sources of equity

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University of Waterloo
Accounting & Financial Management
AFM 123
Christine Dupont

New share issues via public flotations Introduction There are three main ways of raising equity finance: - Retaining profits in the business (rather than distributing them to equity shareholders); - Selling new shares to existing shareholders (a "rights issue") - Selling new shares to the general public and investing institutions This revision note outlines the process involved in the third method above. How significant are new issues of shares in the UK? Issues of new shares to the public account for around 10% of new equity finance in the UK. Whilst not significant in the overall context of UK equity financing, when new issues do occur, they are often large in terms of the amount raised. New issues are usually used at the time a business first obtains a listing on the Stock Exchange. This process is called an Initial Public Offering (“IPO”) or a “flotation”. Methods The process of a stock market flotation can apply both to private and nationalised share issues. There are also several methods that can be used. These methods are: • An introduction • Issue by tender • Offer for sale • Placing, and • A public issue In practice the “offer for sale” method is the most common method of flotation. There is no restriction on the amount of capital raised by this method. The general procedures followed by the various methods of flotation are broadly the same. These include - Advertising, e.g. in newspapers - Following legal requirements, and Stock Exchange regulations in terms of the large volumes of information
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