1. How Corporations Issue Securities

2. Topics Covered Venture Capital The Initial Public Offering
Alternative Issue Procedures for IPOs
Security Sales by Public Companies
Rights Issue
Private Placements and Public Issues 2 2 2 2 3 2

3. Venture Capital Steps to obtaining venture funding:
Prepare a business plan
Receive first-stage financing
Receive subsequent staged financing

4. Money invested to finance a new firm
Venture Capital
Venture Capital
Money invested to finance a new firm
Success of new firm dependent on managers
Restrictions placed on management by venture capital company
Funds usually dispersed in stages after certain level of success 4

5. Venture Capital
Debt
First stage
Value
Assets
Equity 5

6. Venture Capital 6

7. U.S. Venture Capital Investments

8. 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 7

9. Motives For An IPO

10. Underwriter Spread
Spread - the difference between the public offer price and the price paid by underwriter
Example
Assume the issuing company incurs $1 million in expenses to sell 3 million shares at $40 each to an underwriter; the underwriter sells the shares at $43 each. What is the spread for this deal?
Spread – Difference between public offer price and price paid by underwriter.
3 million× $43−$40 =$9 million

11. Underwriting Arrangements
Firm Commitment - Underwriters buy the securities from the firm and then resell them to the public
Best Efforts Commitment - Underwriters agree to sell as much of the issue as possible but do not guarantee the sale of the entire issue
Flotation Costs - The costs incurred when a firm issues new securities to the public
What are some of the specific costs incurred when a firm issues new securities?
Firm commitment – Underwriters buy the securities from the firm and then resell them to the public. Underwriter pays for any shares they cannot resell to the public.
Best efforts basis commitment – Underwriter agrees to sell as much of the issue as possible but does not guarantee the sale of the entire issue.

12. Underwriting Arrangements
Example
How much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees.
Cost to public
= $40
Net to issuer
= $40/1.10 = $36.36
Therefore, the spread was $3.64 per share
= 250,000 × $36.36 =
$9,090,000
Less: Legal fees
600,000
$8,490,000

13. 3 million($70 − $43) = $81 million
Underpricing of an IPO
Underpricing: Issuing securities at an offering price set below the true value of the security.
Example
Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each. By the end of the first day’s trading, the issuing company’s stock price had risen to $70. What is the total cost of underpricing?
Underpricing — Issuing securities at an offering price set below the true value of the security.
Cost of underpricing:
3 million($70 − $43) = $81 million

14. The Top Managing Underwriters
January – June 2014

15. Average Initial IPO Returns9

16. IPO Proceeds
IPO Proceeds and First Day Returns

17. Security Sales by Public Companies
General Cash Offer - Sale of securities open to all investors by an already public company
Seasoned Offering - Sale of securities by a firm that is already publicly traded
Shelf Registration - A procedure that allows firms to file one registration statement for several issues of the same security
International Security Issues- Sale of securities in other countries
Eurobond – Bonds underwritten by a group of international banks and offered simultaneously to investors in a number of countries
Global bonds – Bonds where one part is sold internationally in the eurobond market and the remainder sold in the company’s domestic market 11

18. Underwriting Spreads

19. Total Direct Costs of Raising Capital

20. Rights Issue
Rights Issue - Issue of securities offered only to current stockholders.
Example
Ivanhoe Mines needs C$1.2 billion of new equity. Market price C$ Ivanhoe Mines decides to raise additional funds by offering the right to buy 3 new shares for 20 at C$13.93 per share. With 100% subscription, what is value of each right? 13

21. Rights Issue Current market value = 20 × C$24.73 = C$494.60
Example - Ivanhoe Mines needs C$1.2 billion of new equity. Market price C$ Ivanhoe Mines decides to raise additional funds by offering the right to buy 3 new shares for 20 at C$13.93 per share. With 100% subscription, what is value of each right?
Current market value = 20 × C$24.73 = C$494.60
Total shares = = 23
Amount of new funds = 3 × C$13.93 = C$41.79
New share price = ( ) / 23 = C$23.32
Value of a right = C$ C$13.93 = C$9.39 14

22. Rights Issue
A Slightly More Difficult Example Lafarge Corp needs to raise €1.28billion of new equity. The market price is €60/sh. Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share. If we assume 100% subscription, what is the value of each right? 13

23. Rights Issue Current market value = 17 × €60 = €1,020
Example - Lafarge Corp needs to raise €1.28billion of new equity. The market price is €60/sh. Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share. If we assume 100% subscription, what is the value of each right?
Current market value = 17 × €60 = €1,020
Total shares = = 21
Amount of funds = 1,020 + (4x41) = €1,184
New share price = (1,184) / 21 = €56.38
Value of a right = – 41 = €15.38 14

24. Private Placements and Public Issues
Private Placement - Sale of securities to a limited number of investors without a public offering. Qualified Institutional Buyer – Entity entitled under SEC Rule 144A to purchase and trade private placements. 11