A private placement offering is the sale of stock of a company to private investors without the use of public market exchanges. Although the end result of a private placement offering is the same as a public sale of stock through the exchange markets (i.e. the sale of stock to the private investor), unlike a public offering, a private placement offering does not involve securities that are registered with the Securities & Exchange Commission ("SEC"). Accordingly, there are certain restrictions on the sale of stock pursuant to a private placement offering that are not inherent in a "public" sale of securities. The most significant restrictions are the dollar amount of stock that may be sold and the investors to whom such stock may be sold.
Private placement offerings will usually use an Offering Memorandum, which is a document very similar to a prospectus, which will be distributed to potential investors before the actual sale of securities. The Offering Memorandum contains a large amount of information on the company proposing to sell its stock, such as the company's history, its key employees, its financial statements, its primary products and/or services, its competitors and its marketing strategy. A private placement offering is very useful to small to mid-sized businesses seeking capital infusion since the expense incurred in a private placement offering is a fraction of that incurred in registering securities with the SEC to enable trading on the public market exchanges. Furthermore, the requirements of a company that wishes to sell stock through a private placement offering are much less restrictive than a company wishing to offer securities on a public market (i.e. there are no minimum size requirements for a company selling stock through a private placement offering).
As noted above, the drawbacks of a private placement offering is that there are certain investor and dollar amount restrictions. Also, due to the fact that no public market for the stock offered in a private placement offering exists, the investor pool may be smaller due to a potential investor's perception that the stock may not be readily liquidated.