Question

a method of raising equity funds is for a company to make a private placement of shares with a large instructional investor. from the company’s position what advantages does this method of raising capital have over a public issue? in what ways exiting shareholder be disadvantaged by a private placement? please explain in Australian firms

Answer 1

ADVANTAGES OF PRIVATE PLACEMENTS OVER EQUITY FINANCING TO COMPANY

Saved Cost and Time

Equity financing deals such as initial public offerings and venture capital often take time to configure and finalize. There are extensive vetting processes in place from the SEC and venture capitalist firms with which companies seeking this type of capital must comply before receiving funds. Completing all the necessary requirements can take up to a year, and the costs associated with doing so can be a burden to the business.

The nature of a private placement makes the funding process much less time-consuming and far less costly for the receiving company. Because no securities registration is necessary, fewer legal fees are associated with this strategy compared to other financing options. Additionally, the smaller number of investors in the deal results in less negotiation before the company receives funding.

Private Means Private

The greatest benefit to a private placement is the company's ability to remain a private company.. A business obtaining investment through private placement is also not required to give up a seat on the board of directors or a management position to the group of investors. Instead, control over business operations and financial management remains with the owner, unlike a venture capital deal

Speed — A private placement of shares can be effected in a short period of time.

* Price — As because this type of placement is made to other than existing shareholders and to a market that is potentially more informed and better funded, the issue price of the new shares may be closer to the market price at the date of issue or issue price may be higher than normal.

* Direction — These shares may be placed with investors who approve of the directions of the company or who will not interfere in the formation of company policies.

* Prospectus — In some cases, private placement of shares can occur without the need for a detailed prospectus to be prepared. So, it is easy to issue.

Disadvantages Of Private Placement Of Shares are:

* Dilution of current shareholders’ interests: The current shareholders will have their interest diluted in the company because of the private placement. In some countries, the securities regulations place specific limits on the amounts of placements of shares without the approval of existing shareholders.

* Shares are placed at a discount: If the company privately places the shares at a large discount, the interest of the existing shareholders will get affected . In some countries, securities laws are generally enacted to ensure that management cannot abuse the placement process and that current shareholders are protected.

If a company is private and issuing its shares through a private placement then the placement has no effect on share prices because there are no preexisting shares in the market.