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Also known as a non-public offering, private placement is the approach of selling securities to some type of institutional investor, without offering those securities for sale to investors in general. The use of this type of strategy is common in the United States, where regulations put in place by the Securities and Exchange Commission help to define the process of selling a round of securities in this manner. While the term private placement is used more frequently in the United States, the general concept is found in investment circles around the globe.
One of the distinguishing characteristics of private placement is that these private investors must be institutions rather than individuals. This means that banks, insurance companies, pension funds, and other incorporated entities are free to participate in this type of sale. The range of securities that can be offered in a non-public offering vary from shares of common or preferred stock, promissory notes, and bond issues.
It is important to note that this type of non-public offering is a common approach to investing in just about every country around the world. The process makes it possible to generate returns that help to keep an institution solvent and capable of providing ongoing support to its clients or members. For example, banks engage in private placement as a means of generating a return on the resources of depositors, which in turn increases the security of those deposits.
In the United States, as well as a number of other countries, securities obtained via private placement do not necessarily have to be registered with a government regulatory agency. This is typically true when there is no intention of reselling the acquired securities to private investors. If the intent is to acquire the securities and offer them for sale within a relatively short period of time, many nations require that the acquisitions be registered, using the same general procedures followed by any securities that are included in an initial public offering.
The need to regulate private placement has long been understood in the financial world. Laws in the United States like the Securities Act of 1933 provide the framework for the ongoing creation of rules and regulations supported and enforced by the Securities and Exchange Commission in that country. By creating standards and specific processes whereby private placement can occur, the opportunity for unethical and possibly illegal trading of securities is minimized. From this perspective, regulating the process of private placement helps to keep investment markets somewhat stable, while also protecting the rights of all investors, individual as well as institutional.