A private placement offering is a type of non-public offering in which a company initiates the sale of a limited number of stock shares to a select group of private investors. This is in contrast to a public offering, in which any and all investors are free to participate and purchase as many shares as they wish. In most nations, the creation of a private placement offering must comply with specific rules and regulations, with strict regulations regarding the price per share being one of the most commonly regulated aspects of the offering.
In many situations, a private placement offering is issued as the means of securing cash quickly for the issuer. Rather than placing the shares for sale in a public marketplace, a select group of investors are invited to purchase the shares as part of the private offering. While there are a few different ways to go about this process, it is not unusual for offerings of this type to place limits on the amount of shares any one entity can purchase, a move that helps to prevent the creation of a power bloc that could eventually lead to a takeover of the company. In addition, the price extended as part of the invitation to participate in the offering is usually only good for a limited period of time. Once that date has passed, the chance of securing the shares at that price are usually very slim.
Another aspect of the private placement offering is that investors who do choose to purchase the shares may be required to hold onto those shares for a certain amount of time after the company initiates a public offering. This prevents the possibility of the market being flooded with shares and driving the unit price downward. At the same time, participating in a private placement offering and securing shares means that if the shares perform on the open market as projected in the offering memorandum, the investor can usually sell the shares at a significant profit once the time limit is fulfilled, or continue to hold the shares and enjoy the dividend payments that often are part of the arrangement.
In many nations, governmental restrictions also control the investor pool that can be associated with a private placement offering. In some cases, the offering may be limited by law to industrial investors only, or to investors such as banks or insurance companies. Before structuring an offering of this type, it is important to talk with financial experts who are aware of current laws, and also who are in a position to identify investors who may participate and are highly likely to be interested in the offering.