The World of Private Placements: Reg Ds, 506(b)s, and 506(c)s

In my trading days, I remember the beginning moments of stocks IPOing. I remember Google's IPO on August 19, 2004, one day after my 23rd birthday. It opened at 100, traded down to 95, and then bounced to head back up (more or less for forever). You could have bought it at any point that day, held it, and it probably would have been your best investment ever.

I saw a bunch of stocks IPO during my 7 years of equities trading, some good and some not so good.

But they always got me thinking: how do you get in before the stock IPOs?

If you got in at a fraction of the IPO price, years prior, then you had a good chance of a high return on your investment. Of course, not all make it to an IPO. Some exit privately. Many fail. But it always intrigued me.

This is the world of Regulation D Private Placements.

Regulation D Private Placements are a type of investment offering that allow a company to raise debt or equity capital without having to register the securities with the SEC. This allows companies to raise capital more easily and more cheaply. They can raise an unlimited amount of capital.

For an investor to invest in a Regulation D Private Placement, he or she typically has to be an accredited investor, defined as having an income of at least $200K in each of the past two years and an expectation of that for this year or $300K joint with spouse, or having a net worth of at least $1M excluding primary residence.

The logic is that if you're accredited, then you should have either the understanding and/or means to protect yourself.

The two most common types are 506(b) and 506(c).

The main difference between 506(b) and 506(c) Regulation Ds is the way in which you become aware of them. 506(c)s allow for general marketing, so if you see an ad about a private placement offering, it's a 506(c). 506(b)s do not allow for general marketing, so you will only learn about these through existing relationships you have with a Registered Rep of a Broker-Dealer who is licensed to offer them.

Another difference between the two is the accreditation process. 506(b)s are based on existing relationships where the registered rep knows that the investor is accredited. 506(b)s also allow for up to 35 of the investors in the offering to be non-accredited. Investors in these offerings have to attest to being accredited investors.

For a 506(c) offering, all investors must be accredited. And they need to be verified as such, typically with a letter from a CPA.

Historically, more of the Reg D offerings were 506(b)s, but the market is moving away from those and more into 506(c)s.

For you the investor, this is generally a good thing as you'll likely have higher visibility into the various open offerings at any given point.

Either way, it's all about access. These offerings are limited - there is a cap to how much a given company is raising for itself or for a specific project/fund. Getting access to the best deals is a game that people have been playing for decades.?

There are all kinds of Reg Ds, not just companies looking to IPO. Real estate private equity, private credit, oil and gas, private equity, etc.

Start a relationship with a Registered Rep (or multiple) if you don't have one already so that you can see these exclusive offerings and potentially add them to your portfolio if they make sense.