What Is A Top Up Placement?
Placing is another way in which listed companies can raise capital, and is the issue of securities to selected persons. Listed companies usually employ a placing broker to help identify interested investors.
Listed companies may ask shareholders for a general mandate allowing the board of directors to increase the company’s share capital by up to 20% each year. Most listed companies ask the shareholders to approve this kind of mandate in the annual general meeting. Once it has this mandate, and provided it does not exceed the limit approved by the shareholders, the board does not need to ask the shareholders for approval before making a placing at any time during the year. If the board wants to issue more than the approved amount, it must get approval from the shareholders first.When a listed company wants to conduct a placing, it must publish an announcement disclosing the details, such as the reasons for the placing and how the proceeds will be used.
Who can the company place shares with?
A company must satisfy the Stock Exchange that the placees are independent, and has to disclose their names if there are less than 6 of them. If there are 6 or more placees, the company has to give a generic description of the placees. GEM companies have to make more specific disclosures if there are different groups of placees.
How about top-up placing?
• A company can also raise funds by way of “top-up placing”. Under this arrangement, the major shareholders place their existing shares with independent persons, then subscribe for additional new shares. Again, a placing broker usually helps identify interested investors.
• In a top-up placing, the new shares’ issue price cannot be lower than the old shares’ placing price. Also, the number of new shares to be issued to the major shareholders must not exceed the number of old shares placed by them.
• If the issue does not exceed the amount of the general mandate and the major shareholders complete subscription of the new shares within 14 days after executing an agreement to reduce their shareholdings in the class of the old shares being placed, shareholders’ approval is not needed.
• As with a placing, companies have to satisfy the Stock Exchange that the placees are independent. The disclosure requirements for placees are the same as for a placing.
Fund raising activities are part of a listed company’s commercial decisions, and regulators are generally not in a position to intervene in them. However, companies must ensure that all rules and regulations are complied with when they go to the market to seek further funds.
What is a private placement?
A private placement is a method for both public and private companies to raise capital through the private sale of corporate debt or equity securities, to a limited number of qualified investors (aka lenders); it is an alternative to traditional capital sources, such as bank debt, or issuing securities on the public bond market.
Advantages of private placement
One major advantage of private placement is that the issuer isn’t subject to the SEC’s strict regulations for a typical public offering. With a private placement, the issuing company isn’t subject to the same disclosure and reporting requirements as a publicly offered bond. Furthermore, privately placed bonds don’t require credit-agency ratings. Another advantage of private placement is the cost and time-related savings involved. Issuing bonds publicly means incurring significant underwriter fees, while issuing them privately can save money. Similarly, the process can be expedited when done in a private manner. Furthermore, private placement deals can be custom-built to meet the financial needs of both the issuer and investors.
Advantages of Raising Capital through Private Placement
Small businesses face the constant challenge of raising affordable capital to fund business operations. Equity financing comes in a wide range of forms, including venture capital, an initial public offering, business loans, and private placement. Established companies may choose the route of an initial public offering to raise capital through selling shares of company stock. However, this strategy can be complex and costly, and it may not be suitable for smaller, less-established businesses. As an alternative to an initial public offering, businesses that want to offer shares to investors can complete a private placement investment. This strategy allows a company to sell shares of company stock to a select group of investors privately instead of the public. Private placement has advantages over other equity financing methods, including less burdensome regulatory requirements, reduced cost and time, and the ability to remain a private company.
Regulatory Requirements for Private Placement
When a company decides to issue shares of an initial public offering, the U.S. Securities and Exchange Commission requires the company to meet a lengthy list of requirements. Detailed financial reporting is necessary once an initial public offering is issued, and any shareholder must be able to access the company’s financial statements at any time. This information should provide enough disclosure to investors so they can make informed investment decisions. Private placements are offered to a small group of select investors instead of the public. So, companies employing this type of financing do not need to comply with the same reporting and disclosure regulations. Instead, private placement financing deals are exempt from SEC regulations under Regulation D. There is less concern from the SEC regarding participating investors’ level of investment knowledge because more sophisticated investors (such as pension funds, mutual fund companies, and insurance companies) purchase the majority of private placement shares.
Saved Cost and Time
Equity financing deals such as initial public offerings and venture capital often take time to configure and finalize. There are extensive vetting processes in place from the SEC and venture capitalist firms with which companies seeking this type of capital must comply before receiving funds. Completing all the necessary requirements can take up to a year, and the costs associated with doing so can be a burden to the business. The nature of a private placement makes the funding process much less time-consuming and far less costly for the receiving company. Because no securities registration is necessary, fewer legal fees are associated with this strategy compared to other financing options. Additionally, the smaller number of investors in the deal results in less negotiation before the company receives funding.
Private Means Private
The greatest benefit to a private placement is the company’s ability to remain a private company. The exemption under Regulation D allows companies to raise capital while keeping financial records private instead of disclosing information each quarter to the buying public. A business obtaining investment through private placement is also not required to give up a seat on the board of directors or a management position to the group of investors. Instead, control over business operations and financial management remains with the owner, unlike a venture capital deal.
Reasons to issue a private placement
Private placements enable companies that value privacy to remain private. In contrast to public debt and equity offerings – which require public filings, disclosures of company information and financing documents and terms – private placement transactions are negotiated confidentially, and public disclosure requirements are limited. With a private placement, companies would not be beholden to public shareholders.
Private placements provide longer maturities than typical bank financing arrangements. They are ideal for companies seeking to extend or layer their refinancing obligations out beyond the typical 3-5-year bank tenor. Additionally, longer maturities often allow for limited amortization, which can be attractive to companies seeking to invest in capital assets, acquisitions and/or invest in projects that have a longer investment return runway.
Typically, private placements are offered at a fixed-interest rate, minimizing interest rate risk. Through a fixed-rate financing, companies can avoid the concern commonly associated with floating-rate coupons, should underlying interest rates rise. A fixed coupon generally allows companies to allocate the cost of debt capital for specific project financings, acquisitions or large capital investment programs.
Diversify Capital Sources
Private placements help diversify a company’s sources of capital and capital structure. The stable investment appetite shown by insurance companies and other large institutional investors in the private placement market is typically independent from many of the market variables that impact bank market lending activity. Since the terms of private placements can be customized, these transactions are typically crafted to complement existing bank credit facility capacity as opposed to directly competing with these relationships. Creating capital access in both the private debt and bank markets can allow companies to optimize their access to debt capital. Diversification of financing sources becomes particularly important during market cycles when bank liquidity may be tight.
Many companies issue private placements because they have outgrown their borrowing capacity and need capital beyond what their existing lenders (banks, private equity firms, etc.) can provide. Private placements typically focus on cash flow lending metrics and can be completed on either a secured or unsecured basis, depending on the issuer’s existing capital structure.
Private placements are typically “buy-and-hold,” meaning the debt investment wouldn’t be purchased with the intent to sell to another investor. Thus, private placement borrowers benefit from the ability to create a long-term relationship with the same investor throughout the life of the financing.
Private placement financings are regularly completed by both privately-held, middle-market companies as well as large public companies. These transactions provide issuers with access to capital on a scale that rivals underwritten public debt offerings, but without certain preconditional requirements, such as ratings, public registrations or minimum size restrictions. For public companies, private placements can offer superior execution relative to the public market for small issuance sizes as well as greater structural flexibility.
A company can often issue a private placement for a much lower all-in cost than it could in a public offering. For public issuers, the Security and Exchange Commission (SEC) related registration, legal documentation and underwriting fees for a public offering can be expensive. Additionally, in contrast to banks that often rely on ancillary services and fee generation to enhance investment return, private placement lenders rely exclusively on the yield from the notes that they purchase. Taking into consideration the yield-equivalent savings on avoided underwriting fees, in conjunction with the yield premium often associated with first time issuers and small issuance premiums, private placements can provide a very attractive alternative to the public debt market.
Unlike issuing securities on the public market, where companies issuing debt securities often deal with hundreds of investors, private placement transactions typically involve fewer than 10-20 investors, and in many cases, are completed with a single large institutional investor. This approach can materially simplify the investor tracking burden for issuers as well as allow them to concentrate their investor-relationship efforts on a few key financial partners.
Familiar Pricing Process
The process for pricing private placements debt transactions is very similar to that of public securities. The coupon set for fixed-rate notes issued reflects the underlying U.S. Treasury rate corresponding to the tenor of the notes issued, plus a credit risk premium (a “credit spread”). This process allows for general transparency as to the approach that institutional investors undertake when establishing the economics of the transaction.
Speed of Execution
The growth and maturity of the private placement market has led to improved standardization of documentation, visibility of pricing and terms as well as increased capacity for financings. As a result, the private market can accommodate transactions as small as $10 million and as large as $1-$2 billion. That, when combined with standardized documentation and a smaller universe of investors, fosters quick execution of an investment, generally within 6-8 weeks (for an initial transaction, with follow-on financings executed within a shorter time frame). As noted, it can be much faster to issue a private placement versus a public corporate bond (particularly for first-time issuers) due to the elimination of prospectus drafting, rating agency diligence and registering requirements with the SEC.
Is a private placement a good investment?
Like As we all know, private placements are a funding round of securities which are sold outside of a public offering and mostly to a small number of chosen investors. Investments in companies that are privately owned. In other words, these placements can be can be sold by:
• Private companies; these are non-negotiable companies whose shares are negotiated outside of in the public stock market, like NYSE, NASDAQ, AMEX, etc.
• Through private investment in public equity, which are the selling of publicly traded common shares, preferred stocks or convertible security to private investors.
• Or, via a standby equity distribution agreement. Basically, a relatively flexible and customizable type of share allocation agreement between a company and an investor.
Top Placement Lawyer
When you need a securities lawyer, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
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84088 United States
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