Purchase for investment: Overview, definition, and example
What is purchase for investment?
Purchase for investment refers to the acquisition of securities, such as stocks or bonds, with the intent of holding them for long-term investment purposes rather than reselling them for short-term profit. This term is often used in private placements or other securities transactions where buyers are required to represent that they are acquiring the securities for investment and not for distribution, ensuring compliance with securities laws.
For example, an investor purchasing shares in a private company might sign an agreement stating that they intend to hold the shares for investment purposes and not resell them unless permitted by applicable laws.
Why is purchase for investment important?
Purchase for investment is important because it ensures compliance with securities regulations, particularly those governing private placements or exempt transactions. By confirming the buyer’s intent to invest rather than distribute, the issuer can avoid the need for registration with regulatory authorities, such as the SEC.
For issuers, this representation protects them from liability related to unregistered securities offerings. For buyers, it clarifies their rights and obligations, particularly regarding restrictions on resale.
Understanding purchase for investment through an example
Imagine a private company raises capital by selling shares to accredited investors under Regulation D of the U.S. Securities Act. Each investor signs a purchase agreement representing that they are buying the shares for investment purposes and not with the intent to resell. This helps the company avoid the need to register the securities with the SEC, saving time and costs.
In another example, an investor purchasing bonds in a private placement represents that they are acquiring the bonds for their own account as an investment, rather than as part of a plan to distribute or sell the bonds to others. This ensures the transaction qualifies for a securities registration exemption.
An example of a purchase for investment clause
Here’s how a purchase for investment clause might appear in a purchase agreement:
“The Purchaser represents and warrants that it is acquiring the Securities solely for investment purposes and not with a view to, or for sale in connection with, any distribution or resale thereof in violation of applicable securities laws. The Purchaser acknowledges that the Securities have not been registered under the Securities Act and may not be resold or transferred except in compliance with applicable laws.”
Conclusion
Purchase for investment provisions protect issuers and buyers in securities transactions by ensuring compliance with securities laws and restricting resale or distribution. For businesses, this representation helps qualify transactions for exemptions from registration, reducing legal and regulatory risks. For investors, it clarifies their obligations and reinforces the intent of the transaction as a long-term investment. Including clear purchase for investment clauses in agreements is critical to ensuring smooth and compliant securities transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.