Summary #15

Summary Corporate Finance
Chapter 15: Raising Capital
15.1 Entrepreneurship: Early-Stage Financing and Venture Capital

-Entrepreneur create new businesses, which means they bear most of the risk but can also reap
much of the reward.
- venture capital (VC): Financing for new, often high- risk, ventures.
15.2 Selling Securities to the Public: The Basic Procedure

- Registration Statement: A statement filed with the SEC that discloses all material information
concerning the corporation making a public offering.
- Regulation A: An SEC regulation that exempts public issues of less than $5 million from most
registration requirements.
- Prospectus: A legal document describing details of the issuing corporation and the proposed
offering to potential investors.
- Red Herring: A preliminary prospectus distributed to prospective investors in a new issue of
securities.
- Tombstone: An advertisement announcing a public offering.
15.3 Alternative Issue Methods

- General cash offer: An issue of securities offered for sale to the general public on a cash basis.
- Rights offer: A public issue of securities in which securities are first offered to existing
shareholders. Also called a rights offering.
- Initial public offering (IPO): A company’s first equity issue made available to the public.
Also called an unseasoned new issue.
- Seasoned equity offering (SEO): A new equity issue of securities by a company that has
previously issued securities to the public.
15.4 Underwriters
- Underwriters: Investment firms that act as intermediaries between a company selling
securities and the investing public.
- Syndicate: A group of underwriters formed to share the risk and to help sell an issue
- Gross Spread: Compensation to the underwriter, determined by the difference between the
underwriter’s buying price and the offering price.
-Firm commitment underwriting: The type of underwriting in which the underwriter buys the
entire issue, assuming full financial responsibility for any unsold shares.
- Best efforts underwriting: The type of underwriting in which the underwriter sells as much of
the issue as possible, but can return any unsold shares to the issuer without financial
responsibility.
-Dutch auction underwriting: The type of underwriting in which the offer price is set based on
competitive bidding by investors. Also known as a uniform price auction.
- Green Shoe provision: A contract provision giving the underwriter the option to purchase
additional shares from the issuer at the offering price. Also called the overallotment option
- Lockup agreement : The part of the underwriting contract that specifies how long insiders
must wait after an IPO before they can sell stock.
- Direct listing: In a direct listing, a firm arranges for its stock to be listed on an exchange
without marketing and other help from an underwriter.
15.7 The Cost of Issuing Securities

1. Gross spread
The gross spread consists of direct fees paid by the issuer to the underwriting
syndicate—the difference between the price the issuer receives and the offer price.
2. Other direct expenses
These are direct costs, incurred by the issuer, that are not part of the compensation to
underwriters. These costs include filing fees, legal fees, and taxes—all reported on the
prospectus.
3. Indirect expenses
These costs are not reported on the prospectus and include the costs of management
time spent working on the new issue.
4. Abnormal returns
In a seasoned issue of stock, the price of the existing stock drops on average by 3 percent
on the announcement of the issue. This drop is called the abnormal return.
5. Underpricing
For initial public offerings, losses arise from selling the stock below the true value.
6. Green Shoe option
The Green Shoe option gives the underwriters the right to buy additional shares at the
offer price to cover overallotments.
15.8 Rights
- Number of new shares = Fund to be raised/ Subscription price

- Number of rights needed to buy a share of stock = Old shares / New Shares
- Ex-rights date: The beginning of the period when stock is sold without a recently declared
right, normally one trading day before the holder-of-record date
- Holder-of-record date : The date on which existing shareholders on company records are
designated as the recipients of stock rights. Also, the date of record.
- Standby underwriting: The type of underwriting in which the underwriter agrees to purchase
the unsubscribed portion of the issue.
- Standby fee: An amount paid to an underwriter participating in a standby underwriting
agreement.
- Oversubscription privilege: A privilege that allows shareholders to purchase unsubscribed
shares in a rights offering at the subscription price.
- Dilution: Loss in existing shareholders’ value in terms of ownership, market value, book value,
or EPS.
15. 10 Issuing Long-Term Debt
- Terms loans: Direct business loans of typically one to five years.

- private placements: Loans (usually long-term) provided directly by a limited number of
investors.
15. 11 Shelf Registration

- Shelf registration: Registration permitted bySEC Rule 415, which allows a company to register
all issues it expects to sell within two years at one time, with subsequent sales at any time within
those two years.

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Summary Corporate Finance

Chapter 15: Raising Capital

15.1 Entrepreneurship: Early-Stage Financing and Venture Capital

15.2 Selling Securities to the Public: The Basic Procedure

15.3 Alternative Issue Methods

15.7 The Cost of Issuing Securities

- Number of new shares = Fund to be raised/ Subscription price

15. 10 Issuing Long-Term Debt

- Terms loans: Direct business loans of typically one to five years.

15. 11 Shelf Registration

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