:max_bytes(150000):strip_icc()/privateplacement.asp-finalv2-f8327aa785bd4295a67657a04765e829.png)
Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).
Fact checked by Fact checked by Vikki VelasquezVikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.
A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on a public exchange. It is an alternative to an initial public offering (IPO) for a young company seeking to raise money to expand.
The process is sometimes referred to as a 4(a)(2) private placement. The main process that enables such a sale is the 4(a)(2) exemption to Securities and Exchange Commission (SEC) rules regarding registration of public companies. The 4(a)(2) exemption permits companies and buyers of their securities to conduct such transactions without the company first filing for registration with the SEC.
Private placements have become a popular way for startups to raise money, particularly in the Internet and financial technology sectors. They allow these companies to grow and develop while avoiding the full glare of government and public scrutiny that accompanies an initial public offering (IPO).
There are minimal regulatory requirements and standards for a private placement even though, like an IPO, it involves the sale of securities. The sale does not have to be registered with the U.S. Securities and Exchange Commission (SEC). The company is not required to provide a prospectus to potential investors and detailed financial information may not be disclosed.
Companies that sell shares privately can do so under either of two exemptions to the usual SEC rules requiring full registration:
In any case, accredited investors are defined as individuals and institutions that have a sophisticated knowledge of the securities industry and considerable financial resources.
That restricts access to private placements to wealthy individual investors, financial institutions like banks, mutual funds, insurance companies, and pension fund managers.
The sale of stock on public exchanges is regulated primarily by the Securities Act of 1933. The law was enacted after the market crash of 1929 to ensure that investors receive sufficient disclosure when they purchase securities.
Regulation D of that act provides an exemption for private placement offerings.
The same regulation allows an issuer to sell securities to a pre-selected group of investors that meet specified requirements. Instead of a prospectus, private placements are sold using a private placement memorandum (PPM). They cannot be broadly marketed to the general public.
A private placement allows a young company to put off the onerous process of registering for a public stock offering. Moreover, going public involves a considerable burden of quarterly and annual financial filings that many new companies can ill afford to undertake.
A private company is relatively lightly regulated, as are private placements of stock shares.
That means the process of underwriting is faster, and the company gets its funding sooner. If the issuer is selling a bond, it also avoids the time and expense of obtaining a credit rating from a bond agency.
A private placement allows the issuer to sell a more complex security to accredited investors who understand the potential risks and rewards.
The buyer of a private placement bond issue expects a higher rate of interest than can be earned on a publicly traded security. Because of the additional risk, a private placement buyer may not buy a bond unless it is secured by specific collateral.
A private placement stock investor may also demand a higher percentage of ownership in the business or a fixed dividend payment per share of stock. This puts pressure on the company to perform at a higher level, which could lead it to ignore the careful process of healthy growth.
There also is a risk of a loss of control if private placements result in increased ownership by investors rather than founders.
Private placements are conducted at invitation-only events, real or virtual. The prospective buyers are all accredited investors. They have registered with the SEC as investors who have the knowledge and the resources to participate in the sale.
The company raising money has to make its case for being a sound investment. However, it does not have to produce the full financial prospectus that is required of a company undergoing an initial public offering.
An initial public offering or IPO is a sale of stock, conducted on a stock exchange and open to the general public.
Down the road, the company may offer a public offering or PO. The company issues another round of shares to raise more money.
There are many benefits to a private placement. These include a faster process than an IPO and fewer regulatory requirements than an IPO. There are also fewer regulatory obligations on an ongoing basis than being a public company entails.
Private placements allow business owners to raise capital while foregoing the IPO process, which can be long, difficult, and burdensome. By opening their doors to pre-selected investors through private placements, businesses can raise funds for expansion while not having to abide by the many regulatory requirements that an IPO and being public demand.
There is a downside, given the demands of private investors seeking high returns for the increased risk they are taking on.
Article SourcesThe offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Description Related TermsA grantee is the recipient of a grant, scholarship, or some type of property. In real estate, the grantee is the one taking title to a purchased property.
A sublease is the renting of property by a tenant to a third party for a portion of the tenant’s existing lease contract.
The gross income multiplier is obtained by dividing the property's sale price by its gross annual rental income, and is used in valuing commercial real estates, such as shopping centers and apartment complexes.
Tag-along rights are contractual obligations used to protect a minority shareholder, usually in a venture capital deal.
A unicorn in business refers to a startup company with a value of over $1 billion. Read about top unicorn companies.
Equity co-investment is made by minority investors alongside a majority institutional investor. Related Articles:max_bytes(150000):strip_icc()/shutterstock_158361296-5bfc366b46e0fb0051471aa9.jpg)
:max_bytes(150000):strip_icc()/Methodology-recirc-v13-da5a3e13175c467d85f3d29cf9f418c5.png)
:max_bytes(150000):strip_icc()/TurnkeySolution-f8922a1cb1574e08918ffdce3f15415a.jpg)
:max_bytes(150000):strip_icc()/growingfacility-56a710423df78cf77291ed1d.jpg)
:max_bytes(150000):strip_icc()/Subleasedocumentwithkeyandmoney-d7a8682bbe344e5dac5d1e8d57eeb014.jpg)
:max_bytes(150000):strip_icc()/GettyImages-1081824440-2fcd29d1f0974847af9b6f57a3d2ba6d.jpg)
We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.
Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)
