What is a Private Placement?
A Private Placement is private investment capital invested in a company, usually from individual investors in the form of stock and sometimes bonds. In the United States, Private Placements do not need to be registered with the Securities Exchange Commission. Regulation D and Rule 4(2) of the Securities Act of 1933 are the most popular forms of non-public private placements. The process can also be referred to as a Private Stock Offering as well.
More than $400 billion in capital was raised in the Private Placement market during 2002. The majority of that equity came from pension funds, investment pools, banks and insurance companies. In total, there were just over 2,000 completed offerings. However, Private Placements do not simply favor small businesses. Larger corporations can reap the benefits as well because Private Placements are far less expensive and time consuming than public offerings. Because there are so many options for undertaking corporate financing it is essential that corporate officers carefully review their entire financial picture before embarking on a capital raise or a stock offering of any kind. In a brief overview though, Private Placements offer a viable form of business financing without the constraints of taking a company public and conceding control.
Private Placement Benefits
Private Placements have a high degree of flexibility in regard to the amount of money that can be raised. Private Placements can range in size from less than $50,000 to upwards of $50 million. Private Placements come in a variety of forms and may consist of debt, equity or a combination of debt and equity financing.
The investors that fund the Private Placement are usually more "business friendly" than lending institutions or venture capitalists due to the fact that they are "hand-picked" by the company raising money for itself. The company can establish their own terms for return on investment. As long as these terms are fully disclosed and agreed to by all parties involved, a highly beneficial capital raise can be completed in a relatively short period of time. Of course, the more reputable the company and the more promising their outlook, the easier it is to complete the private placement. Like any other investment vehicle, participants still want to know that their money is invested wisely.
In addition to the more favorable return on investment, the Private Placement itself can be substantially faster and less expensive than seeking the assistance of a venture capitalist or selling the stock to the public in the form of an Initial Public Offering or IPO
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