Textbook Notes (367,974)
Canada (161,538)
Economics (818)
ECON 2560 (71)
Chapter 15

Chapter 15 ECON 2560

5 Pages
Unlock Document

ECON 2560
Tahsin Mehdi

Chapter 15 ECON 2560 Venture Capital, IPOs & Seasoned Offerings VENTURE CAPITAL Venture Capital: Money invested to finance a new firm  Is provided by specialized venture capital firms, financial & investment institution s(such as banks & pension funds) & government agencies Angel: A wealthy individual investor in early-stage ventures  Seek this out if you need really early stage financing for a new enterprise  Angels also bring hands-on contribution to small-scale investments and early-stage ventures  It’s hard to convince a venture capitalist to invest in your business  Must 1 prepare a business plan that describes your product, the potential market, production method, and the resources (time, money, employees, facilities & equipment) needed for success nd  Once business has grown to point where it needs further equity, the 2 stage of financing involves issue of more shares from original investors to by other venture capital firms Venture Capital Companies  While some young companies g row with the help of angels, many others will raise capital from specialist venture capital firms which pool funds from a variety of investors, seek out fledgling companies to invest in, and then work w/ these companies as they try to grow  Most venture capital funds are organized as limited private partnerships w/a fixed life of about 10 years  Pension funds & other investors are the limited partners  The management company, which is the general partner, is responsible for making and overseeing the investments & in return gets a fixed fee as well as a share of the profits  Venture capitalists are not passive investors… they are usually represented on each company’s board of directors, help recruit senior management and they provide ongoing advice to business st  For every 10 1 stage venture capital investments, only 2 or 3 may survive as successful, self-sufficient business, and only 1 may pay off big THE INITIAL PUBLIC OFFERING  For many successful start-ups there comes a time when they need more capital than can comfortably by provided by a small # of individuals or venture capitalists  In this case company may choose to raise money by selling shares to the public st Initial Public Offering (IPO): 1 offering of stock to the general public  IPO is a primary offering when new shares are sold to raise additional cash for the company  Secondary offering when the company’s founders & the venture capitalist cash in on some of their gains by selling shares  IPOS can be (and commonly are) both primary & secondary Arranging a Public Issue  Once a firm decides to go public, the 1 task is to select the underwriters who usually play a triple role of providing company with procedural & financial advice, then buying the stock, and finally reselling it to the public Underwriter: Investment dealer that buys an issue of securities from a company & resells it to the public  A small IPO may only have 1 underwriter but larger issues usually requires a syndicate of underwriters who buy the issue and resell it  In the typical underwriting arrangement, (firm commitment), the underwriters buy the securities from the firm and then resell them to the public  Underwriters allowed to sell the shares at a slightly higher price than they paid for them Spread: Difference between the public offer price & price paid by underwriter  Before any stock can be sold to the public, the company must satisfy the requirements of provincial securities laws & regulations  Each province & territory in Canada has a securities commission or related authority and its own piece of legislation  The stock may have to be registered w/ and appropriate securities commission Prospectus: Formal summary that provides info on an issue of securities  This is the 1 part of the registration statement, the prospectus is distributed to the public  Contains some financial info, company’s history & plans for the future  It serves to warn investors about the risks involved in any investment in the firm  The securities commission while reviewing he preliminary prospectus may require it to be revised before approving  The company & its underwriters also need to set the issue price  To gauge how much the stock is worth they may undertake discounted cash flow calculations and/or look at the price-earnings ratios of the shares of the firm’s principal competitors  Before settling on the issue price the underwriters may arrange a “roadshow” which gives the underwriters an the company’s management an opportunity to talk to potential investors who can say if price is fair  The managers of the firm are eager to secure the highest possible price for their stock but underwriters are likely to be cautious b/c they will be left w/ any unsold stock if they overestimate investor demand Underpricing: Issuing securities at an offering price set below the true value of the security Floatation Costs: The costs incurred when a firm issues new securities to the public  Underpricing  Direct costs: prep of the registration statement & prospectus involves management, legal counsel & accountants as well as underwriters and their advisors  Direct costs: Underwriting commissions, legal, accounting & other admin costs THE UNDERWRITERS  Underwriters don’t just help the company make its IPOs, they are called in whenever a company wants to raise cash by selling securities to the public  Most companies raise capital just occasionally, but underwriters are in the business all the time  Underwriters are careful of their reps and wont handle a new issue unless they think the facts have been presented fairly to investors  For big issues, a group of underwriters (syndicate or banking group) will usually be formed to handle the sale  Companies get to make only 1 IPO but underwriters are in the business all the time  Wise underwriters realize that their rep is on the line & wont handle an issue unless they believe the facts have been presented fairly to investors  If a new issue goes wrong & the stock price crashes, the underwriters can find themselves very unpopular w/ their clients Who are the Underwriters?  Several hundred investment banks, security deals & brokers are at least sometimes involved in underwriting  The market for larger issues is dominated by the major investment dealers which specialize in underwriting new issues, dealing w/ securities & arranging mergers  These firms have great prestige, experience & financial sense LISTING ON THE STOCK MARKET  When a firm decides on an IPO of its stocks, it has to decide where its newly issued shares should be traded
More Less

Related notes for ECON 2560

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.