What Is Private Financing?

by Eric Bank; Updated September 26, 2017
Businesswoman Working In Office

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.

Private Placements

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.

About the Author

Based in Chicago, Eric Bank has been writing business-related articles since 1985, and science articles since 2010. His articles have appeared in "PC Magazine" and on numerous websites. He holds a B.S. in biology and an M.B.A. from New York University. He also holds an M.S. in finance from DePaul University.

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