Private Purchase

Private Purchase

Private purchase refers to an investment in which an individual or institutional investor purchases shares in a privately-held firm. But individual investors with high-net-worth, called accredited investors by the Securities and Exchange Commission (SEC), are allowed to make private purchases with venture funds, private placements, and other exclusive opportunities. Since a private company has not yet made an initial public offering, its shares are typically closely held by the firm's founders and perhaps some VC and private equity investors. Add that to the fact that private markets are not as liquid, and offer less investment information than public exchanges, private investors and VC firms are often able to use this to their advantage. Specific companies are allowed to sell a small number of them to outside investors, and SEC rules also state that some restricted private shares can be resold publicly after a six-month or one-year holding period.

Private purchase refers to investments in which an individual or institutional investor purchases shares in a privately-held firm.

What is a Private Purchase

Private purchase refers to an investment in which an individual or institutional investor purchases shares in a privately-held firm. The investor may buy all of the company's shares, or just a portion of them. The fact that a private purchase does not involve the use of capital markets means that a broker is usually required to complete the deal.

Private purchase refers to investments in which an individual or institutional investor purchases shares in a privately-held firm.
The vast majority of private purchases are restricted to accredited investors.
The SEC regulates private purchases depending on the amount raised and disclosures made.

Understanding Private Purchase

Venture capital (VC) firms seeking to adjust their holdings in a particular company will often make private purchases. These positions are usually long holdings. Add that to the fact that private markets are not as liquid, and offer less investment information than public exchanges, private investors and VC firms are often able to use this to their advantage.

The limited nature of private shares means they're not as easy to purchase as public stocks. But there are a few different ways a private stock can be acquired. Since a private company has not yet made an initial public offering, its shares are typically closely held by the firm's founders and perhaps some VC and private equity investors.

But individual investors with high-net-worth, called accredited investors by the Securities and Exchange Commission (SEC), are allowed to make private purchases with venture funds, private placements, and other exclusive opportunities. Being an accredited investor means that the investors have demonstrated the personal wealth and professional experience to show that they understand the risks of such investments.

The SEC regulates private purchases by categorizing them based on the amount raised and disclosures required during an offering. For example, startups making regulation A offerings can raise up to $50 million from private investors in a calendar year. They must register with the SEC for such offerings but the disclosures required of them are not as strict as those for publicly-held companies. Regulation D offerings limit the amount raised to $5 million in a single year and only 35 unaccredited investors can participate in the offering.

But even non-accredited investors can sometimes purchase private shares. Specific companies are allowed to sell a small number of them to outside investors, and SEC rules also state that some restricted private shares can be resold publicly after a six-month or one-year holding period.

Crowdfunding offers another chance for private purchase opportunities. SEC recently relaxed its rules around crowdfunding, permitting private companies to raise $1,070,000 in a 12-month period through smaller investors. But the commission also has rules outlining how much those individuals are allowed to invest: It places strict limitations on the percentage of income or net worth a crowd-funder can invest in a private company in a given year.

An Example of how Private Purchase Works

More often than not, a private purchase is a tool used by wealthy company executives to increase or adjust their holdings in their firms. For example, in 2017, Jupai Holdings Limited, a wealth management service provider focused on the Chinese market, announced that its chair and CEO would purchase nearly 20 million shares of Jupai shares. This purchase from one of the company's directors in a private transaction amounted to about 10 percent of the outstanding stock.

Related terms:

What Is 3C1?

3C1 funds are privately traded funds that are exempt from SEC registration through the Investment Company Act of 1940. read more

3(c)(7) Exemption

The 3(c)(7) exemption refers to a segment of the Investment Company Act of 1940 that allows private funds to sidestep some SEC regulations. 3C7 is shorthand for the 3(c)(7) exemption. read more

Accredited Investor

An accredited investor has the financial sophistication and capacity to take the high-risk, high-reward path of investing in unregistered securities sans certain protections of the SEC. read more

Crowdfunding

Crowdfunding is the use of small amounts of capital from a large number of people to raise money or fund a business. Learn the pros and cons of crowdfunding. read more

Initial Public Offering (IPO)

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. read more

Jumpstart Our Business Startups (JOBS) Act

The JOBS Act or Jumpstart Our Business Startups Act loosened SEC regulations on small businesses and enabled investments in startups via crowdfunding. read more

Private Company

A private company is a company held under private ownership with shares that are not traded publicly on exchanges. read more

Privately Owned

Privately owned refers to businesses that have not offered shares to be traded on a public exchange. read more

Regulation A

Regulation A is an exemption from the registration requirements mandated by the Securities Act, applicable to small public offerings of securities. read more

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is a U.S. government agency created by Congress to regulate the securities markets and protect investors. read more