5.5 Private Placements

Private placements are sale transactions in which the issuer sells the entire issue of debt to a single or to a limited number of investors. The terms of the issue are generally negotiated directly between the issuer and the investor. Sometimes, an investment banker (or other advisor) will act as placement agent, bringing the parties together and acting as an intermediary in the negotiations. Instead of an OS, an offering circular, offering memorandum, or private placement memorandum may be prepared. The principal characteristics of a private placement are described below.

NO “SEC RULE 10B-5-COMPLIANT” OFFERING DOCUMENT – There may be a private placement memorandum or other offering material for soliciting investor interest, but there is no OS purporting to disclose all a prospective investor needs to know in order to make an informed investment decision. Issuers should be aware that while a private placement may not require a “SEC Rule 10b-5-compliant” offering document, applicable anti fraud provisions of securities laws still apply to the issuer in private offering (i.e., issuers cannot fail to disclose material information). See Section 6.3, The Official Statement.

INVESTOR ACCESS TO RELEVANT INFORMATION – In the absence of a SEC Rule 10b-5-compliant offering document, prospective investors are provided sufficient access to information (which may include direct conversations with issuer officials) to enable them to evaluate the debt and the likelihood of repayment.

SOPHISTICATED INVESTORS – To ensure that investors are capable of making an adequate investigation, initial sales and subsequent transfers are limited to sophisticated investors, generally either “Qualified Institutional Buyers” (as defined in Rule 144A promulgated under the Securities Act of 1933) or “Accredited Investors” (as defined in Regulation D promulgated under the Securities Act of 1933).90 Accredited Investors may be further limited to accredited investors that are not natural persons. The transfer restrictions may be removed later if, for example, the debt receives an “A” rating or an “investment grade” rating.

LARGE MINIMUM DENOMINATIONS – The minimum authorized denominations for privately placed debt are usually $100,000 or $250,000, which are higher than the principal amounts in which municipal bonds are typically held by retail investors.

INVESTOR LETTER – Private placement purchasers are generally required to deliver an investor letter (described below) upon purchase of the bonds in an initial offering. Subsequent purchasers are sometimes required to deliver an investor letter as a condition to transfer of the bonds, in which case the transaction is said to require a “traveling letter.”

Private placement offerings take a variety of forms, including the following:

Sale by the issuer to an underwriter for resale to one or a limited number of investors. From a regulatory perspective, this is an underwriting that may be referred to as a limited public offering. In general, a limited public offering is sold in authorized denominations of $100,000 to a limited number of investors (no more than 35 persons) that meet certain established “sophisticated investor” standards for qualifying as a purchaser of the securities. This form of offering is exempt from the provisions of SEC Rule 15c2-12
Sale by the issuer directly to one or a limited number of investors “brought to the table” by a placement agent
Sale by the issuer directly to an investor without the engagement of either an underwriter or a placement agent, of which a “direct loan” (discussed below) is a variant

As a result of limits on the amount of credit a financial institution can extend to a particular borrower and the efficiency (in terms of issuance cost per dollar borrowed) of large public offerings, private placements tend to be limited in size. Further, because privately placed debt is often of lesser credit quality, security is often of a type that cannot be analyzed through standard rating criteria (e.g., real property), and obtaining ratings is an avoidable expense, privately placed debt is generally unrated.

Private placements are common in conduit financings (See Section 3.3.9, Conduit Revenue Bonds), in which event investigative activities and credit negotiations are handled by the conduit borrower who acknowledges and agrees that the conduit issuer has no responsibility for the completeness or accuracy of the information provided or for payment of the debt.