TL;DR
Placements are a common form of equity capital raising where sophisticated investors buy shares at an offer price. They're quick to execute and exclusive to s708 investors but incur a management fee and often exclude existing shareholders.
Table of contents
What is a placement?
Placements are the most common form of equity capital raising, only allowing sophisticated investors to purchase additional shares quickly. They are efficient but limited to a specific investor group due to regulatory constraints.
Who can participate?
Placements are limited to sophisticated investors, often referred to as 's708 investors', a term derived from Section 708 of the Corporations Act in Australia. This limitation ensures that only investors who meet certain financial criteria and understand the risks are involved, in line with regulatory frameworks to protect general or retail investors.
What's the timing?
Placements are known for their rapid execution. The process from announcing the offer to settlement can be completed quickly, often just 3-4 trading days.
What are the costs?
The primary cost of a placement is the management fee charged by the lead manager, which can amount to about 6% of the total raised.
This typically consists of a 2% management fee (for handling the raise) and a 4% finder's fee (for sourcing the investors). Additional expenses like broker options may also apply (depending on the broker) which come into play post-placement.
How do you determine the offer price?
The offer price in a placement is typically set at a discount to the closing price on the day before the offer's announcement. This discount is a strategy to incentivise quick investment and account for market risks, often communicated in relation to the volume-weighed average price (VWAP) over the last five trading days.
Many companies that raise via a placement also include options (e.g. 1 option for every 2 placement shares allotted) as an additional incentive to maximise investor participation by providing risk-free upside into the company in the future.
What's required from management?
Responsibilities from the management team include but aren’t limited to:
Engaging a lead manager, like an investment bank or broker, to oversee the placement.
Coordinating with the share registry to manage the administrative aspects of share issuance.
Preparing and issuing regulatory materials, such as a cleansing notice, to ensure compliance with ASX regulations.
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Understanding placements in equity capital raising is crucial for companies considering this method. While placements offer rapid execution and the potential to attract new investors, they come with specific costs and may worsen existing relationships with shareholders.