About Private Placement Meaning Types

Meaning of Private Placement

Instead of selling stock, shares, or bonds on the open market, a private placement sells them to pre-selected investors and institutions. For a company wanting to generate funds for expansion, it is an alternative to an initial public offering (IPO).

Wealthy investors, other financial institutions, banks, insurance companies, mutual funds, and pension funds are among the investors who are asked to engage in private placement programs.

One of the benefits of a private placement is that it has fewer regulatory restrictions.

Salient Features of Private Placement

  • A private placement is the sale of securities to a select group of people or institutions.
  • When compared to open market sales of securities, private placements are comparatively unregulated.
  • Private sales are becoming more prevalent for companies since they allow them to raise funds while foregoing or delaying an IPO.

Types of Private Placement

  1. Preferential Allotment
  2. Qualified institutional placement

Preferential Allotment: It refers to the procedure of issuing certain securities at pre-determined prices and to exclusive business entities, such as mutual fund firms, promoters, or financial institutions.

In Chapter XIII of the SEBI (DIP) guidelines, the directions for such an allotment are stated. For the issuing of securities, investors may have a lock-in period that the company must follow.

Qualified Institutional Placement: Under the private placement, a company that is into trading publicly can issue shares as well as other types of securities to solely institutional investors. This is a technique of stimulating publicly traded entities to amplify funds from the domestic market. Such a kind of placement is regulated by SEBI (DIP) guidelines, Chapter XIIA.

Benefits of Private Placement

  1. Facilitates funding.
  2. Economical.
  3. Confidentiality.
  4. Stability of the market.
  5. Raising tiny amounts of capital.

Following are some of the multiple choice questions on the Private Placement Meaning Types with answers that will help the students in developing their knowledge.

Private Placement Meaning Types MCQ

1. Private placement involves selling securities directly to:

  • insurance companies
  • wealthy individuals
  • pension funds
  • all of the above

2. FPO and IPO can be either a fresh issue or ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐.

  • Offer for sale
  • Private placement
  • Both a & b
  • None of these

3. Issue of equity shares to QIBs on a private placement basis is called --------------.

  • Initial public offer
  • Qualified institutions placement
  • Preferential placement
  • None of these

4. Large Australian company stocks such as BHP and Telstra:

  • can only trade on the ASX.
  • can trade on the stock exchange of their choosing as long as they qualify for listing.
  • trade only in dealer markets.
  • are sold to investors as private placement and are held to maturity.

5. A certain number of shares are reserved for purchase and issued to key permanent employees at a price much lower than the market price called

  • Employees stock option plan
  • Preferential Allotment
  • Private placement of shares
  • none of the options

6. An issue of shares which is not a public issue but offered to a selected group of persons is called :

  • Initial public offer
  • Private placement of shares
  • Public offer
  • None of these

7. Private placement is preferred by companies ,because it is

  • time effective
  • cost effective
  • access effective
  • all of these

8. In case of private placement of shares and company does not invite the general public for subscription of shares in that case, company instead of issuing prospectus :

  • Prepares the Asset side of Balance Sheet
  • Prepares the Budget
  • Prepares the Report
  • Prepares the statement in lieu of prospectus

9. In case of private placement of shares, to raise the amount of capital a company :

  • does not invite the public
  • invites the public through prospectus
  • invites the public through memorandum of association
  • invites the public through advertisement

10. In case of private placement of shares, the lock in period is :

  • 1 Year
  • 2 Years
  • 3 Years
  • None of the above

11. When securities are allotted to institutional investors & some selected individuals is referred to as _________.

  • Initial public offer
  • Offer through prospectus
  • Private placement
  • Offer for sale

12. Private placement covers

  • Shares
  • Preference shares
  • Debentures
  • All of the above

13. Which of the following is not a method a firm can use to finance their long-term needs externally?

  • Private placement.
  • Privileged subscription.
  • Public issue.
  • Retained earnings.

14. Which of the following is not a method a firm can use to publicly issue common stock?

  • Firm commitment underwriting.
  • Private placement.
  • Shelf registration.
  • Best efforts offering.

15. FINRA Rule 5122 governs which of the following?

  • offerings of private securities to foreign investment managers
  • offerings of registered securities pursuant to Rule 151
  • registrations of public companies under the '33 Act
  • private placements of securities issued by members

16. An engagement letter in a private placement contains all of the following information EXCEPT

  • The engagement of the investment bank as an underwriter
  • The duration of the engagement
  • The material covenants of the offering
  • The fees or percentage of capital raised

17. Which of the following is an offering document prepared by a financial advisor as part of a private placement, and which is subsequently distributed to potential investors?

  • Confidentiality Agreement
  • Engagement Lette
  • Private Placement Memorandum
  • Private Member Offering

18. Which of the following is a valid reason for a company to pursue a private placement rather than a registered offering?

  • Since the deal is not registered, investors expect a lower return
  • Since the deal is not registered, it can be marketed to more investors
  • Since the deal is not registered, it is likely to be subject to less regulatory scrutiny, and will permit the issuer to offer the securities in a more timely fashion
  • Since the deal is not registered, sales are not subject to anti fraud provision

19. Private placement of issues is consisted as

  • negotiable issue
  • federal issue
  • unregistered issue
  • registered issue

20. Shares can be distributed through outright sale by companies to select group of persons, this is known as ---------------

  • Public issue
  • Private placement
  • Institutions
  • Underwriting

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