What Is a Private Placement?

A private placement is a common method of rai༒sing business capital. It involves offering equity shares or bonds privately, and not to the public-at-large. Private placements can be done by either private compan♎ies wishing to acquire a few select investors or by publicly-traded companies, for example as a secondary stock offering.

When a publicly-traded company☂ issues equity through a private placement, existing shareh🅘olders often sustain at least a short-term loss from the resulting dilution of their shares.

However, stockholders may see long-term gains if the company can effectively invest the extra capital ob💎tained and ultimately increase its revenues and profitabꦅility.

Understanding a Private Placement

Private placement is an issue of stock or debt either to an individual or corporate entity, or to a small group of investors. Investors typically involved in private placement issues are either 澳洲幸运5官方开奖结果体彩网:institutional investors, such as banks and 澳洲幸运5官方开奖结果体彩网:pension funds, or high-net-worth individuals.

The individual investor who wishes to participate in a private placement offering must be an 澳洲幸运5官方开奖结果体彩网:accredited investor, as defined under regulations of the 澳洲幸运5官方开奖结果体彩网:Securities and🅰 Exchange Commission (SEC).

This requirement is usually met by having a net worth in excess of $1 million or an annual income in excess of $200,000.

A private placement has minimal regulatory requirements and standards that it must abide by. The investment does not require a 澳洲幸运5官方开奖结果体彩网:prospectus and, quite often, detailed financial information is not disclosed.

Private Placement and Shareholder Equity

If the entity conducting a private placement is a private company, the private placement offering has no effect on share price bec꧅ause there are no pre-existing shares.

Dilution

With a publicly-traded company, the percentage of equity ownership that existing shareholders have prior🧔 to the priva൲te placement is diluted by the secondary issuance of additional stock.

This happens because the extra shares in circulation increase the total number of shares outstanding. The extent of the dilution is proportionate to the size of the private 🤡pla♔cement offering.

For example, if there were 1 million shares of a company's stock outstanding prior to a private placement offering of 100,000 shares, then the private placement would result in existing shareholders having 10 percent less of an equity interest in the company.

However, if theꦦ company offered an additional 1 million shares through the private placement, that would reduce the ownership percentage ♚of existing shareholders by 50 percent.

The Effect on Share Price

Short Term

The dilution of shares commonly leads to a corresponding decline in share price—at least in the near-term. The effect of a private placement offering on share price is similar to the effect of a company doing a 澳洲幸运5官方开奖结果体彩网:stock split.

Longer Term

The long-term effect on share price is m🐻uch less certain and depends on how effectively the company utilizes the additional capital raised from the private placement.

Why does the company need the funds? If the company were on the verge of 澳洲幸运5官方开奖结果体彩网:insolvency and did the private placement as a means of avoiding 澳洲幸运5官方开奖结果体彩网:bankruptcy, it would not bode well for the comp💖any's shareholders.

However, the motivation for raising additional funds may be an outstanding opportunity for rapid growth. The private placement can help the company make the most of it. As a result, the eventual extra profits realized from the company's expansion may push its stock price substantially higher.

Another possible motivation for doing a private placement could be that the company cannot attract large numbers of institutional or 澳洲幸运5官方开奖结果体彩网:retail investors. This might be the case if the company's mജarket sector is currently considered unattractive, or there are only a few analysts covering the company.

The Bottom Line

A private placement is a non-public issuance of a security to a specific group of accre⭕dited investors. It ⛦can be undertaken by either a private or public company.

P♔ublic company private placements can dilute the ownership percentage for existing shareholders and cause a loss of value in their holdings in the short term. The long-term effect of a private placement on share price depends on the reason for the private placement 🔯and how well the funds that are raised are used.