Private Placement Definition

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Contributor, Benzinga
October 7, 2021

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Private placement is a term used to describe the sale of securities, bonds or company stock in a private transaction. Private placement is the diametric opposite of a public transaction, such as an initial public offering (IPO), when securities, stocks or bonds are sold on a public exchange or through a broker. 

Typically, private placement transactions are done with carefully chosen investors, institutional funds, venture capitalists or other people with close connections to the company selling the stock (e.g. family members, friends). Private placement transactions also differ from public transactions in that private placement deals do not have to be reported to the Securities and Exchange Commission (SEC). 

Many fledgling companies who seek to raise operating capital will offer equity through private placement deals before eventually going public. Privately held companies, which are business entities not listed for sale on any public exchange, may also do private placements to raise money for a new venture or consummate partnerships with investors. 

Private placements are also a popular way investment firms and developers fund commercial real estate deals. The company will sell shares in the project to a group of investors to cover the down payment needed to finance the deal. The investors will then get a share of the net operating income earned through the property as well as their share of the profits when the property later sells.

See also: Real Estate Crowdfunding

Private Placement-Example

Frederick is a real estate agent who has a great idea for a social media app that will connect commercial landlords with the top agents in their area. Unfortunately, he doesn’t have the $200,000 he needs to build out the website and develop the app. So, he forms a corporation and offers 25% of its stock as a private placement offering to an angel investor in exchange for the $200,000 he needs. This means when and if Frederick’s company goes public, he will only be able to sell a maximum 75% of the company’s stock because the remaining 25% has already been sold through private placement. 

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