Many companies raise money through an initial public offering (IPO), but that's a costly and time-intensive process. A private placement offering is often more appropriate for private companies and smaller businesses that need to raise capital.
What is a Private Placement?
A private placement is a sale of a company's securities to a limited number of qualified investors. They are not offered to the general public and are exempt from the registration requirements of the Securities and Exchange Commission (SEC). Securities sold can take different forms, but they are usually either equity or debt. There's been a tricky new development. Under new Rule 506(c) of Regulation D, a private placement could actually be generally solicited and advertised while still being considered a private placement. The securities, however, may only be purchased by investors who have been verified as accredited investors.
Benefits to the Company
Private placements are a quicker, cheaper way to raise cash than a public offering, and are not usually subject to the onerous obligations affecting publicly listed companies. Companies typically have more control over the entire process and can decide how much to sell, at what price, and to whom.
Benefits to Investors
Securities obtained through public placement are generally alternative investments. In other words, they are investments that wouldn't normally be part of most portfolios. That means they also provide an interesting way to diversity the typical portfolios that might be typically dominated by large cap stocks and bonds.
Risks of Private Placement Investment
These types of investments always carry a high risk. The reasons for this are varied. Companies looking for private placement investment are usually less established. Private placement securities are also less liquid and may be subject to holding requirements.
Investing in private placements requires a high tolerance to risk, as well as low concerns over liquidity, and a willingness to take on long-term commitments. Investors should also be prepared for the worse case, although not uncommon, scenario, which is that they lose their entire investment.
- Do your homework - find out as much as you can about the company and the industry within which it operates.
- Undestand the exit strategy - be prepared to have your capital tied up for a long time, but ask yourself how and when you will liquidate your securities.
- Talk to your advisor - find out the risk factors, and ask how well this investment dovetails with others in your portfolio.
Rule 506(c) private placements are available only to accredited investors that have been verified. Get verified safely and securely with VerifyInvestor.com.