The Costs of Issuing Private Versus Public Equity for Entrepreneurial Ventures

Small Canadian listed firms issue private offerings more often than public offerings. We analyze the way the firms discriminate between competing selling mechanisms to minimize their issuance costs. We examine a sample of 799 private placements (PPs) and 469 seasoned equity offerings (SEOs) issued by small and medium-sized enterprises between 1993 and 2003. In sharp contrast with the situation observed for other countries, both categories of issuers are similar in size, profitability and development stage. As expected, PPs are discounted more than SEOs, although the commissions paid to investment bankers are lower. When we control for size and other characteristics of the issuers, the difference between the total cost is 6% of the gross proceeds. Although this figure is significant, if the PP process allows firms to obtain financing four or six months earlier than via public offering, the price gap may be economically justifiable. We do not observe significant differences between the total cost of SEOs and direct PPs. This finding, together with the regulatory changes that reduce the resale restriction period, may explain the growing use of the PP market