One example to help you understand private placement


The word “private” means not everyone can participate. The word “placement” refers to the issuance of more shares based on the existing total shares of the listed company. In other words, when a listed company is short of money, it sells new stocks to a few local tyrants to raise money, and the price is generally lower than the market price.


Why do listed companies sell their stocks at a discount? The answer is for quick and low-cost financing. If a listed company wants to raise funds, it can generally apply for a bank loan or issue bonds, but the bank loan comes with interest, and the loan term is generally relatively short. When issuing bonds, the principal and interest must also be repaid. Though the loan term is a bit longer, the performance requirements of listed companies are relatively high, and the time cost of issuing a bond is relatively high. In terms of the private placement, there is no need to pay back the money, and the other is that the performance requirements are not high; the issuance is relatively simple, and a large amount of funds can be quickly received.

For example:

Philips, the owner of a listed company, spotted a good opportunity and needed a large amount of money immediately. Therefore, he gathered several entrepreneurs and investment institutions, and described the bright prospects of this project to everyone, and promised that if everyone invested money, he would make sure to raise the stock price! Hearing this, everyone made investment.


What is even better about private placement is that it can acquire other companies without spending cash to operate capital.

For example, Gill wants to buy Mary’s duck farm, but he has no money to buy it. So he discussed with Mary, “you are busy all day, and you cannot earn too much money, why not make a deal with me? I will sell you an additional stock worth $100 million at a 20% discount on the current stock price. You will transfer the equity of the duck farm to my company, and then you will be financially secured for the rest of your life. Of course, Mary is reluctant to give up her farm, but the prospect of being financially secured for the rest of the life is hard to resist, so in the end, Mary agreed.


For Gill, he manages to buy a large duck farm without spending a penny, the company's strength has been enhanced. So is this transaction completely harmless to his listed company? No.

Firstly, the equity of the original shareholders will be diluted. To be more specific, Gill originally held 51% of the shares, but now a new batch of stocks has been issued. The number of shares held by Gill remains unchanged, but the total number of shares in the company has increased, and his shareholding ratio has dropped to, lets’ say, 48%, and his control over the company will be weaken.

Secondly, it may damage the interests of the original shareholders. The transaction between Gill and Mary, in fact, is to use stocks instead of cash to pay, but stocks are not cash, so they have to be discounted to be sold.