What is private placement?

Private placement/offering is a type of funding of securities which are sold through a private offering rather than the conventional offering to the public. In Kenya, the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 classify the type of offers that qualify as private placements.

An offer is considered a private offer where the securities are offered to not more than 100 persons; to members of a club or association with a common interest in the affairs of the club or association and use of the proceeds of the offer; or to a restricted circle of persons who are sufficiently knowledgeable to understand the risks involved in accepting the offer. In addition, offering securities of a private company to its employees or their families is also considered a private offering.

How can a company raise money through private placement?

Notably, private placements/offerings are not subject to onerous reporting requirements to the Capital Markets Authority and are thus considered a cost-effective way to raise capital without an initial public offering. Moreover, this investment mechanism is considered to be a quicker way to raise capital from a limited number of investors.

Section 30B of the Capital Markets Act requires an issuer of a private placement offer to submit a short-form prospectus to the Capital Markets Authority (Authority) for approval. Further, the issuer should file an information notice with the Authority where the minimum amount which may be paid under the offer is not less than the amount prescribed by the Authority. Similarly, the information notice is to be filed where the securities are denominated in an amount prescribed by the Authority.

Private placement/offerings can be utilised by both small and big companies. Smaller companies can use this investment method where they lack the reputation or financial strength to appeal to a broad base of investors and cannot afford the expense of a public offering. Conversely, bigger firms can use private placements/offerings where a company needs significant funding and prefers seeking private investors with deep industry expertise.

Why private placement?

Private placement/offering enables companies to control the funding process and work directly with veteran investors who have extensive expertise in the company, its industry, and in understanding growth potential. In addition, companies avoid the need for an in-depth prospectus and detailed ongoing disclosure requirements that accompany public offers which enables them to have a short turnaround time and be less costly to set up.

Overall, start-ups and large companies can use private placement as an alternative investment channel to facilitate expeditious investment and avoid strenuous regulatory requirements for public offers. Companies looking to utilise this investment model should get legal advice to ensure that the offer complies with the requisites of a private placement/offering under the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 and the Capital Markets Act.