Top 10 Practice Tips: Private Placement Transactions

Posted on 06-22-2018

By: Chris Kelly, Jones Day

IN RECENT YEARS, THE STAFF OF THE U.S. SECURITIES AND Exchange Commission (SEC) has undertaken an initiative to bolster capital formation, including by providing companies more flexibility to access U.S. capital markets. As a result, recent changes to law and SEC interpretations provide companies with a broad range of potential private financing opportunities that can be executed more quickly and with less expense than traditional public registered securities offerings. However, the rapidly changing legal and regulatory landscape has also introduced additional nuances and complexity to be considered in the context of these offerings.

Because the consequences of mistakes in a private placement transaction can be severe, it is important for lawyers advising companies in connection with private placements to maintain a deep understanding of evolving securities laws and their interpretations in order to guide these companies in successfully planning, implementing, and executing their private placement transactions. Below are 10 practice points that you should be mindful of in steering a private placement transaction from start to finish.

1. Understand the company’s goals and needs.

Private placements, including private investments in public equities (PIPEs), provide companies with great flexibility, allowing them to issue a variety of instruments— common or preferred equity securities, straight or convertible debt securities, warrants, units, and/or bespoke securities— tailored to meet their particular financing needs. A company considering a private placement may not be familiar with the range of securities available and may not fully appreciate how a particular security fits within its existing capital structure. As a starting point, you should discuss with the company its strategic objectives for the proposed financing within the context of its existing capital structure and, within this framework, assist the company in deciding what type of security is best suited to the company’s goals and needs.

2. Find your U.S. federal securities law exemption for issuance and understand resale limitations.

Private placements occur within a complex and evolving regulatory framework of U.S. federal securities laws, stock exchanges’ rules, regulators’ interpretations, and companies’ own limitations under their existing capital structures. For purposes of U.S. federal securities laws, the fundamental principle is that a company may not offer or sell securities unless the transaction has been registered with the SEC or an exemption from registration is available. For a private placement to comply with the U.S. federal securities laws, there must be a valid exemption from the registration requirements available, and the terms and execution of the proposed offering and sale must comply with the requirements of that exemption. You should engage in a collaborative exercise with the issuing company to identify the exemption that is best suited to the proposed transaction from the range of available exemptions, including, among others:

  • Section 4(a)(2) exemption (Section 4(a)(2)) under the Securities Act of 1933, as amended, 15 U.S.C. § 77a et seq., (Securities Act)
  • Safe harbors of Regulation D under the Securities Act
  • Quasi-public offering structure of Regulation A (informally known as Regulation A+) under the Securities Act
  • Crowdfunding exemption under Section 4(a)(6) of the Securities Act (Section 4(a)(6))
  • Exemption for private placements under Rule 144A of the Securities Act (Rule 144A)
  • Offshore transaction exemption under Regulation S of the Securities Act
  • Exchange offer exemption of Section 3(a)(9) of the Securities Act

In order to choose an appropriate exemption, it will be necessary to know various key facts, including the proposed size of the potential offering, identity of the potential investors (and how they will be identified), location of potential investors, whether an investment bank will be engaged to facilitate the offering and, if so, in what capacity, the nature and extent of the marketing and distribution process, and other factors.

Most securities sold in private placements will be restricted securities that may not be resold unless the company registers the resale with the SEC or an exemption from the registration requirements is available for the resale. You should make sure that any restricted securities issued in a private placement bear an appropriate restrictive legend, which indicates these resale restrictions. The company will receive inquiries from holders about how to resell the securities that they acquire in the private placement, and you should familiarize yourself with potential resale exemptions and applicable state law about when and how a restrictive legend can be removed from restricted securities.

The most commonly utilized exemption for the resale of restricted securities is Rule 144 of the Securities Act (Rule 144), which permits the public resale of securities if a number of conditions are met. Among other things, Rule 144 requires that restricted securities be held for a certain period of time before they can be sold in the public market and that there be adequate current information about the issuing company available to potential purchasers. Where the holder of restricted securities is, or has been, an affiliate of the company, these securities are referred to as control securities, and additional technical requirements apply with respect to the volume of securities that can be sold, the manner in which they can be sold, and the filing of a notice of sale with the SEC under certain circumstances.

If the company agrees to register the resale of the restricted securities pursuant to a resale registration rights agreement (as is common in PIPE transactions) or otherwise, you should determine which SEC registration forms are available to the company and ensure that the company is aware of the timing, cost, and effort involved in the registration process. In connection with a registered resale, you should review the SEC’s guidance regarding so-called disguised primary offerings (e.g., Securities Act Rules Compliance & Disclosure Interpretation 612.09) and extreme convertibles (i.e., the SEC staff's restrictive application of Rule 415 under the Securities Act for secondary offerings), which can raise issues about the size of the resale transaction relative to the number of the company’s shares outstanding.

3. Don’t forget the company’s existing obligations.

Companies typically have outstanding securities, existing contracts, and regulatory obligations that may impose limitations or requirements on the issuance of new securities in a private placement. It is important at the outset to review the company’s existing agreements (e.g., organizational documents, outstanding instruments, preemptive rights agreements, and shareholders agreements, among others) and to consider existing regulatory obligations (e.g., public company disclosure requirements—particularly in the case of PIPEs, stock exchange requirements, and any industry-based ownership limitations) to determine whether any parties have rights in connection with the private placement or whether the private placement will trigger any existing obligations. For example, you should consider:

  • Whether the company’s organizational documents permit the proposed transaction or require shareholder votes or amendments before the transaction can proceed (such as an amendment to increase the number of authorized equity securities)
  • Whether the holders of existing securities have been granted any preemptive rights, rights of first refusal, or similar rights to participate in the transaction, or whether the transaction triggers conversion, anti-dilution, or other rights under existing instruments
  • If the company is a public reporting company (particularly, in the case of PIPEs), whether the transaction triggers disclosure obligations pursuant to the requirements of a Current Report on Form 8-K or under Regulation FD

4. Watch your 20% rule.

If the company’s stock is listed on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market (Nasdaq) and the offering is of equity or an equity-linked instrument (such as convertible debt, convertible preferred stock, or warrants), then you must pay attention to the relevant exchange’s 20% rule. As a general matter, for private placements the 20% rule requires shareholder approval of issuances of stock or equitylinked instruments representing over 20% of the pre-deal outstanding common stock or voting power, if the offering price or strike price is less than the market price of the stock or book value per share immediately preceding the transaction. Some important considerations in assessing the 20% rule are as follows:

  • Each transaction must be considered separately, on a case-by-case basis, with attention to when the applicable stock exchange’s rules might require aggregating multiple issuances for purposes of the 20% rule.
  • The exchanges’ rules and interpretations are detailed and differ from each other.
  • Registered direct and other hybrid offerings, as well as exchange offers, may be covered by the 20% rule.
  • A foreign private issuer is not required to follow the rule, subject to certain procedural requirements to confirm to the stock exchange that the rule is not required by its home country’s practices.
  • Failure to comply with the rule can result in delisting, disclosure of which is required by the filing with the SEC of a Current Report on Form 8-K.

5. Remember to analyze blue sky and world sky issues.

U.S. state and non-U.S. governments have their own securities laws and regulations—referred to as blue sky laws, in the case of U.S. states, and world sky laws, in the case of foreign governments—which can serve as a trap for the unwary in connection with certain private placement transactions. Federal preemption rules and the National Securities Markets Improvement Act of 1996 (NSMIA) created a limited class of covered securities that are not subject to blue sky registration requirements. Covered securities include:

  • Securities listed (or approved for listing) on the NYSE, Nasdaq, or other approved national securities exchanges
  • Securities where the same company has a class of securities with equal or greater seniority listed on any exchange identified in the prior bullet
  • Securities issued by an investment company registered under the Investment Company Act of 1940
  • Securities sold to certain qualified purchasers (a term that the SEC has not yet defined, although it has proposed— but not approved—a definition that would mirror the definition of accredited investors in Regulation D under the Securities Act)
  • Securities issued under specified exemptions from the registration requirements of the Securities Act, including secondary market transactions under Sections 4(a)(1) or 4(a)(3) of the Securities Act, securities of an SEC-reporting company brokers’ transactions exempt under Section 4(a) (4) of the Securities Act, crowdfunding transactions under Section 4(a)(6), certain (but not all) offers and sales exempt under Section 3(a) of the Securities Act, and securities exempt under Rule 506 of Regulation D under the Securities Act (Rule 506) transactions (but not Section 4(a)(2) itself)

You should carefully analyze whether the securities to be issued in a private placement are covered securities—if not, the offer and sale of these securities remains subject to the requirements of applicable blue sky laws, including state-level registration requirements. In addition, even where securities are covered securities, federal preemption rules still permit states to require notice filings and the payment of fees for offers and sales of covered securities within their borders. Form D, which is required to be filed with the SEC in connection with offerings under Regulation D, can often be used to satisfy blue sky notice requirements, but you should be careful to review all relevant blue sky requirements well ahead of the closing of a private placement transaction. You should also keep in mind that state-level broker-dealer and salesperson compliance requirements are not preempted under NSMIA, and persons or entities selling or distributing securities must always comply with such state requirements or identify an available exemption.

Whether or not securities are covered securities for U.S. federal preemption, any offer and sale of securities in non-U.S. jurisdictions remain subject to the requirements of applicable world sky laws, which you should vet with local counsel in the relevant jurisdictions.

6. Make sure that broker-dealers are aware of applicable FINRA rules.

If you represent a broker-dealer that is participating in a private placement (e.g., as a placement agent), you should remember that certain Financial Industry Regulatory Authority (FINRA) rules apply, including certain filing requirements and due diligence requirements.

With respect to filing requirements, you should familiarize yourself with FINRA Rules 5122 and 5123, among others, which are available at display_main.html?rbid=2403&element_id=4584. Subject to certain exemptions for securities placed solely with specified categories of investors:

  • Under Rule 5122, any broker-dealer offering and selling its own securities (or those of a control entity) must include specified disclosures within the offering materials, file with FINRA at or prior to their first use any offering materials provided to prospective investors, and apply the offering proceeds for permitted business purposes.
  • Under Rule 5123, any broker-dealer participating in a private placement must within 15 calendar days of the first sale, file with FINRA all offering documents that were provided to potential investors or indicate to FINRA that no such offering materials were used.

With respect to due diligence requirements, FINRA has provided guidance to broker-dealers that they have an obligation to conduct a reasonable investigation of an issuer and the securities offered in connection with private placement transactions. In addition, FINRA’s Rule 2111, which is available at html?rbid=2403&element_id=9859, requires broker-dealers to conduct a suitability analysis when recommending securities to both accredited and non-accredited investors, which should take into account the investors’ knowledge and experience.

7. Weigh any integration issues.

Often, companies execute private placement transactions concurrent with, or in close proximity to, separate private or public offerings. In such cases, the SEC’s integration doctrine addresses whether a putative private placement should be considered and required to be registered as a public offering. This can occur in two settings: (1) ostensibly distinct exempt offerings that are, in reality, a single offering that does not quality for an exemption from the registration requirements of the federal securities laws, and (2) an exempt offering that is, in reality, part of a purportedly separate registered public offering.

The SEC has clarified that different analytical frameworks apply to concurrent, or temporally serial, transactions solely involving private placements versus involving both a private placement and a public offering. In addition, the SEC has adopted numerous safe harbors, highlighted below, to provide certainty with respect to specific scenarios that might otherwise give rise to integration concerns.

In the case of concurrent or sequential private placement transactions, the SEC has developed a fulsome—albeit technically complex—integration doctrine to prevent companies from taking a transaction that would require registration with the SEC and breaking it up into several transactions, each of which individually may be claimed to be purportedly exempt from registration. You should carefully consider the integration analysis prior to commencing a private placement. Integration can cause a previously completed private placement to interfere with a new proposed private placement. It can also have the more serious consequence of having a current transaction eliminate the validity of an exemption that was relied upon for a previously consummated private placement. Generally, in the absence of an available integration safe harbor, the SEC’s well-known five-factor integration test is applied to determine whether transactions should be integrated. See Nonpublic Offering Exemption, Release No. 33-4452 (November 6, 1962). This integration test looks at whether the offerings are part of a single plan of financing, involve the same class of securities, are made at about the same time, involve the same type of consideration in each offering, and are made for the same general purpose.

In the case of a concurrent or sequential private placement and public offering, the SEC has updated its earlier integration guidance and has made clear that the appropriate integration analysis is that provided for in the SEC’s Revisions of Limited Offering Exemptions in Regulation D, SEC Release No. 33-8828 (August 3, 2007) (the 2007 release). Under the 2007 release, the SEC’s analysis focuses on how investors in the private placement are solicited for that offering. If the investors in the private placement become interested in that transaction because of the registration statement being utilized in the public offering, the 2007 release cautions that the registration statement would have served as a general solicitation for the private offering. In light of recent changes permitting general solicitations in connection with certain private placements, the application of the integration analysis in this context is more complicated and will be intertwined with your analysis of which exemptions are being relied upon for the private placement transaction.

As noted above, several safe harbors are available with respect to integration, including:

  • Rule 502(a) of Regulation D under the Securities Act, which protects offers and sales of securities that occur at least six months prior to the start of a Regulation D offering or at least six months after the completion of a Regulation D offering, provided that no offers or sales of the same class of securities occur within the applicable six-month period (other than pursuant to an employee benefit plan)
  • Rule 152 under the Securities Act, which (1) protects public offerings that are undertaken after a Section 4(a)(2) or Rule 506 private placement is consummated; and (2) pursuant to recent SEC guidance in Securities Act Rules Compliance & Disclosure Interpretation 256.34, protects a Rule 506(c) offering that is undertaken after a Rule 506(b) offering is consummated
  • Rule 155 under the Securities Act, which provides protections, upon the satisfaction of conditions specified in the rule, in connection with certain abandoned offerings, where (1) an issuer abandons a private offering under Section 4(a)(2) or Section 4(a)(5) of the Securities Act or Rule 506 and subsequently commences a public offering, or (2) an issuer abandons an SEC-registered public offering and subsequently commences a private offering
  • Rule 701(f) under the Securities Act, which provides protections for offerings contemporaneous with stock-based compensation issuances pursuant to Rule 701 under the Securities Act (Rule 701)
  • Rule 251(c) of Regulation A under the Securities Act, which protects a Regulation A offering from being integrated with (1) prior offers or sales of securities; (2) subsequent offers or sales of securities pursuant to an effective registration statement (subject to certain conditions), Rule 701, an employee benefit plan, Regulation S, or Section 4(a)(6); or (3) subsequent offerings made more than six months after completion of the Regulation A offering
  • SEC guidance regarding crowdfunding offerings under Section 4(a)(6), which protects a crowdfunding offering under Section 4(a)(6) from being integrated with another exempt offering as long as each exempt offering is conducted in accordance with the requirements of the applicable exemption
  • Rules 147(g) and 147A(g) under the Securities Act, which protect intrastate offerings under those rules from being integrated with (1) prior offers or sales of securities; (2) subsequent offers or sales of securities pursuant to an effective registration statement (subject to certain conditions), Regulation A, Rule 701, an employee benefit plan, Regulation S, or Section 4(a)(6); or (3) subsequent offerings made more than six months after the completion of the intrastate offering
  • SEC guidance included in the adopting release for Regulation S and the Note to Rule 502 of Regulation D under the Securities Act, which protects Regulation S offerings from being integrated with contemporaneous private placements
  • Rule 144A(e), which protects resales made in reliance on Rule 144A from affecting the availability of any exemption or safe harbor relating to prior or subsequent offerings

The application of these safe harbors can be nuanced, and you should carefully review the applicable safe harbor rules and available SEC guidance for any conditions that may be applicable for its availability.

8. Disclosure matters.

Depending on the exemption from registration under the Securities Act that is being relied upon, a private placement transaction may or may not be subject to specific requirements relating to the information that must be provided to potential investors. In addition to complying with these exemptionspecific requirements, you should remember that the antifraud provisions of both state and federal securities laws, including Rule 10b-5 (17 CFR 240.10b-5) under the Securities Exchange Act of 1934, as amended, 15 U.S.C § 78a et seq. (Exchange Act), apply to all sales of securities to offerees. As a result, any material misstatement or omission in the offering document for a private placement is subject to such anti-fraud provisions. Regardless of the medium by which information is provided to potential investors, you should ensure that adequate risk disclosure, specific to the company and its offering of securities, is conveyed.

In addition, where a public company is conducting a private offering, Regulation FD continues to apply and makes no distinction between oral and written statements made in connection with the private placement. As a result, a public company engaging in a private placement transaction must either publicly disclose any material information that it privately discloses to prospective investors in the private placement or obtain a confidentiality agreement from every recipient of the information, which also alerts them to potential public trading restrictions as a result of their possession of material non-public information. Further, you should confirm that a public company conducting a private offering is aware of its obligations with respect to the filing of a Current Report on Form 8-K in connection with unregistered sales of equity securities. This obligation applies unless the aggregate number of equity securities sold since the company’s last Exchange Act report constitutes less than 1% of the number of outstanding shares of the class of equity being sold.

9. Don’t forget Exchange Act registration triggers.

When a company issues equity securities in a private placement, you should remember that under Section 12(g) of the Exchange Act (Section 12(g)), the company will, subject to limited exceptions, be required to register the securities within 120 days after the last day of its first fiscal year ended on which it has total assets exceeding $10 million and the securities are held of record by either 2,000 or more persons or 500 persons who are not accredited investors. Some key considerations:

  • You should make sure that a company undertaking a private placement understands that even if this obligation is not triggered at the closing of the private placement transaction, subsequent resales of the securities could result in this registration requirement being triggered in the future.
  • A company that is required to register securities under Section 12(g) becomes subject to the ongoing periodic and current reporting requirements of the Exchange Act, including the filing of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K; the beneficial ownership reporting requirements and short-swing trading rules of under Sections 16 and 13(d) of the Exchange Act; the requirements of the SarbanesOxley Act of 2002 (15 U.S.C. 7201); and certain recordkeeping and internal controls requirements.

Because of the significant consequences of triggering the registration requirements of Section 12(g), you should discuss with your clients what processes and procedures will be put in place in connection with the private placement transaction to ensure that the number of holders of record remains below the thresholds described above.

10. Be prepared to change course.

Because private placements typically involve direct negotiation between the company and potential investors (some of which may be large or sophisticated institutions), fundamental characteristics of the offering may change significantly during the course of the transaction. Revisions to the terms of securities or the structure of the offering may change key facts underlying previous analysis that you have conducted and may implicate new issues that you have not considered. As the company and investors explore new transaction terms, you should constantly revisit your analysis to ensure that new issues and concerns are raised and addressed in a timely manner.

Chris Kelly is a corporate lawyer with more than 30 years of experience. He represents corporations and financial institutions in diverse domestic and international corporate finance matters including public equity and debt offerings, Rule 144A high yield offerings, private capital raisings, reorganizations, restructurings, recapitalizations, and acquisition transactions. Chris, a partner at Jones Day, regularly advises SEC reporting companies on corporate governance, board of directors, securities laws, stock exchange rules, and related public company regulatory compliance matters.

To find this article in Lexis Practice Advisor, follow this research path:

RESEARCH PATH: Capital Markets & Corporate Governance > Private Offerings > Private Placements > Practice Notes

For an overview of private placements, see


RESEARCH PATH: Capital Markets & Corporate Governance > Private Offerings > Private Placements > Practice Notes

For more information on issues to consider when conducting a private placement of securities, see


RESEARCH PATH: Capital Markets & Corporate Governance > Private Offerings > Private Placements > Practice Notes

To see a checklist of tasks to be undertaken in the closing of a private offering, see


RESEARCH PATH: Capital Markets & Corporate Governance > Private Offerings > Private Placements > Checklists

To learn more about private offering exemptions, see


RESEARCH PATH: Capital Markets & Corporate Governance > Private Offerings > Private Placements > Practice Notes