Friday, 20 January 2012

Private Placement

Private Placement:
Private placement is the process of raising capital directly from institutional investors. A company that does not have access to or does not wish to make use of public capital markets can issue stocks, bonds, or other financial instruments directly to institutional investors. Institutional investors include mutual funds, pension funds, insurance companies, and large banks.

Private placement issuances do not have to be registered with the Securities and Exchange Commission (SEC) and do not require a detailed prospectus. The terms and conditions of a private placement are negotiated between the issuing company and the purchasing investors. Private placement securities cannot be traded on public markets, but they can be traded privately among institutional investors after they have been issued by the issuing company.

A private placement is in contrast to a public offering, which is issued in public capital markets, requires a detailed prospectus, must be registered with the SEC, and can be traded by the investing public in the secondary markets.

Advantages and Disadvantages of Private Placement:
>>The primary advantage of the private placement is that it bypasses the stringent regulatory requirements of a public offering. Public offerings must be done in accordance with SEC regulations.

>>Private placements are negotiated privately between the investors and the issuing company. Private placements do not have to register with the SEC, do not require the issuing company to publicly disclose its financial statements, and avoid the scrutiny of the SEC.

>>Another advantage of private placement is the reduced time of issuance and the reduced costs of issuance. Issuing securities publicly can be time-consuming and may require certain expenses.

>>A private placement forgoes the time and costs that come with a public offering.

>>Also, because private placements are negotiated privately between the investors and the issuing company, they can be tailored to meet the financing needs of the company and the investing needs of the investor. This gives both parties a degree of flexibility.

>>The main disadvantage of private placement is that the issuer will often have to pay higher interest rates on the debt issuance or offer the equity shares at a discount to the market value in order to make the deal attractive to the institutional investor purchasing the securities.

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