Securities: Privately Held Firms

Privately Held Firms: The Inside Scoop

1. What Are Privately Held Firms?

So, you've heard about these privately held companies, but what's the deal? Well, they're owned by a small number of shareholders, keeping things on the down-low. Fewer obligations to release financial info means more money saved and less intel for competitors. Plus, they're all about that long-term goal chase, free from shareholder pressure.

2. Why Aren't They Everywhere?

Hold up, though! Privately held firms face a limit—they can only have up to 499 shareholders. That means they can't raise huge amounts of capital from a wide investor base. That's why you'll mostly find the big players in the public corporations club. They've got the numbers, baby!

3. Raising Funds with a Twist

When private firms want that dough, they sell shares directly to a select few institutional or wealthy investors, like a secret club handshake. No extensive registration statements required, thanks to Rule 144A of the SEC. But here's the catch: these shares don't trade on secondary markets like a stock exchange. Translation? They're not as easy to buy or sell, and investors might not be willing to pay as much for them.

What's Liquidity Got to Do with It?

Liquidity is all about being able to buy or sell something at a fair price ASAP. And when it comes to illiquid securities (like those privately held firm shares we mentioned), investors want a bargain. They're not dishing out top dollar for something that's harder to move. Can you blame them?

4. Regulators to the Rescue?

Private firms are getting tired of all the public company requirements and want more freedom. Can you blame them? That's why federal regulators have come under pressure to loosen the constraints of private ownership. They may raise the limit on the number of shareholders a private firm can have before disclosing financial info. Plus, they're making it easier to publicize share offerings. It's all about leveling the playing field!

5. Trading Tricks

Trading in private corporations has seen some cool changes. To bypass the 499-investor restriction, middlemen have formed partnerships. Guess what? The partnership counts as just one investor, even if many individuals are involved. Sneaky, right?

6. The Wild West of Private Company Networks

Recently, some firms have set up computer networks for trading private company stock among themselves. It's like having your own secret trading club! But here's the catch: these networks don't require much financial info disclosure and have minimal oversight. Critics worry about the lack of transparency, making it hard for investors to see the full picture. Just think about Facebook's 2012 IPO frenzy. People were hyped, but skeptics questioned the lack of clarity in these markets. Who knows what really went down?

This article takes inspiration from a lesson found in FIN 4504 at the University of Florida.