PowerPoint PresentationKey Concepts and SkillsChapter Outline19.1 The Financing Lifecycle of a Firm: Venture CapitalVenture Capital Stage Financing19.2 Selling Securities to the PublicSelling Securities to the Public (Cont.)Tombstone Figure 19.419.3 Alternative Issue MethodsMethods of Issuing New Securities Table 19.119.4 UnderwritersFirm Commitment UnderwritingBest Efforts UnderwritingDutch or Uniform Price AuctionDutch or Uniform Price Auction ExampleGreen Shoe ProvisionLockup Agreements19.5 IPOs and UnderpricingIPO Underpricing Reasons19.6 What CFOs Say About the Underwriting Process19.7 SEOs and The Value of the Firm19.8 The Cost of Issuing SecuritiesSlide 2319.9 RightsRights (Cont.)19.10 Dilution19.11 Types of Long-term Debt19.12 Shelf RegistrationSlide 29Quick QuizSlide 3119-1RAISING CAPITALChapter 19Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.19-2KEY CONCEPTS AND SKILLS•Describe the venture capital market and its role in financing new businesses•Articulate how securities are sold to the public, and the role of investment bankers•Explain initial public offerings, and the costs of going public19-3CHAPTER OUTLINE19.1 Early-Stage Financing and Venture Capital19.2 Selling Securities to the Public: The Basic Procedure19.3 Alternative Issue Methods19.4 Underwriters19.5 IPOs and Underpricing19.6 What CFOs Say about the IPO Process19.7 SEOs and the Value of the Firm19.8 The Cost of Issuing Securities19.9 Rights19.10 Dilution19.11 Issuing Long-Term Debt19.12 Shelf Registration19-419.1 THE FINANCING LIFECYCLE OF A FIRM: VENTURE CAPITAL•Private financing for new, high risk businesses in exchange for stock•Individual investors•Venture capital firms•Usually involves active participation by VC•Ultimate goal: take company public; the VC will benefit from the capital raised in the IPO•Hard to find•Expensive19-5VENTURE CAPITAL STAGE FINANCING•Funding provided in several stages•Contingent upon specified goals at each stage•First stage•“Ground floor” or “Seed money”•Fund prototype and manufacturing plan•Second Stage•“Mezzanine” financing•Begin manufacturing, marketing & distribution19-619.2 SELLING SECURITIES TO THE PUBLIC1. Management obtains permission from the Board of Directors2. Firm files a registration statement with the SEC3. SEC examines the registration during a 20-day waiting period4. Securities may not be sold during the waiting period19-7SELLING SECURITIES TO THE PUBLIC (CONT.)5. A preliminary prospectus, called a red herring, is distributed during the waiting period - If problems, the company amends the registration, and the waiting period starts over6. Price per share determined on the effective date of the registration and the selling effort begins19-8TOMBSTONEFIGURE 19.4• Investment banks in syndicate divided into brackets•Firms listed alphabetically within each bracket•“Pecking order”•Higher bracket = greater prestige•Underwriting success built on reputation19-919.3 ALTERNATIVE ISSUE METHODS•Public Issue•Registration with SEC required•General cash offer = offered to general public•Rights offer = offered only to current shareholders•IPO = Initial Public Offering = Unseasoned new issue•SEO = Seasoned Equity Offering•Private Issue•Sold to fewer than 35 investors•SEC registration not required19-10METHODS OF ISSUING NEW SECURITIESTABLE 19.119-1119.4 UNDERWRITERS•Underwriting services: •Formulate method to issue securities•Price the securities•Sell the securities•Price stabilization by lead underwriter in the aftermarket•Syndicate = group of investment bankers that market the securities and share the risk associated with selling the issue•Spread = difference between what the syndicate pays the company and what the security sells for in the market19-12FIRM COMMITMENT UNDERWRITING•Issuer sells entire issue to underwriting syndicate•Syndicate resells issue to the public•Underwriter makes money on the spread between the price paid to the issuer and the price received from investors when the stock is sold•Syndicate bears the risk of not being able to sell the entire issue for more than the cost•Most common type of underwriting in the United States19-13BEST EFFORTS UNDERWRITING•Underwriter makes “best effort” to sell the securities at an agreed-upon offering price•Issuing company bears the risk of the issue not being sold•Offer may be pulled if not enough interest at the offer price •Company does not get the capital and they have still incurred substantial flotation costs•Not as common as it used to be19-14DUTCH OR UNIFORM PRICE AUCTIONBuyers:•Bid a price and number of sharesSeller: •Work down the list of bidders•Determine the highest price at which they can sell the desired number of shares•All successful bidders pay the same price per share.•Encourages aggressive bidding19-1519-15DUTCH OR UNIFORM PRICE AUCTION EXAMPLEThe company wants to sell 1,500 shares of stock.The firm will sell 1,500 shares at $15 per share.Bidders A, B, C, and D will get shares.19-16GREEN SHOE PROVISION•“Overallotment Option”•Allows syndicate to purchase an additional 15% of the issue from the issuer•Allows the issue to be oversubscribed•Provides some protection for the lead underwriter as they perform their price stabilization function•In all IPO and SEO offerings but not in ordinary debt offerings19-17LOCKUP AGREEMENTS•Not legally required but common•Restricts insiders from selling IPO shares for a specified time period•Common lockup period = 180 days•Stock price tends to drop when the lockup period expires due to market anticipation of additional shares hitting the Street19-1819.5 IPOS AND UNDERPRICING•IPO pricing = very difficult•No current market price available•Dutch Auctions designed to eliminate first day IPO price “pop”•Underpricing causes the issuer to “leave money on the table”•Degree of underpricing varies over time19-19IPO UNDERPRICING REASONS•Underwriters want offerings to sell out•Reputation for successful IPOs is critical•Underpricing = insurance for underwriters•Oversubscription & allotment •“Winner’s Curse”•Smaller, riskier IPOs underprice to attract investors19-2019.6 WHAT CFOS SAY ABOUT THE UNDERWRITING PROCESS•Most Common Motivations for IPO:•Create Public Shares for Use in