Question

11， Within the financial markets, explain what we mean by "private placements" and name the advantages and disadvantages.

Answer 1

Private placement means the sale of securities [shares/bonds] to selected

investors and institutions. This is in contrast to the public offering through which

securities are offered to the public.

The investors who participate in a private placement are wealthy individuals,

banks and other financial institutions, mutual funds, insurance funds, etc.

It is usually resorted to by small business, start up business etc.

Advantages:

*Limited legal and other formalities, as the issue need not be registered with

SEC and no reporting regulations are applicable.

*Cost is minimal, as the costs related underwriting, brokerage, etc are not

required. Futher the administrative costs are also lower.

*The raising time is minimal

*The issuer can select the investors. They could be entrepreneurs who may

understand business risks and situations better.

*Public gaze is avoided.

Disadvantages:

*Only limited funds can be raised as the public cannot be solicited.

*The prices of securities tend to be lower.

*More equity would have to be relinquished as the investors would ask for

higher return.