A private placement agreement is a legal document which is used to sell securities to select few and small number of investors in order to raise capital. Since the number of investors is few, usually 35 or fewer, the placement need not be registered at the Securities and Exchange Commission. Other financial details or the prospectus are also not very necessary.
Investors in such a situation are mostly big banking corporations and large institutional investors like mutual funds, pension funds and different insurance companies. In a way private placement agreements are the reverse of public issues, where securities are sold to everyone in the open market. Since these placement agreements are private, a regular investor is made aware of the agreement only after the placement has already taken place. The investors or buyers sign an investment letter saying that they will not sell these securities for a particular period of time, which is usually regarded to be two years.
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