Private Placement Definition
A Private Placement is a capital raising event undertaken by a non-public company. The procedure concerns selling securities (stocks or bonds) to private investors. These investors may include banks, insurance organization, mutual funds, and even pension funds.
A Little More on What is a Private Placement
There are numerous regulatory conditions and applicable standards for Private Placements. As previously stated, the private placement involves selling stock to raise money. It allows the company to sell shares without registering with SEC (Securities and Exchange Commission). The registraitn process is very onerous and expensive.
In a private placement, the number of participants is a small group. The investment does not require a prospectus. In most of the cases, none of the financial information is disclosed publicly.
The Securities Exchange Commission monitors the sale of stockcomplies with the 1933 securities act. This act makes sure investors recieve full and accurae information before purchasing securities.
Regulation D of 1933 Act provides the exemption from registration for a private placement. There are various provisions of Regulation D. The most popular is Rule 506(c), which allows an issuer of stock to sell to private, accredited investors. If all investors are accredits (meeting financial wealth standards), then the issuer can generally soliciate investments from them.
The issuer must provide a PPM (Private Placement Memorandum) to all potential investors.
References for Private Placement
Academic Research on Private Offering/Private Placement
The economics of the private placement market, Carey, M., Prowse, S., Rea, J., & Udell, G. (1994). Fed. Res. Bull., 80, 5. This research examines the working mechanism of the private placement market in the US. Such market is considered a source of attraction for corporations. The private placement is a stock or security that requires no registration with the SEC to sell it in the US market. This also allows the concealment of information or limited release of information. There is not much literary exploration of private placement because of its being simple and understandable rules of doing business. The research highlights the rule A 144 introduced in 1991, about reselling a stock viewing the banking sector’s role in the private placement market.
Financial contracting and the choice between private placement and publicly offered bonds, Kwan, S. H., & Carleton, W. T. (2010). Journal of Money, Credit and Banking, 42(5), 907-929. The study addresses the levels of financial contracting in the context of private placement as well as publicly offered bonds. There is a huge difference between the pricing of public and private placement bonds. It has been noted that private placement bonds are issued by some smaller and riskier organizations.
Private placement of common equity and earnings expectations, Goh, J., Gombola, M. J., Lee, H. W., & Liu, F. Y. (1999). Financial Review, 34(3), 19-32. This review paper explains the role of the private placement of common stock and expectations concerning the earning from the stock. Analysts make the forecast for annual earnings of private stock placements. The findings in this research are that private stock placement gives encouraging information of future earnings.
Some Commercial Overtones of Private Placement, Israels, C. L. (1959). Va. L. Rev., 45, 851. This paper highlights the commercial role and qualities of private placement as this process allows organizations to perform selling or buying without registration with the SEC. The review paper comprehensively explores the benefits of private placement used by individuals and entities.
Private Placement under the Control of Major Shareholder and Wealth Tunneling [J], Ming, Z., & Siyong, G. (2009). Accounting Research, 5, 012. In this paper, the writer throws light on the use of private placement by main investors for earning more profits. The study also highlights the registration process with the SEC.
The private placement of debt and outside equity as an information revelation mechanism, Habib, M. A., & Bruce Johnsen, D. (2000). The Review of Financial Studies, 13(4), 1017-1055. This paper investigates private placement in relation to debt and outside stock as an information revelation procedure. The debt assessment specialist gives a price estimate for debt and discloses information about the value of company in its alternative use.
Private Placement and Intrastate Offerings of Securities, Mulford, J. (1957). Bus. Law., 13, 297. The author elaborates the use of private placement in the context of intrastate commerce in the US. The study explores the scale and securities types of private placement while organizations do business with other organizations of other states.
Firm characteristics and seasoned equity issuance method: Private placement versus public offering, Lee, H. W., & Kocher, C. (2001). Journal of Applied Business Research, 17(3), 23-36. This paper is a standardized and complete guide to understand private placement as well as public offerings. The research highlights organizational characteristics and seasons stock issuance procedures. Private placement organization gains more growth opportunities because of being smaller in size in comparison to public offering firms.
The private placement of bank equity, Varma, R., & Szewczyk, S. H. (1993). Journal of Banking & Finance, 17(6), 1111-1131. The paper describes the private placement of bank stock as it is bank capital. Any irregularity of information on bank stock does not get much attention in private placement. Some private placement stock buyers provide monitoring facility to banks. It interests to the managers as well as shareholders. The banks sell their stock as per market conditions and do not cause any harm to shareholders.
The wealth effects of reducing private placement resale restrictions, Maynes, E., & Pandes, J. A. (2011). European Financial Management, 17(3), 500-531. The research focuses on recent changes made by the US Securities Exchange Commission about reselling of stock under Rule 144. This allows sellers to resell their stock from 12 to 6 months. The purpose is to decrease the cost of equity capital. Similar types of regulatory conditions were allowed in Canada many years ago and the results were positive. This helped Canadian authorities to evaluate the wealth impact of decreasing private placement resale conditions.
Private Placement of Convertible Securities, Gadsby, E. N. (1959). Bus. Law, 15, 470. In the paper, the writer discusses private placement of convertible securities. The study also highlights how an organization can enjoy maximum profit by using private placement principles that allow them to sell without registration.