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FIN 501 Study Guide - Initial Public Offering


Department
Finance
Course Code
FIN 501
Professor
D Imaria

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ntroduction
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.
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 which must be provided. Great expense is incurred in providing this information, e.g.
lawyers, accountants, other advisors.
Why issue new shares on a stock exchange?
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