What is a Private Placement Investment?

Most investors have heard of private placements (PPs), but many people aren’t quite sure what they are or how they work. The short explanation is that private placements are, as their name describes, exclusive. They’re not open to the public. You generally have to know someone who knows someone to take advantage of these unique financial arrangements. Or you might choose to locate a broker who specializes in them and can help you park some of your money in one.

If you’re interested in delving into the world of non-traditional investing, take the time to find out exactly what these instruments are, how they’re structured, where to find them, how to qualify to invest in one, and the unique precautions to take before signing on the dotted line.

What are Private Placements?

The Securities and Exchange Commission recognizes and allows three kinds of offerings, which are equity, IPOs and private placements, commonly called Regulation D investments. One thing that sets the Reg D market apart from the other two is its size, standing at several trillion dollars. The PP market is massive. It consists of unregistered securities sold to a few accredited investors. In essence, one must be invited to invest in a PP. They include family-only businesses as well as huge start-ups that rely solely on angel investors with very deep pockets.

The SEC says that only about a quarter-million individuals put money into private placements during the past decade. That means only a tiny fraction of people who buy and sell traditional equities are also involved in PPs. In most cases, only accredited investors can take part in PPs. That means you’ll need a steady income in excess of $200,000 or net worth of $1 million.

No Secrets

It’s important to remember that PPs are not secret or shady in any way. They are simply private. The companies raising money this way prefer to go the less-regulated route and bring in as much accredited funding as possible. In many cases, a company that offers a PP follows up with an initial public offering and eventually ends up selling traditional shares of stock. But it’s up to the company to decide what method to use because SEC regulations allow any or all of the three ways.

Current Opportunities

The cannabis industry is rife with pre-IPO investment opportunity and has already drawn billions in angel funding. In fact, as the entire cannabis sector continues to take off, most financial experts believe that the majority of PP opportunities will be in this area of the economy. The key thing for interested investors to remember is to spend time researching any company before making a monetary commitment.

What to Watch for Before Investing

Never put your hard-earned money into anything without a healthy dose of due diligence. That means spending time finding out what the offering is for. Most companies, even when they don’t have to go through the standard SEC hoops, post information about how PP money will be used and how much they need. As with any other financial commitment, learn about the key personnel of the organization, their backgrounds and how they came to hold their current positions.

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