ACCA Advanced Financial Management (AFM) Practice Exam

In private placement, what is sold?

1. Securities to the general public

2. Securities to a limited number of investors

3. Securities exclusively to institutional investors

4. Securities via a public offering

The correct answer is: Securities to a limited number of investors

Private placement refers to the sale of securities to a select group of investors rather than the general public. This method typically involves offering securities to a limited number of qualified investors, which may include institutional investors, accredited individuals, or other sophisticated investors who are deemed capable of understanding and assuming the financial risks associated with the investment. This approach can be advantageous for companies seeking to raise capital, as it often involves fewer regulatory requirements compared to public offerings, thus leading to lower costs and a quicker fundraising process. Since the securities are not being marketed to the broader public audience, the issuer can tailor the offerings to meet the specific needs and profiles of the selected investors. While institutional investors are often a key target in private placements, the primary characteristic is indeed the limitation on the number of investors involved, making the choice about selling to a limited select group rather than a wider public audience. This differentiation is crucial in understanding the nature of private placements compared to public offerings where securities are sold to the general public.