Valuation of Private Placement Securities

This article will provide an overview of the valuation process for private placement securities.

Valuation of private placement securities is the process of determining the fair market value of financial instruments that are not publicly traded and are sold directly to a limited number of investors. An accurate valuation is crucial for investors, issuers, and other stakeholders in the private placement market to assess potential risks and returns, negotiate pricing, and make informed investment decisions. However, valuing private placement securities can be challenging due to their illiquidity, lack of transparency, and unique characteristics. Valuation methods for private placement securities vary depending on the type of security, industry, and market conditions.

This article will provide an overview of the valuation process for private placement securities, including the methods used, the factors that affect valuation, and the challenges and opportunities in valuing these securities.

Private placement securities

Private placements are an alternative method for companies to raise capital through the sale of securities directly to a select group of investors rather than the general public. This method offers several advantages over public offerings, including lower costs and less regulatory burden. Private placements are generally sold to institutional investors such as pension plans, private insurers and venture capital organizations.

What are private placement securities?

Private placement securities refer to financial instruments that are not publicly traded and are sold directly to a small group of investors. Private placements are often available to a small group of investors that meet specified eligibility requirements, such as accredited investors, and are exempt from registration with the Securities and Exchange Commission (SEC) under Regulation D of the Securities Act of 1933.

Types of private placements of securities

There are two types of private placements of securities: preferential allotment and qualified institutional placement.

  • Preferential allotment – A preferential allotment is a private placement method where securities are issued to a specific group of investors at a predetermined price. This strategy involves the issuer selecting investors based on characteristics such as net worth and investment experience. Securities offered by preferential allocation, in contrast to public offerings, are often sold to institutions rather than the general public. A preferential allocation is a popular form of raising money for businesses since it gives more control over the choice of investors and may be less expensive than public offerings.
  • Qualified institutional placement – A Qualified Institutional Placement (QIP) is a means for listed companies to raise capital in India and other Southeast Asian countries without having to submit legal paperwork to market regulators. This method was created by the Securities and Exchange Board of India (SEBI) to reduce the dependence of companies on foreign capital resources. QIPs are beneficial because they save time and are cost-efficient due to fewer legal rules and regulations. Access to capital through QIPs is much quicker than through a follow-on public offer (FPO). QIPs are becoming an increasingly popular way for companies to raise capital and expand their operations.

Advantages and disadvantages of private placement of securities

Private placements of securities offer businesses an alternative method of raising capital, but it is crucial to consider their advantages and disadvantages. Benefits include lower costs, wider investor access, quicker completion times, and customization options. However, drawbacks include limited investor access, lack of transparency, low liquidity, regulatory complexities, and higher risk. Evaluating these factors helps businesses make informed decisions about utilizing private placement for funding.


  • Lower costs compared to public offerings – Private placements typically involve fewer regulatory requirements and marketing expenses, resulting in lower overall costs for businesses seeking funding.
  • Access to a wider range of investors, including institutional investors – Private placements allow businesses to attract a diverse pool of investors, including institutions such as venture capital firms and private equity funds, who may not participate in public offerings.
  • No need for public disclosure – Unlike public offerings, private placements do not require businesses to disclose detailed financial and operational information to the public, allowing them to maintain confidentiality and strategic advantage.
  • Quicker completion times than public offers – Private placements generally involve a more streamlined and efficient process, enabling businesses to secure funding in a shorter timeframe compared to the lengthy procedures associated with public offerings.
  • More customization options for the securities being offered – Private placements offer greater flexibility in structuring the terms and conditions of the securities being offered, allowing businesses to tailor the investment opportunity to suit the preferences of both the issuer and the investors.
  • Greater flexibility over the offering process and investor selection – Businesses have more control in choosing the specific investors they want to approach and negotiate with, enabling them to target individuals or entities that align with their strategic objectives.


  • Limited investor access – Private placements may restrict the number of investors who can participate, potentially limiting the pool of available capital compared to public offerings that are open to a larger investor base.
  • Lack of transparency – Private placements lack the same level of public disclosure as required in public offerings, which can make it more challenging for investors to thoroughly evaluate the investment opportunity.
  • Low liquidity – Securities issued through private placements may have limited secondary market trading, meaning investors may face difficulty in selling or exiting their investments before maturity.
  • Difficult regulatory compliance standards – Private placements involve compliance with specific regulations and legal requirements, which can be complex and demanding for businesses, necessitating careful navigation and expertise.
  • Higher risk due to absence of public disclosure and scrutiny – Without the extensive scrutiny and transparency of public offerings, private placements carry a higher level of risk for investors, as they may have limited information and market visibility to assess the investment’s potential returns and risks.

Why use the private placement of securities?

Private placement of securities is an attractive option for companies due to its various advantages. The primary reason why many companies prefer private placement is the lack of stringent rules to be followed, which allows them to avoid the lengthy process involved in raising capital from the public. Private placement also offers flexibility as it lacks transparency and does not have restrictive rules regarding disclosure to the public. Moreover, companies can use private placement at any stage of their business cycle, making it a versatile funding option. Additionally, private equity investors, who are experts in specific fields, can lend their knowledge and network to the company, facilitating faster growth and success.

Private placement security valuation

Private placement security valuation involves determining the fair value of securities issued in a private placement, which can include equity, debt, or convertible securities. In most cases, this is done through a negotiating process involving the issuer and the investor, which takes into account elements including the company’s financial performance, market trends, and the terms and conditions of the securities being offered. The valuation process may also involve consulting with third-party advisers or using a variety of valuation methods, like discounted cash flow analysis or analysis of comparable companies.

Why do you need a valuation report for private placement?

A valuation report is important for private placement because it helps to determine the fair value of the securities being offered to potential investors. The report provides an objective evaluation of the company’s financial position, including assets, liabilities, and future prospects, which can assist investors in making informed decisions. Furthermore, regulatory authorities such as the Securities and Exchange Commission may require a valuation report to ensure that the offering price is fair and reasonable. It also adds transparency and credibility to the company’s financial position, which can attract potential investors and build market trust.

Methods to value securities for private placement

There are three primary methods for valuing securities in private placement: the market approach, the income approach, and the cost approach. We will discuss the market approach and income approach here.

Methods to value securities for private placement

  • Market approach – A common method for valuing securities in private placements is the market approach. It involves comparing the security under evaluation to similar securities that have recently sold in the market. This method assumes that the security’s value can be determined by examining prices for comparable securities in a comparable market. The market approach is especially useful for valuing publicly traded securities because there is a readily available market for such securities. However, using the market approach to value securities that are not publicly traded can be more difficult due to limited data on comparable securities.
  • Income approach – While the cost approach is commonly used to value physical assets such as real estate or equipment, it may not be as applicable to securities in the context of a private placement. This is due to the fact that the value of a security is frequently determined by factors such as market demand, the issuer’s financial performance and future prospects, and investor sentiment, none of which can be attributed solely to the cost of producing or acquiring the security. As a result, the market and income approaches are frequently used to value securities in private placements because they provide a more thorough analysis of the security’s worth.

Example of private placement securities valuation

The impact on existing shareholders‘ equity interest in a private placement offering is determined by the number of shares offered and the number of outstanding shares prior to the offering. If a company has 1 million outstanding shares and offers 100,000 shares via private placement, existing shareholders will have a 10% lower equity stake in the company. The greater the number of shares offered in the private placement, the greater the reduction in the equity interest of existing shareholders. As a result, it is critical for a company to carefully consider the number of shares offered in a private placement in order to avoid significantly diluting existing shareholders’ ownership.

Choose Eqvista for your private placement security valuation!

While private placement securities valuation can be a complex process, Eqvista offers a simple and reliable solution. Eqvista’s platform uses advanced valuation methods to accurately value private placement securities, taking into account all relevant factors such as financial performance, industry trends, and market conditions. With Eqvista, companies can rest assured that their private placement securities are accurately valued and that they are meeting all regulatory compliance requirements. So if you’re looking for a trusted partner for your private placement security valuation needs, contact Eqvista!

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