What Is Private Placement vs. Public Offering?
When a growing company wishes to raise money, it might sell ownership, or equity, to public investors via an initial public offering, or IPO. However, under the Securities Act of 1933, there are strict registration requirements for IPO's so that public investors are adequately informed before they invest their money.
A company can bypass the registration requirements by doing a private placement. In a private placement, attempts are made to shield unsophisticated investors from buying in, and the registration requirements are fewer.
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Advantages of Public Offerings
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One of the major advantages of a public offering is that it allows a company to raise a large amount of money. This is because anyone who can afford to invest can purchase the company's stock through a broker. Moreover, the shares in the company will be highly liquid, for the same reason there will always be buyers and sellers in the market. There is prestige in an IPO, and it can bring wide exposure and a great deal of information about a company to the forefront.
Advantages of Private Placements
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A private placement will probably be cheaper and faster. Public companies must fulfill strict reporting and registration requirements, while companies that sell equity through a private placement face fewer such requirements. With a private placement, it might be easier to decide to whom owners sell equity, and to keep more information about the company secret.
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The Securities Act of 1933
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The Securities Act of 1933 was enacted in response to the stock market crash that preceded the Great Depression. It requires that securities offered to the public be registered unless they fall under an exception. The major exemption used when doing a private placement is Regulation D.
Regulation D
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The most common way of making a private placement is under Regulation D. Regulation D has three categories of offerings that are exempt from registration. The first is for offerings with a value of less than $1 million. The second is for offerings of less than $5 million, which are limited to 35 non-accredited investors and unlimited accredited investors, sold within 12 months and without solicitation.
The third category is similar to the second, also prohibiting solicitation and having no more than 35 non-accredited investors, unlimited accredited investors, and a requirement that non-accredited investors meet a certain level of sophistication.
Accredited Investors
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For a person to be an accredited investor, he must meet one of two criteria. He must have a net worth of more than $1 million, or a yearly income of more than $200,000 ($300,000 with a spouse).
Also, a person can be considered an accredited investor if he or she is an officer, director, partner of the company being sold in the private placement. Other entities, such as trusts, businesses, and banks, can be accredited investors if they meet certain conditions.
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References
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