Private Placements

Private Placements and Exempt Offerings

Regulatory status current as of June 2026 — verify effective dates, dollar thresholds, and pending rulemakings against current SEC/FINRA/FinCEN sources before advising.

Core Concepts

The Registration Baseline and the Exemption Architecture

Securities Act §5 prohibits offering or selling a security without an effective registration statement. Every private placement rests on an exemption from that requirement. The statutory exemption is §4(a)(2) — "transactions by an issuer not involving any public offering" — a facts-and-circumstances standard shaped by SEC v. Ralston Purina (investors must be able to "fend for themselves"). Because §4(a)(2) alone is uncertain, most issuers rely on Regulation D (17 CFR 230.500-508), a non-exclusive safe harbor. Losing the safe harbor does not automatically mean a §5 violation, but the issuer must then defend the offering under raw §4(a)(2), a materially weaker position. State blue-sky registration is preempted for Rule 506 offerings because they are "covered securities" under Securities Act §18(b)(4)(F), though states retain notice-filing and antifraud authority.

Rule 506(b) — The Traditional Private Placement (17 CFR 230.506(b))

• No general solicitation or general advertising (Rule 502(c)). The issuer (and anyone acting on its behalf, including a placement agent) must have a pre-existing, substantive relationship with offerees, or use another means that does not constitute general solicitation.
• Unlimited accredited investors plus up to 35 non-accredited purchasers (per offering, counted under Rule 501(e)), each of whom must be "sophisticated" — alone or with a purchaser representative, capable of evaluating the merits and risks (Rule 506(b)(2)(ii)).
• If any non-accredited investor purchases, the issuer must furnish the disclosure specified in Rule 502(b) — financial statements and information comparable to a registered offering — which is why most 506(b) offerings in practice are accredited-only.
• Self-certification is acceptable: the issuer needs a reasonable belief that investors are accredited (Rule 501(a) preamble), typically documented through an investor questionnaire. No verification procedures are mandated.

Rule 506(c) — General Solicitation with Verification (17 CFR 230.506(c))

Added by the JOBS Act (2012, effective September 2013):

• General solicitation is permitted — public websites, mass email, advertising, demo days.
• All purchasers must be accredited, and the issuer must take reasonable steps to verify accredited status. Self-certification alone is not sufficient. The verification requirement is a separate condition — an issuer can fail 506(c) even if every purchaser was in fact accredited.
• Non-exclusive verification methods (Rule 506(c)(2)(ii)): review of tax forms (W-2, 1099, K-1) for the two most recent years plus a written representation for the current year (income test); review of bank/brokerage statements and a credit report within the prior three months plus a liabilities representation (net worth test); written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA who has verified status within the prior three months.
• Minimum-investment-based verification (SEC staff no-action guidance, March 2025): an issuer may reasonably rely on high minimum investment amounts (at least $200,000 for natural persons, $1,000,000 for entities) combined with written representations of accredited status and that the investment is not financed by third parties, absent contrary knowledge. Where those conditions are not met, apply the principles-based standard: the reasonableness of steps depends on the nature of the purchaser, the information the issuer has, and the terms of the offering (minimum investment, manner of solicitation).
• An offering that begins under 506(b) may convert to 506(c) prospectively (SEC C&DI 256.34), but not the reverse — once general solicitation has occurred, 506(b) is unavailable for that offering.

Accredited Investor — Rule 501(a) (17 CFR 230.501(a))

Natural persons qualify by:

• Income: individual income over $200,000, or joint income with a spouse or spousal equivalent over $300,000, in each of the two most recent years with a reasonable expectation of the same in the current year (Rule 501(a)(6)).
• Net worth: over $1,000,000, individually or jointly, excluding the primary residence (and excluding mortgage debt up to the home's value; underwater mortgage excess counts as a liability) (Rule 501(a)(5), as amended by Dodd-Frank §413(a)).
• Professional certifications (2020 amendments, effective December 2020): holders in good standing of FINRA Series 7, Series 65, or Series 82 licenses (Rule 501(a)(10) and the SEC's designating order).
• Knowledgeable employees of a private fund, for investments in that fund (Rule 501(a)(11), cross-referencing Investment Company Act Rule 3c-5).

Entities qualify as, among others: entities with over $5 million in assets not formed for the specific purpose of the investment (Rule 501(a)(3)); SEC- and state-registered investment advisers and exempt reporting advisers (Rule 501(a)(1)); any entity owning over $5 million in "investments" as defined in ICA Rule 2a51-1 (Rule 501(a)(9), a 2020 catch-all covering Indian tribes, governmental bodies, and foreign entities); family offices with over $5 million under management and their family clients (Rule 501(a)(12)-(13)); and entities all of whose equity owners are accredited (Rule 501(a)(8), look-through).

Time anchoring: the $200,000/$300,000 income and $1,000,000 net worth thresholds are fixed in Rule 501(a) and are not inflation-indexed — they have been unchanged since 1982 (income) and since the 2010 Dodd-Frank primary-residence exclusion (net worth). Dodd-Frank §413(b) requires the SEC to review the accredited investor definition at least every four years; reviews have so far left the dollar tests unchanged, but pending rulemaking could change them — verify before advising.

Qualified Purchaser and the Fund Exclusions — ICA §3(c)(1) vs §3(c)(7)

Private funds avoid Investment Company Act registration through one of two exclusions from the §3(a) "investment company" definition:

• §3(c)(1): no more than 100 beneficial owners of the fund's outstanding securities and no public offering. A qualifying venture capital fund — one with no more than $12 million in aggregate capital contributions and uncalled commitments (as adjusted; originally $10 million under the Economic Growth Act of 2018, raised by SEC inflation adjustment effective 2024) — may have up to 250 beneficial owners (§3(c)(1)(C)).
• §3(c)(7): no beneficial-owner limit (in practice capped at 1,999 holders of record to avoid Exchange Act §12(g) registration), but every owner must be a qualified purchaser at the time of acquisition.
• Qualified purchaser (ICA §2(a)(51)(A)): a natural person owning at least $5,000,000 in "investments" (as defined in Rule 2a51-1 — securities, real estate held for investment, commodity interests, cash held for investment; not the primary residence or a personally used asset); a family-owned company with $5 million in investments; a trust meeting specified conditions; or any person owning and investing at least $25 million in investments for its own account or others. The $5 million threshold is not inflation-indexed — anchored as of 2026, unchanged since the 1996 statute.
• A fund cannot mix regimes for one vehicle: a §3(c)(1) fund may admit accredited-but-not-qualified purchasers; a §3(c)(7) fund may not, ever. Look-through rules apply when an entity formed for the purpose of investing, or a §3(c)(1)/§3(c)(7) fund owning 10%+ of a §3(c)(1) fund's voting securities, invests (§3(c)(1)(A)).

The Three-Tier Confusion: Accredited vs Qualified Client vs Qualified Purchaser

Advisers routinely conflate three distinct tests that serve three distinct statutes:

1. Accredited investor (Securities Act Rule 501(a)) — who may buy in a Reg D offering. $200K/$300K income or $1M net worth ex-residence; not indexed.
2. Qualified client (Advisers Act Rule 205-3) — to whom a registered adviser may charge performance fees under §205(a)(1). This threshold is inflation-adjusted by SEC order every five years; as of the 2026 anchor it sits above the accredited tests ($1.1M assets under management with the adviser or $2.2M net worth, per the 2021 order, with the next adjustment due 2026). See the fee-billing skill for the authoritative current figures and adjustment mechanics.
3. Qualified purchaser (ICA §2(a)(51)) — who may own a §3(c)(7) fund. $5M in investments; not indexed.

An investor can be accredited but neither a qualified client nor a qualified purchaser. A 3(c)(1) fund charging carried interest must confirm investors are qualified clients (if the manager is an SEC-registered adviser); a 3(c)(7) fund needs qualified purchasers, full stop.

Form D, Bad Actors, Integration, and Resales

• Form D (Rule 503): the issuer must file a notice on Form D with the SEC via EDGAR no later than 15 calendar days after the first sale of securities in the offering, and amend annually for continuous offerings and upon material changes (Rule 503(a)(3)). Filing is not a condition of the 506 exemption itself, but Rule 507 disqualifies future Reg D reliance for issuers enjoined for Rule 503 violations, and states expect parallel notice filings.
• Bad-actor disqualification (Rule 506(d)): the exemption is unavailable if the issuer or a "covered person" (directors, executive officers, 20% beneficial owners, promoters, placement agents and their covered personnel) has a disqualifying event — criminal convictions, SEC or state regulatory orders, FINRA suspension/bar — occurring after September 23, 2013. Pre-existing events must instead be disclosed under Rule 506(e). The issuer must exercise reasonable care (factual inquiry, questionnaires) to establish the absence of disqualifying events.
• Integration (Rule 152, restructured March 2021): two offerings are not integrated if, based on facts and circumstances, each independently complies with an exemption; four safe harbors apply, including offerings more than 30 days apart (Rule 152(b)(1), subject to the general-solicitation carve-outs) and a completed 506(b) offering followed by a 506(c) offering. The old five-factor test and six-month rule are superseded.
• Resale restrictions: Reg D securities are "restricted securities" (Rule 144(a)(3)). Purchasers must buy for investment, not distribution; resales rely on Rule 144 — a six-month holding period for issuers subject to Exchange Act reporting, one year for non-reporting issuers (Rule 144(d)), with additional current-information, volume, and manner-of-sale conditions for affiliates — or on §4(a)(7)/the so-called "§4(a)(1-1/2)" doctrine for private resales to accredited investors.

FINRA Filing Requirements and the Recommendation Overlay

• FINRA Rule 5123: a member selling a private placement to retail investors must file the offering documents (PPM, term sheet) with FINRA's Corporate Financing Department within 15 calendar days of the first sale, or indicate no offering documents were used. Exemptions cover sales solely to institutional accounts, qualified purchasers, and other listed categories (Rule 5123(b)).
• FINRA Rule 5122: member private offerings (a BD selling its own or a control entity's securities) require that at least 85% of proceeds be used for the disclosed business purposes and that the PPM be filed at or before first use.
• Reg BI / fiduciary overlay: recommending a private placement to a retail customer triggers the Reg BI Care Obligation (17 CFR 240.15l-1(a)(2)(ii)) for BDs and the Advisers Act §206 fiduciary duty for RIAs. Heightened factors: illiquidity against the client's liquidity needs and time horizon, concentration relative to net worth (many firms cap alternatives at 10-20% of liquid net worth), fee opacity (management fee plus carry plus fund expenses plus placement fees), stale or manager-marked valuations, limited transparency, and reasonable-basis diligence on the issuer (FINRA Regulatory Notice 10-22 requires independent investigation of the issuer and offering, not reliance on the PPM alone). Eligibility (accredited status) is the floor, not the analysis — an accredited investor can still receive an unsuitable or not-in-best-interest recommendation.
• AML: private funds and their placement agents face customer due diligence and beneficial-ownership expectations; FinCEN's investment adviser AML program rule (effective January 1, 2026, compliance date subject to FinCEN's 2025 postponement proposal — verify status) brings SEC-registered and exempt reporting advisers into the BSA regime. See the anti-money-laundering skill.

Worked Examples