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Issuing Equity


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There are three categories of firm ownership, privately owned, publicly owned, and nationalized. Privately owned firms are owned by a single investor, a group of investors or a parent firm. These shares are not traded on market exchanges and are not subjected to exchange regulations and requirements. If sold, they are sold from shareholder to shareholder in private deals. Publicly owned firms are sold on share exchanges, and can openly be purchased and sold by any desiring potential shareholder. These firms are subject to exchange requirements, public trading regulations, and public firm information disclosure laws. Nationalized firms are owned by the governments of their domestic markets. Nationalized firm’s shares usually cannot be publicly traded, but governments may allow limited investment and control rights within the firm. Firms can move their stock from the private market to the public market by issuing equity.

Firms often change status over time. Most firms begin as privately owned businesses founded by entrepreneurs, which are retained by their private owners, created or seized by nationalizing governments, or become publicly traded through the public offering process. A public offering process moves firms from the private market, into the primary and then secondary marketplaces. The primary market consists of shares that are being prepared to move to public trading from private holdings and consists of several preparatory stages. To begin the process, financial firms and shares need to meet the registration requirements of financial regulation agencies in the market of share trading. These restrictions are typically based on firm size, earnings, and length of existence.

If the restrictions are cleared, shares can file for registration with regulatory bodies and submit a prospectus for approval. This statement details the firm being offered for investment, and is used to justify the investment’s approval for sale. Prospectuses are not allowed to market as for sale investments until after approval. To avoid these documents being used for the sale of investments, prospectuses must have a red border and red ink statement clearly denoting it as a pre-approval market testing document. If the firm is approved for transition to the primary market, prices scaled to investor demand will be announced by an investment bank. The approval of shares to be sold does not in any way commend the firm’s financial quality. Approvals are only for sale on the public market.

Investment Banking Roles

Investment Banks actually market and sell the potential investment shares to the marketplace. Investment banks begin polling investors to both generate and determine interest in the issuing shares. This process allows the bank to acquire data on likely buyer demographics, and allows the banks to predict and revise potential pricing of sold shares. Investment banks market new corporate securities directly to institutional and private investors via a process called underwriting. The underwriting process varies depending on the contract between the firm which is tied to the shares and the bank. Changes determine who will suffer the risk of financial loss, and can also infer the quality of the issue. If an investment is regarded as high quality, an investment bank will be more willing to accept potential financial risk. If the investment bank believes the issuing firm is a low quality issue, the bank will avoid taking financial responsibility.  Banks avoid risk from low quality businesses, and will attempt to pass financial risks for the underwriting process onto the firm rather than accept potential perils. Banks generally consider an issue to be low quality if they believe the shares will not sell or the issuing firm’s financials are poor.

Underwriting can occur in one of five different ways. Our listings are in alphabetical order, not in order of occurrence, preference, or risk.

All or None

The first method for underwriting shares when issuing equity is “All or None”. In this arrangement, a firm will issue shares to the market if the investment bank successfully finds a purchaser for all shares within the issue. If shares are not sold, the IPO is canceled. The investment bank accepts the requirement to make their best efforts to sell shares from the issuer. In “All or None” issuing, the firm issuing the shares has the risk of loss due to failure of the sale occurring. The investment bank has a low amount of risk. The bank never purchases the shares, but they will only receive commission if they successfully sell all shares.

Best Efforts

The second method for underwriting shares when issuing equity is the “Best Efforts” underwriting. Investment bank sells sell shares on the behalf of firms but does not purchase any shares. For each share sold the investment bank receives a commission, but since they do not purchase shares they do not incur risks from marketing failure. Any unsold shares will be returned to the share issuer. This method of sale is preferable when an investment bank desires no liability for the results of the issue. This is specifically used if the investment bank believes the issue will be a low quality issue.

Firm Commitment

The third method for underwriting shares when issuing equity is known as “Firm Commitment”. In this method of underwriting, the bank purchases all shares of the issue up front, from its own cash pool. The issuing firm accepts the cash and allows the investment bank to sell shares however it wants. The investment bank increases the prices and sells the shares to the public, keeping its profit. This method of underwriting gives the investment bank the highest amount of risk, and gives the issuing firm the lowest amount of risk. If the shares fail to sell, the bank will absorb are large measure of loss. Banks typically only use Firm Commitment with extremely high quality issues.

Minimum to Maximum

The fourth method for underwriting shares when issuing equity is the “Minimum to Maximum” method. With this method of underwriting, issuing firms require shares to sell above a minimum amount for a public offering to occur. Either the issuing firm, or the investment bank, will set a maximum amount of shares that can be sold on the market. The public offering will limit at this level. An investment bank does not have to purchase the left over shares, and collects commission from share sales on a per share basis if the minimum share requirement is met. The issuer takes risk for failure to sell shares.


The last method for underwriting shares when issuing equity is the “Stand-By” method. This method of underwriting requires banks to make a best effort to sell shares, but any shares not sold by the issuer must be purchased by the investment bank. If the issue fails completely the investment bank must purchase all the shares. Risk for failed issues is fully absorbed by the investment bank. This method of underwriting is used by firms with a relatively high likelihood for issuing equity successfully, but a lower quality than “Firm Commitment” issues.

Initial Public Offering

After firms and banks agree on the method for underwriting shares when issuing equity, shares enter the initial public offering phase. This phase is the actual sale of shares on the market on a specific financial share exchange. Private and venture capital investors who do not wish to hold public shares exit the investment by selling their shares to the market. This is the first time public shareholders can invest in a firm; highly desired firms have high competition for their shares during an initial public offering. This causes a firm’s shares to spike in price, and typically immediately decrease after the IPO. You’d be wise to avoid the competition for shares, let prices settle, at which point the prices usually decrease.

After an IPO shares are officially traded within the secondary market. The secondary market consists of investment securities being traded between investors.  Shares often face secondary issues. Secondary issues occur when firms already trading publicly release more shares onto the secondary market. These shares have never been released before. It’s important to note that secondary share releases dilute holdings of previous investors, reducing the value of their shares and their control over the company. There are categories of share releases that do not qualify as secondary issues, these are firms previously released by the firm and then re-purchased to be kept in treasury.

Treasury Shares

Treasury shares have previously been issued or released, purchased by the firm from the secondary market, and are deposited within the firm’s treasury. This share category only consists of previously released shares, and never consists of shares that have not been issued to the public. The purchase of shares for the treasury occurs through share buyback programs. Share buybacks are generally considered positive events. Investors gain capital from selling their shares back to the firm and the price for share buyback is higher than open market prices. Total shares outstanding is reduced, increasing the value of remaining shares. Control percentages of investors who do not sell shares are increased. Importantly, share buybacks may indicate a firm is financially stable enough to devote earnings and profit to boosting its share price.

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