Fraine, Direct Sale of Security Issues, 16 J. Am. Ass'n of Univ. Teachers of Ins. 40 (1949); Kuhn, The Securities Act and Its Effect Upon the Institutional Investor, 4 L. & Contemp. Prob. 84 (1937).

9Maher, Leveling Off: The Difference Between Public and Private Market Financing Costs Is Slimmer Than Ever, Investment Dealers' Digest 17 (Oct. 3, 1988); Private Placement Use To Grow, Pens. & Inv Age 18 (Sept. 19, 1988); Zigas, The Bonds Most Investors Never Hear About, Bus. Week 152 (Sept. 19, 1988); Parker, More Issuers Turn to Private Market, Pens. & Inv. Age 3 (Feb. 8, 1988); Wayne, A Wall Street Sector Blossoms: The Private Placement, The New York Times D1 (July 17, 1987); Baker, Private Offers Up, Pens. & Inv. Age 23 (Apr. 6, 1987); Picker, Breaking Records: Private Placements Grow in Popularity, Complexity, Investment Dealers' Digest 30 (Mar. 9, 1987); Monahan, Private Placements Soar, Investment Dealers' Digest 8 (Feb. 8, 1983).

10 Christie, 1981-An Innovative Year in the Private Sector, Investment Dealers' Digest 20 (Mar. 20, 1982).

11 Bensman, Shifting Boundaries: Moving the Line Between the Public and Private Markets, Investment Dealers' Digest 19 (Mar. 21, 1988). Total private placements amounted to $71 billion in the first half of 1988 compared to $62 billion in the first half of 1987. Maher, supra n. 9, at 20. 12 The data in Table 1 and much of the other data cited in this Release are based upon data published in the Investment Dealers' Digest and Dealers' Digest, Directory of Corporate Financing, or obtained from IDD Information Services, Inc. See Dealers' Digest, Directory of Corporate Financing: Semi Annual Directory (Spring 1988); id. (Spring 1987);

Higgins, The Big Four of Private Placements, Investment Dealers' Digest 13 (March 1985); Dealers' Digest, Five Year Directory of Corporate Financing 1980-1984; id., Directory of Corporate Financing: 1970-1980 Decade. Private placement totals for 1984-1987 are from IDD Information Services, Inc. The Investment Dealers' Digest defines "private placement" to include securities that are privately placed through a dealer with non-bank, third-party investors, where the securities have a maturity of at least one year and are non-callable for at least one year. Bensman, supra n. 11, at 18. The definition thus would generally exclude privately placed commercial paper. The data do not include securities privately placed directly by the issuer. Bank loans, interest rate and currency swaps and securities that a dealer buys for its own account are not included in the data. Finally, the data exclude school issues, tax-exempt securities, sales of outstanding securities, private placements purchased by foreign investors and bridge loans. See Bensman, supra n. 11, at 17-18; Bensman, Equity Kickers 23-24 (Sept. 14, 1987); Christie, Private Sector In Slump During 1980, Investment Dealers' Digest 36 (Mar. 3, 1981).

The annual figures published by the Investment Dealers' Digest are not in all cases directly comparable, because the publication made various changes to its classifications in some years. Moreover, the data presented appear to be under-inclusive, in view of the narrowness of the definition of private placement. Nonetheless, they provide an estimate of minimum amounts of securities privately placed annually. The data presented in this Release have not been verified independently by the Commission or its staff.

13 See Parker, supra n. 9, at 34.

14 Higgins, supra n. 12, at 13; Dealers' Digest, Directory of Corporate Financing: 1970-1980 Decade; Investment Dealers' Digest and Investment Bankers Association, 19601969: A Decade of Corporate and International Finance 12. Data for 1985-1987 are from IDD Information Services, Inc. 15 IDD Information Services, Inc. This amount includes, inter alia, straight debt, lease-, mortgage-, and acquisitionrelated debt, private debt with registration rights and certificates of deposits placed through a dealer.

16 See Dash, The Private Placement Alternative, in Private Placements 1988, at 123 (1988).

Of total debt securities issued privately in 1987, the components were as follows: bonds, 23 percent; notes, 59 percent; certificates of deposit, 9 percent; lease-related, 7 percent; and other, 2 percent. IDD Information Services, Inc.

17 Interviews of members of the financial services industry ("Market Participants") by the SEC staff. During 1988, the Commission's staff conducted numerous interviews of members of the financial services industry, including investment banks, commercial banks, insurance companies and pension funds, to discuss the private placement market. See also Bensman, supra n. 11, at 18 (traditional placement was long-term investment grade debt); Lund, supra n. 4, at 109, 111; Corey, supra n. 8, at 43.

18 Market Participants, supra n. 17 (most common maturity is 10-12 years); Higgins, supra r. 12, at 12 (10 years or less maturity predominates); Picker, supra n. 9, at 30; Altman, Financial Handbook, 4-23 (1981). “[I]n response to shifting needs of both borrowers and lenders, financings of debt with intermediate maturities (1-10 years) have become more prevalent." Id.

19 See Parker, supra n. 9, at 34 (1-25 years); Market Participants, supra n. 17.

20 Market Participants, supra n. 17. To be included in the Investment Dealers' Digest tabulations of "private placement," see Table 1, supra, securities must have a maturity of at least one year. See Bensman, supra n. 11, at 18. 21 Market Participants, supra n. 17. 22 IDD Information Services, Inc.

23 In 1987, preferred stock accounted for 26 percent of total equity privately placed. IDD Information Services, Inc. During the period 1980-1984, preferred stock accounted for 32 percent of total equity securities privately placed. Higgins, supra n. 12, at 13. In 1977, preferred stocks accounted for 92 percent of total private equity. Christie, 1981-An Innovative Year in the Private Sector, Investment Dealers' Digest 21 (Mar. 30, 1982).

The market for preferred stock began to grow in the 1970s. Altman, supra n. 18, at 422. This growth is reported to be largely attributable to the increased use of preferred stocks

common stock accounted for only 16 percent of total equity privately issued.24 Excluding equity portions of lease financings, mortgage- and acquisition-related financings and private transactions with registration rights, the amount of equity sold privately in 1987 totalled approximately $12 billion. 25

In 1987 almost $16 billion in private financing (including debt and equity securities) was acquisition-related.26 Private placements of securitized assets grew in 1987 to $23 billion, reflecting increases in the overall mortgage and asset-backed market.27 Lease-related private placements also continued to grow in 1987, reaching about $15 billion by year end. 28 B. Issuers

A diverse group of issuers supplies securities to the private market.29 The core segment of the market traditionally has been the "lower investment-quality issuer":

The core market comprises mainly the large but not giant corporations, those with a bond rating of A or Baa from Moody's, or an A or BBB from

Standard & Poor's. . . Long-term loans to these borrowers are perceived as somewhat risky (at least compared to government obligations) but overall not likely to default. . . They constitute the lower end of the investment grade securities, which institutions consider prudent fiduciary investments.30

Less significant segments of the private placement market are the two ends of the spectrum in terms of risk. 31 At one end are high quality, highly rated issuers whose securities are preferred by conservative investors, such as public retirement funds.32 Higher quality issuers are more apt than lower quality issuers to use the public markets for financing, given the accessibility of the public market and the ease of registration.33 At the other end of the spectrum are highly leveraged and other higher risk issuers whose securities frequently are purchased by asset-based lenders (such as commercial finance companies) and venture capitalists, as well as by insurance companies.34 Private placement of “high yield" debt has increased substantially in the last four years.35

in corporate mergers, and to the increased participation of utility companies in the private placement market. Id. The development of an intermediate preferred market in the 1970s also contributed to the expansion of the private preferred market. Id., at 4-23. Today, the preferred market includes a wide range of securities. E.g., Bensman, supra n. 11, at 17 (private placement in the United States of Dutch auction preferred stock by foreign issuer).

24 IDD Information Services, Inc. "Other equity," which includes equity portions of lease financings and limited partnership interests, see Monahan, Private Placements Soar, Investment Dealers' Digest 9 (Feb. 8, 1983), accounted for 58 percent of private equity in 1987. IDD Information Services, Inc. See also Lund, supra n. 4, at 110 (private equity is largely just participation in various kinds of taxoriented investments, such as equipment financing and oiland-gas partnerships); Bensman, supra n. 11, at 22 (large amount of limited partnership interests in leveraged buyout funds).

25 Bensman, supra n. 11, at 20.

26 Id. See LBOs Forced to Abandon Public Market for Private Investors, 13 Corp. Fin. Week 2 (Dec. 28, 1987).

27 Bensman, supra n. 11, at 20, 21. Securitized transactions include mortgage-related placements, receivablesbacked securities (e.g., securitized car loans), and other asset-backed securities. Id. Mortgage-related private placements amounted to $13 billion in 1986. See Picker, supra n. 9, at 34 (total includes only mortgage-related placements, and excludes receivables-backed and other asset-backed securities.) See generally Cumming, The Economics of Securitization, 12 Fed. Res. Bank of N.Y. Q. Rev. 11 (Fall 1987). See also Holiday Uses Unique Collateral In Private Deal, 14 Corp. Fin. Week (Feb. 29, 1988) (franchise royal

ties); Givant, World Taking Asset-Backed Idea to Heart, 16 Pens. & Inv. Age 37 (May 2, 1988); Mortgage Loans, 153 Am. Banker (Mar. 29, 1988); Albert, Auto Leases Used to Back 4-Year Notes, Am. Banker (Oct. 13, 1987). Fraust, Loan-Sales Gurus Project Big Growth, Am. Banker 7 (Aug. 22, 1988); Neustadt, Insurer Buys $400 Million of CardBacked Notes, Am. Banker 2 (June 22, 1988); Major Mortgage-Backed Securities Offerings, Am. Banker 12 (May 20, 1988).

28 Bensman supra n. 11, at 21. The significant increase from the 1986 total of $11.5 billion represents, in part, an increase in aircraft lease finance. Id. See also Lund, supra n. 4, at 114 (equipment financing also includes railroad stock, freighters, tankers and pipelines). See generally Kadlec, The Lease Finance Business is Exploding, Investment Dealers' Digest 18 (Mar. 10, 1986).

29 Lund, supra n. 4, at 111.

30 Id. See also Gage, Private Placement: A New Option for the Middle Market, 8 Cash Flow 49 (Feb. 1987); Private Window Opens for Baa Issuers, 13 Corp. Fin. Week 1 (Jan. 26, 1987); Equitable Nixes Private High Grade Corporates, 13 Corp. Fin. Week 1 (Feb. 2, 1987); Raising More Cash in Private Placements, Business Week 96 (Oct. 27, 1975) (lower-grade companies that cannot borrow in the public market are using private market).

31 Lund, supra n. 4, at 112. 32 Id.

33 Market Participants, supra n. 17.

34 Lund, supra n. 4, at 113. See also Raising More Cash in Private Placements, Business Week 96 (Oct. 27, 1975). 35 Market Participants, supra n. 17; see Bensman, supra n. 11, at 17; Picker, supra, n. 9, at 30.

36 See generally Shapiro and Wolf, supra n. 8, at 30-35 (substantial reliance by utilities on public market); Wolf, Demand for Funds in the Public and Private Corporate Bond Market, 65 Rev. of Econ. and Statistics 27 (Feb. 1974) (same). See also Gas Company Debt Issues, 112 Pub. Util. Fortn. 44 (Dec. 22, 1983) (during period 1981-1983, 33 percent of debt financing by natural gas industry was placed privately). Mississippi P&L Turns to Private Market for Junk Bonds, 13 Corp. Fin. Week 8 (Dec. 28, 1987).

A large amount of real estate securities is also sold privately. Wolf, supra at 26. Shapiro, supra n. 19, at 41-43, 142.

37 A Good Year for Private Placements, Investment Dealers' Digest 8 (Mar. 13, 1984). Data for 1984-1987 are from IDD Information Services, Inc. The issuers shown do not represent all categories of issuers. The sum of the amounts presented in the four categories does not equal the totals, because not all categories of issuers are shown; also, amounts shown under "foreign issuers" also may be counted in other categories (e.g., industrials). In addition to the categories shown, the totals include government securities and "other" securities. "Industrials" include, inter alia, transportation securities and service companies.

38 E.g., Belgium to Tap Private Placement Market, 14 Corp. Fin. Week 1 (May 9, 1988).

39 Wave of Foreign Debt to Hit U.S. Private Placement Market, 13 Corp. Fin. Week 1 (Dec. 14, 1987). Several private placement professionals have pointed to "a continuing trend among foreign issuers to use the U.S. private market be

contemporaneously with an offshore offering.41 The participation of foreign issuers in the U.S. private placement market may be limited by state laws or internal regulations that restrict the percentage of assets that insurance companies and pension funds may invest in foreign securities.42 Domestic issuers of equity in private placements are usually non-reporting companies.43 Secondary market liquidity for reporting companies provides a strong incentive to issue freely resalable securities.44 At the same time, the existence of secondary market liquidity for these issuers cre

cause it offers competitive rates, and all-in financing costs may be lower than U.S. public and Eurobond market rates.' See Belgium to Tap Private Placement Market, supra n. 38, at 1. See also Lund, supra n. 4, at 114; Bensman, supra n. 11, at 17 (U.S. private market desirable for European companies with dollar exposures to get long-term, fixed-rate financing). 40 IDD Information Services, Inc. The same year, foreign issuers registered with the Commission securities aggregating $12 billion.

41 Lund, supra n. 4, at 42. E.g., CGE Plans U.S. Placement at Time of Offer in France, Wall St. J. 31 (Apr. 28, 1987) (CIE Generale D'Electricite).

42 See Lund, supra n. 4, at 114. E.g., N.Y. Insurance Law § 1405(a)(7) (McKinney 1985); Wave of Foreign Debt to Hit U.S. Private Market, 13 Corp. Fin. Week 1, 12 (Dec. 14, 1987).

43 Market Participants, supra n. 17. Public companies reportedly tend to issue equity securities only in special circumstances, such as a debt transaction with an equity component (e.g., debt with warrants); a takeover defense; a leveraged buy-out; a joint venture; or a restructuring. Id. Occasionally, small public companies issue equity privately, but ordinarily only to satisfy a relatively small need for funds.

44 Restricted securities typically sell at a discount to securities that are freely tradeable in the public market. Market Participants, supra n. 17. See Bolten, Discounts for the Stocks of Closely Held Corporations, Trusts & Estates 22 (Dec. 1984); Gelman, An Economist-Financial Analyst's

ates concern that fungible privately placed equity securities will be resold into the retail market. On the other hand, a large amount of debt is sold in private placements by reporting companies, in situations where there is no pre-existing public market providing easy resale.45

Issuers reportedly participate in the private market to preserve confidentiality; to avoid the rating process; to issue securities with complicated or unusual terms; to reduce costs of issuance; to avoid delays associated with registration; and to delay take-down of funds.46

C. Investors

Investors in the private placement market are almost exclusively institutions.47 Insurance companies became48 and remain49 the dominant investors in this market, consistently supplying substantial funds to the U.S. private market since its inception. 50 Acquisitions of privately placed securities by insurance companies account for the vast majority of total private offerings. 51 Various other institutions participate as investors

in the private market, but the extent of their participation is small relative to that of insurance companies. Private pension funds, state and local retirement funds, state and local governments, domestic bank trust departments, bank holding companies, and similar institutions purchase privately placed securities,52 although their collective purchases in the 1980s have been estimated to account for only about 10 to 20 percent of total private placements. 53

Venture capitalists invest in the private market$4 and tend to purchase securities of start-up companies, highly leveraged companies or other higher risk enterprises. 55 Foreign institutions, particularly Japanese investors, have participated in the U.S. private placement market in recent years in a wide variety of transactions, including complex placements such as leveraged leases and leveraged buy-outs.56

Generally, the reasons given for investors' participation in the U.S. private market are yield incentives, asset/liability matching, the ability to

Approach to Valuing Stock of a Closely-Held Company, J. of Taxation 353 (June 1972); Feld, The Implications of Minority Interest and Stock Restrictions in Valuing CloselyHeld Shares, Univ. of Pa. L. Rev. 934 (1974).

45 Market Participants, supra n. 17.

46 Dash, supra n. 16 at 24; Lund, supra n. 4, at 111; W. Cowie, Direct Placements with Insurance Companies, in 6 N.Y. State Ins. Dept. Examination of Ins. Companies (1955); Wolf, supra n. 36, at 27, 28. See also, Bensman, supra n. 11, at 19 (private market used for complex transactions); Small Lenders Heat Up Competition in Private Placement Market, 14 Corp. Fin. Week 1 (Apr. 11, 1988) (delayed delivery feature permits issuers to lock-in rate for securities to be issued in the future).

47 Market Participants, supra n. 17. Indeed, an important catalyst to the development of the private placement market in the United States was the tremendous growth in institutional savings, especially in the form of life insurance reserves. E. Shapiro and Wolf, supra n. 8.

48 Shapiro and Wolf, supra n. 8, at 50. "Life insurance companies have been the most active and consistent participants in the private market during the post-war period." Id. at 49 (1972). One reason for the dominance of insurance companies as investors in the private market has been the growth in life insurance assets coupled with difficulties in finding qualified outlets for life insurance funds. Corey, supra n. 8, at 19. "Competing as they do with other investors for the available supply of investments, life companies as a group face an investment problem created by their own size." Id. (1951).

49 Wayne, supra n. 9, at D2; Baker, Private Offers Up, Pens. & Inv. Age 23 (Apr. 6, 1987); Higgins, supra n. 12, at 13; Insurance Companies Feed Private Placement Market, 11 Pens. & Inv. Age 33 (July 11, 1983).

50 See Lund, supra n. 4, at 110.

51 Market Participants, supra n. 17; Cabanilla, Directly

Placed Bonds: A Test of Market Efficiency, 10 J. of Portfolio Management 72 (Winter 1984).

52 Market Participants, supra, n. 17; Lund, supra n. 4, at 109.

53 Market Participants, supra n. 17. Traditionally, pension funds have tended to prefer securities of higher quality issuers than have insurance companies. Id.

54 Lund, supra n. 4, at 113. Benton and Gunderson, Venture Capital Financings and Exemptions from Registration Under the Securities Act of 1933: Section 4(2), Rule 146 and Rule 242, 21 Santa Clara L. Rev. 23 (Winter 1981). Cf. Torpey and Viscione, Mezzanine Money for Smaller Businesses, 3 Harv. B. Rev. 116 (May-June 1987). 55 Lund, supra n. 4, at 113.

56 Parker, supra, n. 9, at 3 (Japanese institutions); Wayne, A Wall Street Sector Blossoms: The Private Placements, The New York Times D2 (July 17, 1987) (Japanese investors); Keslar, Joining in a Private Fight: Commercial Banks Are Doing Private Placements, Euromoney 175 (Dec. 1986) (Japanese institutions and European banks); Greene, Every Risk Has Its Price, Forbes 156 (Nov. 16, 1987); Gage, Wide Range of Factors Favor Overseas Financing, 8 Cash Flow 53 (Sept. 1987) (discussing private placements by U.S. corporations to foreign investors offshore); Fed Approves Sale of Major Stake in CB Bancshares to Japanese, Am. Bank. 2 (May 12, 1987) (private placement to Japanese finance company); Blanton, Japanese Companies Help Jet Financing Get Off Ground, Pens. & Inv. Age 47 (Oct. 1, 1984); Albert, Banks Sell Notes Backed by Associated Grocers' Assets, Am. Bank. 30 (Feb. 16, 1988) (foreign banks major purchasers in asset-backed securities transaction); Bensman, supra n. 11, at 22 (Japanese investment in privately placed interests in leveraged buyout funds); Parker, supra n. 9, at 34 (participation of Japanese investors in leveraged buyouts); Picker, supra n. 9, at 30, 35; Hemmerick, Japanese Vie for U.S. Debt Market, Pens. & Inv. Age 6 (Nov. 30, 1987).