PART 4: CAPITAL STRUCTURE AND PAYOUT POLICYseasoned equity offerings have been documented in a variety of studies. As with long-run IPO returns,
however, whether or not long-run returns following SEOs are unusually low depends on the comparison
benchmark.
Most equity sales in the US fall under the category of general cash offerings, meaning that shares are
offered for sale to any and all investors. However, there is a special type of seasoned equity offering
that allows firms’ existing owners to buy new shares at a bargain price or to sell that right to other
investors. These rights offerings are relatively scarce in the United States but are growing in importance
internationally, and are more common in Australia.12- 4b RIGHTS OFFERINGS
One of the basic tenets of domestic commercial law is that shareholders have first claim on anything
of value distributed by a corporation. These pre-emptive rights give ordinary shareholders the right to
maintain their proportionate ownership in the corporation by purchasing shares whenever the firm sells
new equity. Because this strategy keeps all the gains and losses on share issues within the family, firms
usually price rights offerings well below the current market price in order to ensure that the offering
sells out and the firm raises the funds needed. The laws of most jurisdictions grant shareholders the
pre-emptive right to participate in new issues unless this right is removed by shareholder consent. Thus,
rights offerings are still common in many countries (including Australia). In contrast, in the US, the vast
majority of publicly traded US companies have removed pre-emptive rights from their corporate charter,
so rights offerings by large US companies are quite rare today.12- 4c PRIVATE PLACEMENTS
As noted earlier, a private placement involves the sale of securities in a transaction that is exempt from the
registration requirements imposed by securities law. A private placement occurs when an investment
banker arranges for the direct sale of a new security issue to an individual, several individuals, an
institutional investor or a group of institutions. The investment banker is paid a commission for acting
as an intermediary in the transaction. To qualify for a private-placement exemption, the sale of the
securities must be restricted to a small group of accredited investors, individuals or institutions that meet
certain income and wealth requirements. The rationale for the private-placement exemption is that
accredited investors are financially sophisticated agents who do not need the protection afforded by
the registration process. Typical accredited institutional investors include insurance companies, pension
funds, mutual funds and venture capitalists.
Private placements have several advantages over public offerings. They are less costly in terms of time
and money than registering with the market regulator, and the issuers do not have to reveal confidential
information. Also, because there are typically far fewer investors, the terms of a private placement are
easier to renegotiate, if necessary. The disadvantages of private placement are that the securities have
no readily available market price, they are less liquid, and there is a smaller group of potential investors
than in the public market.
As can be seen from Figure 12.7, the bulk of secondary capital raisings in Australia in 2011 (across
companies of all sizes) were through placements and rights issues. However, the allocation to these two
offer structures varied significantly by the size of the company. Companies with market capitalisations
below $500 million tended to favour placements, in contrast to the larger companies that raised a larger
proportion of funds from rights issues.general cash offerings
Share offerings sold to all
investors, not just existing
shareholders
rights offerings
A special type of seasoned
equity offering that allows the
firm’s existing owners to buy
new shares at a bargain price
or to sell that right to other
investors
pre-emptive rights
These hold that shareholders
have first claim on anything
of value distributed by a
corporation
private placement
Unregistered security
offerings sold directly to
accredited investors
accredited investors
Individuals or institutions
that meet certain income and
wealth requirements