What is the difference between initial public offering and private placement?

Answer 1

An initial Public Offering is the sale of a company's shares on an organized exchange usually accompanied by books and records that have been audited and made available for public viewing. In the past, many smaller companies have opted to "Go Public" via a reverse merger, in which a private company is "Acquired" by a "Public Shell" (a company that has a listed symbol but no business, hence the term "Shell"). However, this technique has fallen out of favor with regulators and is often highly scrutinized to the point of the process no longer being a desirable route to public trading.

A private placement is a private offering of a company's privately held stock, usually packaged in "Units" or "Blocks" of investments. A unit can consist of shares (Stock), Warrants (options), and a coupon (interest payments) or any combination.

Commonly, any company with shares can sell their shares privately to any other interested party. You do not have to be a huge company to sell shares. (You own a small car wash business. You're incorporated with 1,000 shares. You can sell all, or any part of those shares.)

A private placement differs from the aforementioned common traditional private sale of stock due mostly to the addition of "Selling Groups" (Such as Broker Dealers) whom when brought into the deal bring with them additional layers of requirements and regulations. These regulations include risk disclosures, disclosures of material facts and the investor "Type" that the private placement can be offered to (Usually only "Accredited Investors" as defined by regulation having minimum liquid net worth and investment experience requirements.)

The most common private placement is a "Reg D" (Rule 504, Regulation D), which allows for the exemption from registration of certain "Private Offerings."