Venture Financing:

Venture Capital Basics

Private Placements

A Means of Accessing the Venture Capital Market

Typically used to restructure short term notes by longer term debt instruments and to raise additional capital, private placements provide an alternate means of accessing a widely used segment of the capital markets when the public market may not be appropriate or available.  These transactions involve institutional investors with an appetite for fixed rate long-term obligations.  Private placement issues can be structured with less restrictive covenants than public issues and can carry significantly lower transactional costs.  Such issues can be structured at various points along the debt ladder to meet specific requirements of the issuer as well as that of the investors with maturities ranging between 2 to 30 years. 

Equity transactions and hybrids are also common.  A private placement candidate company typically has a net worth of at least $15 Million with annual sales of $30 Million.  This may not always be the case, however, because private placements can be used in smaller startup or seed capital rounds.

Private placements are the issuances of securities in transactions that do not occur on a public exchange.  A company does not have to be public in order to complete a private placement; private companies do them all the time.  In fact by definition, all stock issuances by privately held companies are privately placed.  But it is not widely known that a public company can issue shares from its treasury in the form of a private placement as well.  Why, you ask, would a public company issue its shares in a private placement rather than offer them directly to the market on an exchange?  There are several important reasons that are outlined below. 

• Ease of raising cash. 

• Private placements are the number one method in Vancouver of raising funds for public companies. 

• The required documentation is considerably less for a private placement (when an exemption to the prospectus requirements is available) that means that it is less expensive and simpler to complete. 

With the lower required documentation, private placements can be completed very quickly.  Private placements allow firms to raise equity capital in smaller increments than might otherwise be practical with a public offering.  Another key benefit is that stock of a publicly traded company can be issued in a private placement at a discount to the current market price.  This provides the potential for a built in capital gain to those investors buying the stock. 

Balancing the benefits of lower documentation and the pricing discount is the requirement that the stock be held for up to a year (longer in other jurisdictions) before it becomes freely tradable on the exchange.  This hold period protects the new investor as well as other existing shareholders from a flood of discount shares hitting the market. 

Private placements provide an excellent way for management and other insiders associated with the company to maintain a high degree of ownership in the listed company when they are the investors purchasing the stock.  It is also a frequently used method to compensate executives (by allowing them to purchase discounted stock) and at the same time inject funds into the coffers of the company.