Markets in a downturn often halt new secondary offerings and IPOs, causing companies to wait and hope for a quick return to the upside. While new secondary offerings and IPOs are one way of raising working capital, there are many other ways, each source having specific limitations and requirements.
For instance, venture capital raises money with the expectation of a return on a future event. Venture capital is common with start-up companies that are positioned to make big moves. However, venture capitalists often want a large portion of control in a company. But what about more established companies or those that don’t want the ties that can come with venture capital? Private placement may just be the answer.
Private placement, or non-public offering, is defined by Investopedia as “the sale of securities to a relatively small number of select investors as a way of raising capital”. Since a private placement is limited to a smaller number of investors, the transaction does not have to be registered with the Securities and Exchange Commission (SEC). This also allows companies to avoid many of the reporting requirements as required by the Sarbanes-Oxley Act.
There are varying levels of private placements, depending on the amount of capital the company is looking to raise. The three levels, 504, 505 and 506, offer various amounts that companies can raise in a 12-month timeframe. With the various levels come different guidelines for investors. For instance, under a 504, companies may raise up to $1 million within a 12-month timeframe.
There are many benefits of private placement, including:
• Much lower costs than IPOs or approaching venture capitalists
• Open to a wider variety of companies, from start-ups to mature businesses
• Can assemble capital quickly
• Can issue debt or equity – or both
Private placement offers a viable structure of financing business without IPO restrictions or ceding control.