Private Placements Can Replenish Capital Easily And Inexpensively

Tuesday, July 12, 2005

Jeffrey Marshall, Financial Executive - April 2005, Pgs. 46-49, http://

Abstracted from: Capital Plenishment

Private placement on the rebound.
Small private company seeking $1 million or so to finance expansion? Larger private (or even public) company hoping to raise money quietly? Both might benefit from going to the same alternative-financing well to draw capital: private placement. Although activity is not nearly as great as it was at the top of the dot.com bubble, Jeffrey Marshall writes, private equity remains a key financing alternative. Private placement offers substantial benefits, including flexibility in the amount of financing raised, investors who are less demanding than venture capitalists, financing costs that are lower, and lead times that are shorter. It is particularly useful for small, unsophisticated companies that want to avoid more debt and the restrictions imposed by venture capitalists. The company sells stock, most often preferred, to a small group of well-heeled investors.

Prospects ideally are generated from the executives' personal or business networks. The investors' financial suitability is important, since no more than 35 nonaccredited investors (i.e., those failing to meet asset and income minimums) can participate in a placement. However, SEC Regulation D does not limit the number of accredited investors, such as the numerous hedge funds seeking more profitable returns than those offered by traditional investments.

Relatively simple financing.
Private placements are usually free from SEC registration under the 1933 Securities Act, provided the size of the investment remains small and the number of investors limited. To be exempt from registration, private issues must comply with SEC Rule 504 (for issues under $1 million), Rule 505 (issues under $5 million), or Rule 506. Deals using a simple subscription agreement can usually be completed in several weeks. If, however, the deal involves non-accredited investors, both federal and state laws require additional disclosure. For this relatively simple form of financing, an experienced securities attorney can draft most of the placement documents. When the deal is more complex or has more disclosure concerns, the author suggests companies enlist help from an investment bank or private equity firm.

Filing requirements are not expensive, given the few governing regulations, but counsel must be aware of the requirements in the states where investors live. These range from lenient to lengthy and can be complicated if investors from different states are involved in the same issue. At the very least, an accredited deal needs an offering statement, which provides information about the company's finances, business, and risks.

A global attraction.
Companies around the globe are recognizing the attraction of private placements. Startups in China as well as listed European companies are floating private issues. Larger companies, both private and public, also occasionally avail themselves of private placements. These deals tap large commercial or investment banks, since the amounts raised can be in the hundreds of millions. Large issues are usually divided into tiers or tranches with maturities varying from four to ten years. The larger bond offerings receive a rating by Standard & Poor's, and prices are pegged to Treasury rates for comparable maturities, the author mentions, or sometimes to LIBOR. Some issues may even include backing from an insurance company, the author notes. To reduce risk to investors, smaller companies have the option of offering preferred stock, generally with a stated dividend ranging from 7% to 9%, in the private placement.

Abstracted from Financial Executive, published by
Financial Executives International
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Florham Park, NJ 07932.

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