Capital plenishment: private placements are a time-honored way to raise both small and large amounts of capital. At best, they can offer quicker access to capital and far less red tape than alternative forms of financing.

• Author: Marshall, Jeffrey
• Position: Financing

Michael Zuppone, a partner and chair of the Securities Practice Group at law firm Paul Hastings, Janofsky & Walker LLP in New York, recalls doing a private placement a few years ago for a fulfillment company in the e-commerce sector. Four employees who were working together at a company came to him with a business plan, he says, which became the germ for a private placement.

The first round of financing, Zuppone says, raised $6 million, and two subsequent rounds raised the capital base to $14 million. The company "rode out the storm in the tech sector bubble," he says; it's now doing $10 million in sales a year with "a blue chip clientele" and is heavily involved in technology like radio frequency identification (RFID) for inventory control.

Compare that to what OneAmerica, a private mutual insurance holding company, did in October 2003. Using an investment banker, the Indianapolis-based firm lined up a $200 million offering of 30-year bonds; the offering ended up attracting 31 institutional investors, many of them other insurers, and was significantly oversubscribed, says Constance E. Lund, the firm's senior vice president, corporate finance.

A pair of very different transactions--but the private placement story is a tale of two markets, both well-established. Small private placements, some under $1 million, are common in start-up or early financing rounds for companies that might have otherwise considered venture capital investments. On the other hand, many public and larger private companies turn to big investment banks for placement of non-public issues with institutional investors; these can be done without the cumbersome registration and disclosure procedures common to public securities.

The first type, and still probably the most common, involves the sale of securities (most often preferred stock) to a small group of investors, usually institutions or well-heeled individuals. Because the offering is generally small and has limited circulation, it can be structured to be exempt from registration with the Securities and Exchange Commission (SEC) or other regulatory bodies.

Small private placements can be done simply with the help of an attorney, with the senior managers of the firm seeking the capital being responsible for selling and recordkeeping. Or the company can enlist the help of an investment bank or private equity firm to help it navigate and locate the necessary investors.

There are specific rules governing these transactions, particularly with respect to their exemption from the Securities Act of 1933. Under Regulation D, common exceptions exist under Rules...