Private placement is raising equity or any other form of security capital through placement of additional equity to the existing shareholders or new individuals. These individuals are identified by the management and their selection is based on a criteria. The word private converts that the company cannot raise money from the general public as it does in the the initial public offer.
What is the process? The maximum number of individuals in a single issue can be around 50 and the maximum number of investors in a year can be maximum 200. The consideration is only cash. The security can be of any type. The terms of investment have to be elaborated and communicated to the investors. The compliance of this process is very less as compared to the public issue.
When is private placement used? When are small and medium enterprises takes equity funding from private equity investors, this is the most preferred mode of placement of shares. The word private in private placement refers to no involvement of public investors.