Companies that are looking to raise capital for their business typically use corporate credit loans from banks. However, with the recent economical crisis including the collapse of major U.S. banks and the tightening of credit, businesses are beginning to turn to a forgotten alternative to corporate credit and that is private placement.
Private placement is raising money for a company by issuing securities, such as corporate stock or an interest in a limited partnership. There are several private placement options for business owners that do not require registration of the securities with the Securities and Exchange Commission. Thus, this is an attractive method for business owners to raise the capital they need without the complicated restrictions, filing requirements or bank loans.
Private placement also makes it much easier, faster and far less costly than taking a company public. This also gives the business owner greater control and flexibility with how they raise their financing, including with a select group of investors that meet their requirements. Many companies do not meet the stringent requirements of taking a company public, thus another advantage provided by private placement.
During this economic crisis, banks are now placing a far higher level of scrutiny and restrictions for a company to get the level of funding they need. Private placement is an attractive option for many business owners to get around this hurdle.
There are several private placement options available for businesses to take advantage of, each with different restrictions and limits to how much securities a company can sell.
Rule 504 - Allows a company to sell up to $1,000,000 of its securities in any 12 month period. Companies are not allowed to solicit or advertise their securities to the general public. Word of mouth advertising is typically used rather than advertising in a public forum. Purchasers receive restricted securities which require them to meet additional rules before allowing them to resell the securities. Purchasers will generally need to hold the securities for at least one year.
Rule 505 - Allows a company to sell up to $5,000,000 of their securities in any 12 month period. Again, companies are not allowed to solicit or advertise their securities to the general public but generally can let others know via word of mouth. Companies are allowed to sell to an unlimited number of accredited investors and up to 35 other persons who do not meet the sophistication of wealth standards associated with other exemptions. Purchasers receive restricted securities which requires them to meet additional rules before allowing them to resell the securities, including holding the securities for at least one year.
Rule 506 - Allows a company to raise an unlimited amount of money. Companies may sell their securities to an unlimited number of accredited investors and up to 35 other people. Unlike Rule 505, all non-accredited investors, either alone or with a representative, must be sophisticated, meaning, they must have sufficient understanding and experience in financial business matters to make them capable of examining the risks and rewards of the investment. Purchasers receive restricted securities which requires them to meet additional rules before allowing them to resell the securities, including holding the securities for at least one year.
For more information about private placement, contact 1-800-COMPANY.com at 1-800-COMPANY (1-800-266-7269)
