Chapter 19 Raising Capital

General Cash Offer

sold to public on first come first served basis

Most US new equity issues are

sold without rights

Rights

sometimes called warrants are often traded on exchanges and OTC

Underwriters receive a ____ between the price they ______ and the price they ______ them to the market for.

spread; buy securities; sell securities

New firms go through several different ____ of financing and various venture capital firms ____ in the different stages of investing

stages;specialize

When seasoned equity is issued

stock prices usually decline. On average, about 3%

Underwriters often form a ______ to share risk and help sell the issue

syndicate

6. Price per share is determined on......

the effective date of registration.

If the price rises in the aftermarket,

the exercise the Green Shoe option to purchase the extra 15% needed.

Green shoe Provision/Over allotment option allows the underwriting group

the option to purchase an additional 15% of the amount of shares originally issued from the issuer.

Securities Act of 1933 and Securities Exchange Act of 1934 along with SEC govern

the process of issuing new securities

Shareholders can exercise their rights or sell them so in either case

the shareholders neither win or lose.

If the price declines in the aftermarket,

the underwriter will buy stock in the open market to support the price.

Efficient market theory dictates that

there is no long term advantage to acquiring shares via rights versus the open market.

Companies can either sell securities to the general public and register with the SEC or......

they can sell to fewer than 35 investors privately.

Dutch Auctions are designed

to eliminate first day price po.

If investors do not exercise or sell their rights

under subscription can occur. In this case, underwriters will often take up the undersubscribed portion of the offering in exchange for a standby fee

Smaller, riskier IPOs are often

underpriced to attract investors.

(FCU)The issuer sells the entire issue to the ___________ who then sells the issue to the _____________

underwriter syndicate; public

The degree of underpricing

varies over time

Winner's curse

winner pays the most- must underprice to get average inestor interested in all issues.

Three types of dilution exist

1. Dilution of percentage ownership 2. Dilution of M.V. 3. Dilution of B.V. and EPS

Types of Public (Issuing New Securities)

1. Firm Commitment cash offer 2. Best efforts cash-offer 3. Dutch auction cash offer

Underwriters.........

1. Formulate method to issue new securities. 2. Price new securities. 3. Sell the new securities. 4. Stabilize price by lead underwriter in the aftermarket.

Public Issues

1. General Cash offer 2. Rights Offer

The Costs of Issuing SEcurities

1. Spread 2. Other Direct expenses 3. Indirect expenses 4. Abnormal returns 5. Underpricing 6. Green Shoe option

Patterns of Cost of Isssuing Securities

1. Substantial economies of scale 2. Cost of selling debt < issuing equity 3. IPO costs > SEO costs 4. Straight bonds < Convertible bonds

3. SEC examines the registration in a _________

20 day waiting period

Venture Capital and venture capitalist have ___ characteristics

3

There are __ reasons as to why underwriters want offerings to sell out

4

Most VC firms will expect to receive _____ of the new venture's equity in exchange for investing.

40% or more

For crowdfunding. SEC must approve and investors must be

Accredited

First-Round Financing

Additional money to begin sales and manufacturing after spending start-up funds.

Second -Round Financing

Additional money to support sales and manufacturing.

Shelf Registration

Allows company to register large issue but sell it in small portions. Reduces flotation costs. Allows company more flexibility to raise money quickly.

Tombstone

An advertisement after the waiting period that contains basic information about the issue, the issuer and the investment banks involved.

Individuals with large assets who invest in new ventures

Angel Investors or Angels(Shark Tank))

This method is not as common today as in the past

Best Efforts Underwriting(BEU).

Competitive firm cash offer

Company can elect to award the underwriting contract through a public auction instead of negotiation.

Dutch auction cash offer

Company has investment bankers auction shares to determine the highest offer price obtainable for a given number of shares to be sold.

Best efforts cash offer

Company has investment bankers sell as many of the new shares as possible at the agreed-upon price. There is no guarantee concerning how much cash will be raised. Some best efforts offerings do not use an underwriter.

Firm Commitment cash offer

Company negotiates an agreement with an investment banker to underwrite and distribute the new shares. A specified number of shares are bought by underwriters and sold at a higher price.

Direct Rights Offer

Company offers the new stock directly to its existing shareholders

Types of Privileged Subscription (Issuing New Securities)

Direct Rights Offer & Standby rights offer

Term Loans

Direct business loans from commercial banks, insurance companies, Maturities 1-5 years, repayable during the life of the loan.

Private (Issuing New Securities)

Direct placement- Securities are sold directly to the purchaser, who, at least until recently, generally could not resell the securities for at least two years.

This method encourages aggressive bidding

Dutch or Uniform Price Auction. (DPA)

Third-Round Financing

Financing for companies breaking even and expanding. Known as mezzanine financing. Sales forecast?

Fourth-Round Financing

Financing for firms likely to public in the next 6 months. Bridge Financing.

This is the most common type of underwriting in the US.

Firm Commitment Underwriting (FCU).

Start-up

For the firms that started within the last year. Typically pay for marketing and produce development.

Managerial Information

If management believes equity is overvalued, they would choose to issue stock shares

When firm's first sell stock to the public of "go public," it is known as

Initial Public Offering or IPO

Debt Usage

Issuing stock may indicate firm has too much debt and can not issue more debt

Standby rights offer

Like the direct rights offer, this contains a privileged subscription arrangement with existing shareholders. The net proceeds are guaranteed by the underwriters.

Possible explanations why seasoned equity declines about 3% when its issued

Managerial Information and Debt Usage

Lockup Agreements

Not legally required but very common. 180 days is common.

Methods of Issuing New SEcurities

Public(Traditional negotiated cash offer), Privileged subscription, Nontraditional(cash offer), and Private

Shelf Cash Offer

Qualifying companies can authorize all the shares they expect to sell over two-year period and sell them when needed.

Firms later offerings are called

Seasoned Equity Offerings(SEO)

Rights Offer

Securities initially only offered to existing owners

Nontraditional cash offer (Issuing New Securities)

Shelf Cash Offer & Competitive firm cash offer

Private Placements

Similar to term loans with longer maturity, easier to renegotiate than public issues, lower costs than public issues, NO SEC registration

Private issues

Term Loans and Private Placements

Best Efforts Underwriting

The Underwriter makes a "best effort" to sell the securities at an agree-upon offering price.

In BEU, the issuing company is taking upon what risk?

The risk of the issue not being sold.

(FCU)How does the underwriting syndicate make money?

They make money on the spread.

Second reason: _______ provides insurance

Underpricing

VC firms receive thousands of proposals every year and only accept

a small number of those request.

Third Reason: Over-subscription and ________ by underwriter

allocation

Dilution of percentage ownership can

be overcome with rights

(Managerial Information) Usually benefits current shareholders but new shareholders anticipate the superior information and

bid down the price of the stock over time.

4. Securities _______ be sold during this period

can't

Preliminary prospectus/red herring

contains most of the information pertaining to the company's operations and prospects but does not include key details of the issue, such as its price and the number of shares offered.

If the offer is pulled the company ________ raise any capital but.......

does not; the company will incurred substantial flotation cost.

Limited partnership

exists when two or more partners unite to jointly conduct a business in which one more partners is liable only to the extent amount of money that partner has invested.

Dilution of value is not a result of _________ financing; it results from less than ______ use of financing

expanded; optimal

IPO pricing is __________

extremely difficult

Banks are normally not interested in giving loans to new start up companies because of

high rates of failures

Sellers work down the list of bidders and determine ________ at which they can sell the _____________

highest price; desired number of shares (DPA)

Green Shoe Provision/Over allotment option is used

in all IPO and SEO offerings but not ordinary debt offerings.

Most VCs rely on........

informal networks of engineers, scientists, lawyers and accountants to help identify potential investments.

Lockup Agreements restrict ________ from selling the IPO shares for ______________

insiders; specific time period.

Crowdfunding

is a legal way to sell equity. Can issue up to $1 million in a 12 month period.

Dilution

is a loss in existing shareholder value caused by issuance of more stock. Watered down

After market

is a period after a new issue is initially sold to the public

Spinning

is a process that's legal but not ethical. Banks bribe firms to get the firm to get their bank to be their underwriter.

Underwriting

is an important business for large investment banks such as Goldman Sachs

Rights offering

is an issue of new common stock to existing shareholders.

There is a _________ in a syndicate who is responsible for pricing the securities.

lead manager

The ________ will stabilize or support the ________ for a short period of time following the offering.(Aftermarket)

lead underwriter; market price

In lockup agreements stock price tends to drop when lockup period expires due to

market anticipation of additional shares being sold.

Under-pricing leaves

money on the table

VCs play an active role in overseeing, advising and _____ the company with which they invest.

monitoring

Accredited investors

must have at least $1 million in net worth or more than $200,000 in income for two of three past years.

VCs are financial intermediaries that raise funds from outside investors and then invest the money in ________. This is done through ____ partnership

new ventures; limited

(FCU)Risk of the syndicate

not being able to sell the entire issue for more than the cost.

The offer may be pulled if there is ____________ at the offer price.

not enough interest. (BEU).

An SEC registration statement is _______ for private issues

not required

Shareholders are issued options to purchase specified _____________ at a fixed price and _______ period of time

number of shares; specific

Underwriting contracts contain a Green shoe Provision which is sometimes called

over allotment option

Green Shoe Provision allows the issue to be __________ and provides __________ for the __________ as they perform their price stabilization function.

oversubscribed; protection; lead underwriter

VCs don't generally want to ___ the new ventures forever. They want to _____ when the venture goes public or is ___ to a larger company.

own; cash out; sold

All bidders _____ per share

pay the same price

1. Management obtains ____ from the __________

permission; Board Of Directors

5. Firms can distribute a ______ which is sometimes called a ___________

preliminary prospectus; red herring

Buyers bid a ____ and a ________ they would like to purchase

price; number of shares

Seed Money Stage

product development. No marketing funds included in this stage.

A rights offering usually cost less, it _________ the proportionate interest of existing share-holders and also protects against _________

protects;underpricing

Bonds

public issue of long-term debt

2. Firm files _______ with the SEC

registration statement

First reason: Their _______ for succesful IPOs is important

reputation