Equity Financing can be accomplished through the sale of company stock which will either be traded on a public exchange shortly after the offering closes or be held for a period of time by the purchasers before it can be sold. The type of equity financing where company shares start trading on an exchange shortly after the offering is completed is commonly referred to as an Initial Public Offering (IPO). The equity financing process where shares sold to investors will not trade on an exchange imminently is known as a Private Placement.
Companies that opt for a private placement typically share several characteristics including:
- They are at an early stage in their development process. Companies at this stage may have product designs, a beta version of their product, or a limited number of completed products.
- There are relatively few employees.
- There are a handful of shareholders
- They have little or no cash flow.
- They do not meet the requirements necessary to trade on an exchange.
- They are seeking less than $5 million from the offering.
Private Placements have the following characteristics that differentiate them from IPO’s:
- A Private Placement will not trade on an exchange for at least one year from the close of the offering.
- Only accredited investors are allowed to purchase shares. Accredited investors can be defined as individuals having a net worth of at $1 million or yearly income in excess of $200,000. Institutions that are considered to be accredited investors include banks, insurance companies, and investment companies. Some states do allow for a small number of non-accredited investors to participate in private placements.
- Shares purchased in a Private Placement can be “Restricted”, meaning that they must be held by the investor for at least one year.
- Because they are not listed on an exchange, companies that sell Private Placement shares need not follow Sarbanes/Oxley accounting standards.
Private placements offerings provide an opportunity to raise capital without many of the hindrances that accompany shares sold through an IPO. As coordinated by Dmitrij Harder and the team at Solvo group, a Private Placement can generate needed capital without the headaches that come with public offerings.