Public companies are prone to using multiple tactics to secure the investment of stockholders that are interested in their product/service. The general method of selling these shares into the company is through public placement which is accessible to anyone. Yet, public companies do target specific investors with their shares from time to time in a process called ‘private placement’. These are investors that have a high net worth and will be spending big when it comes to their time to invest. Let’s take a deeper look at what private placement entails and why companies decide to go down this route.
How Do They Work?
Before looking at why public companies decide to wander down the path of private placement, it is essential to understand how it works. This concept is derived to ensure certain investors are targeted. There are general rules associated with these actions such as following ‘Regulation D’. There are a range of methods to make these shares available such as common or preferred shares plus warrants or bonds. Generally, the purchasers for these shares come in the forms of banks and other high net worth investors.
There is a minimum net worth in place for all accredited investors that has to be kept in mind prior to setting up the private placement. The investor’s net worth has to be over $1 million or annual income has to be above $200,000. Not only are these income restrictions in place, but no more than 35 non-accredited investors can be added to the proceedings according to the rules in place. This is done to ensure there is some form of fairness to the process in place.
Pros
Why would a public company go through this private route instead of doing everything through public means? What are the advantages to doing things in this manner? The major benefit comes through the ability to choose the investors that will be investing into the company. With regular investing practices, anyone from the public can invest and this is not beneficial for the company.
With bigger investors, it is better to bring specifically chosen minds into the company’s hands. These investors have a role to play in how the company moves forward and are influential at the same time. This is a major coup for any company that wants to make inroads in their niche.
Faster capital is another benefit. When the funds are being acquired through public means, the time for the money to arrive into the company’s accounts is time lost. This period is reduced when the investors are coming through a private placement set-up. The funds are immediately put into the accounts and that makes the process that much more beneficial in the short-term.
Patience is a virtue that is not understood by public investors. It is just the way things are when public trading happens. With bigger investors, the chances of them being patient and willing to work on the return rates are higher. They will be wiling to sit down and negotiate.