April 20, 2005--More and more companies are looking away from venture capital and toward private placements as a source of cultivating capital.
Private placements, speaking in general terms, are non-public offerings of company stock to a small group of investors that does not require U.S. Securities and Exchange Commission registration. Since all private placements are not extensively tracked, it is difficult to say with certainty exactly how many occur in a given year, however, Regulation D filings, an SEC regulation governing private placement exemption, can serve as a reliable indicator of activity. According to Capital Hunter, a California-based research firm, there were nearly 2,000 more Reg D filings in 2004 that the year before - accounting for a 14% increase.
"We're seeing a lot more companies of all shapes and sizes turning to private placements as a source of funding," Seymour Siegel, a principal with the Siegel Rich Division of Rothstein Kass-Certified Public Accountants, said. According to Siegel, private placements are becoming more of an alluring option to companies with limited equity, low liquid capital or companies that are leery of letting outside influence creep too deeply into their corporate structures.
"Venture capital is still a sound option for many companies," Siegel said. "But private placements dilute outside influence among several investors, and they require very little money, relatively speaking, to get going. So they fit smaller, closely held companies very well."
Seen by many as a suitable substitute to the rigors of seeking venture capital, private placements are growing in popularity and show no signs of slowing, Siegel said.
However, private placements aren't hassle-free, inexpensive maps to money trees either. The SEC has stringent rules on the amount of investors that can be included, the amount of money the offering can gather and specifically says the offering cannot be advertised. Some state laws also stack stipulations on top of the federal laws so checking with the state attorney general's office should be one of the first steps.
"Private placements are perfect for those that want capital but don't want to spend a lot to get it," Siegel said.