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Private Placements by Small Public Entities: Canadian Experience

In Canada, most of the private placements are offered by small and unprofitable entrepreneurial ventures -- for which the asymmetry of information and adverse selection problems are particularly acute. Private placements are a very important source of equity for these emerging businesses. In contrast with the public offering process, placements of shares are made in the exempt market with accredited or sophisticated investors. It is assumed that these investors would be knowledgeable enough to protect their own interests. The aim of this paper is to analyze the extent to which such private placements can be considered “fair”, i.e. if they provide investors with a fair rate of return and if accredited investors are indeed able to price these placements correctly in a context of large asymmetry of information. The answer is clearly negative.
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