"Private placement" refers to a sale of any security that is not public. The seller doesn't have to register the sale with the Securities and Exchange Commission, and it incurs fewer costs than an initial public offering, making it attractive to small companies wishing to raise capital. The SEC relaxed its restrictions on private placements in 1992, but businesses need to understand various federal and state securities laws and follow the procedures carefully.

History
Prior to 1992, the SEC stipulated that private placement offers could only be made to a limited number of investors who the SEC considered "sophisticated." What this meant was that the investors had to be capable of evaluating an investment and understanding the risks. Additionally, companies couldn't advertise the sale and there were restrictions on reselling the stock. The SEC changes in 1992 lifted the limit on the number of investors, relaxed the conditions of resale and allowed companies a bit more leeway in promoting the sale.

Federal Securities Law
Most of the rules affecting private placement are in Section 4(2) of the federal securities law. This exempts a sale of securities worth up to $5 million from registration. The investors must be accredited, which means they are either existing company management or they are experienced investors that have an existing relationship with the company. The seller must provide the investors with recent financial statements and an analysis of the risks involved with the investment.

Regulation D
Rules 501 to 508 in Regulation D of the Securities Act, adopted in 1982, relate to private placements. In particular, rules 504, 505 and 506 list the restrictions on the sum and number of investors allowed for three different types of private offerings. Rule 504 applies to companies raising no more than $1 million in a year, while companies wishing to raise at least $5 million in a year must follow rule 505, which has more restrictions on investors and their assets. Rule 506 allows an unlimited sale of securities to an unlimited number of investors, but no more than 35 of the investors can be non-accredited, under the SEC definition.

Solicitation
There are a number of restrictions on promoting a sale, which is one of the reasons why commentators on private placements often state that investors find it almost impossible to find a private placement. Sellers cannot use cold calling, nor can they promote the sale through any medium, even if it is indirectly, such as in a newspaper interview. The company can't hold any seminars about the offer, nor can they announce it at any other seminars they attend.