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mini-case-ch19 - Chapter 19 Initial Public Offerings...

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Chapter 19 Initial Public Offerings, Investment Banking, and Financial Restructuring MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point where expansion throughout the entire southeast is feasible. The proposed expansion would require the firm to raise about $15 million in new capital. Because Randy’s currently has a debt ratio of 50 percent, and also because the family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $15 million. However, the family does want to retain voting control. You have been asked to brief the family members on the issues involved by answering the following questions: a. What agencies regulate securities markets? Answer: The main agency that regulates the securities market is the Securities And Exchange Commission. Some of the responsibilities of the SEC include: regulation of all national stock exchanges--companies whose securities are listed on an exchange must file annual reports with the SEC; prohibiting manipulation by pools or wash sales; controls over trading by corporate insiders; and control over the proxy statement and how it is used to solicit votes. The Federal Reserve Board controls flow of credit into security transactions through margin requirements. States also have some control over the issuance of new securities within their boundaries. The securities industry itself realizes the importance of stable markets, therefore, the various exchanges work closely with the sec to police transactions and to maintain the integrity and credibility of the system. Mini Case: 19 - 1
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b. How are start-up firms usually financed? Answer: The first financing comes from the founders. The first external financing comes from angels, who are wealthy individuals. The next external financing comes from a venture capital fund. The fund raises capital from institutional investors, usually around $70 to $80 million. The managers of the fund are called venture capitalists. The fund invests in ten to twelve companies, and the venture capitalist sits on their boards. c. Differentiate between a private placement and a public offering. Answer: In a private placement stock is sold directly to one or a small group of investors rather than being distributed to the public at large. A private placement has the advantage of lower flotation costs; however, since the stock would be bought by a small number of outsiders, it would not be actively traded, and a liquid market would not exist. Further, since it would not have gone through the SEC registration process, the holders would be unable to sell it except to a restricted set of “sophisticated” investors. Further, it might be difficult to find investors willing to invest large sums in the company and yet be minority stockholders. Thus, many of the advantages listed above would not be obtained. For these reasons, a public placement makes more sense in Randy’s situation.
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mini-case-ch19 - Chapter 19 Initial Public Offerings...

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