Going Public, Sort of!

Having made the decision to access fresh capital for growth here in the United States, private companies can choose between two avenues, an IPO or a Section 144A offering. Each offers advantages and disadvantages that will become clearer as we explain, for those who don’t know, what a 144A offering is.

Under SEC Rule 144A, a company can sell its shares in a private placement with registration rights to qualified institutional buyers (“QIB”), which are defined as investors with at least $100 million in assets under management. This rule allows for the sales to take place among QIBs without requiring registration of the shares with the SEC and compliance with U.S. GAAP unlike a normal IPO. Therefore the shares are not subject to the same regulation as ’34 Act registered shares including but not limited to Sarbanes-Oxley. By filing under 144A, the company gains the benefits of speed to market and limited disclosure. The downside is liquidity, which is constrained by the limit of 499 QIBs to retain its status as a private company. On the other hand, how many institutional investors do you want? Also private stock cannot be used for acquisitions or as part of a remuneration package.

This is not a small market. According to Thomson Financial, 144A placements last year raised $162 billion versus the $154 billion raised through initial and secondary public offerings. Since 2002 the 144A market has tripled both in terms of capital raised and number of deals as evidenced in Figure 1.

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