Private Placements by Small Public Entities: Canadian Experience

PRIVATE EQUITY: FUND TYPES, RISKS AND RETURNS, AND REGULATION, Douglas J. Cumming, ed., Ch. 8, pp. 129-152

34 Pages Posted: 8 Mar 2009 Last revised: 12 Feb 2010

See all articles by Cécile Carpentier

Cécile Carpentier

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Lille II - European Center for Corporate Control Studies

Jean-Marc Suret

Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); European Center for Corporate Control Studies

Date Written: January 31, 2009

Abstract

The specificities of the Canadian securities market render the analysis of private placements particularly insightful in this country. First, Canada applies very lax listing requirements, allowing tiny capitalization companies to list at a pre-revenue stage (Carpentier et al. 2009). Most of the private placements are offered by these companies - in essence, entrepreneurial ventures - for which the asymmetry of information and adverse selection problems are particularly acute. Second, public companies tend to use private placements more frequently than seasoned equity offerings as a financing source, probably owing to the lax regulation of this activity. Private placements seem to be a very important source of equity for these emerging businesses, which allows the analysis of a large number of placements. Third, hedge funds and other institutional investors that are strongly involved in the private equity activity in the U.S. are only marginally active in Canada, where individual investors are the main buyers of private placements. In contrast with the public offering process, placements of shares are made in the exempt market with accredited or sophisticated investors, and mandatory disclosure is dispensed with because it is assumed that these investors would be knowledgeable enough to protect their own interests. The question of whether such investors can indeed invest wisely in emerging companies should be analyzed. Lastly, in Canada, private placements are mainly composed of ordinary stocks, in contrast with the U.S., where structured private investments in public equity (PIPEs) make up a large proportion of private placements. The valuation problems associated with the specificities of structured PIPEs are then largely absent.

This situation provides a unique opportunity to analyze the information and pricing dynamics around private placements, which are quite different from PIPEs in the U.S. The aim of this chapter is to analyze the extent to which this financing tool can be considered fair, i.e. if it provides investors with a fair rate of return and if accredited investors are indeed able to price these placements correctly in a context of large asymmetry of information.

Keywords: Private placement, small business, Canada, regulation

JEL Classification: K22, G38, G32

Suggested Citation

Carpentier, Cécile and Suret, Jean-Marc, Private Placements by Small Public Entities: Canadian Experience (January 31, 2009). PRIVATE EQUITY: FUND TYPES, RISKS AND RETURNS, AND REGULATION, Douglas J. Cumming, ed., Ch. 8, pp. 129-152. Available at SSRN: https://ssrn.com/abstract=1355232

Cécile Carpentier

Laval University ( email )

Pavilion Palasis Prince
Quebec, Quebec G1V 0A6
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th floor
Montreal, Quebec H3C 3J7
Canada

University of Lille II - European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

Jean-Marc Suret (Contact Author)

Laval University ( email )

Accounting School
Quebec, P.Q. G1K 7P4
Canada
418-656-7134 (Phone)
418-656-7746 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

1130 rue Sherbrooke Ouest
Bureau 1400
Montreal, Quebec H3A 2M8
Canada

European Center for Corporate Control Studies ( email )

2 rue de Mulhouse
BP381
Lille, 59800
France

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