What is a Private Security?
Private securities are investable assets issued by a privately owned company in accordance with exemptions from the SEC’s registration requirements. Private securities allow private companies to raise capital from a limited number of accredited investors to start or grow their business. Although private securities are exempt from registration with the SEC, issuers of private securities are still subject to all of the anti-fraud provisions of the Securities Act of 1933.
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Who Issues Private Securities?
Private securities are used by private companies in all stages of their development. Any company that is duly incorporated can issue securities to raise capital, whether as seed capital or growth capital. Private securities can range in the amount raised from several hundred thousand dollars raised by small start-ups to tens of millions of dollars raised by large growing private companies. Over the last decade, many private companies chose to use private securities to raise capital instead of doing an initial public offering (IPO), giving rise to “unicorns” – which are privately held companies with multi-billion dollar valuation.
Are There Risks Associated with Private Securities?
Although large mature companies can issue private securities to raise capital, private securities are often used by smaller, early-stage or growing companies. As a result, investing in a private security gives an investor the potential to realize greater returns if they back the right business. However, all investment returns must be considered in light of risks associated with such investments.
When it comes to risk, here’s a reality check: all investments carry some degree of risk. Stocks, bonds, mutual funds, exchange-traded funds, and private securities can lose value, even all their value. Private securities may carry a higher degree of risk of loss of all value since the companies issuing such securities are younger and have a shorter operating history or are involved in the development of novel products and services. Therefore, in evaluating each investment opportunity an investor should consider risks along with potential returns.
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Unlike securities issued in public markets, private securities tend to have very limited secondary market liquidity. Therefore, investors participating in private securities must consider their liquidity needs in deciding whether or not to invest in private securities.
All private securities are restricted from resale for a period of 1 year from the date of the issuance. Following the 1 year restricted period, an investor can sell their holdings following SEC Rule 144 among several other options. An investor that is not an affiliate of the company that issued the private security can sell their holding to another investor if they are able to find a buyer. However, even after the expiration of the restriction period these securities cannot be sold on public markets or to anyone who is not an accredited investor.
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Information Disclosures by Issuers
Private security issuers have fewer regulatory requirements to disclose detailed financial and operational data when compared to issuers in public markets. The Private Placement Memorandum (PPM) is often the main source of information about the issuer’s business plans.
iownit provides tools and templates for issuers to provide as much information and disclosures to the prospective investors as they can. Investors should note that the PPM may contain forward-looking statements that may or may not be achieved by the issuing company.
Securities Holder’s Rights
Companies listed on the iownit platform issue digital securities directly to investors. As a security holder, the investor has all the rights normally associated with investing in private companies. Depending on the class of security, investors may have voting rights, rights to a dividend or interest distributions, etc. In addition, investors may have certain information rights such as the right to periodic updates from the company. However, the companies listed on the platform are not bound by the same stringent information disclosure requirements as publicly listed companies.
Preventing and Reporting Fraud
All issuers are subject to anti-fraud provisions of the Securities Regulations. Fraud Detection and Reporting – The Office of Fraud Detection and Market Intelligence (OFDMI) centralizes FINRA’s review of allegations of serious fraud and significant investor harm, and serves as a central point of contact, both internally and externally, on fraud-related issues. Investors suspecting potential fraud should notify IOI Capital and Markets, LLC Compliance and FINRA OFDMI of their concerns.
Private securities are an asset class that allows investors to diversify their investment portfolio, and invest capital outside of public markets. However, private securities may have additional risk factors due to a lack of market infrastructure.
You can learn more about how private securities function on iownit here: