Private Placements vs Public Offerings: What’s the Difference?

Both private placements and public offerings, such as IPO’s, are ways for businesses to attract capital with the goal of expediating growth. It is important to understand the differences between the two methods in order to get a better idea of how companies can raise funds. In this article, we establish the differences of both private placements and public offerings and how private companies can utilize each approach to raise the necessary capital to succeed in their ventures.

At a Glance:

· The difference between a private placement and a public offering is that a private placement is the sale of stock to only one or a few investors, usually accredited, where a public offering is made available to the general public.

· An IPO is underwritten by a syndicate of investment bank firms led by a lead or managing underwriter, which then allow securities to be sold on the open market.

· Private placements offer securities to be sold to a select few accredited investors which often include institutions like investment banks, high net worth individuals, pension funds and insurance companies.

What is an IPO?

An IPO, or initial public offering, is a conversion of a private company to a public company by the listing of shares on a stock exchange, making them available for the general public to purchase. Transitioning from a private to a public company isn’t always smooth, as the company going forward with an IPO will be under the public eye and will also have to prepare for a mountain of paperwork and financial disclosures in order to meet the proper requirements.

The IPO process typically involves a syndicate of underwriters from an investment bank, providing functions that include the following:

· Advising the client;

· Determining the type of securities to be issued;

· Setting the price of the securities;

· Determining the number of shares to be issued;

· Preparing and filing the required documents; &

· Distributing the securities to investors

It is not unusual for the underwriters to hold shares of the private business with plans to sell them to their clients at the initial sales price determined, leaving the remaining shares to be purchased by the average investor in the secondary market once trading begins. This is often risky for the average investor as there is no previous market activity to refer back to, making the initial reading of the prospectus created such a crucial activity.

The IPO process is still an efficient way to attract capital to grow your business. However, there are more ways in which a private company can go public without the need of an investment bank, resulting in the saving of money and time which is advantageous for business looking to grow. To learn more, check out our previous blog 5 Ways to Go Public in Canada for more information.

What Is a Private Placement?

A private placement is a sale of shares to a small group of investors and institutions rather than on the open market and is seen as a private alternative to issuing, or selling, a publicly offered security as a way for raising capital. The target investor pool for private placements are accredited investors who earn a minimum of $200,000 annually or whose net worth exceeds $1 million, along with institutional buyers like banks, pension funds, insurance companies, and mutual funds. However, sometimes private placements can be offered to non-accredited investors such as friends and family of the company's executives or via crowdfunding.

The process of selling securities through the private placement method tends to be easier and, in most cases, considerably less expensive than a prospectus offering. Private placement sale provisions are normally not reviewed by provincial regulators which can therefore allow for more flexibility for the business doing the raise. Increased flexibility for the private business along with cost and time savings have made private placements commonly used by start-ups as they allow companies to raise money while delaying the IPO process.

Private placement transactions are negotiated confidentially and detailed financial information is not typically disclosed. The private issuance allows the issuer to sell a more complex security to accredited investors who understand the potential risks and rewards. The primary risk is the potential lack of immediate liquidity of the securities as there is often a lock-up period for the shareholder. Once the lock up period has ended, there is not guarantee that there will be a buyer for the shares looking to be sold.

It can sometimes be difficult to comprehend the differences between a public offering and a private placement. If there is any further clarification needed, please feel free to reach out to Our Team of experts who will be happy to assist.