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Understanding how private placements work in raising capital

On Behalf of | Sep 17, 2020 | Business Financing |

New companies consistently seek capital to grow their business. Start-ups like yours do have a few options. One is through a private placement in which you invite specific investors to the table to buy your securities or bonds and help build your company. This is a common way for start-ups to secure capital and diversify financial sources, while sidestepping an initial public offering (IPO).

Start-up companies sell their private placements — not offered to the general public — through a private placement memorandum (PPM). PPMs provide information such as an in-depth review of the company and how it operates. Seeking investors through PPMs differs from the way companies going public do things. The latter group relies instead on a prospectus to sell their stock through an IPO.

Private placement memorandums a key component

In seeking a private placement investment, it is crucial to create a basic business plan. The PPM serves as a key aspect of the business plan, too. It includes an abundant amount of information to allow potential investors to understand where their money will go. Investors can expect to find these details in a PPM:

  • Company background, including what the business does and how it generates revenue.
  • Investment terms, including the amount of money the company hopes to raise as well as how the investor benefits.
  • Information regarding any potential investment risks.
  • The company’s leadership team as well as its business structure.

An advantage of a private placement is that it has fewer regulatory requirements than an IPO. For example, the securities sale via a private placement is not required to be registered with the U.S. Securities and Exchange Commission (SEC).

Your company remains a private company, too, not beholden to the requirements of an IPO. Because you do not have to register with the SEC, you save time, the underwriting process is swifter, and your small company obtains funding sooner. It allows your company to grow while avoiding the public spotlight that companies face when filing for an IPO.