Private placement refers to offering and selling shares in a company to a small group of buyers. The buyers are typically sophisticated investors like banks, pension funds, mutual funds, insurance companies and very wealthy investors. In the United States private placement are subject to Security and Exchange Commission regulation under the Securities and Exchange Act of 1933. Private placement is different from public offerings where the securities are sold on the open market to any investor. Private placement is considered a cost-effective way of raising capital without going public through IPO.
Companies that want to organize public placement event don’t have to be registered with the SEC if certain private placement offering requirements are met. These requirements are specified in a SEC rule called Regulation D. It also doesn’t require prospectus, instead private placement are sold using a private placement memorandum and cannot be broadly marketed to the public. SEC has formerly put many restrictions on private placement transactions. In 1992 SEC eliminated many of these restrictions in order to enable small companies to raise capital. Nevertheless it is important for small business owners to know various federal and state laws that may affect the procedure. Private placement gives you the opportunity to hand pick your investors. Considering the fact that only accredited investors are allowed that gives you the opportunity to meet people with same goals and interest who can help you in business.
Private placement has its advantages. One of the main ones is that the issuer isn’t subject to SEC’s strict regulation. You are allowed to avoid registering with SEC and thus save considerable amount of time and money. The process of underwriting the securities is faster and you will receive proceeding from the sale in a shorter time period. After selling of securities company can remain private and in that way avoid producing annually disclosures with SEC. There are also few disadvantages including, higher interest rates for the buyer, investors may demand higher percentage of ownership or dividends for taking a risk.
