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What is a Private Offering?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 11 November 2016
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Private offerings are offerings of new issues of stock that are extended to a select group of investors. Typically, this type of private stock offering is limited to fewer than 50 participants. In some nations, should the number of investors invited to participate exceed a certain amount determined by trade regulations in that nation, the offering becomes a public rather than a private issue.

With a private offering, specific investors are invited to purchase shares of stock before those shares are offered to the general public. Both accredited investors and institutional investors may be among those invited to purchase the shares as part of this non-public offering. In most cases, there are time limits that must be observed in order to secure the shares. Any shares that are not sold as part of this type of invitation-only approach may be included in a subsequent initial public offering or IPO. Since regulations regarding the issue of shares differ slightly from one nation to the next, it is important to make sure that the private offering is structured to allow for the easy transition of the shares not sold to be included in that later IPO.

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There are a couple of benefits associated with a private offering. In many nations, different policies and procedures govern the extension of this type of private opportunity, allowing the registration requirements to be somewhat less stringent in comparison to a public offering. The fact that this type of stock offering is private rather than public makes it possible to create an invitation list that contains individuals and entities that the issuing company believes would be interested and highly likely to buy, or at least will benefit the company in some manner. A successful private offering helps to position the company for entry into the marketplace with a subsequent public offering, sometimes making it possible to see rapid growth in the value of the stock once it is publicly traded on various markets.

While a private offering usually occurs prior to an initial public offering, a corporation may choose to create an invitation-only offering at a later date as it prepares to issue additional shares of stock. Provisions for this type of activity are normally found in the bylaws for the company and must comply with the trading regulations that apply in the nation in which the business is located. When structured properly, the issuing company can use this tool to generate needed revenue from the sale of stock quickly, while also creating goodwill with a select group of investors who are likely to remain with the business over the long term.

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