A private placement is the sale of securities to a limited number of qualified private investors. While an IPO is the initial sale of shares to the general public, a typical private placement is offered only to institutional investors and accredited individuals and entities that meet certain eligibility requirements.
For companies, private placements can provide an infusion of cash more quickly and less expensively than a public offering. Private placements are also generally not subject to public disclosure obligations. They typically allow companies to have a great deal of control over the process – the company can decide how much to sell, at what price, and to whom. However, those decisions do require a tremendous amount of due diligence and careful deliberation.
For investors, securities purchased through a private placement typically fall into the realm of alternative assets – investments that often have a low correlation to public markets and offer essential diversification to portfolios dominated by traditional stocks and bonds. Private placements also may give investors more control of their private equity allocations. Unlike venture capital – which usually takes the form of funds raised by venture capital firms and invested in portfolios of private companies – investments through private placements are made on an individual basis.
What are private placements?
Private placements are exempt from the registration requirements of the federal Securities Act of 1933 and public disclosure requirements as long as certain requirements are met. The sale of securities through private placements cannot involve any public offering, public solicitation, or advertising. In addition, private placements must comply with state laws and anti-fraud provisions of securities laws. Companies must disclose to potential investors all of the pertinent information needed to make a fully informed decision.
Securities sold through private placement securities can take different forms. Typically, they involve the sale of either debt or equity.