What Is a Private Placement Offering?

Private placements, also known as private or internal offerings, refer to the manner in which securities are issued to a small number of specific investors. The objects of private placements are roughly two types. One is an individual investor, such as a company's old shareholders or the issuer's own employees (commonly known as "internal employee shares"); the other is an institutional investor such as a large financial institution or Companies that have a close relationship with the issuer. Private placement has certain investors, and the issuance procedure is simple, which can save the issuance time and cost. The shortcomings of private placement is that the number of investors is limited, the liquidity is poor, and it is not conducive to improving the issuer's social credibility. At present, the issuance of domestically listed foreign shares (B shares) in China is almost exclusively by private placement. China's laws on the regulation of securities private placement activities are gradually being improved.

Private placement

Meaning of private placement in China

The feasibility of private equity offerings by Chinese listed companies

Under the sound capital raising system, the establishment of joint stock companies,

Number of private equity shares and subscription methods

Liquidity of private equity

To protect the interests of public investors, securities laws in various countries are liberalizing

In the United States, Japan and other Western countries, companies

Phases of China's legal regulation of private placement

The mature securities private equity market takes a long time to form, and perfect private equity issuance regulations cannot be achieved overnight. Since the enactment of the Securities Act of 1933, the regulations on private placements in US federal law have evolved over 70 years, and the state regulations and the application of private placements in real life can be traced back to earlier times. The practice of the United States and other countries (regions) in this field has provided China with valuable reference models and reference objects. As latecomers, in addition to having confidence and patience in future development, we also need to sum up past experiences and lessons, and based on the country's actual conditions, plan the direction and steps for progress. The author puts forward the following preliminary phased assumptions regarding the regulation of securities private placement activities in Chinese law: (1) in the long run, with the conversion of the securities issuance from the approval system to the registration system, simplifying the approval process, and finally establishing an exempt status for private placement; 2) In the medium term, formulate or adjust relevant laws and regulations in a timely manner, and gradually create a better development environment for private placement; (3) Study and issue corresponding regulations in the form of departmental regulations as soon as possible, and continuously improve and strictly implement them on the basis of this, for real life Private equity activities in China provide a basic code of conduct.

Forward: Simplify the approval process and introduce a private placement exemption

The core and origin of the US securities private placement system is (registration) exemption. The entire regulatory system is built on the issuance registration system established by its federal securities laws. The core of the registration system (disclosure supervision) is that (issuers) register and declare all information that should be disclosed to the competent securities authority in accordance with legal requirements, and take legal responsibility for the authenticity, completeness, and accuracy of such information. After a certain period of time, if the competent authority does not raise an objection, it can proceed to issue without approval. Due to the special nature, object, and method, and special laws imposed by the law, the private placement in the United States is different from the ordinary public offering, and the obligation to register and declare in advance is also relieved, and it is only required to report for the record after the event.

With the implementation of the "Securities Law" in 1999, China's securities issuance has basically adopted an approval system. In addition to the formal examination under the registration system, the approval system focuses on substantive examination (substantive supervision). On the basis of adhering to the principle of openness, the competent securities department shall also evaluate the issuer s capital composition, operating status, fund investment, and manager qualifications, in other words, review and judge its overall investment value. . There are advantages and disadvantages to the approval system and the registration system. China chooses the approval system in order to adapt to the reality of immature development of the securities market, generally low quality of the company, poor investor identification and risk awareness, and at the same time have to bear such as audit efficiency Accusations of inferiority, abuse of power, de facto treatment of enterprises of different ownership, and deviation from market requirements.

However, the choice of system is not static. Instead, it must advance with the times as social conditions change. As time passes, the approval system can transition to a registration system. The practice of Taiwan in China on this issue provides an example. Prior to 1988, the issuance of securities in Taiwan had been approved. In 1988, its Securities Exchange Law was amended to change the securities issuance and collection system to a combination of approval system and registration system (reporting effective system). The reason for this change is that "(Taiwan)) the securities market has developed for many years, the transaction volume of publicly issued companies and the market has increased day by day with economic growth, and investors' investment knowledge has gradually been enriched. About the raising and review of marketable securities In cooperation with the increased accountant's financial visa responsibility and the issuing company's false or untrue information about the financial report, for the damage caused by the bona fide securities acquirer or seller, the company should be liable for compensation and other improvement measures can be partially simplified The auditing procedures of the fundraising and issuance adopt the registration systems of the United States, Japan, and other countries to increase the timeliness of the fundraising and issuance. "On this basis, the Taiwan Securities Exchange Law of 2002 was amended again, clearly granting Private placements are exempt from registration (declaration).

It is not difficult to see that, as far as the "improvement measures" in the Taiwan area mentioned above, mainland China has also been or is being implemented. Over time, the market is perfect and investors are mature. After a long-term effort, it should be said that it is possible to transition from a securities issuance system to a registration system or to adopt a registration system. In this context, it is obviously a very natural choice to provide a reasonable and regulated private placement activity with registration exemption. Taking a step back, even if the registration system is eventually difficult to be adopted by China or it must take a long period of history to achieve, considering the special characteristics of private placements in various aspects, the author still tends to regulate it and make it public. Issuing different treatments, greatly simplifying the approval process, and giving full play to the characteristics and advantages of the system.

Medium-term: timely adjustment of laws to promote the development of private equity

In countries where the rule of law is perfect, financial innovation is more of a financial engineering technology issue; in countries where the rule of law is not perfect, financial innovation is often both a technical issue and a legal issue. It may not be appropriate to call private equity offerings a financial innovation, but I am afraid that China still has its realism. The overall logic of the US private placement system is very clear: balanced fundraising facilitates and protects investors, balanced efficiency and fairness, and balanced market and regulation, that is, through exemption from registration, to speed up the issuer's financing speed and save its costs; to reduce the pressure on relevant departments and reasonable Allocate limited regulatory resources; at the same time clearly specify the conditions that private placements should meet to protect investors from unlawful infringement. Similar systems have been adopted in Britain, Japan and Taiwan. For the same logic to be verified and established in China's securities market, at least the law needs to provide "trial and error" space.

Chen Zhiwu, a professor of financial economics at Yale School of Management in the United States, believes that the development of the securities market and the construction of the rule of law are a mutually reinforcing process. In his view, in a situation like China with economic needs but without the rule of law, we should not expect too much from the mass securities market. "For a considerable period of time in the future, the main force for funding Chinese companies and entrepreneurs should be non-public private financing channels, including private equity investment companies, venture capital funds, wealthy individuals, money houses and other joint ventures invested by a few people Institutions. "It's not hard to understand that private equity offerings in China are promising. Professor Fang Liufang from China University of Political Science and Law once profoundly pointed out: When there is an economic need for the development of the securities market in a society, and the law cannot adapt to the development of the securities market, one should not suppress the economic needs and wait for the law to improve. Make it meet economic needs. This statement also applies to both the public securities market and Chinese private equity offerings.

In view of this, despite the failure to pass as scheduled, China's "Investment Fund Law" (draft) 's attempt to regulate "special funds" such private placement activities is still of great significance. At the same time, the drafters of the draft stated that they would summarize in depth Research and continue to work, the spirit of "more frustration and more courage" is even more desirable. After all, the perfection of the US securities private placement system has gone through decades of exploration, and the first attempt of reference in Taiwan has not been successful. "In addition, the author believes that the" Securities Law "," Company Law ", etc. Consideration should be given to making appropriate adjustments, granting legal status to private placements and clearing legal obstacles to their healthy development, as Mingzhengfang can speak well.

Of course, the amendment at the legal level needs to choose the right time, and it requires relatively rich and mature sub-standard practices. In addition, the provisions of these laws can be simpler and more principled. Just as the "Securities Act of 1933" in the United States has only nine-word regulations on private placement of securities. Although China cannot "judge-create (interpret) the law" like common law countries, but after legal authorization, the courts, the China Securities Regulatory Commission and other relevant departments can still play an important role in the exploration of regulating securities private placement activities. In this regard, legislators must review the situation, demand stability and innovation, and truly reflect the balance between legal stability and forward-lookingness. Furthermore, even if the law still maintains the overall framework of the approval system, consideration may be given to providing special or simplified procedures for private placements.

Issue enforcement rules and establish basic rules for private placement

There is no doubt that the securities market itself is not a product of legal design. On the contrary, problems that cannot be solved by the securities market itself require legal responses. In addition to conscientiously summing up the experience and lessons in the field of targeted fundraising in the past, the relevant departments should also focus on solving practical problems in regulating the private placement of securities. It is reported that the State Planning Commission is drafting a provision entitled "Interim Measures for the Management of Venture Capital Companies" to regulate the management of "venture investment funds" and partially fill the legal gap left by the Securities Investment Fund Law.

A recent hot spot in the private equity field is the Interim Measures of the People's Bank of China on the Management of Trust Funds of Trust and Investment Companies (hereinafter referred to as the Interim Measures) issued by the People's Bank of China on June 13, 2002, as well as the fund trust products successively launched by various trust and investment companies. According to the "Trust Law", "People's Bank of China Law" and the Central Bank's "Management Measures for Trust and Investment Companies", the promulgation of the "Interim Measures" is intended to "recruit" to regulate private private equity funds and make them public organizations under the name of trust and investment companies Form, so as to achieve the purpose of changing from underground to ground and from darkness to light. The "fund trust business" as mentioned in the "Interim Measures" has obvious private equity. For example, Article 6 states: "When a trust and investment company collectively manages, uses, and disposes of trust funds, the trustee's fund trust contract must not exceed 200 (including 200), and the amount of each contract must not be less than RMB 50,000. (Including 50,000 yuan). " This move obviously hopes to indirectly limit the scope of investors by raising the "threshold" for participation. Another example is that it requires trust and investment companies to do not conduct marketing and publicity through newspapers, television, radio, and other public media when handling this business, otherwise it will treat as illegal fundraising.

However, the requirements of the Interim Measures are still rough by the standards of mature private placement standards. First of all, indirectly limiting by the amount of the contract, can it be guaranteed that the investor really meets the "mature" qualifications or is really a "specific person"? Second, the provision of information is not detailed enough, and there is no requirement for continuous or temporary disclosure. Third, the protection of investor interests is insufficient. What is more serious is that in the actual handling of the fund trust business, the above-mentioned relatively clear private placement rules have not been observed. Related products are often reported through various media before they are sold, and are almost on sale to the public. Some also sell through banks and promise in their instructions that their yield will reach a certain percentage point much higher than the deposit interest rate. It is easy for investors to mistake it for a bond with a higher interest rate.

It can be seen that, even in relatively mature fields, there is still a long way to go to establish the basic rules of private equity. If it is not faced squarely, the fund trust business is likely to repeat the same mistakes as the private placement of internal employee stocks and fall into the chaos of "pan-socialization." This case also reminds us once again that China's private placement is promising only if it develops while regulating.

Of course, no matter what the planning period is, it is impossible for securities private placement rules to exist in isolation from the status quo of China's capital market, legal system construction, and even the social environment. If there is no independent issuer, no personal wealth, and no proper circulation channels, private equity offerings are simply impossible to talk about. Similarly, when the concept of good faith is severely indifferent, the contract is not respected, when the breach of contract does not require compensation, and the loss is difficult to be remedied, when the society cannot achieve "number management", information is incomplete, and when people are used to "fuzzy existence", they are keen For the pursuit of privileges beyond the rules, the development and regulation of private equity activities can only be extravagant expectations. In the final analysis, the maturity and improvement of private placement and its legal system depends on the improvement of the overall quality of China's securities market and Chinese society.