Introduction to Corporate Finance

12: Raising Long-Term Financing

If the purpose of the offering is to allow an existing shareholder to sell a large block of shares to new investors,

the issue is a secondary offering and raises no capital for the firm. If the shares offered for sale are newly issued

shares, which increase the number of outstanding shares and raise new capital for firms, the issue is a primary

offering. If some of the shares come from existing shareholders and some are new, the issue is a mixed offering.

The process is similar in New Zealand, where the key regulators are the NZX Market Supervision, the

NZX Markets Disciplinary Tribunal and the Financial Markets Authority. The NZX Market Supervision

supervises market participants and issuers, and assists the Financial Markets Authority under the

Securities Markets Act 1988. The NZX Markets Disciplinary Tribunal investigates and enforces matters

in relation to the conduct of parties regulated by NZX’s market rules, and the Financial Markets Authority

enforces applicable securities, financial reporting, and company law.

example

The Financial Engines IPO was a mixed offering. The

company itself was issuing 5,868,100 new shares to

raise US$70.42 million, and intended to use the net

proceeds from this offering for general corporate

purposes, including working capital and capital

expenditures. A group of existing shareholders sold

an additional 4,731,900 shares, netting themselves

US$56.78 million.

Ongoing Regulatory Requirements for a Publicly Traded Company

Once a company successfully completes an IPO and lists its shares for trading on an exchange, it

becomes subject to all the costs and reporting requirements of a public company. These include cash

expenses, such as exchange-listing fees and the cost of preparing and distributing proxies, annual reports

and other documents to shareholders. Additionally, public companies must hold general shareholders’

meetings at least once each year and must obtain shareholder approval for important decisions, such

as  approving a merger, authorising additional shares and approving new share option plans. The most

costly regulatory constraints on public companies are the disclosure requirements for the firm, its officers

and directors, and its principal shareholders. In essence, the company must report any material change in

its operations, ownership or financing. Once a firm goes public, life becomes very public indeed.

2 What does the phrase bulge bracket mean?

3 What is the guiding principle behind most securities legislation? What role does the security

registration process play in implementing this philosophy?

CONCEPT REVIEW QUESTIONS 12-2

12-3 THE MARKET FOR INITIAL PUBLIC

OFFERINGS (IPOs)

Given its role in providing capital market access to entrepreneurial growth companies, the US initial

public offering (IPO) market has long been considered a vital economic and financial asset. Indeed, a

LO 12.4