Equity Placements to Attract Institutional and Private Investments
An equity placement is a term that refers to a method of financing which allows companies to finance expansions and start-up operations. There are two forms of equity investments. One approach is to issue a private placement memorandum, which outlines key details and the terms of the deal. Institutional and venture investors use such agreements to secure seats on the board of directors. Another option is to issue stock and trade it on the public stock exchanges.
Private Placement Memorandum
As a rule, a PPM serves to inform investors of potential risks. This is a very complex document that may include a subscription agreement, due diligence, engagement letter, and more. Companies often use the services of PPM specialists, investment banks, and lawyers. Most companies hire an attorney to prepare a memorandum and then present it to potential investors. The fees vary widely, depending on the type of PPM and the attorney. It can cost between $5,000 and $20,000. Other companies choose to hire a PPM specialist. These are professionals who offer counseling and specialized services. Investment banks also offer specialist services and raise capital on behalf of clients.
The private placement memorandum comes with a subscription agreement. This is an application that investors fill in when joining a limited partnership. The engagement letter is sent to entrepreneurs and defines the relationship between a client and a company. The latter can be an accountancy firm, an investment bank, or a law firm. The engagement letter specifies the deadline of preparing the financial statements as well as the responsibilities of the auditor. There is a disclaimer, which serves to outline the purpose and limitations of the audit. Financial audits are not intended to investigate companies for illegal acts and fraud.
Banks and other financial institutions have extensive experience with private placements. They follow new trends and stay current on first-time funds, fundraisings, and other events. They maintain contacts with mutual funds, crossover buyers, mezzanine investors, and venture capitalists. Bank officers work with financial institutions and investors to help businesses to grow and expand. They negotiate the terms of transactions, prepare memorandums, and structure deals in the best way possible.
Start-ups require substantial financing for their operations. They seek capital in the form of outside financing, be it long- or medium-term loans from commercial banks or short-term loans from clearing banks. Other sources of financing include business associates’ and friends’ loans, government grants, leasing, invoice discounting, and more. Some companies, however, have limited access to such sources of financing. These include businesses that expect extended periods of negative cash flows, companies that have more intangible assets, and firms with uncertain prospects. This is where equity placements come handy. There are two ways to achieve this – through public offerings and private placements. The latter are a better option for newly established businesses and involve drafting and disseminating memoranda and other disclosure documents. Memoranda are often sent to institutional and private investors.
Most businesses prefer outside financing in the form of debt and self-financing. The reason is that these forms are less expensive and more certain. The problem is that start-ups don’t have many options to raise capital. Selling shares is one way to increase liquidity and finance business operations. Some businesses prefer a private placement while others opt for a floatation. The former is beneficial in that it takes less time to raise capital. Initial public offerings take more time and incur additional costs. Moreover, there are disclosure requirements to meet and paperwork to submit.
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