For most companies, raising capital through issuing stocks is a prevalent option to get funds. However, there are different ways they can generate those funds. For most companies, obtaining funds from existing financiers is a great option. However, there is a limited amount of funds that companies can generate. Therefore, they must get those funds from other parties, usually the general public.
When it comes to generating funds through the public, companies also have several options. Among these, private placements and public offerings are most common. There are differences between both options, which is crucial to understand.
What is a Private Placement?
A private placement allows companies to issue their stocks or bonds to a pre-selected pool of investors and institutions. They don’t go to the open market to get these funds. It is a great alternative to public offerings, especially for companies looking to stay private. For public offerings, companies have to change their status to the public.
Usually, companies select investors from different sources. These may include wealthy investors, banks and other financial institutions, insurance companies, pension funds, mutual funds, etc. The selection process of these investors differs according to every company. However, companies always target investors that can provide a sizeable investment.
Private placements, unlike public offerings, have relatively fewer requirements and standards. For most companies, going through the additional regulatory procedures may not be worth generating the finance. Therefore, they may prefer private placements as opposed to public offerings. Companies don’t have to provide detailed information to investors either. However, they may still do it.
Private placements are most common for startups that want to raise finance. Mostly, startups within the e-commerce and financial technology sectors benefit from private placements. Private placements allow companies to grow and develop while avoiding regulations that come with public offerings. The process is also quicker, making it easier for startups to generate funds.
What is a Public Offering?
Unlike private placements, companies do not limit their options with public offerings. Companies that use public offerings offer their stocks or securities to the public through a market. During the process, the company also becomes public, allowing its securities to trade in the market. Before public offerings, companies have to offer their securities in private.
Companies start public offerings by selecting an investment bank for the process. Once they do so, they perform due diligence and make the necessary filings. Similarly, companies also decide on a price for their securities. There are several factors that they weigh in to make a pricing decision. Once they go public, companies perform further analysis to ensure after-market stabilization. Next, companies have to go through a quiet period after which they can transition to market competition.
Public offerings allow companies to generate significantly more finance. In theory, companies don’t have to stay limited to a few selected investors. They can receive funds from an unlimited number of investors. Similarly, once a company goes public, it can use the same process in the future to generate more funds. However, public offerings come with stricter regulations to which companies must oblige.
There’s also an extra party involved in public offerings known as underwriters, or the investment bank. These are institutions or firms that bring a company’s issues to the market. These firms sell shares to their clients at the initial sales price. Once these shares go through their investors, other investors can obtain them after the company’s shares start trading in the market.
Conclusion
Companies can generate funds through several sources. For this process, they may either use private placements or public offerings. With a private placement, companies offer their shares to a pre-selected pool of investors. With public offerings, companies can get funds from the public, not limited to a pool of investors.
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