Private placements have become increasingly popular in recent years. In a private placement, a private or public company can sell a security to a small number of private investors without having to register the security with the Securities and Exchange Commission. Some CEOs and CFOs are interested in private placements, but have not yet issued any. In this post, we will examine five of the best reasons for issuing these transactions– and why they require caution.
1. They offer privacy and control
Discretion is of utmost importance to many companies and investors. Private placements do not have to go through public filing or disclosures.
2. They have longer maturities
For companies that wish to extend their refinancing obligations past the typical three to five years, private placement transactions can be ideal. They offer much longer maturities than most other financing arrangements.
3. No fluctuating interest rates
Private placements have less interest rate risk, as companies generally offer them at a fixed rate. This grants much-needed reassurance in the event of rising interest rates.
4. The all-in cost is lower
Between regulatory issues, legal documentation, underwriting expenses and bank fees, issuing a public offering can quickly become expensive. Companies can have a much lower all-in cost when issuing private placements.
5. The process can be much faster
Because private placements do not have to go through the bureaucracy-filled regulation process, issuing them is much faster compared to public bonds.
Pursue Private Placements… With Caution
The allure of issuing securities privately is easy to see. These transactions could prove beneficial if your company wishes to raise capital through private investors. However, before issuing private placements, it is crucial to understand which types of securities are exempt from SEC registration. If your company inadvertently issues a security that is not eligible for private placement, you risk facing civil or criminal penalties.