Resources
A private placement is an offering of securities, typically to a small select number of potential investors, that is not required to be registered under federal or state securities laws. Private placements are exempt from registration because they consist of high-dollar offerings made to accredited investors or investors that are highly sophisticated with high net worths. Examples of accredited investors include: banks, investment companies, large employee benefit plans and charities, businesses in which all owners are accredited investors, and individuals with a net worth of at least $1 million or annual income of at least $200,000 (or $300,000 with jointly with their spouse).
The most frequently used exemptions from registration applicable to private placements are contained in Section 506, Regulation D of the Federal Securities Act of 1933 and rely on factors such as the private nature of the offering (i.e. not being advertised to the public,) restrictions on the resale of the offered securities, and that all or most of the investors qualify as accredited investors.
Additionally, some of the legal protections that apply to larger offerings made to public shareholders do not apply in the case of private placements.
The subscription agreement is used to keep track of how many shares have been sold and at what price the shares sold at for a privately held company. The subscription agreement details all the information about the transaction, such as the number of shares and price, and confidentiality provisions.
Some agreements include a specified rate of return that investors are guaranteed to receive. That might be a percentage of the company's net income, or it could be a specific amount in lump sums that are to be paid out on specific days.
Subscription agreements are most common with startups and smaller companies. They're used when business owners don't have the resources to work with venture capitalists or to take the company public.
In the past, to find investors to take part in the sale of stock by privately held companies, you could not solicit investors generally. However, in 2013 the SEC lifted the ban on general solicitation. This means you can advertise that you're looking for investors, such as online advertising through websites and social media. Note though that the investors still have to be vetted to ensure they are accredited investors. Only verified and accredited investors can be accepted as investors for your company.
However, there is an exception made for equity crowdfunding. Those are considered different and have different requirements.
Source: Subscription Agreement: Everything to Know (upcounsel.com)
An accredited investor in the United States is a person or applicable entity that meets certain financial or sophistication criteria that should, in most cases, allow such an investor to absorb or anticipate a complete loss related to an investment. In other words, if you are accredited then U.S. law contemplates that you knew, or should have known, that an investment was a bad idea prior to making the investment.
Anyone can “invest” in the stock of a company not registered with the Securities and Exchange Commission, but a person or entity is generally deemed “accredited” if one or more of the following three criteria are met:
Earnings qualification – must earn more than $200k per year or $300k per year with a spouse. Earnings must have met the minimum for each of the last two years and must be expected to remain the same going forward.
Net worth qualification – the individual on their own or with their spouse must have a net worth of $1,000,000. The value of the investors primary residence cannot be used to meet the minimum.
Insider qualification – those who are general partners, executive officers or a combination of both of the company issuing the stock.
Simply put, a person must be wealthy and/or have a strong understanding of the risks of investing to be considered “accredited”. You can learn more about calculating net worth from the SEC website; this is important if you are considering raising money for your business from private investors.
Private offerings are essentially deregulated offerings where limited information can be presented and the risk is generally thought to be significant; therefore, non-accredited investors are protected related to such investments in ways that accredited investors are not.
Please refer to 33-9415.pdf (sec.gov)
Forming a limited partnership (LP) is a method of structuring a business. For an LP to be valid and to operate legally, it must be registered in the state where the business is located. To register a limited partnership, a variety of documents are required, including state registration forms. Depending on the nature of the business, additional documents may be required.
Basically, general partnerships and limited partnerships function in the same way. The only difference is that limited partnerships need at least one limited partner and one general partner.
A general partner holds complete liability for the actions of the business, including debts and lawsuits. Limited partners, on the other hand, can only be held liable for the money that they've put into the business. Additionally, limited partners are not as involved in operating the business as a general partner would be.
Source: Limited Partnership Formation Documents (upcounsel.com)