Lecture 8
Issuing Securities to the Public
Issuing Securities to the Public
The Public Issue vs The Private Issue
Alternative Issue Methods
The Cash Offer
New Equity and the Value of the Firm
The Cost of New Issues
Rights
Shelf Registration
The Private Equity Market
The Public Issue 증권의 공개매각

The Basic Procedure
 Management
gets the approval of the Board of
Directors.
 The firm prepares and files a registration
statement with the SEC. 등록신청서, 증권거래위원회
 The SEC studies the registration statement during
the waiting period. 20일의 대기기간
 red
 If
herring ( 임시 투자설명서)
배포
everything is copasetic with the SEC, a price is
set and a full-fledged selling effort gets
underway.
The Process of A Public Offering
Steps in Public Offering
1. Pre-underwriting conferences
2. Registration statements
3. Pricing the issue
4. Public offering and sale
5. Market stabilization


Time
Several months
20-day waiting period
Usually on the 20th day
After the 20th day
30 days after offering
대기기간 중에는 증권을 매각할 수 없다.
증권의 가격은 등록이 효력을 가지게 되는 날 결정된다
Tombstone Advertisement Example
증권의 인수회사



인수회사가 제공하는 서비스
 신규증권의 발행방법을 제시한다.
 신규증권의 가격을 책정한다.
 신규증권을 판매한다.
 대표인수회사에 의한 주가의 안정화
인수연합(syndicate) – 증권을 매각하고 매각에 따른
위험을 분담할 수 있도록 증권인수회사들이 형성한 연합
총차액( gross spread) – 발행회사에게 인수회사가
지불하는 가격(인수회사의 매수가격)과 시장에서 판매할
때의 가격(발행가격; offering price)과의 차이
16-6
Alternative Issue Methods


There are two kinds of public issues:
Negotiated vs direct cash offer
 The
general cash offer
 Nontraditional
 Shelf
 The


cash offer . Stand-by offer
rights offer
Privileged subscription or Rights offer
Almost all debt is sold in general cash offerings.
 Direct
placement
The Cash Offer 현금발행

There are two methods for issuing securities for cash:
 Firm
Commitment
 Best Efforts
 Dutch auction cash offer

There are two methods for selecting an underwriter
 Competitive
 Negotiated
Firm Commitment



Under a firm commitment underwriting, the
investment bank buys the securities outright from the
issuing firm.
Obviously, they need to make a profit, so they buy
at “wholesale” and try to resell at “retail”.
To minimize their risk, the investment bankers
combine to form an underwriting syndicate to share
the risk and help sell the issue to the public.
Best Efforts



Under a best efforts underwriting, the underwriter
does not buy the issue from the issuing firm.
Instead, the underwriter acts as an agent, receiving
a commission for each share sold, and using its “best
efforts” to sell the entire issue.
This is more common for initial public offerings than
for seasoned new issues.
The Announcement of New Equity
and the Value of the Firm


The market value of existing equity drops on the
announcement of a new issue of common stock.
Reasons include
 Managerial
Information
Since the managers are the insiders, perhaps they are
selling new stock because they think it is overpriced.
 Debt Capacity
If the market infers that the managers are issuing new equity
to reduce their debt-equity ratio due to the specter of
financial distress the stock price will fall.
 Falling
Earnings
The Cost of New Issues
1.
2.
3.
4.
5.
6.
Spread or underwriting discount
Other direct expenses
Indirect expenses
Abnormal returns
Underpricing
Green Shoe Option
The Costs of Public Offerings
Proceeds
(in millions)
2 - 9.99
10 - 19.99
20 - 39.99
40 - 59.99
60 - 79.99
80 - 99.99
100 - 199.99
200 - 499.99
500 and up
Equity
Direct Costs
SEOs
IPOs
13.28%
16.96%
8.72%
11.63%
6.93%
9.70%
5.87%
8.72%
5.18%
8.20%
4.73%
7.91%
4.22%
7.06%
3.47%
6.53%
3.15%
5.72%
Underpricing
IPOs
16.36%
9.65%
12.48%
13.65%
11.31%
8.91%
7.16%
5.70%
7.53%
Rights 주주모집


If a preemptive right is contained in the firm’s
articles of incorporation, the firm must offer any
new issue of common stock first to existing
shareholders.
This allows shareholders to maintain their
percentage ownership if they so desire.
Mechanics of Rights Offerings

The management of the firm must decide:
 The
exercise price (the price existing shareholders must
pay for new shares).
 How many rights will be required to purchase one new
share of stock.

These rights have value:
 Shareholders
rights.
can either exercise their rights or sell their
Rights Offering Example




Popular Delusions, Inc. is proposing a rights offering.
There are 200,000 shares outstanding trading at
$25 each. There will be 10,000 new shares issued
at a $20 subscription price.
What is the new market value of the firm?
What is the ex-rights price?
What is the value of a right?
What is the new market value of
the firm?
$25
$20
$5,200,000  200,000 shares 
 10,000 shares 
share
shares
There are 200,000
outstanding shares at $25
each.
There will be 10,000 new shares
issued at a $20 subscription
price.
What is the Ex-Rights Price?


There are 110,000 outstanding shares of a
firm with a market value of $5,200,000.
Thus the value of an ex-rights share is:
$5,200,000
= $24.7619
210,000 shares
Ex-Rights Price?

Thus the value of a right is
$0.2381 = $25 – $24.7619
The Rights Puzzle


Over 90% of new issues are underwritten, even
though rights offerings are much cheaper.
A few explanations:
 Underwriters
increase the stock price. There is not much
evidence for this, but it sounds good.
 The underwriter provides a form of insurance to the
issuing firm in a firm-commitment underwriting.
 The proceeds from underwriting may be available
sooner than the proceeds from a rights offering.

No one explanation is entirely convincing.
Shelf Registration 일괄등록제도



Permits a corporation to register an offering that it
reasonably expects to sell within the next two years.
Not all companies are allowed shelf registration.
Qualifications include:
 The
firm must be rated investment grade.
 The cannot have recently defaulted on debt.
 The market capitalization must be > $75 m.
 No recent SEC violations.
The Private Equity Market


The previous sections of this chapter assumed that a
company is big enough, successful enough, and old
enough to raise capital in the public equity market.
For start-up firms and firms in financial trouble, the
public equity market is often not available.
Private Placements



Avoid the costly procedures associated with the
registration requirements that are a part of public
issues.
The SEC restricts private placement issues ot no
more than a couple of dozen knowledgeable
investors including institutions such as insurance
companies and pension funds.
The biggest drawback is that the securities cannot
be easily resold.
Venture Capital


The limited partnership is the dominant form of
intermediation in this market.
There are four types of suppliers of venture
capital:
1.
2.
3.
4.
Old-line wealthy families.
Private partnerships and corporations.
Large industrial or financial corporations have
established venture-capital subsidiaries.
Individuals, typically with incomes in excess of
$100,000 and newt worth over $1,000,000. Often
these “angels” have substantial business experience
Corporate Equity Security Offerings
17.7
16.2
66.1
Private Rule 144A
placements
Private non-Rule
144A placements
Public equity
offering
Stages of Financing
1.
Seed-Money Stage:
Small amount of money to prove a concept or develop a product.
2.
Start-Up
Funds are likely to pay for marketing and product refinement.
3.
First-Round Financing
Additional money to begin sales and manufacturing.
4.
Second-Round Financing
Funds earmarked for working capital for a firm that is currently selling
its product but still losing money.
5.
Third-Round Financing
Financing for a firm that is at least breaking even and contemplating
expansion; a.k.a. mezzanine financing.
6.
Fourth-Round Financing
Financing for a firm that is likely to go public within 6 months; a.k.a.
bridge financing.