There are many reasons why a company may need to raise capital from investors. For example, equity financing may be needed to fund the takeover of another company; or to finance a significant increase in capital expenditure; or to repay expensive debt taken out at a time when the company was struggling for finance.
Companies can also approach the stock market to raise capital to address a cashflow deficit caused by a profits warning or to plug a pension shortfall highlighted by the company’s actuary; and an equity finance injection may help arrest a decline in share price performance.
This article explains some of the terminology and processes around raising equity finance on the stock market and the corporate advisers at the centre of the activity.
Initial Public Offering
An initial public offering or IPO is the process by which a private limited company offers shares to members of the public (retail and institutional investors) for the first time.
This method of raising capital is a challenging, complex and expensive process and requires the publication of an admission document and a prospectus.
Apart from raising capital the principal aim of an IPO is to attract as wide a shareholder base as possible to significantly increase liquidity in the company’s shares.
Share Placing
A share placing involves offering a company’s shares to a limited number of carefully chosen investors. Raising capital in this way allows a company to avoid the expense of preparing a prospectus and the cost of marketing the fundraise to a much wider base of potential investors.
While this method gives the company greater control over the composition of its investor base, it potentially means fewer investors than would be considered necessary for creating better liquidity in the shares of the company.
Placings are usually carried out by a corporate adviser (see below) who specialise in corporate finance activities. They act as agent for the company.
Open Offer
An open offer is quite similar to a rights issue in that it enables a company to raise equity from existing shareholders by allowing them to purchase new shares in the company, usually at a discount to the prevailing share price.
The open offer is made to shareholders on a pre-emptive basis. This means that each shareholder is guaranteed a minimum share entitlement which is proportionate to their existing shareholding. This is done to avoid dilution of their existing ownership stake.
Shareholders can apply for more than their minimum entitlement if this wish, although any additional allocation depends on whether other shareholders take up the offer. If a shareholder decides not to take up the offer, their entitlement cannot be sold on the market (unlike a rights issue).
Share Warrants
A share warrant is a financial instrument which gives the holder the right, but not an obligation, to purchase a company’s shares at a fixed price before a specified date. Share warrants are usually issued to investors to encourage participation in placings for example, or even to lenders who have provided debt finance to the company.
The share warrant does mean actual ownership of the shares but it does give the holder an entitlement to purchase additional shares at a future date at an agreed price (usually a discount to the prevailing share price, thereby giving an immediate capital gain to the holder).
The proceeds from exercising share warrants belongs to the company.
Share Subscription
A share subscription is an undertaking between a company and a potential investor (subscriber) whereby the company agrees to sell a specified number of shares at an agreed time for a fixed price. Once payment of funds has been made to the company, the subscriber becomes a shareholder.
Bookbuild
A bookbuild is the process by which the corporate adviser determines the level of demand from investors for participation in a share placing at the proposed share price.
In effect, the corporate adviser invites applications for the purchase of shares in a placing and will establish the number of ordinary shares to be issued at the proposed price.
Bookbuilds are usually done on an accelerated basis, in that the offer to participate in a share placing is made to potential investors for a short window of time (48 hours or less).
Shareholder approval
Share Placings, Share Subscriptions and Open Offers are conditional upon shareholders approving a resolution at a general meeting of the company. If the resolution is not passed, the company will not be able to proceed with raising capital in the form anticipated.
Corporate advisers
In general, corporate advisers can be retained to advise on almost any aspect of a company’s operations: from the composition of the board of directors, to evaluating professional advisers such as accountants and lawyers, through to providing input on marketing, finance and strategy.
In the context of the fundraising process, corporate advisers are retained to guide companies on timing, pricing of the share offer (i.e. company valuation) as well as offering advice on the requirements of IPOs or placings and ultimately coordinating the admission process. They will also submit the listing application to the regulatory authorities so the company can be listed on the stock exchange.
One example of a corporate adviser is a nominated adviser (known as a NOMAD). AIM listed companies are legally required to engage a NOMAD once they have been listed and their role is to guide the company on its legal and reporting obligations under AIM rules.
Another type of corporate adviser is a corporate broker whose role is to understand what is going on in the stock market and raise the profile of the company with existing and potential investors to ensure there is sufficient liquidity and demand for the company’s shares.
Quite often, the roles of corporate broker and NOMAD are carried out by the same firm.
Corporate actions
Companies have many statutory obligations under the Companies Act when raising capital and these responsibilities can impact the rights, holdings and value of shares held. To learn more about some of the more common corporate actions available to companies, please follow the link.
