In the process of growing a successful company, finding the next round of funding is always on the business owner’s mind. Initial Public Offerings (IPOs) can be an exciting avenue to cash but they can also be complicated and expensive. In some cases a private placement round may be more effective.
What is Private Placement?
A private placement is a securities offering not to the public, but to a select group of private investors, typically institutional investors like insurance companies, banks, pension or mutual funds. These nonpublic offerings do not have to be registered with the Securities and Exchange Commission as long as the requirements are met. In general, accredited investors must have annual incomes exceeding $200,000 or have a net worth of $1 million or more. The investors must be able to evaluate the risks of the private placement on their own and the business owner is often waived from providing a prospectus.
The private placement process is less fussy than the IPO journey, and it allows companies to raise as much money as needed as long as there are interested investors. There is less paperwork involved as long as you are selling to accredited investors and an underwriter (and the associated fee) is usually not required like with an IPO. And because the investors are essentially hand-picked, they typically are more forgiving and allow for longer terms for receiving returns on their investments.
Even though there may be only a few investors, you will still be giving up some control of your company. In additional to having access to your financial records, investors can help choose your board of directors and have a say in the direction of your firm. This could significantly change the power and future profits you receive from your own business.
If you decide that a private place is right for your company, be sure to have a water-tight business plan pitch for your potential investors. They will want to know exactly how their investment will turn into revenue for them.