Equity Offerings

What is an Equity offering?

• An equity offering is when a company sells shares of its stock to

investors

• Preferred Stock

or

• Common Stock

• In most equity offerings, shares of common stock are sold

Common Stock

• Each share of common stock represents a share of ownership in the

company

• Each share of common stock usually entitles the holder to one vote at

the annual meeting or in other shareholder voting events:

• Election of directors

• Votes about mergers and takeovers

• Votes about changing the company’s bylaws

• Some companies have more than one class of common stock:

• Regular voting (1 vote per share)

• Non-voting

• Supervoting (multiple votes per share)

• Multiple voting classes are often used in companies where insiders

(founding family, executives, etc.) are trying to maintain control

Preferred Stock

• Preferred Stock pays its holders a specified dividend throughout its

life

• Most preferred stock is perpetual (it has no maturity)

• Preferred stock is senior to common stock

• Preferred stock dividends must be paid before common stock dividends

Private Companies vs. Public Companies

• Public companies file their financial statements quarterly with the

Securities and Exchange Commission (the “SEC”)

• Their shares can be owned by any investor in the USA (and foreign investors)

• Their shares are usually traded on an exchange (New York Stock Exchange,

American Stock Exchange, NASDAQ)

• Private companies have restrictions on who can own their shares

• Usually only wealthy investors or large institutions can own the shares

• Private companies don’t have to file their financials with the SEC

• Trading private shares is harder, due to the lack of information and liquidity

Types of Offerings

• Private Offering – A private company company sells private shares to a

limited number of investors

• The shares are not listed on an exchange or registered with the SEC

• Only wealthy individuals or institutions are permitted to buy them

• Anyone who wants to see the financials needs to sign a confidentiality agreement

• Often done in the earlier stages of a company’s life

• Initial Public Offering (IPO) – The company sells common shares to the

public for the first time

• The shares are registered with the SEC and can be bought by anyone

• They will be listed on an exchange

• The company has to now start filing public financials (with the SEC)

• Secondary Offering – The company, which is already public, sells additional

shares of stock to public investors

• Often done to raise cash to expand, make acquisitions, or pay down debt

Primary Shares vs. Secondary Shares

• Primary shares are new shares being issued

• The company gets the cash proceeds (net of deal costs) from selling them

• Secondary Shares are shares being sold that someone already owns

• The existing owners of the shares (not the company) get the cash proceeds

from the sale

• Treasury Shares are shares that the company has bought back from

investors

• They can be canceled or can be reissued at a later date

Examples of Primary and Secondary

• IPO of Primary Shares – It is the company’s first public equity offering,

and they sell new shares (and get to keep the proceeds)

• IPO of Secondary Shares – It is the company’s first public equity

offering, and the share that are sold are existing shares owned by the

company’s founders (who get to keep the sale proceeds)

• Secondary Offering of Primary shares – It is the 2nd time that the

company has sold shares to the public, and the shares being sold are

new shares (company keeps the proceeds)

• Secondary Offering of Secondary shares - It is the 2nd time that the

company has sold shares to the public, and the shares being sold are

existing shares owned by the company’s founders (who get to keep

the sale proceeds)

Different Company Sizes

• Large Cap – the largest of the public companies, with equity market

values greater than $10 billion

• Mid-Cap – companies with equity market values $2-10 billion

• Small Cap – companies with equity market vales of $300 million to

$2 billion

• Micro Cap – companies with equity market values below $300 million

Who Sells Stock in an IPO?

• The company usually sells new shares (primary shares) to the public

investors to raise cash

• Proceeds are often used to pay down debt or fund expansion

• Existing investors may also sell some of their shares (secondary

shares) to the public

• These are often founders, management, or early investors in the company

who want to cash out or diversify their holdings

• The primary shares usually account for a majority of the shares sold

The Goals for an IPO

• Raise new funds for the company

• Give existing owners a chance to cash out of some or all of their

shares

• Make the company public, which will improve its access to capital in

the future

• Obtain a listing on a major stock exchange, which will enable

shareholders to sell their shares more easily in the future

• Diversify its shareholder base

• Increase the company’s visibility and name recognition

Dilution

• Dilution is a risk associated with equity offerings of primary shares

• The addition of more shares can reduce the earnings per share for

each existing share

• Example – the equity offering proceeds are used to pay off low-cost debt

• However, if the use of proceeds results in additional net income, then

dilution may not be a problem (EPS increases despite having more

shares)

• Example – the equity offering proceeds are used to pay off high-cost debt

• Example – the equity offering proceeds are used to acquire a business with

strong net income at an attractive price