RAISING CAPITAL

  • Raising capital is depending on the size of the firm, its life-cycle stage and its growth prospect

The financing life cycle of a firm

  • At early stage financing
    : Banks do not make loans to start-up companies with little assets and entrepreneurs with no track record.
    : venture capital market would be the best short for funding.

Venture Capital

⭐ Venture capital refers to financing for new, often high-risk venture ⭐ The aim is to grow the company so that it can be sold to the public in an IPO. ⭐ To earn high return, some venture capitalist may sell the company to other investors before IPO

4 main players in venture capital industry :
✅ Entrepreneurs who need funding
✅ Investors who want high risk
✅ Investment bankers who need companies to sell
✅ Venture capitalist who make money for themselves by making a market for the other three.

💥 bigger deals usually financed by venture capitalist firms which specialize in pooling funds from various sources
💥 The sources of funds are pension funds, insurance companies and large corporations

  • First-stage financing would be seed for money to build a prototype and complete a manufacturing plan
  • Second-stage financing would be financing to actually begin manufacturing the product
  • further stage of financing provide for marketing and distributing the manufactured product.

Seed Money

  • Seed Money refers to the first round of capital for a start-up business
  • It gets the name from the idea where at early stage financing plants the seed that enable small business to grow.
  • It is one of the most critical aspect of starting small business

Considerations in choosing VC :


⭐ Financial Strength - VC have sufficient resources and finances for funding future stages
⭐ Style - How the VC involve in the management
⭐ References - VC's track record and past experiences in dealing difficult situations
⭐ Contacts - VC have many networks
⭐ Exit Strategy - How VC exit from the business

Selling securities to the public : The basic procedure

✅ Management must obtain permission from the BOD
✅ Firm must file a registration statement with the SEC
✅ The SEC examines the registration during a 20-day waiting period

  • A preliminary prospectus called red herring is distributed during the waiting period
  • If there are problems the company is allowed to amend the registration & waiting period starts over.
    ✅ Security may not be sold at waiting period.
    ✅ The price is determined on the effective date of the registration

Underwriters

🔥 An underwriter is refer to any party that evaluates and assumes another party's risk for a fee like commission, premium and interest
🔥 It operate in many aspects of the financial world such as mortgage industry, insurance industry, equity market and common types of debt securities
🔥 considered to be risk experts of financial world
🔥 Investors depend on the to determine if a business risk is worth taking
🔥 contribute to sales-type activities


Roles of Underwriters


✏In IPO, the issuer or company raising capital brings in underwriting firms or investment bank to help determine the best type of security to issue
✏ IPO underwriters are financial specialist who work closely with the issuing body to determine the initial offering price of the securities, buy from issuer and sell to investors
✏ IPO underwriters are typically investment banks that have IPO specialist on staff
✏ Investment banks work with a company to ensure that all regulatory requirements are satisfied.

Service provided by underwriter :
✅ Formulate method used to issue securities
✅ Price the securities
✅ Sell the securities
✅ Price stabilization by lead underwriter

Methods of issuing new securities

Public Method

  1. Traditional negotiated cash offer
    ❤ Firm commitment cash offer - Company negotiates an agreement with an investment banker to underwrite and distribute new shares
    ❤ Best efforts cash offer - Company negotiates so that the underwriters sells as many of the new shares as possible at agreed price
    ❤ Dutch auction cash offer - Company negotiates so that the underwriter auction shares to determine the highest offer price

  1. Privileged subscription


    ❤ Direct Rights offer - Company offers new stock directly to its existing


    shareholders


    ❤ Standby rights offer - it contains a privileged subscription


    arrangement with existing shareholders


  2. Nontraditional cash offer


    ❤ Shelf cash offer - Companies can authorize all shares they expect to sell over 2 year period and sell them when needed


    ❤ Competitive firm cash offer - Underwriters make bid in a public auction for the underwriting contract of a company

🔥 Firm commitment Underwriting

  • Issuer sells entire issue to underwriting syndicate
  • The syndicate then resells the issue to the public
  • Underwriter makes money on the spread between the price paid to the issuer and the price received from investors when stock is sold

🔥 Best Efforts Underwriting

  • underwriter must make their 'best effort' to sell the securities at an agreed-upon offering price
  • company bear the risk of issue not being sold

🔥 Dutch Auction underwriting

  • Underwriter accepts a series of bids that include number of shares and price per share
  • the price that everyone pays is the highest price that will result in all shares being sold

IPO underpricing

  • An underpriced IPO means that the firm and pre-IPO shareholders are shortchanged as they getting less money for the offer than they actually deserved
  • may be difficult to price IPO because there isn't a current market price available

New equity issue and price

  • Stock price tend to decline when new equity is issued

Rights offerings

  • Issue of common stock offered to existing shareholders
  • allow current shareholders to avoid the dilution that can occur with a new stock
  • Rights are given to the shareholder