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FNCE 3P93 (7)
Lecture

chapter15_Raising+Capital.ppt

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Department
Finance
Course
FNCE 3P93
Professor
Geoffrey Hoover
Semester
Winter

Description
15 Raising Capital Key Concepts and Skills • Understand the venture capital market and its role in financing new businesses • Understand how securities are sold to the public and the role of investment bankers • Understand initial public offerings and the costs of going public 15-1 Venture Capital 15.1 •Private financing for relatively new businesses in exchange for stock •Many VC firms are formed from a group of investors that pool capital and then have partners in the firm decide which companies will receive financing •The ultimate goal is usually to take the company public and the VC will benefit from the capital raised in the IPO 15-2 The Public Issue 15.2 • Public issue – the creation and sale of securities that are intended to be traded on the public markets • All companies on the TSE come under the Ontario Securities Commission’s jurisdiction 15-3 Basic Procedures of Selling Securities to the Public 15.3 •Management must obtain permission from the Board of Directors •Firm must prepare and distribute copies of a preliminary prospectus (red herring) to the OSC and to potential investors •OSC studies the preliminary prospectus and notifies the company of required changes (usually takes 2 weeks) •When the prospectus is approved, the price is determined and security dealers can begin selling the new issue 15-4 Alternative Issue Methods • For equity sales, there are two kinds of public issues: • General Cash Offer – New securities offered for sale to the general public on a cash basis. • Rights Offer – New securities are first offered to existing shareholders. These are more common outside North America. 15-5 IPOs and SEOs • IPO – Initial Public Offering (or unseasoned new issue). A company’s first equity issue made available to the public. • SEO – Seasoned Equity Offering. A new issue for a company that has previously issued securities to the public. 15-6 Underwriters 15.4 •Services provided by underwriters •Formulate method used to issue securities •Price the securities •Sell the securities •Price stabilization by lead underwriter •Syndicate – group of underwriters that market the securities and share the risk associated with selling the issue •Basic compensation: Spread – difference between what the syndicate pays the company and what the security sells for in the market 15-7 Firm Commitment Underwriting •Also called a “bought deal” •Issuer sells entire issue to underwriting syndicate •The syndicate then resells the issue to the public •The underwriter makes money on the spread between the price paid to the issuer and the price received from investors when the stock is sold •The syndicate bears the risk of not being able to sell the entire issue for more than the cost •Most common type of underwriting in Canada 15-8 Best Efforts Underwriting •Underwriter must make their “best effort” to sell the securities at an agreed-upon offering price •The company bears the risk of the issue not being sold •The offer may be pulled if there is not enough interest at the offer price. In this situation, the company does not get the capital and they have still incurred substantial flotation costs 15-9 Dutch Auction Underwriting • Underwriter conducts an auction and investors bid for shares • Offer price is determined based on the submitted bids • More commonly used in bond markets • Also called uniform price auction 15-10 Over allotment Option • Over allotment Option / Green Shoe provision •Allows syndicate to purchase an additional 15% of the issue from the issuer •Allows the issue to be oversubscribed •Provides some protection for the lead underwriter as they perform their price stabilization function 15-11 Additional Details • Lockup Agreements – Specify how long insiders must wait after an IPO before they can sell stock, usually 180 days • Quiet Period – For 40 days following an IPO, the OSC requires that all communications with the public are limited to ordinary announcements 15-12 IPO Under pricing 15.5 •Initial Public Offering – IPO •May be difficult to price an IPO because there isn’t a current market price available •Additional asymmetric information associated with companies going public •Underwriters want to ensure
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