Private Placements

An alternative to a general subscription is a private placement, in which securities are sold directly to one or a few investors. The terms for the securities are negotiated between the two parties. The primary advantage of private placements over general subscriptions is the lower cost, since there are fewer intermediaries and no need for underwriting guarantees or marketing. There are also substantial savings in time and

13 The information takes two forms. The first are the filings that every publicly traded firm has to make with the SEC. The other, and more important, is the current stock price.

administrative costs because the SEC registration requirements are bypassed. The other advantages are that the terms of the bond can be tailored to meet the specific needs of the buyer, and the firm can convey proprietary information (presumably positive) to the potential investors.

The primary disadvantage of private placements is that there are relatively few potential investors, since large private placements may expose the investor to firm-specific risks. This is why private placements of corporate bonds are much more common than private placement of equity. In a typical private placement, the buyer tends to be a long-term institutional investor, such as a life insurance company or a pension fund. These investors tend to invest in these bonds and hold them until maturity. Private placements generally range from $ 25 million to $ 250 million in size and have more restrictions associated with them than typical corporate bond issues.

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