When it comes to securities, two types of basic methods are used by companies to offer those to investors. One of the methods used for this is called Initial Public Offering (IPO) or Public Offering. In this particular method securities are offered for sale to general public. Any one can be an investor in the case of initial public offering. Actually it is the first time when a corporation starts to offer a registered security to public. This practice helps companies to get immediate cash to increase their equity base along with positively affecting the stock value appreciation (Initial Public Offering (IPO).
Private Placement is the other method used to offer securities. The basic difference in this particular method as compared to the other one is about selling the shares without the involvement of intermediary of a stockbroker.
Both these methods are used in real world to achieve different types of objectives. Actually, the use of a particular method is directly related to the situations being faced by a corporation. By contemplating more on the details related to both these methods, it becomes quite evident that there are quite a few differences, advantages and disadvantages of using a particular method. A critical comparison of both these methods will help you to understand those advantages and disadvantages in a much better way.
Let's start off with Public or Initial Public...
It is the duty of SEC to set regulations and specific standards for the investment market to function in a right way. Due to these standards and regulations, it is essential for a corporation to reveal a lot of information before making any offering. The information may be about inner workings of a corporation and the plan about using the funds obtained through the offering. Here, a corporation has to wait for the approval of SEC after setting a sales price for the offering along with providing the other necessary information.
Now when you will compare this particular aspect of providing extensive information to SEC with the other method of Private Placement, you will understand why this other method is preferred by most of the corporations. Herein, such securities can be offered which may not be registered with SEC. What it means is that there will be no need to provide extensive information to Securities and Exchange Commission, which is unlike IPO. Since companies making use of this method exploits Securities Act of 1933, there remains no need to follow the rule of quarterly reporting. But, it is significant to mention that a Private Placement Memorandum (PPM) is not exempt from Anti-fraud provisions and state law. It implies the fact that though there will be no need to provide as much details as required in Public Offering but you will have to disclose enough information so an investor may become able to make an informed and rational decision.
Apart from this particular aspect, it is important to compare the basic way in which both these methods actually work. While comparing the working process of both these methods, it is easy to see few important differences. For Private Placement, it is obligatory for a company to use Private Placement Memorandum which