Private Placement

A private placement under the USA is generally:

1. A.Always prohibitedThis reads a limited offering as illicit. Private placements are a recognized way to raise capital; the restrictions on how many are approached and on general advertising are conditions of the exemption, not evidence of wrongdoing.
2. B.A registered public offeringThis is the direct contradiction of the term. The exemption exists so the offering need not be registered, and a private placement is defined by the absence of the broad public distribution a registered offering involves.
3. C.An exempt securityThe closest answer, and right about the outcome: no registration is required. It picks the wrong track, though. The relief attaches to the manner of the offering rather than to the instrument, and the very same security offered to the public at large would need to be registered.
4. D.An exempt transactionCorrect - limited offerings are exempt transactions.

Why: A private placement (limited offering) is an exempt transaction.

Securities sold under a Regulation D private placement are...

1. A.Guaranteed against loss by the issuerNo such guarantee exists; these are high-risk investments.
2. B.Exempt from SEC registrationCorrect — Reg D is a registration exemption.
3. C.Insured by the FDICPrivate placements are risky, uninsured securities.
4. D.Registered with the SEC like a public offeringThe whole point of Reg D is to avoid full registration.

Why: Reg D provides an exemption from SEC registration, so private placements are unregistered securities sold mainly to accredited investors.

Fallbrook Analytics is conducting an offering to accredited investors under Rule 506 of Regulation D and will sell to residents of State N. The State N Administrator writes demanding that the company register the offering in the state and submit to a merit review of the terms. What is the correct position?

1. A.The Administrator is correct, because a state may always require registration of any offering sold to its own residents.Incorrect. NSMIA makes Rule 506 securities covered securities and preempts state registration and merit review of the offering.
2. B.The Administrator may not require registration or merit review of a Rule 506 covered security, but may require a notice filing and a fee and retains full antifraud enforcement authority.Correct. Preemption is limited to registration and merit review; notice filings, fees and antifraud jurisdiction survive.
3. C.The state has no authority of any kind over the offering, so it may not require a notice filing, charge a fee or investigate fraud.Incorrect. It overstates preemption. Notice filings, fees and antifraud authority are expressly preserved to the states.
4. D.The Administrator may not require registration, but only because the purchasers are accredited investors rather than because the security is covered.Incorrect reasoning. Preemption follows from the securities being covered securities under NSMIA, not from the status of the purchasers.

Why: Securities sold in a Rule 506 offering are covered securities under the National Securities Markets Improvement Act. Congress made federal regulation exclusive for that category, so a state may NOT require registration of the offering or subject its terms to a merit review. The Administrator demand is therefore beyond his authority as stated. States are not, however, cut out entirely. They retain three specific powers over covered securities. They may require a NOTICE FILING, typically a copy of the Form D filed with the SEC together with a consent to service of process, they may charge a filing FEE, and they retain full authority to investigate and bring enforcement actions for FRAUD or deceit in connection with the offering. Preemption is therefore about registration and merit review only; it is not a general immunity from state law. Separately, the persons selling the offering may still need to be registered in the state as broker-dealers or agents unless an exclusion applies to them.

An investor needs cash and tries to sell a bond that rarely trades. The only bids available sit well below the last reported price. This exposure is best described as:

1. A.Liquidity risk, the risk of being unable to sell promptly at a fair price.Correct. Thin trading forces a seller to accept a discount, which is precisely what marketability risk describes.
2. B.Credit risk, the risk that the issuer fails to make its scheduled payments.Wrong. Nothing in the facts suggests the issuer has missed a payment or is likely to miss one.
3. C.Market risk, the risk that the entire bond market declines in value together.Wrong. A broad market decline would move prices for everyone, while the problem here is finding any buyer at all.
4. D.Reinvestment risk, the risk of having to put proceeds back to work at a lower rate.Wrong. That risk arises after a sale or a maturity, when the proceeds have to be put back to work.

Why: Liquidity risk is the risk that a holder cannot convert a position into cash quickly without surrendering value. It is driven by how many buyers and sellers are active in that particular instrument, which is why thinly traded municipal issues, private placements and limited partnership interests carry so much of it. The discount the seller must accept reflects that scarcity rather than any judgment about the issuer's finances. An investor who may need money at short notice should keep enough of the portfolio in instruments with deep and continuous markets.