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CHAPTER 2 : RAISING CAPITAL (FIN544) - Coggle Diagram
CHAPTER 2 : RAISING CAPITAL
(FIN544)
VENTURE CAPITAL
AIM -to nurture and grow the company to the
point that the it can be sold to the
public(IPO)
PLAYERS
entrepreneurs(need funding)
investors (want higher returns)
investment bankers (need companies to sell)
venture capitalists (make market for the above parties)
STAGES
seed money (build prototype & manufacturing plan)
financing (manufacturing product)
financing (marketing & distributing products)
SECURITIES
BASIC PROCEDURE (selling to the public)
obtain permission (Board of Directors)
firm must file a registration statement (SEC)
SEC examines the reg (20-days waiting period) securities may not be sold
price determined on the effective date of the reg
UNDERWRITERS
party that evaluates and assumes another party's risk for a fee
ROLES
help determine the best type of security to issue, offering price, amount of shares and time frame
IPO underwriters - determine the initial offering price, buy the from issuers and sell to investors
guarantees a specific number of shares will be sold (will purchase any surplus)
SERVICES
formulate method used to issue securities
price of the securities
sell the securities
price stabilization(lead underwriter)
METHOD OF ISSUING NEW SECURITIES
PUBLIC METHOD
traditional negotiated cash offering
firm commitment cash offer (company- sell/ underwriters- buy)
best efforts cash offer (company- buy/ underwriters- sell)
Dutch auction cash offer (determine highest offer price)
privileged subscription
direct rights offer (offer new stock to existing shareholders)
standby rights offer (same as direct but net proceeds guaranteed by underwriters) issuer - underwriter syndicate - public
non-traditional cash offering
shelf cash offer (companies authorize all share expected to sell over 2y period and sell them when needed)
competitive firm cash offer (underwriters make bid in public auction) - company awards the contract to underwrites with best price and contract terms
PRIVATE METHOD
direct placement
OTHER TERMS
GREEN SHOES AND LOCKUPS
GREEN SHOES
allows the syndicate purchase an additional 15%
allows issues to be oversubscribed
protection for underwriters (price stabilization function)
LOCKUP AGREEMENTS
restriction(insiders) that prevents them selling (IPO) for a specified period of time.
lockup period (180 days)
-stock price drop when the period expires (due to market anticipation additional share)
NEW EQUITY ISSUES
stock prices tend to decline when new equity is issued
DUE TO
signaling and managerial information (manager may sell new shares of stock [current stock price is high])
signaling and debt usage (issue equity might means the company has too much debt)
issue costs
Types of long-term
bonds
PRIVATE ISSUES
term loans (CM Bank, insurance companies)
Private placements (like term loans but longer maturity)
easier to renegotiate than public issues
lower costs than public issues