Private companies that seek to raise capital through issuing securities have two options: offering securities to the public or through a private placement. Regulations on publicly traded securities are subject to more scrutiny than those for private placements.

Each offers the necessary capital, but the criteria for issuing, ongoing financial reporting and availability to investors differs with each type of issue.

What Is an Initial Public Offering (IPO)?

An IPO is the first time a particular issue of a security is made available for sale on the open market. These issues are under regulation by the Securities and Exchange Commission (SEC) and require strict financial reporting criteria on a regular basis to remain available for trade by investors.

In an IPO, the issuer obtains the assistance of an underwriting firm to help determine what type of security to issue, the best offering price, the number of shares to be issued and the time to bring it to market.

Though the underwriting firms such as Goldman Sachs (GS) or Morgan Stanley (MS) that bring the issue to market hold shares to sell to their clients at the initial sales price, average investors can obtain the shares once they begin trading in the secondary market. IPOs can be a risky bet for investors, as there is no previous market activity to evaluate. This is why reading the IPO prospectus report, and gaining any knowledge about the company is crucial before investing.

What Is a Private Placement?

Private placement offerings are securities released for sale only to accredited investors such as investment banks, pensions or mutual funds. Some high-net-worth individuals may also purchase the shares through these options.

Companies using private placements generally seek a smaller amount of capital from a limited number of investors. If issued under Regulation D, these securities are exempt from many of the financial reporting requirements of public offerings, saving the issuing company time and money.

A private placement issuer can sell a more complex security to accredited investors who understand the potential risks and rewards, allowing the firm to remain as a privately-owned company and avoiding the need to file annual disclosures with the SEC. Marketing an issue may be more difficult for private placements, as these investments can be quite risky with lower liquidity than publicly traded securities.

  1. What's the difference between primary and secondary capital markets?

    In the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors ... Read Answer >>
  2. What's the difference between publicly- and privately-held companies?

    Privately-held companies are owned by the company's founders, management, or private investors. Public companies are owned ... Read Answer >>
  3. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  4. What are the advantages and disadvantages for a company going public?

    Companies often use an initial public offering (IPO) as a way to generate capital. There are both advantages and disadvantages ... Read Answer >>
Related Articles
  1. Managing Wealth

    How to invest in private companies

    It can be tough to analyze a company that doesn't trade publicly, but there are several advantages to investing in private companies.
  2. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  3. Investing

    House of Cards Adds More Product Placements (NFLX, GOOGL)

    How else is an ad-free streaming service supposed to make money? Now, there's more official confirmation that Netflix is getting big in the product placement game on House of Cards.
  4. Investing

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
  5. Small Business

    Is the Private Equity Bubble Still Expanding? (GS)

    Learn about the factors influencing valuations in the private equity market. Find out if there is a private tech bubble and if it is growing in 2016.
  6. Investing

    Top Alternative Investments for Retirement

    Diversify your retirement portfolio with alternative investments – peer-to-peer lending, precious metals, even Bitcoins.
  7. Investing

    How to Invest in Private Equity

    Private equity might be a pricey investment, but the payoff could be big. Here's why and where you should invest in private equity.
  8. Insurance

    Initial Public Offering (IPO) Explained

    An initial public offering (IPO) marks the start of a company's publicly traded life. Find out why companies undergo IPOs, and how the process works.
  1. Private Placement

    A private placement is a capital raising event that involves ...
  2. Placement

    A placement is the sale of securities to a small number of private ...
  3. SEC Form D

    SEC Form D is a filing with the Securities and Exchange Commission ...
  4. Private Purchase

    A private purchase refers to an investment in which an investor ...
  5. Public Offering

    A public offering is an organization’s sale of equity shares ...
  6. Private Equity

    Private equity is a non-publicly traded source of capital from ...
Trading Center