The sale of securities to a small number of select investors as a way of raising capital. Serves as either a precursor to an initial public offering or an alternative to an IPO. Usually used in early-round stages of fundraising, but can be offered at virtually any time.
Unlike issuing shares to the public on an open exchange, private placements allow corporations to raise funds by targeting select private investors. This form of securities trading is far less regulated and subject to fewer reporting requirements than the sale of public securities is. Private placement offerings do not even have to be registered with the U.S. Securities and Exchange Commission. This exemption is made possible by Regulation D of the Securities Act of 1933. It is worth noting however, that investors interested in private placements tend to expect a higher return on their contributions than common shareholders do, as private placement offerings tend to be riskier than public ones, simply because they are less regulated.
Startup Founder: “I want to keep the company relatively small, but we need funding to expand to a second campus. I think that a well-run private placement capital fundraising effort may allow us to do what we need without having to go public.”
Spouse: “I’m sorry, babe! I just totally spaced out. I’m really sorry. What did you just say?”
Startup Founder: “I was just saying how lucky I am to have married you.”
Spouse: “Uh-oh. What did you do wrong?”
Startup Founder: “Nothing! Why do you always think I did something wrong when I say something nice?”
Startup Founder: “Yeah… okay.”