or all you ever wanted to know about private placements
The Securities and Exchange Commission is stepping into the meeting point of its mandates by looking to “simplify, harmonize, and improve” the framework for private placements. The SEC is looking to expand investment opportunities while balancing investor protections and the promotion of capital formation.
The 200+page release provides a summary of the various private placement regimes in one handy guide. As Chairman Clayton noted, its an “elaborate patchwork.”
Note that twice as much capital is raised from private placement than capital raised through registered offerings. On page 16, the SEC notes:
In 2018, registered offerings accounted for $1.4 trillion of new capital compared to approximately $2.9 trillion that we estimate was raised through exempt offering channels.
| Exemption | 2018 Amount Raised |
| Rule 506(b) of Regulation D | $1,500 billion |
| Rule 506(c) of Regulation D | $ 211 billion |
| Regulation A: Tier 1 | $ 0.061 billion |
| Regulation A: Tier 2 | $ 0.675 billion |
| Rule 504 of Regulation D | $ 2 billion |
| Regulation Crowdfunding; Section 4(a)(6) | $0.055 billion |
| Other exempt offering | $1,200 billion |
This has been true for at least the past decade, despite the elaborate patchwork. 506(b) offerings alone exceeded registered offerings last year.
As I’ve said in the past, private placement investments are not necessarily more risky than investments in registered offerings. The risk is one of liquidity. There is no market to buy or sell the investment so there is no ready exit.
If you had invested in Uber prior to the public offering, you had little choice but to sit and wait for a liquidity event. Now, you can liquidate your Uber position the same day.
The Concept Release is a great document to summarize the various ways to raise money privately, with the pros, cons and limitations of each.
The SEC has limited abilities to make wholesale changes. Many of the exemptions are driven by statute and would take Congressional approval. Nothing is passing in the Congress right now.
The SEC can make some changes around Regulation D that could be useful. The SEC should be careful that it does not disrupt the most widely used way to raise capital.
Sources:
I was expecting the acceptance growth curve of crowdfunding to be more robust by now. Being at the bottom of the pyramid should imply a wide, if thin, layer in the capital stack. Innovation ain’t easy, but I hope we see 10x the volume soon. Fueling new areas of startups and the job growth that implies depends on it.
Getting capital to new businesses is important. The crowdfunding regulatory platform is a mess. I don’t expect it to grow much as a capital source.