensive financial and company information to investors on a regular basis.
By comparison, there are fewer disclosure requirements for private securities.
Other differences include:
- Accessibility. While public securities are offered to the general public, private securities are reserved for high-net-worth persons or venture capitalists. However, private securities give investors a chance to invest in startups before they’re publicly traded.
- Liquidity. It’s common for public shares to be sold at a faster rate than private ones. This is one of the biggest advantages of public securities.
- Risk and returns. Private securities are usually favored by sophisticated investors who want to achieve higher returns, although there can be a higher risk.
What are Common Types of Private Securities?
Some typical private securities include:
- Private equity. This involves investing in companies not listed on public stock exchanges.
- Venture capital. Funding is provided to startups that have growth potential and want to scale quickly.
- Private real estate funds. Investor capital is collected to invest in property.
- Private debt. Loans are made directly to companies.
What Laws Govern Private Securities?
There are various laws that govern private securities. These include:
- Securities Act of 1933. This specifies that any sale or offer of securities must be registered with the SEC unless it is exempt.
- Regulation D. This provides safe harbor exemptions from registration. It has two rules, 506(b) and 506(c).
- Rule 506(b). This enables unlimited money to be raised from up to 35 non-accredited investors and an unlimited number of accredited investors. General solicitation and advertising is prohibited.
- Rule 506(c). This rule allows issuers to advertise and solicit their offering if all investors are accredited. Issuers have to take steps to ensure they have verified the investors to the best of their ability.
- Regulation A+. Small companies can raise up to $75 million over a period of 12 months, with fewer disclosure requirements. It’s usually called a mini public offering because securities can be offered to the general public.
How Do Private Securities Work?
There are various steps involved in the private securities process. These include:
- Considering financial requirements. Prior to offering a private security, the company needs to think about how much money they want to raise and for what purpose.
- Finding potential investors. The company will choose their potential investors.
- Drafting an offering memorandum. This document is used to appeal to potential investors. It explains the company’s business model and discloses risks to investors.
- Presenting to investors. The company will present their offering to the potential investors.
- Due diligence. The investors will conduct research into the company and offering. They can review the company’s memorandum, financial statements, and other information.
- Finalize capital. When investors are committed, details of the private securities (such as their number and pricing) will be finalized.
- Transfer funds. To end the process, the investors will transfer their funds to the company.
How Can a Lawyer Help You with Private Securities?
Since private securities can be complex, especially for beginners, it’s important to consult a qualified securities lawyer who can guide you through the process. Here are some practical ways in which they will help you.
- Investment structuring. A lawyer will guide you on the best legal structure for your investment to ensure you meet all specific requirements and the investment is aligned with your business goals.
- Compliance. A key element of private securities is ensuring that regulations are adhered to. This takes the form of checking compliance with relevant laws and that all disclosure duties are completed.
- Drafting documents. A lawyer is skilled at preparing all important documents involved in the investment, such as offering memoranda. These must be clear, legal, and professionally drafted to avoid issues.
- Due diligence. A lawyer will provide thorough due diligence, which is especially important if you’re an investor. They’ll review the investment and spot hidden risks.
- Rights. They will check that your rights are defined and legally enforceable to protect your interests.
- Dispute resolution. Should conflicts arise between the company and investors, a lawyer will provide guidance and represent you in court.
Where to Find a Lawyer for Private Securities
Although hiring a lawyer for help with private securities is recommended, you might wonder where to find one. This isn’t always easy via networking or your social circles, and it can be a time-consuming process.
On ContractsCounsel, one of the largest online legal marketplaces where clients connect with vetted lawyers on the platform, you can find a securities lawyer without having to cold-call traditional law firms.
The platform provides all the research you need. You can search for lawyers based on research such as their level of expertise, years of experience, client ratings, and previously completed projects.
Once you find the right lawyer for your legal requirements, you’ll have more confidence to offer or invest in private securities.