One constant thing in the life of every business is the need for cash to boost working capital, enhance sales, expand into new markets or sustain operations. There are several financing options available to the entrepreneur e.g. commercial bank loans, grants, public offerings, angel investor’s etc. and they all have their advantages and limitations. Many companies now consider the private placement option as it remains an easier model of raising money without the stringent processes and requirements of commercial bank loans and public offers. Private placement is an attractive model for raising capital especially for startups and it basically involves getting selected/ sophisticated investors to put money in your business in return for equity.
A suitable candidate for a private placement would be your typical business that is already established but looking for capital to take things to the next level. In most cases such businesses have a long term plan to eventually offer their shares to the Public and convert to a Public Limited Company (PLC) and a key attraction to investors in the private placement would be the chance to get a slice of the cake early and at a discount.
FRAMEWORK OF PRIVATE PLACEMENTS IN NIGERIA.
Guidelines for Private Placements is provided for under Section B3 of the Securities And Exchange Commission Rules and Regulations made pursuant to Investments and Securities Act (ISA). The rules provide that the maximum number of subscribers to a Private Placement should be 50 individual or corporate investors.
Some other provisions of the rules includes restriction on solicitation or advertising, limitation of the offer to only informed investors who can correctly interpret the unregistered security they are being offered or have the capacity to bear the risk. The rules also mandate the issuer to come up with a Placement memorandum detailing adequate information about the issuer, its business and the securities being offered which shall be filed with the Securities and Exchange Commission (SEC).
BENEFITS OF PRIVATE PLACEMENT.
Private placements offer Businesses/Investors a number of advantages which include:
- Private placements have less burdensome regulatory requirements and do not require the assistance of brokers or underwriters consequently they are considerably less expensive and less time-consuming.
- A private placement also allows the business owner the choice of picking investors who have compatible goals and interests.
- The subscribers are usually sophisticated investors who bring on board additional skills and expertise which could be of good use to the business.
- Investors to a Private Placements are usually more patient than venture capitalists, often seeking 10 to 20% return on investments over a longer term of 5 to 10 years.
- Shares offered through private placements are relatively priced at a discount to compensate for investment risk.
- It attracts higher returns to investors as they have opportunity to grow with the Company especially where the shares are eventually listed on the floor of the Nigerian Stock Exchange.
On a general note, the absence of stringent regulatory control usually shrouds private placements in secrecy thereby undermining transparency and accountability. Sometimes, share certificates are unduly delayed and there is much uncertainty about when such shares will be listed. Private placements are also illiquid as investors cannot easily sell unless when the securities are listed on the Exchange. It is therefore important that any investor wishing to invest in any private placement to conduct due diligence before making the move.
REQUIREMENTS FOR A PRIVATE PLACEMENT
- A sound business plan.
- A private placement memorandum (PPM) disclosing the full facts of the investment and business.
- Issuing Houses, Reporting Accountants, Auditors and Lawyers are very key to the success of a Private Placement, and it is thus important to retain experienced hands to handle the offer.