Problem with Private Securities Offerings
The average person believes that they are legally allowed to make any investment that a rich person can. However, this is not true in America, and this is certainly not true in many parts of the developed world. The reality is that the average American population is only legally allowed to purchase securities which are offered by public companies. On the other hand, wealthy Americans known as accredited investors can purchase securities being sold in the private market as well! In order to become an accredited investor, a person must have at least $1 million in net worth or must earn at least $200,000 per annum. It is said that some of the best investment opportunities are denied to the average American investor since they cannot buy private securities offerings.
In this article, we will have a closer look at the way private securities offerings work.
What are Private Securities Offerings?
Speaking from a common sense point of view, the difference between private securities and public securities is that public securities are registered, whereas private securities arent. The reality is that the registration process can be extremely onerous and time-consuming. This is the reason why many companies decide to forego the process. This is because they are still in their nascent stage and hence cannot afford to bear the expenses. In order to allow such companies to raise capital, American securities law allows the sale of unregistered offerings as long as the securities are not being sold to the general public.
Over a period of time, private offerings have definitely come of age. Today, most start-up companies raise capital from angel investors and venture capital firms. Private securities are the investment vehicle which is used in the majority of these cases.
Why do Companies Prefer Private Securities Offerings?
There are several reasons which make a company choose a private securities offering over a public one. Some of these reasons have been listed below:
- Venture capitalists and angel investors are fond of these investments. This is because they do not have to disclose much information and can avoid public glare. Preventing the leakage of information is extremely important for companies in the nascent stage. If they fail to do so, they might end up attracting unnecessary competition
- Issuing public securities is expensive. It usually requires a team of lawyers, accountants, and other personnel. The services of these personnel have to be employed because a wide variety of documents need to be prepared in the exact manner as specified by the Securities and Exchange Commission. The cost of this exercise can run into at least a million dollars. If the company just wants to raise a few million dollars, then the entire exercise seems futile.
The Problem with Private Offerings as of Now
- At the present moment, government laws do not restrict the amount of money that can be raised via private security offerings. Hence, it is not surprising that companies sometimes raise billions of dollars using this route. The government must ensure that private securities offerings do not remain a way to raise huge sums of money without providing any information. As a result, the amount of money that can be raised via such offerings must be capped.
- The problem with private security offerings is that they lock out the common investor. As a result, American investors only have mediocre options available to invest in. All the good options are taken up by the accredited investors in the private securities market. The empirical data record is very clear in this regard. The average rate of return provided by the securities issued in the private market is much higher than the ones issued in the public market.
- The government laws surrounding private offerings automatically assume that rich people are smarter and have more access to information. The law also inherently assumes that rich people know which information is important for making an investment, and when should one ask for it. It is assumed that the poor and the middle class are not as information savvy. Hence, the government needs to get involved to ensure that mandatory disclosure are made.
The reality is that in the connected world that we live in today, obtaining information is not really a tough task. Also, in many cases, people inherit their wealth. As a result, they do have the money to be called an accredited investor. However, they do not have any knowledge or experience. The current law assumes that since they are rich, they will be able to bear any losses that arise from these investments.
The reality is that it is not really the governments job to regulate the safety of investments in the securities market. The government does not need to handhold investors. Instead, they must be provided with the freedom required to make their own decisions and also face the consequences (rewards and/or losses). It is strange that the government allows poor people to buy dangerous products like negative amortization mortgages and payday loans. However, they cannot buy private securities.
The market for private securities was ideally thought of as being a small peripheral market to the larger public securities markets. However, over time, it has started to dwarf the open market in size as well as scope. It would be better if the government relaxed the laws around the public listing of securities. This would solve many of the problems which are currently present in the private securities market.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Corporate Finance - Introduction
- Nominal and Real Value of Money
- Fundamental Rules of Corporate Finance
- Present and Future Value of Money
- Net Present Value Calculations
- Compounding Intervals and Interest Rate
- What Are Negative Interest Rates ?
- The Consequences of Negative Interest Rates
- Opportunity Cost of Capital
- Valuing Cash Flows in Different Periods
- What is Perpetuity ?
- Growing Perpetuity
- What is Annuity ?
- Ordinary Annuity vs. Annuity Due
- Types of Annuity Calculations
- What is Bond Valuation ?
- Bond Market Conventions
- How Interest Rates Affect Bonds ?
- Stock Valuation Models
- Discounted Cash Flow Approach
- Assumptions During Stock Valuation
- What is Cost of Equity ?
- What is Payback Period ?
- What is Internal Rate of Return (IRR) ?
- Problems With Using IRR
- Capital Rationing & Profitability Index
- Types of Capital Rationing
- Capital Controls: Meaning, Types, Benefits and Downside
- Estimating Project Cash Flows: Part 1
- Estimating Project Cash Flows: Part 2
- Estimating Project Cash Flows: Part 3
- Capital Budgeting and Inflation
- Capital Budgeting and Depreciation
- Equivalent Annual Costs
- Investing and Financing Decisions
- Getting Creative with Capital Budgeting
- The Fallacy of Creative Destruction
- Companys Risk vs. Project Risk
- How Governments around the World are Bankrupting Future Generations for Present Consumption
- Role of Credit Rating Agencies in Determining Attractiveness of Companies and Countries
- Federal Reserve Announcement to Taper Quantitative Easing
- How Do Funds Transfer Systems Work
- The Importance of KYC (Know Your Customer) Norms and Procedures in Banking
- Difference between Corporate, Retail, Investment Banking, and Private Banking
- Impact of Geography on Banking and its Functions
- Functions of a Central Bank in Modern Economies
- Lease Rental Discounting
- Lending Against Intangible Assets
- Real Reasons behind FDI in Retail in India
- Microfinance: A Cure for Poverty
- Microfinance: Indebting the Poorest in the World
- Behind the Scenes of an Initial Public Offer (IPO)
- Pros and Cons of Going Public
- Snapchat IPO: Is this the New Tech Bubble ?
- Benefits of Delaying Profitability
- Why Do Corporations Get Away With Tax Avoidance ?
- After Effects of the Nirav Modi Scam
- The Panaya Acquisition
- The Flipkart and Wal-Mart Alliance
- The Worlds Largest IPO
- Initial Coin Offerings: A Primer
- The Aftermath of the Qualcomm Deal
- What are Demergers: Its Pros and Cons
- Benefits of a Holding Company
- The Economics of Lawsuits
- Protectionist Sentiment over Flipkart Takeover
- The Impact of Tariffs on the Energy Sector
- Venture Debt A Primer
- Interest Rates and Automobile Sales
- How Should Companies Communicate With Wall Street?
- How an Interest Rate Hike Will Affect the Government of USA
- Is Tesla Close to Bankruptcy?
- Myths Surrounding Toys R Us Bankruptcy
- The Economics of 'Soda Taxes'
- Why Elon Musk's Tesla Should Go Private and Why It Won't?
- Why the Xiaomi IPO Failed?
- How A Whatsapp Message Nearly Took Down A Company
- The Case for Index Funds
- The Sears Bankruptcy
- The Socialization of Losses
- The Sudden Downfall of IL&FS
- Why Healthy Corporate-Regulator Tussle is Good for Free Market Capitalist Economies
- What Happens When Businesses Go Bankrupt? Insolvency, Aftermath, and Recovery
- Alibabas Singles Day
- Ubers New Businesses
- Goldman Sachs and the 1MDB Scandal
- The Amazon Divorce
- Are Index Funds Not A Good Investment In India?
- Can Brick And Mortar Stores Compete With Amazon?
- Why is the Fed Still Raising Interest Rates?
- Problems Related to Facebook, WhatsApp, and Instagram Mega Merger
- The Whatsapp-Facebook-Instagram Merger
- What Is The DHFL Scam?
- Financial Troubles In the Fracking Industry
- Flipkart Circumvents Indias FDI Norms
- Subprime Automobile Loans in America
- The Jaguar Land Rover Debacle
- The Kraft - Heinz Fallout
- Why Uber Should Be Regulated?
- Is Regulation of the Tech Sector Long Overdue with the Tech Giants being Too Big
- The Fall of An Ambani Scion
- Litigation Funding: A Primer
- The Finance behind the Plastic Problem
- The MasterCard Visa Duopoly
- Is the Lyft IPO Overpriced?
- The Alliance between Car Companies and Ride Hailing Apps
- The Amazon Divorce Deal
- The Lawsuit Between Spotify and Apple Corporation
- The Story Behind the L&T- Mindtree Takeover Bid
- Do IPOs Affect Competitive Firms?
- Can Cost Cutting Turn Out To Be Expensive?
- The Economic Impact of Facebook Outage
- The Apple-Qualcomm Legal Battle
- Cross Border Credit Reporting
- The Sudden Deluge of Unicorn IPOs
- The Wow Airline Debacle
- The WeWork Business Model
- Problem with Private Securities Offerings
- The Amazon FedEx Breakup
- The Decline of the Big Corporation
- The Gap-Old Navy Breakup
- Apples Acquisition of Intels Modem Business
- Mergers and Acquisitions: A New Perspective
- The CBS-Viacom Merger
- Why are Sprint Wireless and T-Mobile Funding their own Competition?
- Why are Corporations Hoarding Trillions in Cash?