Investing in Private Placements – High Risk, High Reward, Limited Opportunities

Sometimes privately owned companies open up investment opportunities to a small, select group of investors. These investment opportunities are called private placements. They can be in shares of the company, specific projects, debt reduction, or other investment opportunities. Investing in these placements is normally a limited time opportunity. This can become very profitable, especially if you get a share in a private company that then goes public, causing a vast increase in the value of your share of the company. However, they are also considered very high risk. Internal growth, recapitalization, and acquisitions can provide investment opportunities in privately held companies.

Investing in these kind of placements is a risky venture. Publicly traded companies have scads of paperwork designed for educating investors. Researching the company is the responsibility of the investor in private trading. Necessary research topics include ownership, management, industry, and market of the company plus any specific area of investment, such as a project or acquisition. Doing your due diligence prior to investing is a good rule of thumb for any investment venture. There are rules and regulations in this investment structure, but it is less regulated than public traded stocks.

These traded securities may be debts or equities in the company. Banks, insurance companies and financial institutions are most often involved in investing in these types of placements, though individuals can also take advantage of this type of speculative investing. These securities do not have to be registered with the Securities and Exchanges Commission. This type of trading is based on the fractional reserve banking system, the system common to all banks.

Along with investing in these placements, some investors may provide bridge loans for these companies. These are loans that help support a company between the private placement stage and the public offering stage (long term financing). These are short term, high interest rate loans; some are even as short as two to three weeks or as long as one year in duration. They are meant to simply help out until the long term financing solution is in place. There are investment bankers with multiple decades of experience in these types of placements and bridge loans to service companies in every step of the process. Some open investment opportunities to individuals as part of a private placement group. There can be tax benefits for trading in the private sector as a part of these types of placements.

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