Private Placement

3 Key excerpts on "Private Placement"

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  eBook - ePub

  Raising Capital

  Get the Money You Need to Grow Your Business

  • Andrew Sherman(Author)
  • 2012(Publication Date)
  • AMACOM

    (Publisher)

  Chapter 6 Private Placements

  One financing strategy that is available to early-stage and emerging-growth companies is the Private Placement offering, which generally refers to an offering of securities by a small or growing company that does not need to be registered with the Securities and Exchange Commission (SEC ). A Private Placement can offer you (as the “offeror” or “issuer”) reduced transaction and ongoing costs because it is exempt from many of the extensive registration and reporting requirements imposed by federal and state securities laws. Private Placements usually also offer the ability to structure a more focused and dynamic transaction, because they attract a small number of sophisticated investors. These investors may also provide the company with certain strategic benefits and industry knowledge. In addition, a Private Placement permits more rapid penetration into the capital markets than would a public offering of securities requiring registration with the SEC .

  To find out whether a Private Placement is a sensible strategy for you, you must (1) have a fundamental understanding of the federal and state securities laws affecting Private Placements (an overview is provided in the next section), (2) be familiar with the basic procedural steps that must be taken before this capital-formation alternative can be pursued, (3) have a good sense of your list of targeted investors, and (4) have a team of qualified legal and accounting professionals to assist you in preparing the Private Placement offering documents, usually referred to as the Private Placement memorandum, or PPM . The PPM

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  eBook - PDF

  Fundamentals of Corporate Finance

  • Robert Parrino, David S. Kidwell, Thomas Bates(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  We should mention that bootstrapping and venture capital financing are part of the private market as well. We discussed these two processes at the beginning of the chapter because they are primary sources of funding for new businesses. Private Placements As you may recall from Chapter 2, a Private Placement occurs when a firm sells unlisted securi-ties directly to investors such as insurance companies, commercial banks or wealthy individu-als. Most Private Placements involve the sale of debt issues but equity issues can also be placed privately. About half of all corporate debt is sold through the Private Placement market. Investment banks and commercial banks often assist firms with Private Placements. They help the issuer locate potential buyers for their securities, put the transaction together and assist in the documentation and other elements of the placement. They may also help negotiate the terms and price of the sale, but they do not underwrite the issue. In a traditional private place-ment, the issuer sells the securities directly to investors. For certain issuers, Private Placements have a number of advantages, relative to public offerings. The cost of funds, net of transaction costs, may be lower, especially for smaller firms and those with low credit ratings. In addition, private lenders, because of their intimate knowledge of the firm and its management, are more willing to negotiate changes to a bond contract, if changes are needed. Furthermore, if a firm suffers financial distress, the problems are more likely to be resolved without going into bankruptcy proceedings. Other advantages include the speed at which Private Placements can be completed and flexibility in issue size. If the issuer and the investor already have a relationship, a sale can be completed in a few days and placements of sums as small as €10 million are possible. The biggest drawback of Private Placements involves the ability of the purchaser to resell the securities.

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  Investments

  An Introduction

  • Herbert Mayo(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  The direct sale of an entire issue of bonds or stock to an investor or to a finan -cial institution, such as a pension fund or a life insurance company, is called a Private Placement . The primary advantages of a Private Placement to the issuing firm are the elimination of the cost of selling securities to the general public and the availability of large amounts of cash. In addition, the firm does not have to meet the disclosure requirements that are necessary to sell securities to the general public. This disclosure of information is for the protection of the investing public; it is presumed that the financial institution can protect itself by requiring information as a precondition for granting a loan or buying the securities. The disclosure requirements are both a cost to the firm when securities are issued to the public and a possible source of information to its competitors that the firm may wish to avoid divulging. An additional advantage of a Private Placement to both the firm and the financial institution is that the terms of securities may be tailored to meet both parties’ needs. A Private Placement has similar advantages for the firm that is investing the funds. A substantial amount of money may be invested at one time, and the maturity date can be set to meet the lender’s needs. In addition, brokerage fees associated with purchas -ing securities are avoided. The financial intermediary can gain more control over the firm that receives the funds by building restrictive covenants into the agreement. These covenants may restrict the firm from issuing additional securities without the prior permission of the lender and may limit the firm’s dividends, its merger activity, and the types of investments that it may make. All these restrictive covenants are designed to protect the lender from risk of loss and are part of any private sale of securities from a firm to a financial institution.

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