Selling of New Financial Assets_handout

Selling of New Financial Assets_handout - SELLING OF NEW...

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SELLING OF NEW FINANCIAL ASSETS: Means of raising external funds: public issue; private placement; and bought deal. 1. Public Offering - New securities are made available for sale to the general public. -Seasoned New Issues —Sales of new securities from a company who already has publicly traded shares outstanding. -Initial Public Offerings (IPOs) —Issuer is selling securities for the first time. A public offering can either be a cash offering or a rights offering . Cash Offering - the shares are offered for sale to investors at large. Rights offering - the firm’s current shareholders are given the right to subscribe to a new issue of securities at a specified subscription price A cash offering may be a: 1. Firm Commitment— the investment dealer purchases the entire issue at a set price on a particular day. The dealer then arranges to resell the securities to investors at a higher price. The risk of the new issue not being successful rests with the underwriter. The underwriter makes money on the spread between the purchase and the selling price. 2. Best Efforts Basis— the investment dealer attempts to sell the securities for the issuer, receiving a commission on the sales made. This is usually done with high-risk issues by relatively new companies or well established companies. The risk of the new issue not being successful rests with the corporation. 3. Dutch auction: this is a relatively new method of obtaining external finances. The selected price is not necessarily the highest but the price that results in all the securities being sold. 2. Private Placements As an alternative to a public offering, securities may be privately placed with one or more financial institutions. The financial institution buys the entire issue of securities and the terms and price of the offering is determined through private negotiations. One big advantage of private placements to the corporation is that they are exempt from the registration and disclosure requirements of the provincial securities commissions. In recent years, it has accounted for as much as 35% of total corporate financing in Canada. 4. Bought Deal The investment dealer buys the entire issue outright and then decides when and how it should be marketed. The risk of the new issue not being successful rests with the underwriter. In a bought deal the price is usually set before the filing of the prospectus and the clients are usually large wealthy investors. This often allows the investment dealers to use the POP system. Prompt offering prospectus (POP) system: Provinces from Quebec westward allow qualified firms access to the capital market without filing full prospectuses. Requirements vary across provinces. For example, in Ontario firms must have: Publicly traded equity with a market value of $75 million Filed financial statements with the securities commission for 36 months Firms file a simplified document called a short form prospectus at the time of issue Companies issuing new securities usually engage the underwriting services of an investment dealer. Role
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This note was uploaded on 01/07/2012 for the course FIN 3361 taught by Professor Mishra during the Spring '11 term at Dalhousie.

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Selling of New Financial Assets_handout - SELLING OF NEW...

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