Pros and cons of private placement vs. rights issue

Posted by:
Are Berg Hjelle
on
December 20, 2021

In the event of a share issue, the company must clarify whether it is to be carried out in the form of a rights issue (where all shareholders are offered to purchase shares, cf. Aksjeloven) or as a private placement (where a specific group of internal or external shareholders is offered to purchase shares).

A share issue is simply explained by a capital increase by issuing new shares that are sold to investors so that the company receives fresh equity.

The company must consider this
It must be taken into account whether the company's shareholders have sufficient capital to provide the company with sufficient investment. If a very large issue is to be carried out, a private placement will not always hold, and a rights issue may be necessary. This will of course vary.

Preferential issues will tend to extend over a long period of time, which opens up the risk that the share price may fall below the subscription price. Thus, the subscription price must often be set lower than the share price in the market to take into account that the share price may fall below the subscription price.

In the list below, we have set up an overview of the advantages and disadvantages of private placement vs. rights issue:

Benefits Private placement:

  • Fast process and the ability to secure new capital quickly
  • Fast process and the ability to secure new capital quickly
  • Smaller amount of documentation
  • The prospectus can be set up afterwards
  • Lower cost, as no subscription guarantees are required and the company avoids full subscription fees

Benefits Preferential issues:

  • Opportunity to raise more capital than in a private placement
  • Better equality / treatment of shareholders
  • In the case of crisis issues, the subscription price is set low, which is to the benefit of potential investors

Disadvantages Private placement:

  • Requires the necessary board authorization to deviate from the preferential right
  • Discrimination against shareholders in that only a specific committee can subscribe for shares. If one is to prove this later with a rights issue, it will require a prospectus. Note that if the share price in the market falls below the rights issue, it will usually be canceled.
  • It is not a given that the shareholders have enough capital to invest
  • In the first phase, a prospectus may be required, if there are no exceptions

Disadvantages Preferential issue:

  • More time consuming
  • As the subscription price is set low to prevent it from falling below the market value, it signals negatively about the company's financial status to potential investors / shareholders
  • Higher cost in the form of subscription guarantees

There is a lot to consider and the type of share issue that should be chosen depends on the company's financial situation, articles of association, general meeting and not least the time the company has to set aside to carry out the share issue.

We recommend that the assessment between a private placement and a rights issue be assessed with financial and legal advisers.

With Adminflow, we help you make such processes easier and more efficient so you can spend more time on other value-creating tasks. In Adminflow you will find, among other things, a separate digital boardroom, document center, integration with Altinn and a safe and secure tool for board and investor communication. Read more here and test out our solution for free.

You might also be interested in these

 Board work: Questions and answers about electronic signing
May 10, 2022
Board work: Questions and answers about electronic signing

Board work requires a lot of obtaining signatures for board minutes and other things that require signatures from the board members. This can be both cumbersome and time consuming if done manually. With electronic signing, on the other hand, you can save both time and resources.

Learn More
The government wants to make it easier to establish limited companies
March 28, 2022
The government wants to make it easier to establish limited companies

The Ministry of Trade and Industry stated in a press release on 24 February that the government is proposing new rules that will make it easier to establish and register joint stock companies, public limited companies and branches online, across the entire EØS.

Learn More
New releases in Adminflow
March 21, 2022
New releases in Adminflow

We have updated Adminflow with new features.

Learn More
What rules must be followed when convening a general meeting?
March 8, 2022
What rules must be followed when convening a general meeting?

All limited companies are required to hold a general meeting at least once a year, within six months after the end of the financial year. In this article, we have compiled the rules that must be followed in the summons.

Learn More
The board and the general manager's liability
February 21, 2022
The board and the general manager's liability

Have you been offered a board position? This can be an exciting role, but it is important to be aware of the responsibilities that come with it. Then board members and the general manager can be held personally liable if the company goes bankrupt.

Learn More
 What is important to think about when composing a board?
January 24, 2022
What is important to think about when composing a board?

The board is the company's top management and has the task of managing and managing the company. All limited companies are required to have a board, but how do you choose the best composition of board members?

Learn More