BUSINESS FINANCE: PRIVATE PLACEMENTS EXPLAINED
Dear Subscriber,
As a Company develops, funding growth and expansion becomes a major consideration for the sustainability of the business and this necessary capital can be sourced though diverse means which includes Public Offerings (selling shares to the public) Private Placements (selling shares/securities to select investors), Loans & Grants (Governmental & Financial Institutions) etc. Our focus this week is on Private Placements which simply refers to the offer and sale of corporate securities to a limited number of sophisticated investors.
Guidelines for Private Placement in Nigeria.
Guidelines for Private Placements in Nigeria is provided for under Section B3 of the Securities And Exchange Commission Rules and Regulations made pursuant to Investments and Securities Act (ISA). Worthy of note is the provision limiting the maximum number of subscribers to a Private Placement to 50 individual/corporate investors.
Some other provisions of the rules includes restrictionon solicitation or advertising, limitation of the offer to only informed investors who can correctly interpret the unregistered security they are being offered or have the capacity to bear the risk. The rules also mandate the issuer to come up with a Private Placement memorandum detailing adequate information about the issuer, its business and the securities being offered which shall be filed with the Securities and Exchange Commission (SEC).
Features of a Private Placement Offer.
The three most important features that would classify a securities issue as a private placement are:
1. The securities are not publicly offered
2. The securities are not required to be registered with the Securities and Exchange Commission (SEC)
3. The investors are limited in number and must be sophisticated
Benefits of Private Placement.
Private placements offer businesses a number of advantages over other financing models, some of these benefits include:
- Private placements have less burdensome regulatory requirements and do not require the assistance of brokers or underwriters consequently they are considerably less expensive and less time-consuming.
- A private placement also allows the business owner the choice of picking investors who have compatible goals and interests.
- The subscribers are usually sophisticated investors and bring on board additional skills and expertise which could be of good use to the business.
- Investors to a Private Placements are usually more patient than venture capitalists, often seeking 10 to 20% return on investments over a longer term of 5 to 10 years.
- Shares offered through private placements are relatively priced at a discount to compensate for absence of immediate liquidity.
- It attracts higher returns to investors as they have opportunity to grow with the Company especially where the shares are eventually listed on the floor of the Nigerian Stock Exchange.
Conducting a thorough due diligence is mandatory and very essential when offering securities. This creates the foundation for a solid offer, one that both provides a prospective investor with an accurate picture of the company and limits the liability exposure of the company and its Promoters and Directors.
What is required for Private Placements in Nigeria?
- A sound Business Plan and Management forecast for 5-7 years.
- Retain services of professionals experienced in private placements.
- A private placement memorandum (PPM) disclosing the full facts of the investment and business
This document is not legal advice, and is intended solely for information and educational purposes. If you are contemplating a private placement, or any legal transaction, you should consult a commercial attorney who can provide you with the advice that you need, for your specific circumstances. Securities law, and corporate finance, is not the area for novices to play and incorrect documentation can have serious ramifications for all involved parties.
