Question

I see a lot of use of the terms "private placement" and "venture capital" on your site, but I'm unsure as to the difference between the two. What distinguishes a private placement from a venture capital investment?

Answer
Private placement refers to the regulatory status of the investment, while venture capital refers to the type of company in which the capital is invested, i.e. new ventures. Venture capital is usually invested in private firms pre-initial public offering, but private placements can be made in both public and private companies.

The Federal government and each of the state governments regulate investments in accordance with the Securities Act of 1933. Under that Act, Regulation D covers private placements, which can be of three types, covered under sections 504, 505, and 506 of Regulation D. There are restrictions on the number and types of investors that can be involved in a private placement. The money could go into a venture-capital type of start-up, or it could go into a very conservative, low-return business.

Equity investments are generally classified along a spectrum of risk and return. The following lists types of investment, with the riskiest at the top.

• Seed Capital
• Angel Investments
• Venture Capital
• Mezzanine Financing
• IPO
• Follow-on Offering

The Private Equity Analyst recently published its tabulations of the amounts of money raised by funds of various types prior to investing. It does not measure actual investments. Click here for chart.

In 1999, a total of $95.5 billion was raised for private equity funds of all types. About 37% of that, or $35.6 billion, was raised for venture capital funds. That was up sharply from $19.0 billion in 1998, and $11.7 billion in 1997.

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