Law and regulation of private placement of common stock in the US

1. Prospectus requirement

  • The general rule in the USA is that an offer and sale of a security to the general public requires registration with the US regulator, the Securities and Exchange Commission, and the delivery of a prospectus.
  • No registration or prospectus is required for private placement transactions with sophisticated investors, such as “qualified institutional buyers” or “QIBs”
    as defined in Rule 144A under the US Securities Act of 1933, as amended (the “US Securities Act”), and “accredited investors” as defined in Regulation D under the US Securities Act.
  • Even though a prospectus is not required in private placement transactions, in most circumstances it is customary in the market to have a written offering document that provides disclosure to potential investors.

2. Prospectus exemptions

Key exemptions
  • Section 4(a)(2) under the US Securities Act, usually used for sales to “QIBs”.
  • Regulation D under the US Securities Act for sales to “accredited investors”.
  • Rule 144 A under the US Securities Act for resales to QIBs.

3. Ability to offer shares to

3.1 Institutional/professional/authorised investors (for example investment funds, insurers, pension funds)

Yes.

3.2 High net worth individuals 

Yes.

3.3 Retail/public/others

No – private placement offerings should never be made to retail investors or to the general public in the USA, but up to 35 non-accredited investors under certain circumstances can participate in Regulation D private placement offerings.

4. Can the issuer approach potential investors on their own?

Yes, subject to the requirements of the private placement regime being followed, including that the issuer has a pre-existing relationship with the potential investor and the issuer does not conduct general solicitation or general advertising in the USA.

5. Can the issuer's financial adviser/placement agent approach potential investors on their own?

Yes, subject to the requirements of the private placement regime being followed (e.g. no general solicitation and no general advertising) as well as following the laws and regulations regulating the activities of broker dealers in the USA.

6. Are there any other exemptions which may be relied on?

There are other exemptions, but they usually limit the amount of capital that can be raised and have additional requirements that may make the cost of the offering prohibitive.