What is a Private Placement? | Definition, Usage & Examples

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  1. Definition of Private Placement
  2. Why Company Choose Private Placement
  3. Usage of Private Placement Investment
  4. Real Examples of Private Placement
  5. Private Placement Advantages
  6. Private Placement Disadvantages

Definition of Private Placement

A private placement is a fund-raising method where the stocks are sold through a private offering either to an individual person or corporate entity or to a small group of investors. Private placements are only offered to a limited pool of accredited investors.

In a private placement, the company does not offer their stocks through a public offering. This is also known as a non-public offering and these are less regulated when compare to a public offering.

Private placements are a type of unregistered securities offering. Investors typically involved in private placement issues are either institutional investors, such as banks, pension funds, or individuals with a higher level of worth.

Private placement offerings do not require Securities and Exchange Commission’s (SEC) enrolment and do not require usual reporting demands.

Companies use a Private Placement Memorandum (PPM) to raise funds through a private placement offering. The investors can decide on the merits of the investment by referring to the PPM.

In the United States, private placements are subject to the Securities Act of 1933.

Why Company Choose Private Placement

Companies mostly choose private placement to raise capital because the company forecasted an excellent opportunity for rapid growth, which demands extra capital. This is one of the best financing methods when a company does not interested to accompany an initial public offering (IPO). The profit realization will boost the stock price in the future.

Another reason for the company to choose private placement because the company is unable to attract a large number of institutional or retail investors. It might be the company’s future profitability is not confident for a large number of investors.

There are some other reasons for a company to consider private placement like the desire to obtain long-term capital, variety of financing sources, avoid costs linked with a public offering, gain an advantage of the terms of securities, maintain the confidentiality of privately held business, etc.

Usage of Private Placement Investment

A company can obtain private placement capital for various reasons such as,

  1. To refinance existing debt
  2. Expand the business
  3. Acquire another company
  4. Diversify existing debt
  5. Change the company’s gearing ratio
  6. Take public company to private

Real Examples of Private Placement

1) Stelmine is a Canadian company that carries mining exploration pioneering a new gold district. Stelmine Canada (STH-TSXV) has closed its private placement in 2021 with gross proceeds of $700,000.
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2) SalMar is a Norwegian fish farm company and one of the world’s biggest producers of farmed salmon. SalMar had raised approximately USD 325.6 million in gross proceeds through a private placement of 4,500,000 new shares in 2021.
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3) Progenity supports patients and their families Prepare for Life, with medically relevant health information starting before conception, through pregnancy, and adulthood. Progenity Announces $40 Million Private Placement on 2021.
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4) The Tinley Beverage Company is a functional beverage company focused on hemp-infused beverages and supplements. The Tinley Beverage Company (CSE:TNY, OTC:TNYBF) has secured a C$2.4 million private placement to advance its co-packing and branded product growth in 2021.
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