What Is Non-Brokered Private Placement?

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When raising capital, a company can elect to tap either the public or private capital markets. A company can choose to seek additional investment for many reasons, including growth, acquisitions or to strengthen its liquidity position. Raising capital through a non-brokered private placement is one of the numerous options a company has when attempting to achieve one of these goals.

What Private Placement Is

  • Private placement (also known as a private offering) occurs when a company hoping to raise capital sells securities to a small number of investors. In most cases these investors are institutional (banks, insurance companies, mutual funds) or wealthy individuals. Private placement is the opposite of public placement, in which companies offer securities to investors on the open market. Most private placements are subject to Securities and Exchange Commission Regulation D, which aims to provide access to the capital markets for smaller companies.

Types of Securites Sold in Private Placements

  • Private placements typically consist of sales of shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes). The wide range of potential options for a company going through a private placement gives management flexibility when considering the future of the company. Since many of these companies are small, management often has a large ownership interest, and the individuals running the company must consider how the offering will alter their control of the business.

Non-Brokered Private Placement

  • Non-brokered private placement takes on most of the characteristics of a traditional private placement. The only major difference is that in a non-brokered private placement, a company's investor relations department sells the stock (or other security) directly to investors. By doing this, the company can forgo the fees and hassle of hiring a broker (often an investment bank) and maintains more control over the selling process.

Benefits of Non-Brokered Private Placement

  • In addition to cost savings related to investment banking fees, companies using non-brokered private placement benefit in other ways. While private placements are still subject to the Securities Act of 1933, the company is not required to register the security offering with the SEC. This saves the company the costs associated with filing and allows it to keep detailed financial information private. With a private placement, the company also has the ability to hand-select investors.

References

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