How businesses raise debt capital
Selling bonds
How businesses raise equity capital
Selling stocks
An offer or sale of any security must either be:
Registered with the SEC (IPO process) or conducted under an expection
Securities Act of 1933
Securities must be registered for lawful public sale, unless the security is exempt
How to register securities
Register by filing a registration statement that provides disclosures to investors
- What’s disclosed (purpose is to provide all material information about the offered securities)
— The issuers business description and details
— The amount and planned use of the proceeds
— Audited financial statements
Underwriting Timeline
Pre-Registration, Cooling Off/Waiting Period, Post Effective
Pre Registration
Pre-filing/quiet period
a. Issuer: hires underwriting bank
b. Underwriter: prepares registration agreement (disclosure)
1. No discussing/marketing of deal
c. Then file it with SEC –> becomes available to the public
Cooling-off/Waiting Period
a. SEC: Reviews registration statement
b. Underwriter: markets the new security and distributes the preliminary prospectus
1. No sales (no orders, money, or sales)
c. SEC will register securities for lawful sale (Effective date)
Post Effective
a. Underwriter: sells shares
b. Prospectus: delivered to all investors who buy IPO (and any investors who buy on exchange for first 25 days)
Types of offerings: Timing
IPO
Follow-on Offering
IPO
Initial Public Offering
the first time a company offers its shares to the general public (happens one time)
Follow-on Offering
any subsequent offering of securities to the public (after the IPO)
Types of Offerings: Proceeds
who is actually selling the securities
1. Primary Offering
2. Secondary Offering
3. Split Offering
Primary Offering
the company is creating new shares to sell and receiving all proceeds from the sale
Secondary Offering
existing shareholders (founders, executives) are selling the shares and receiving the sale proceeds (no cash for company)
Split Offering
both the company and selling shareholder sell shares (ex: split IPO = company sells and VC exits)
Going Public - Underwriting (process)
Hire investment bank to underwrite the deal –> other firms join the syndicate
–> firm commitment (syndicate buys all the shares and sells them (liability)
–> best efforts (give us the shares and we will try to sell them, but cannot guarantee
What can an Underwriter do to prevent market risk
Underwriter can stabilize at or below IPO price to prevent a decline in price
Underwriting Syndicate (Firm Commitment)
- Lead Manager (managing underwriter): manages deal, directs/leads entire underwriting process (distributes & allocates shares)
- Syndicate members: financially committed to underwrite shares – buy and sell shares (will buy/own unsold shares
- Selling group: helps sell shares (as agent), no financial commitment to deal
Shelf Registration
process that the SEC authorizes that allows public companies to offer another round of securities in an efficient manner
- is valid for up to three years and can be used for follow-on offerings, but not IPOs
Who can buy Common Stock IPO Shares
- FINRA prohibits restricted persons from investing in common stock IPOs
- Who is restricted
— Broker-dealer firms
— Employees of broker-dealers
— Immediate family members of broker-dealer employees
Other than registering with SEC, can exempt offer…
- Exempt Security (US gov securities, US gov agency securities, muni bonds, commercial paper)
- Exempt Transaction: company wants raise debt or capital (Regulation D, Rule 144, Rule 144A, Rule 147)
Regulation D – Private Placement
A way for companies to raise capital without registering their securities
- Any business can do this, can raise unlimited capital, however often they want
- Who can invest: accredited investors & up to 35 non-accredited investors
Can a public company raise capital with a private placement?
Yes, using a PIPE (private investment in public equity)
