Public companies have two primary ways to “raise money” via financing. They sell either debt or equity. In the case of equity a company can sell shares (which is the “equity”) to someone for cash. The company receives this cash directly. The company just ISSUES NEW stock to the buyer and the OS rises as a result. A company can issue stock as long as the “authorized shares” allowed is greater than the outstanding shares in the market. One difference between someone buying stock directly from the company and buying it in the market is that the former transaction puts money into the company’s coffers and the latter puts it into another investors (who sold the stock) account....which is useless to the company
It is fairly straight forward. HOWEVER, there are a number of rules, regulations and restrictions that must be followed for a company to do this (as well as on the buyer too). The reason it is called a “private placement” is that it is a placement of stock done privately between the company and the investor and not through the market.
Now the drawback to a “buyer” in such a scenario is that in order for the stock to be free trading it has to be registered. The way that is done in larger companies and some OTC companies is the company files a Form S-1 Registration Statement that gets reviewed by the SEC. It is a rather long document with a lot of information about the company, but when it goes “effective” (usually in a few months time) any stock sold by the company under that “offering” is immediately “free trading”.
In the absence of a registration statement (which is the case in most OTC stock issuances), the buyer has to find an exemption from registration in order to be able to sell the stock in the open market. In the OTC, the exemption that is used the most is the “holding period” exemption under Rule 144. For an SEC filer the holding period for the newly issued stock is 6 months before it can become free trading and for a non-filer it is one year. When the time period has passed the stockholder can get the restrictive legend removed with the help of a lawyer and the company and then sell the stock into the market.
Now, usually such stock sales by the company are done at a discount to the buyer because the holding period involves some risk. That discount can be anything 1-99%...depends on what the company and the buyer can negotiate.
So in reality the concept of an “equity investor” really only has meaning in the context of the company trying to raise cash. If the person is just buying it from the market, none of that money is going to, or can be used by, the company...the buyer is just another “investor”. And since they bought the stock in the open market at market prices they can sell it in the open market immediately if they like.
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