What are the reasons that favour the use of private placement over public offering?

Question

when a company wishes to raise finance by issue of new security

Answer 1

Private placement has the advantages of:

1. Less disclosure. You do not have to file with the SEC and thus you can keep your financial statements away from your competitors.

2. Less regulations. You may not have to comply with some SEC regs like Sarbanes-Oxley

3. More "professional" investors - You are limited to Rule 144a "qualified" investors. These are usually very well educated financial experts. You may be able to discuss a pending default and work with them to get by the tough times. This is almost impossible to do in a public deal.

The disadvantages of private

1. There may be limited capital availability, especially if you are a risky new start-up (IE, VC deals)
2. It can be difficult to place high risk paper
3. You can't fleece the suckers (IE. Vonage's recent IPO)
4. Having smarter and fewer investors can put you under a microscope.
5. Due to limited disclosure and less regulations, you may end up paying a higher price

Answer 2

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