What Is a Private Placement? How It Differs From a Public Offer or Rights Issue in Nigeria

A private placement is a way for a company to raise money by selling new shares directly to a small number of investors it has chosen in advance, instead of inviting the general public to subscribe. The Securities and Exchange Commission (SEC) describes it as an offer in which securities are sold to specific or pre-arranged buyers. It sits alongside two other common ways Nigerian companies raise equity: a public offer, which is open to everyone, and a rights issue, which is open to existing shareholders in proportion to what they already hold.

Three Ways to Raise Equity, Compared

• Public offer: the company, through an issuing house, invites the public to subscribe for new shares (an offer for subscription) or existing holders sell part of their stake to the public (an offer for sale). A prospectus approved by SEC sets out the terms, and anyone who meets the application conditions can apply. An initial public offering is a public offer by a company listing for the first time.
• Rights issue: the company offers new shares to its existing shareholders, in proportion to their holdings, usually at a price below the market price. Shareholders can take up their rights, sell them where tradable, or let them lapse. Only people on the register at the qualification date receive rights.
• Private placement: the company agrees terms with a limited group of investors, often institutions, high-net-worth individuals or a strategic partner, and allots shares to them. There is no public invitation and no general application process.

Who Can Take Part

Participation in a private placement is by invitation of the company and its advisers. The investors are identified before the offer is made, and the documentation is a placement memorandum shared with them rather than a public prospectus. SEC's rules limit the number of subscribers a placement may be offered to and set conditions on the size of the placement relative to the company's existing capital. The exact limits are set out in SEC's rules and regulations and are revised from time to time.

Retail investors are usually not part of a placement for a practical reason as much as a legal one: the point of a placement is to raise a large sum quickly from a few investors who can each commit a substantial amount, with less paperwork and cost than a public offer. Where a company wants to reach the general public, the route is a public offer, and where it wants to give existing shareholders a chance to keep their percentage, the route is a rights issue.

Placements by Listed Companies

SEC treats private placements by companies already quoted on an exchange with caution, because a placement lets a company issue shares without offering them to its existing holders. SEC's guidance for investors states that quoted companies are generally not permitted to raise money by private placement, and its rules allow a placement by a public company only in specific circumstances, such as a demonstrated need for funds or technical expertise that cannot be met another way, with SEC's approval. When a listed company does announce a placement, the announcement and the SEC approval are published on the NGX website.

Private companies, which are not permitted under the Companies and Allied Matters Act 2020 to invite the public to subscribe for their shares, raise equity through placements as a matter of course. SEC has said that placements by private companies are outside its regulatory purview, and it has issued separate rules on the issuance and allotment of securities by private companies that go beyond a certain size.

What Happens to the Shares Afterwards

Shares allotted in a placement are ordinary shares of the company, ranking equally with the existing ones once issued. For a listed company, the new shares are admitted to the NGX daily official list after allotment; NGX announces this as a supplementary or additional listing, and the company's total issued shares increase. The placement shares are then credited to the investors' accounts at the Central Securities Clearing System (CSCS) under their Clearing House Numbers (CHN), and once any lock-in period set by the terms of the placement or by NGX has expired, they can be traded like any other shares in the company.

For a company that was not listed when it placed shares, SEC's rules require the securities to be listed on a registered exchange within a set period after allotment, so that the investors have a market in which to trade. That may be NGX or another SEC-registered exchange such as the NASD OTC Securities Exchange.

What It Means for Existing Shareholders

Because placement shares are new shares issued to other people, an existing shareholder who does not take part ends up owning a smaller percentage of the company than before. This is called dilution, and it is the reason placements by listed companies need shareholder approval and SEC scrutiny. Whether the money raised is worth the dilution depends on what the company does with it, which is a matter for each shareholder to judge from the company's circular and subsequent reports. The number of shares placed, the price and the identity of the investors are all disclosed in the announcement.

Private Placements in Nigeria: FAQs

Is a private placement the same as an IPO?

No. An initial public offering is a public offer, open to anyone who applies under the prospectus, made by a company listing on an exchange for the first time. A private placement is closed to the public. A company may do a placement before an IPO, but the two are different transactions with different rules.

Can I ask my stockbroker to get me into a placement?

Brokers and issuing houses arranging a placement approach the investors the company has chosen to invite. If a broker offers you a placement, ask for the placement memorandum, the name of the issuing house and evidence of SEC involvement where the issuer is a public company, and check the company on the SEC and NGX websites before sending money.

Do placement shares pay the same dividend as other shares?

Once issued, placement shares are ordinary shares and rank equally with the existing shares for dividends and voting, unless the placement terms say otherwise. The company's announcement states the ranking.

How is a placement different from a rights issue for me as a shareholder?

A rights issue offers you the chance to keep your percentage by taking up new shares in proportion to your holding. A placement offers that chance to selected outside investors instead, so your percentage falls unless you are among those investors. In both cases the terms are disclosed and, for a listed company, approved by shareholders.