244 B.E. Eckbo et al.
Ta b l e 1
Flotation methods
Firm commitment. An underwriter contractually commits to purchase an entire security issue at a fixed price
discount from the public offering price. All shares are sold to the public at the same price and the underwriter
generally has the power to allocate the issue if there is excess demand. This process may involve book
building or a fixed price placing
Rights. Short lived in-the-money warrants to buy a fixed number of new shares at fixed price, which are
distributed to existing shareholders on a pro rata basis. These rights can often be resold to other investors. On
the warrant expiration date, unexercised warrants are sometimes redistributed to shareholders who do
exercise their rights
Standby rights. These contracts represent rights offers combined with a standby underwriting contract. The
underwriter guarantees to exercise all unexercised warrants delivered to them at the warrant expiration date.
Underwriter will often short-sell the stock and buy rights in the secondary market (“layoff”) during the
offering period to the lessen uncertainty about the number of unexercised warrants they will need to exercise
and to receive higher compensation. Compensation is in form of a fixed pre-commitment fee and a variable
take-up fee that is proportional to the number of rights exercised by the underwriter
Private placement. An issuer privately negotiates a sale of stock to qualified investors. There are registered
private placements and restricted private placements. Resale of the stock is generally restricted to other
qualified investors for one year, unless the issue has an effective registration statement covering the resale of
these securities. Restricted private placements are unregistered offers (no prospectus is required) that fall
under Regulation D or Regulation S. Regulation S private placements are sold outside the U.S., while
Regulation D allows private placements within the U.S. Regulation D prohibits an issuer from soliciting the
general public under Rules 505 and 506. Under Regulation D, issuers of private placements are exempt from
SEC disclosure requirements such as having a prospectus. Issuers must target mostly accredited investors
(wealthy or sophisticated investors). Issuers may distribute an offering memorandum, but cannot advertise or
solicit investors. If unaccredited investors participate in the offer, then the offering size is limited to $5
million under Rule 505, though the number of accredited investors also involved is unlimited. Under Rule
506, the offer size is unlimited, but the number of accredited investors is limited to at most 35
PIPE (Private investments in public equity). Private investment in public equity. A public company sells
equity through a privately negotiated sale. These offering may or may not include some form of issuer price
guarantee against a subsequent share price drop, but they generally include a large discount from the
security’s market price
Shelf issue. Financially strong public companies can register to sell up to a certain number of shares over the
next two years using a list of possible underwriters. The registration allows the sale of one or more equity
issues or alternatively the sale of one or more debt issues, the choice of debt or equity must be made at the
filing date
Universal shelf issue. Similar to shelf issues except that the issuer can choose to sell either debt or equity
Direct public offering. Issuer sells equity directly to investors without the use of bank as a financial
intermediary. If the sale involves interstate distribution of the securities, then a brief filing statement with the
SEC is required. A short form registration of an offering under $5 million in a 12 month period is allowed
under Regulation A. Under Regulation D, Rule 504 provides for offerings up to $1 million in a 12 month
period by filing a Form D (Form D registration or small corporate offering registration (SCOR).
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