PRIVATE PLACEMENTSThe term Private Placements is used fairly commonly in the United States and in many countries, but basically has the same meaning. Many public companies make use of this type of structure for their funding needs. Not only are they important to companies for funding purposes, but they are also a very important activity for most hedge funds and development stage companies. Private Placements can be defined as a transaction in which a public company raises capital by selling equity, usually in the form of shares of its stock, to one or more investors in a private transaction not open to the general public and subject to specific regulatory requirements that require minimum income or net assets of each investor and restricted advertising or marketing of the offering by the company. They are also referred to as PIPE transactions, which stand for Private Investment in Public Equity. There are usually billions of dollars in PIPE Funding transactions conducted each year.
There are of course large amounts of capital funded to private companies, but those transactions involve larger private companies that are funded by private equity firms. Those private equity firms usually look to make a return on their investment in 3 to 5 years or longer through merger or buyout from an even larger company. Occasionally, the exit strategy may even be in the form of an initial public offering. Visit this link for more information on Private Placements and Funding Funding. In the United States, Canada and Europe private placements are the main funding structure used by public and private companies for raising capital. There are many advantages to using a PIPE which are as follows: 1. They allow a company to raise capital more quickly without having to go to the general public through an initial public offering which is often a long and complicated process. Private placements are considered a “secondary offering “ of a company’s securities in the United States and subject to a less complicated set of rules and regulations, most of which are contained in Regulation D. 2. In the United States, it allows public and private companies the ability to raise capital without filing a registration statement and getting approved from the Securities and Exchange Commission as long as certain requirements are met such as “accredited investors” status and no public advertising. 3. In many instances (subject to state law restrictions) they can reduce the company’s cost of raising capital since a company can go to family, friends and business contacts it already knows without the use of a broker-dealer, placement agent, finder or investment banker that typically would charge 10% commission on the amount of funding raised. As a general rule, under federal law, officers and directors of a company can raise capital for a company without having to be registered as a broker-dealer as long as that is not their primary role and they do not charge a fee for raising capital for the company. State laws vary so check with a knowledgeable attorney to see what restrictions may apply in a particular situation. You must be in compliance with federal and state law. 4. Private Placements are typically not limited in the amount of capital that can be raised or the number of investors that can participate in the offering as long as the applicable regulatory requirements for that jurisdiction are met. As discussed elsewhere in this article, in the United States the two main regulatory requirements are investors must meet the “accredited investor” definition and the company cannot advertise to the general public. Another requirement for Nasdaq- listed companies and companies on most of the other exchanges is that if the offering could result in dilution to the existing shareholders of more than a certain percentage (usually ten percent or twenty percent) then shareholder approval is required. Hedge Funds have become very good sources of capital financing through Equity Lines which are done through a Standby Equity Purchase Agreement. Some companies have raised substantial sums through equity lines over the years. I have drafted many documents for hedge fund clients over the years for these types of funding structures. Small and large companies, as well as non-US companies have raised capital through this funding structure. Private placement funding for public microcap companies is done mostly with a certain type of hedge fund, also known as a PIPE Fund. Hedge funds, such as a pipe fund, are typically not long term investors like their counterparts the private equity funds. PIPE Funds are usually only in an investment for about a year, or less, and that is why they invest mainly in public companies. They need to have liquidity in their investments. There are also some “Special Situation” strategy funds, like Leaddog Capital L.P. That Fund’s strategy is what is referred to as ‘‘special situations’’ investing because it is designed to capture capital appreciation generated by a significant proposed corporate event such as a merger, acquisition, product launch, public listing, corporate restructuring or reorganization. Although the number of transactions for raising capital are with microcap companies (market capitalization under $300 million), the majority of Private Placement Funding dollars goes to larger companies. This statistic is likely to be on the rise, and not change anytime soon, until the current credit crises and bank lending improves. Many midcap and larger companies are now seeking capital from intuitional investors using a private placement. Examples of some large funding transactions include the investment Berkshire Hathaway made into Goldman Sachs. If you examine the federal government bailout that took in 2009 you would probably be correct in characterizing those bailout investments as Private Placement Funding. There are many large institutional investors making these types of investments as bank financing is still difficult to obtain even in 2011 and likely to continue through 2012 . Placement Agents are typically used by companies to help find hedge funds or even private investors that invest in microcap companies. I have worked with and represented a number of Placement Agents over the years. Sometimes the funding is done in stages or tranches and typically an escrow agent such as a bank or transfer agent is used to disburse funds. Generally, the U.S. Securities Act of 1933, the Financial Regulatory Authority (“FINRA” formerly the National Association of Securities Dealers or “NASD”) and most state securities regulations require these placement agents to be registered representatives of a broker-dealer. These regulatory bodies do not like unregistered persons raising money for companies. If these placement agents are not registered, then there is no oversight and no agency to see how they are conducting business and what written materials they may be sending out to investors in an effort to raise money for a company that may be in serious financial trouble. FINRA regulations require that a broker-dealer acting as a Placement Agent use an escrow agent to disburse funds from an escrow account. Sometimes the securities offering is done as a Mini-Maxi, which is short for Minimum-Maximum. For example, is the offering of the companies securities is conducted by the broker-dealer on a Mini-Maxi basis of $1,000,000 and $5,000,000 that means that the escrow agent will not break escrow until at least the $1,000,000 minimum has been raised. The minimum usually means gross proceeds of $1,000,000 not counting reductions for placement agent fees, attorney fees and escrow fees for the Escrow Agent. By Joseph LaRocco |
Give me a call if your company (especially European, South American and Indian companies) is looking to get listed on an exchange in the United States or Germany, wants to raise capital through asset based funding or some type of