What is a placement?

A placement, in the stock market world, is the sale of shares or bonds to a limited number of private investors or institutions. Participants involved in a placement are pre-selected and are commonly large, sophisticated investors. They can either be individual investors, or enterprises like investment banks, insurance companies, investment funds, etc.

A company seeking to raise funds through a less complex and expensive process can choose a placement as against an initial public offering (IPO), which involves lengthy processes (like registering and filing prospectus). An IPO is also relatively more expensive in terms of time and money.

The securities in placement are sold using a private placement memorandum, like a prospectus in an IPO.

A placement is also known as an unregistered offering, private stock offerings, and private placement.

Frequently Asked Questions (FAQs)

1. What are the advantages of a placement?

There can be many advantages of launching a placement to raise funds. At times, however, it is the last resort for companies to raise funds for their risky ventures and new business ideas.

Some of the advantages of a placement are:

• Choosing your own investors: A placement allows the company to choose its own investors to provide funding. This often lets companies select potential investors who have similar objectives and can offer some business suggestions for improvements.
• Company’s status: If a company chooses to raise funds via a placement, it does not have to go public.
• Less costly: It requires less investment as compared to other methods of raising proceeds, such as an IPO. It is also comparatively a faster process.
• Return on investment: Investors involved in a placement are expected to be patient for a longer time as they go in understanding the risks of a new business or venture, for which the funding is raised.
• Flexible: It allows the company to raise funds in a combination of the security, which is not possible in an IPO. For instance, a company can provide a combination of bonds and equity shares to raise capital.
• Confidentiality: It helps in maintaining confidentiality as the disclosures made in a private placement memorandum are less as compared to a prospectus.
• Small amount:There is no minimum requirement in raising funds through a placement; even the small amounts can be raised.
• Stable market:The placement market is said to be less volatile than the stock market, and the issues are addressed in a much professional way as all the parties involved have sound business knowledge.

2. What are the disadvantages of placement?

Some of the disadvantages of using the placement process to raise funds are mentioned below:

• Reduced market: A placement offers the shares or other securities to pre-selected investors, which reduces the market to trade its securities. The value of the enterprise, as a result, might get hampered in the long run.
• Limited investors: The placement offer is not distributed publicly, which lowers the scope of finding potential investors. Companies might find difficulty in getting the right investors whose potential and interest to invest is in sync with the company’s requirements.

• Discounted price: To compensate the risk borne by the investors on equity shares or bonds subscribed, the company often has to offer its securities at a substantial discount.

• High-interest rates: If a company issues bonds in a placement, it is required to pay higher interest rates to attract potential investors. This is because the privately issued bonds do not have ratings, and it becomes difficult for the investors to determine risk.

3. What is a subscription agreement in private placement?

A subscription agreement in private placement defines the terms and conditions on which the investor and the company have agreed to raise funds. The company agrees to sell its securities to the investor at a specified price, and in return, the subscriber (or investor) is expected to purchase the securities at a pre-determined price. This agreement is also said to include the decided payment dates for the returns to the investor.

4. How is a placement different from an initial public offering?

Both placements and IPOs are efficient methods of raising funds. The former method is mainly used by startups that require a small amount of capital to foster their businesses. An IPO is mostly preferred by large scale companies looking to go public. The key differences between using a placement and an IPO to raise capital are mentioned below:

• The number of investors: Raising capital using an IPO requires selling securities to the public with a large number of investors available. On the contrary, in a placement, an enterprise gets to sell its securities to a selective group of investors.
• Floatation cost: In an IPO, the company has to incur huge floatation cost as it employs underwriters. There is no such floatation cost incurred in placements as the company does not need an underwriter in this case.
• Company size: Mostly, companies operating at a large scale go for public offerings, and small-scale companies prefer to raise capital through placements.
• Intermediaries: In the process of an IPO, investment backers act as intermediators to facilitate the process of buying and selling of securities between the company and investors. On the other hand, there are no intermediaries in placements.

5. What is the purpose of a private placement memorandum?

The private placement memorandum (PPM) is a document that encloses all the relevant information an investor should know before making an informed decision by investing in a private placement.

It is a standalone document providing a piece of exhaustive information about the investment opportunity, risks related to the losses and disclaims from the legal liabilities. A typical PPM includes information on the description of securities offered, use of proceeds, risk factors, how to invest, principal shareholder information, plan of distribution, management information, etc.