Why companies need capital
There are various reasons why companies need capital. Examples are e.g.
A popular form of raising capital is the stock market. The IPO takes a lot of time and is cost-intensive. However, it is the easiest way to collect a large amount of money.
It is not uncommon for listed companies to need fresh capital at a later stage. Younger companies in particular often need new capital to finance growth. The capital increase can again take place via the stock exchange. Many companies avoid this due to effort requirements.
Private placement as an attractive form of corporate finance
A popular form of capital procurement is the non-brokered private placement. This is associated with less effort and runs much faster. The private placement is generally aimed at a small group of investors who receive new shares for their capital. In addition, the investors receive warrants, which allow them to purchase a certain number of additional shares for a specific price within a certain period of time. The whole transaction takes place outside the exchange.
In order to protect private investors against losses, only qualified, accredited investors may participate in private placements. Qualified investors, have the capital, are able to evaluate the offers, can assess the risk and also can weed out a total loss.
PRE-IPO private placement
A private placement can also be used by companies that have not yet been listed on the stock exchange. Since a listing on the stock exchanges is quite cost-intensive, many companies use the private placements to collect funds in advance in order to finance that IPO process. In this case we are talking about venture capital. At this stage it can never be 100% guaranteed that the company is really going to the stock exchange.
Private placements often take place in small and young companies that have not yet established themselves. The risk of loss is therefore very high. However, the chances are the same if the company develops well. Investors should invest only minor portions of their assets in these risk companies.↑
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