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Private securities are investments in commercial ventures that offer a return on investment. Four requirements define private securities: capital investment, expectation of profits, profits from a joint venture, and no participation in enterprise management.
Selling private securities is a way to raise capital for a business venture by offering a return on investment. The first of the four specific requirements that define a private security is capital investment. Second, the reason the investor chooses to invest capital must be an expectation of profits. The last two requirements are that the profits must come from a joint venture and that the venture rests solely on the efforts of a third party.
The first requirement that defines the private securities that a person must contribute capital to a commercial enterprise is pretty simple. There is no need for any particular way or type of contribution. For example, one investor may contribute cash, while another contributes a physical asset, and both could invest in a stock depending on the presence of other factors.
For a capital injection to fall into the private equity category, such an injection must be given with the promise or expectation of a return on investment. In other words, the individual must expect to receive not only the money he has contributed, but a percentage of the profits made by the firm in addition to that amount. Conversely, if someone lends money to finance a business venture but only expects to receive back the money he lent, then he would not meet this second requirement to qualify as collateral. A security is based on return on investment.
The third requirement for a private equity classification is that the investment return comes from a joint venture. In this context, joint venture refers to any business venture presented to the investor as why he should invest his own capital. For example, a business owner may present an investment opportunity to a prospective investor that involves purchasing commercial real estate for the purpose of leasing it to a business. In this case, the joint venture is the purchase of that rental property.
The fourth and final requirement for private securities is that the scope of the investment is limited to the capital contributed and not to participation in the management of the enterprise. Taking the example above, if the investor contributes money to the firm, but does nothing else to contribute, it would qualify as a security. On the other hand, if the investor took a practical approach and worked to improve the property, or otherwise run the business, then he would not meet this fourth and final requirement and the investment would not fall into the private equity category.
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