Tag Archives | public offering

Private Placement

See Also:
Convertible Debt Instrument
Common Stock Definition
Preferred Stocks
Hedging Risk
Treasury Stock

Private Placement Definition

The private placement definition is the process of raising capital directly from institutional investors. A company that does not have access to or does not wish to make use of public capital markets can issue stocks, bonds, or other financial instruments directly to institutional investors. Institutional investors include the following:

You do not have to register private placement issuances with the Securities and Exchange Commission (SEC). In addition, you do not have to provide a detailed prospectus. The issuing company and the purchasing investors negotiates the terms and conditions are negotiated. You cannot trade private placement securities on public markets, but they can be traded privately among institutional investors after they have been issued by the issuing company.

A private placement is in contrast to a public offering, which is issued in public capital markets, requires a detailed prospectus, must be registered with the SEC, and can be traded by the investing public in the secondary markets.

Advantages and Disadvantages of Private Placement

The primary advantage of the private placement is that it bypasses the stringent regulatory requirements of a public offering. You have to conduct public offerings in accordance with SEC regulations; however, investors and the issuing company privately negotiate the private placements. Furthermore, they do not have to register with the SEC, do not require the issuing company to publicly disclose its financial statements, and ultimately avoid the scrutiny of the SEC.

Another advantage of private placement is the reduced time of issuance and the reduced costs of issuance. Issuing securities publicly can be time-consuming and may require certain expenses. It forgoes the time and costs that come with a public offering.

Also, because the investors and the issuing company privately negotiate private placements, they can be tailored to meet the financing needs of the company and the investing needs of the investor. This gives both parties a degree of flexibility.

Now, let’s look at the disadvantages of private placement. The main disadvantage of private placement is the issuer will often have to pay higher interest rates on the debt issuance or offer the equity shares at a discount to the market value. This makes the deal attractive to the institutional investor purchasing the securities.

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Private Placement, Disadvantages of Private Placement, Private Placement Definition
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Private Placement, Disadvantages of Private Placement, Private Placement Definition


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Initial Public Offering (IPO)

See Also:
Finance Beta Definition
Stock Options Basics
Employee Stock Ownership Plan (ESOP)
Blue Sky Laws
Subscription (Preemptive) Rights

Initial Public Offering (IPO) Definition

An Initial Public Offering (IPO) is the process of selling a company’s stock to the public for the first time. Before the IPO the company is private; after the IPO the company is public. The IPO process is typically underwritten by a syndicate of investment banks. The process follows several steps, described below.

Advantages and Disadvantages of IPOs

Going public has at least two advantages: greater liquidity of equity and access to a larger pool of capital. There are at least three disadvantages to going public: dispersion of control, required adherence to regulations and public scrutiny.

IPO Process

The IPO process includes the following steps:

1. The company chooses a syndicate of underwriters (see below)
2. The company and the underwriters compose a preliminary prospectus (see below)
3. The SEC reviews the prospectus and approves the IPO
4. The underwriters determine the value of the firm and the structure of the IPO
5. The underwriters go on a road show to gauge investor interest in the IPO (see below)
6. The investors express level of interest and the underwriters set the offer price
7. The securities are distributed to the public (see below)

Underwriter Duties

In the IPO process, the underwriters – a syndicate of one or more investment banks – are responsible for registering the IPO with the SEC, valuing the company that is going public, structuring the issuance of securities, pricing the securities, and marketing the securities to potential investors. The underwriters also bear the risk of distributing the securities.

Preliminary Prospectus

The preliminary prospectus, or red herring, is a legal document that must be submitted to the SEC for approval prior to an IPO.

The document includes details about the company, including an explanation of the company’s operations and competitive position, and copies of its financial statements. The document also includes the details of the IPO, including the type of security (common stock, preferred stock, etc.) to be offered, the number of shares to be offered, and the anticipated share price.

Road Show

A road show is when the underwriters travel the country, or the even the world, to pitch the IPO to potential investors. The idea is to determine whether investors are interested in the offering. And if so, then they need to determine how many shares they will purchase and what price they are willing to pay. The investors are typically large institutional investors – mutual funds and pension funds.


Underwriters take on significant financial risk when they commit to an IPO. If the market is not interested in the offering, then the underwriters may be stuck holding securities nobody wants.

In order to ensure market interest in the offering, underwriters will often deliberately under-price the securities for the initial public offering. They sell it for cheaper than it is worth. So when the shares go public, investors buy up the bargain-priced shares. This causes them shoot up in value on the first day of trading. You may know this as the “IPO pop.”

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Initial Public Offering

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Initial Public Offering

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Due Diligence

See Also:
Due Diligence on Lenders
Mergers and Acquisitions (M&A)
Audit Committee
Loan Agreement

Due Diligence Definition

The Due Diligence definition is an extensive qualitative and quantitative look at a company. It helps company leaders make the best informed business decision about a company. Furthermore, Due Diligence is often associated with audits, where it is required before a public offering. In addition, it is associated with mergers and acquisitions to reduce the risk in the market for these activities.

Due Diligence Meaning

Due Diligence often becomes necessary when a large transaction is about to take place like a merger or loan agreement, or when the company’s financials are going to be presented to the public. Oftentimes, due diligence requires the assessment to be both qualitatively as well as quantitatively.

Qualitative Due Diligence

A qualitative act of due diligence may be to assess the mental state and capability of the management. This can be done through the following:

Quantitative Due Diligence

In comparison, quantitative due diligence includes thorough investigations of the books and records. This can range from asset appraisals to day to day transactions. A thorough understanding of internal controls and its effectiveness also become necessary to ensure the risk for the business is as low as possible.

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due diligence definition

due diligence definition

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