FINANCIAL STRATEGIES

Market performance of Private companies following the announcement to sell placement shares



Market performance of Private companies following the announcement to sell placement shares

Introduction

As a result of the shortage of liquidity in the bank lending markets, many businesses have a need for additional funding. One source of funds might be a private placement of shares. This has often been the source of funds for expansion of a small or medium-sized business enterprise ("SME") and may be an attractive alternative for both the owners of and investors in a SME, given the relative expense associated with the listing of shares and a public offer, as well as the delay that is involved in taking a company to market.

A private placement of shares will commonly involve circulation of a private placement memorandum (a "Placement Memorandum") which describes the company that will issue the shares and the underlying business. The Placement Memorandum will generally not contain the same level of detail as the offer document for a public offering of listed shares and will not be required to comply with the same content requirements, whether these are imposed by the laws of those jurisdictions where the shares are marketed or the rules or regulations of any stock exchange.

However, the Companies (Jersey) Law 1991 (the "Companies Law") defines "prospectus" as an invitation to the public to become a member of a company or to acquire or apply for any securities. For this purpose, an invitation is made to the public where it is not addressed exclusively to "a restricted circle of persons" and an invitation is considered to be addressed to a restricted circle of persons only if, amongst other things, it is "addressed to an identifiable category of persons to whom it is directly communicated" by the company or its agent and "the number of persons in Jersey or elsewhere to whom the invitation is so communicated does not exceed 50.

Consequently, if the marketing plan for shares in a Jersey company involves the circulation of the Placement Memorandum to more than 50 persons or, for some other reason, its circulation constitutes an invitation to the public, the Placement Memorandum will be treated as a "prospectus". As such, Jersey law requires that it satisfies the same content requirements as any public issue, that it contains the same specified investment warnings, that a copy of the Placement Memorandum has been delivered to the Registrar of Companies in Jersey and that the Registrar has consented to its circulation

Studies on the announcement effects of rights issues have mixed results. (Eckbo and Masulis, 1992) reported statistically significant negative abnormal returns for rights issue in the United States. Loderer and Zimmerman 1988 investigated rights issues in Switzerland and reported insignificant average abnormal returns as did Smith 1977 in the United States. In contrast, Kang 1990 showed significant positive abnormal returns for rights issues in Korea and Ariff and Finn 1989 found positive abnormal returns in Europe.

Private placement is the least-studied method of raising ...