Following the financial scandals associated with the 1929 stock market crash, the US Congress passed the 1933 Securities Act, which regulated the issuance of securities. The Securities and Exchange Commission (SEC) was formed with authority to enforce the act. Generally, the Securities Act was intended to protect investors from dishonest or fraudulent securities offerings. In the United States, all public offerings of securities in more than a single state must be registered in advance with the SEC. A prospectus providing standardized disclosures must be made available to prospective investors. Promotional activities are severely restricted. The act provided a limited exemption for securities that are sold directly to a small number of investors. Such offerings are called private placements. These are easier and less costly than public offerings, since no registration or prospects is required. Both equity and debt securities can be privately placed. The former is called private equity, so the term "private placement" is most commonly applied to privately placed debt. Private equity tends to be issued by corporations in start-up, leveraged buy-out or distressed situations. Privately placed debt is more often issued by established, financially stable corporations to institutional investors such as life insurance companies. Privately placed securities are transferable, but they are not intended to be actively traded. An investor who quickly resells a private placement must be careful to satisfy applicable SEC regulations to avoid being treated as a statutory underwriter under the Securities Act. Private placements are attractive to long-term investors because they should, in theory, offer modestly higher returns than comparable publicly traded securities. Not only should they offer a liquidity premium, but the issuer's savings on the costs of issuance should also be shared with investors. If there are just a handful of investors, they have the flexibility to negotiate for a structure that is appealing to them. If the issuer later becomes financially troubled, it is easier for those few investors to jointly act to protect their interests than it would be for the thousands of investors in a typical public offering.
|
|||||||||||||||||||||||||||||||||||||||||||||
