In general, the determination of whether an offering is a private placement involves consideration of four factors as follows:
- The number of investors and their relationship to one another and the issuer;
- The number of units involved;
- The size of the offering; and,
- The manner of offering.
Over time, the emphasis of the consideration of factors has shifted from the number of investors to their sophistication and access to information. The idea is that the securities laws are designed to prevent fraud and unwary investment. Accordingly, two primary questions a court would ask are as follows:
- Do the investors need the protection of the securities law or can they fend for themselves; and,
- Do the investors have access to the kind of information that registration would provide.
Unfortunately, the judicial interpretation of these considerations have made it difficult to determine how they will be applied in future situations.
Next up…Sophistication of Investors for Private Placements