Investopedia seems to disagree with the curriculum in the sense that primary markets are generally closed to the general public due to their small investing potential (“Small investors are not often able to purchase securities at this point, because the company and its investment bankers seek to sell all of the available securities in a short period of time to meet the required volume and must focus on marketing the sale to large investors who can buy more securities at once.”). Investment banks tend to deal with larger organisations with more buying power in order to sell all the bonds in the so called public offering. This makes total sense to me so I’m finding it hard discerning a private placement to a public offering.
It’s possible for private investors to purchase shares in an IPO however as you’ve highlighted it’s likely the large brokering houses will vacuum up most of the shares to resell to clients/the market. In any case a public listing is going to involve the shares being listed on a stock exchange where they will be available on the secondary market in the future whereas a private placement is where shares are sold to a private entity.
Ah ok, I guess the point about them ever being traded on a secondary market is where the main point of difference is.
Another question:
In 3.1.2. Private Placements
The second paragraph talks about the fact that private placements appear to be more restrictive on the borrowers due to additional collateral backing, credit enhancements and covenants. Moreover, in private placements, “investors are able to negotiate the terms of the bonds”.
and then the following paragraph mentions that private placements are “more flexible” than public offerings.
These two paragraphs seem to contract one another.
In my belief, these two options “private vs public offering” does not have an absolute advantage between them. In practice, private placements could be more flexible or more restrictive depending on the type of investors, and vice versa. While in public offering, one of the major hindrance is the regulatory cost which arises because now the company needs to comply with the prevailing regulatories.
Summing up the essentials, the most basic reasoning for the company itself is to choose the cheaper options.They need to calculate the real direct cost (i.e. required rate of return expected by the investors) and the indirect cost (e.g the cost of getting financial audit, human personnels to hand regulatory reports, etc).