Pros and cons of private placement vs. rights issue

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.

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