Corporations Engage in Two Types of “Primary Market” Transactions: Public Offerings and Private Placements

In a primary market transaction, the corporation is the seller, and the transaction raises money for the corporation. . . . Corporations engage in two types of primary market transactions: public offerings and private placements. A public offering, as the name suggests, involves selling securities to the general public, while a private placement is a negotiated sale involving a specific buyer. . . .

Most publicly offered debt and equity securities are underwritten. In Canada, underwriting is conducted by investment dealers specialized in marketing securities. Examples are RBC Dominion, Scotia Capital, Nesbitt Burns, and CIBC World Markets.

When a public offering is underwritten, an investment dealer or a group of investment dealers (called a syndicate) typically purchases the securities from the firm and markets them to the public. The underwriters hope to profit by reselling the securities to investors at a higher price than they pay the firm.

By law, public offerings of debt and equity must be registered with provincial authorities, of which the most important is the Ontario Securities Commission (OSC). Registration requires the firm to disclose a great deal of information before selling any securities. The accounting, legal, and underwriting costs of public offerings can be considerable.

Partly to avoid the various regulatory requirements and the expense of public offerings, debt and equity are often sold privately to large financial institutions such as life insurance companies or mutual funds. Such private placements do not have to be registered with the OSC and do not require the involvement of underwriters.

—Stephen A. Ross et al., Fundamentals of Corporate Finance, 4th Canadian ed. (Toronto: McGraw-Hill Ryerson, 2002), 17-18.