Question

What are the key distinctions between a private placement and a public offering? Why would Rule 144A increase foreign private placements?

Answer 1

Key distinctions between a private placement and a public offering are:

· In case of public offering securities are offered to the public but this is not the case with private placement in which securities are not offered to the public at large but mainly to accredited investors such as investment banks, pensions, or mutual funds.

· Public offering is underwritten by investment banks while private placements are usually not underwritten.

· The level of regulations and legal formalities are higher in case of public offerings than in case of private placements.

· Public offering generally involve sale of equity securities while private placements may also involve sale of some complex financing instruments as well because accredited investors are ready to lap up these instruments as they understand them well.

Rule 144A will increase foreign private placements because the earlier restrictions that were in place with regards to trade of privately placed securities have now been relaxed. Now the SEC allows for the trade of these securities or investments among qualified institutional buyers. This has opened the scope for the trade of privately placed securities even in foreign markets. There are large number of sophisticated institutional investors outside the home market and now they will be able to park their investments in these securities thanks to the relaxations introduced through rule 144A.