Understanding Private IPO
Private IPO is the method that is used by companies or firms to raise funds or capital via private placements. Investment funds, pension funds, and some mutual funds are the accredited and trust-able investors to whom these placements are generally offered.
The reason why these investors are more preferred because they can meet the minimum requirements set by the private IPO offering company. When these investors purchase through private IPO, they are provided some share percentage of ownership in the firm or company. This is the main difference between private and public IPO as in public IPOs, the shares are sold to the public to generate some funds or capital. For example- if a company wants to raise funds to expand his business, then it will have two options. The first one is that it can take a loan from bank and pay interest. The only problem with this method is that it is not easy to get a loan due to the various limitations of the bank. The second one is the IPO, in which the company goes to the investors and asks them to invest their money in their company and, in exchange, they get some percentage of profits and ownership.
The regulation amount and the subjected company’s scrutiny are the things that differ a public IPO from a private IPO. SEC has laid some regulations and public IPO has to meet them and they also have to stick to the strict financing needs and revelation, which can be clumsy sometimes. On the other hand, for private IPO, regulations are decreased highly. All the companies are free from the financial requirement set by SEC if they raise or generate funds via Regulation D. The best benefit of the decreased regulations is that it saves the company’s time and efforts. This is the main reason why most companies generate funds by this method. Though this method is used by many companies but the only downside of this method is that it is only good for raising small amounts of capital. Due to less availability of investors, it is not possible to raise large funds. Along with this fundraising limitation, another drawback of private IPO is that it is very difficult to market them as compared to public IPO. And this is also a reason why private IPO is riskier than the public IPO. With the Public IPO, the shareholders or you can say the investors can easily sell their shares if they need cash immediately. But, it is more difficult to sell the shares with private IPO, resulting in the low liquidity levels. So these were some reasons that tell that who can benefit from private IPO and for whom this method is not right. If a company wants to raise funds through IPO, then it will have to submit some necessary documents and provide information like the business of the company, the potential risk factors, types of growth opportunities that the company can get, methods and strategies the company is using.