What To Expect With Your First Private Investment

Investing in private placements is very different from investing in public stocks. It’s not as easy as a click of the phone or telling a broker to execute a transaction.

Private investments involve more steps and can be broken up into four phases:

  • Pre-Qualification.
  • Due Diligence.
  • Funding.
  • Post-Funding.

Pre-qualification
Unlike public stocks, not everyone can invest in private placements, which are typically reserved for Accredited Investors.

An Accredited Investor is an individual that meets one of the following criteria:

  • Have a net worth exceeding $1 million individually or combined with a spouse (excluding the value of the primary residence).
  • Have an earned income exceeding $200,000 ($300,000 if combined with a spouse) during each of the last two calendar years, with a reasonable expectation of maintaining these income thresholds during the current year.

Private companies that are restricted to taking only Accredited Investors cannot even make offers to non-accredited investors without violating securities rules. To ensure compliance, private companies will have every prospective investor complete an Investor Questionnaire to verify Accredited Investor status.

For a particular class of private offerings – ones that allow advertising – it’s not enough to claim accreditation status, but your status must also be verifiable. This can be accomplished in one of two ways:

  • Accreditation can be verified by a qualified, independent third party familiar with the investor. Qualified parties include a CPA, attorney, or wealth advisor attached to a registered broker-dealer. These qualified third-parties can provide verification of an investor’s accreditation status simply through a one-page letter.
  • Verification can also be accomplished through a third-party commercial provider such as VerifyInvestor.com and www.earlyiq.com, who will review personal documentation such as W-2s, tax returns, and account balance statements to ensure the satisfaction of the financial criteria for qualifying as an accredited investor.

Due Diligence
Once accredited investor status is established, the private company can now formally offer you their securities through a Private Placement Memorandum (the “PPM”).

The PPM provides comprehensive information about the securities offering as well as the company doing the offering, including the company’s, business strategy, use of funds, financial terms, risks, and management background.

The PPM will include other documents as part of the offering package:

  • Subscription Agreement.
  • The company’s Operating Agreement or Partnership Agreement.
  • A form of the offered security.

Offering documents can be delivered physically, electronically, or through a secure portal. This due diligence phase is the opportunity for a prospective investor to analyze the deal, scrutinize management, and ask any relevant questions.

Most managers are accessible and are happy to answer questions about the offering, company, and management themselves during this phase.

Funding
Once comfortable with the offering and the company’s management, the prospective investor takes the next step towards becoming a full-fledged investor. This is done by filling out and signing the Subscription Agreement, including designating the number of securities to be acquired.

In the case of equity, the prospective investor will also be required to sign the company’s Operating Agreement or Partnership Agreement. The company will then review the Subscription Agreement, countersign it, and provide directions to the investor for paying for the securities.

Once payment is received, the company will transmit either a certificate of ownership (equity) or note/certificate (debt), evidencing the investor’s ownership of the company’s securities.

Post-Funding
After being accepted into the company, investors will be given access to an investor portal where the investor can receive updates from the company – including periodic financial statements and reports – and annual tax forms, including K-1s.

Most PPMs will designate a defined exit plan.

With debt securities, the notes/certificates will have defined terms and with equity securities management will project how far into the future (5, 7, 9 years, etc.) it plans to liquidate the company’s assets and return investor capital along with any profits.

Click here to learn more about available private placement opportunities.

Kyle

About the author

Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.

Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.