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Understanding Securities Issuance: Venture Capital, IPOs, Underwriting, and Rights Issues

This chapter provides a comprehensive overview of how corporations issue securities, focusing on key concepts such as venture capital, initial public offerings (IPOs), underwriting, general cash offers, and rights issues. Venture capital is critical for financing new firms, with strict management oversight and staged funding. The chapter clarifies the roles of underwriters and explains important terms like offering price, underpricing, prospectus, and shelf registration. Examples illustrate rights issues and valuation, enhancing understanding of the securities issuance process.

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Understanding Securities Issuance: Venture Capital, IPOs, Underwriting, and Rights Issues

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  1. Principles of Corporate Finance Brealey and Myers Sixth Edition • How Corporations Issue Securities Slides by Matthew Will Chapter 15 Irwin/McGraw Hill • The McGraw-Hill Companies, Inc., 2000

  2. Topics Covered • Venture Capital • The Initial Public Offering • The Underwriters • General Cash Offers • Rights Issue

  3. Venture Capital Venture Capital Money invested to finance a new firm

  4. Venture Capital Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved. Venture Capital Money invested to finance a new firm

  5. Venture Capital

  6. Venture Capital

  7. Initial Offering Initial Public Offering (IPO) - First offering of stock to the general public. Underwriter - Firm that buys an issue of securities from a company and resells it to the public. Spread - Difference between public offer price and price paid by underwriter. Prospectus - Formal summary that provides information on an issue of securities. Underpricing - Issuing securities at an offering price set below the true value of the security.

  8. The Underwriters

  9. The Underwriters

  10. Initial Offering Average Expenses on 1767 IPOs from 1990-1994

  11. Tombstone

  12. General Cash Offers Seasoned Offering - Sale of securities by a firm that is already publicly traded. General Cash Offer - Sale of securities open to all investors by an already public company. Shelf Registration - A procedure that allows firms to file one registration statement for several issues of the same security. Private Placement - Sale of securities to a limited number of investors without a public offering.

  13. Underwriting Spreads

  14. Rights Issue Rights Issue - Issue of securities offered only to current stockholders.

  15. Rights Issue Rights Issue - Issue of securities offered only to current stockholders. Example - AEP Corp currently has 11 million shares outstanding. The market price is $24/sh. AEP decides to raise additional funds via a 1 for 11 rights offer at $22 per share. If we assume 100% subscription, what is the value of each right?

  16. Rights Issue Example - AEP Corp currently has 11 million shares outstanding. The market price is $24/sh. AEP decides to raise additional funds via a 1 for 11 rights offer at $22 per share. If we assume 100% subscription, what is the value of each right? • Current Market Value = 2mil x $24 = $264 mil • Total Shares = 11 mil + 1 mil = 12 mil • Amount of new funds = 1 mil x $22 = $22 mil • New Share Price = (264 + 22) / 12 = $23.83/sh • Value of a Right = 24 - 23.83 = $0.17

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