Private Placement

Private Placement

For companies, the way to attract funds during financing is very important. For this, they use Initial Public Offering (IPO) or Private Placement. While the IPO means offering the company’s shared stocks to hundreds or thousands of investors, the private placement is focused on a limited number of investors. The two main differences between these two offerings are 1st – a number of investors and 2nd – less regulation in case of the private placement.

The private placement is the procedure of money investment in stocks; it usually comes from investors. As this is a private placement, the company can set up some criteria for investors. Mainly, only accredited investors may participate in the private placement. It might include the wealthy individual investors, banks and other financial institutions, funds, insurance companies, venture capital firms or pension funds.

The private placement is a very attractive way for growing company and expanding new markets. For businessmen, such investment is easier than IPO – this is less expensive and time-consuming as it does not require the help of brokers or underwriters. It is managed as an unregistered offering. Another benefit is that the company is not going public and have closed his confidential information, such as finances.

Private Placement

Advantages and Disadvantages of Private Placement

 Private placements offer small businesses a number of advantages, compared to IPOs.

  • Less expensive and time-consuming- the process of underwriting is faster, and the company gets its funding sooner.
  • As the investor is already much experienced in the business sector, he can be a very good adviser for a new start-up company. The investor is involved in business planning and management.
  • Stay private status – do not have to share confidential information on an open market.
  • A private placement allows the issuer to sell more complex security to investors who understand the risks and rewards.
  •  Investors are more patient than venture capitalists.
  • Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).
  •   A quicker form of raising money than usual venture capital markets.

Of course, there are also a few disadvantages associated with private placements of securities.

  •  Suitable investors may be difficult to locate, for example, and may have limited funds to invest.
  •  In addition, privately placed securities are often sold at a deep discount below their market value.
  •   Because of the additional risk of not obtaining a credit rating, a private placement buyer may not buy a bond unless it is secured by specific collateral.

The private placement, as Initial Public Offering, plays a huge role in today’s equity financing market and is very important for small businesses, especially start-up companies.

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