Issuers have two options for accessing funding, a public offering or a private placement. Each of these options has distinct advantages or disadvantages that may affect funding costs and/or the timing of the issue.
Public vs. Private Offering
The most common type of public offering is an initial public offering, in which equity shares are offered to public investors for the first time. A secondary or follow-on public offering occurs when you want to sell equity shares in the public markets after you’ve completed an IPO. After a company has gone public, it is regulated by the Financial Authorities and must disclose regular financial performance to the public. When you list shares in a public offering, you are inviting shareholders to not only share in the ownership and profits of the business but you are also allowing them a vote on the future direction your company takes.
In a private placement, you sell equity shares or debt instruments of your business to a select group of investors. The target investor audience for private placement deals are accredited investors, high net-worth individuals as described by the applicable regulations. The investors, who you are responsible for finding, although you could enlist the help of an intermediary, agree to buy and hold the participations (debt or equity) for a discounted price. There isn’t a lot of paperwork involved, and you don not have to register the deal with the Financial Authorities.
Although you may not earn as much money in a private placement compared with an IPO, the expenses associated with a private deal are less. Private placements can also be completed quicker than IPOs, and if you value your position as a private entity, you do not have to sacrifice that privacy but can still gain access to liquidity, or cash, from the deal.
When it comes to a public offering, such as an IPO, a potential disadvantage is time. If you need to have the capital that will be raised in the deal, you are probably not going to see any proceeds for at least six months from when you begin the public offering process. A potential drawback with a private placement is that the deal will not get as much attention as it would in an IPO. That’s because securities laws limit the way that you can advertise a private placement, and as a result the deal may not generate as much investor interest versus a deal that is more heavily marketed.