Businesses can raise money by issuing securities -- stocks, warrants and bonds -- and by borrowing money from lenders, such as banks, friends and relatives. Securities-based private financing is fundraising that doesn't require the company to issue securities registered with the U.S. Securities and Exchange Commission. By adhering to certain SEC regulations, companies arrange private financing through securities placements without an expensive initial public offering.
SEC regulations offer several methods by which corporations can place unregistered securities with investors. In some cases, the rules limit the amount that companies can raise and restrict some or all of the investors to those who meet certain wealth qualifications. Initially, unregistered securities are restricted -- investors can't resell them in the open market. However, investors can take steps to publicly resell unregistered securities after holding them for six months to 1 year.
Sources of Financing
The sources of private securities-based financing include private equity investment firms, venture capitalists, hedge funds and wealthy individuals. Often, the financing arrangements call for the company to go public -- undergo an IPO -- within a specified time period. An IPO requires the company to register its securities with the SEC and offer them to the public. In this way, financiers look to benefit from their investments by selling formerly private securities to the public to recoup their investment and make a profit.