IPO vs. Private Placement

Jul 20, 2022 By Susan Kelly

A private placement is a method of fundraising that allows the sale of stocks to pre-selected institutions and investors instead of being sold in the open market. Private placements are typically available to a small number of investors.

The term "initial public offering" (IPO), also referred to as a public offer, refers to giving shares of an individual company to be traded for shares of the general public in a brand new stock issue. Public share issuance permits companies to get capital from investors through the stock exchange.

The company's name was private before its initial publicly-traded company (IPO) since the shares are available only to investors who have been selected. Ownership of shares is made open to the market of stock exchanges after an IPO. The company must meet the conditions the Securities and Exchange Commission (SEC) set for the initial public offerings (IPO).


An IPO is subject to the Securities and Exchange Commission (SEC) regulation and must adhere to strict financial reporting requirements regularly to be accessible for trading by investors. In an IPO, the issuer seeks assistance from an underwriting company to determine the kind of security it will issue and the most appropriate price for offering and the number of shares to be distributed, and the date for bringing it to market.

While the underwriting firms that sell the issue have shares that they can sell to their clients at their starting price, ordinary investors can buy the shares when they begin trading on secondary markets. IPOs are risky for investors since there is no prior market activity to assess. This is why reading the IPO prospectus and getting any information about the company is essential before deciding to invest.

IPOs have become more welcoming for small companies due to the passing of the Jumpstart Our Business Startups Act which was designed to encourage hiring and reduce the often burdensome financial reporting burden for small-sized companies that are failing to file for IPO.

Private Placement

Private placement offers are securities available only for purchase by accredited buyers, such as pensions, investment banks, and mutual funds. A few high-net-worth individuals can buy shares using these options. Private placements typically need less money from a smaller number of investors.

Private placement issuers can sell more complex securities to accredited investors who are aware of the potential risks and benefits and allows the company to continue to be a privately-owned firm and not have to submit annual disclosures to the SEC. Marketing an issue can be more difficult with private placements as these securities can be extremely dangerous and have lower liquidity than securities traded on the public market. Private placements are also executed faster than IPOs. If a company can value its status as a private business, it is not required to compromise its privacy; however, they still have access to liquidity, also known as money, by acquiring the deal.

Comparison of Private Placement and IPO

A private placement is a way to raise money that allows the sale of shares to certain institutions and investors instead of in the open market. A first public offer (IPO), also referred to as a public offer, refers to the issuance of shares by an individual company to trade on the open market as part of brand new stock issuance.

In Private Placement, it is the case that the company doesn't sell its stock in a public sale (shares are not offered for sale to anyone). In a Public Offering (IPO), the company sells its shares through a public offer. Shares are privately held or owned by selected investors through private placement. The general public offers shares to purchase through the stock exchange during an open offering.

Private placements are not as regulated as compared to public offerings. Private Offerings (IPO) tend to be more controlled than a private placement. Securities and Exchange Commission's (SEC) enrollment is not necessary for private placement. Securities and Exchange Commission's (SEC) enrollment is mandatory for public offerings. A private placement is a popular choice for companies since the company has predicted a great opportunity to grow rapidly, which requires more capital. Most companies opt for an initial public offer (IPO) since the business must attract a substantial investor pool.

The company has to opt for private placement so that the company cannot attract a significant number of retail or institutional investors. The company decided to go with a public offering (IPO) because it could attract many retail or institutional investors.

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