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RAISING CAPITAL
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CHAPTER OUTLINE
19.1
19.2
Second Stage
Mezzanine financing
Begin manufacturing, marketing & distribution
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TOMBSTONE
FIGURE 19.4
Investment banks in
syndicate divided into
brackets
Firms listed alphabetically
within each bracket
Pecking order
Higher bracket =
greater prestige
Underwriting success
built on reputation
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Private Issue
Sold to fewer than 35 investors
SEC registration not required
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19.4 UNDERWRITERS
Underwriting services:
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LOCKUP AGREEMENTS
Not legally required but common
Restricts insiders from selling IPO shares for a
specified time period
Common lockup period = 180 days
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Issue costs
Issue costs for equity direct and indirect - are
significantly more than for debt
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19.9 RIGHTS
A rights offering is an issue of new common
stock to existing shareholders
Shareholders are issued options to purchase
specified number of shares at a fixed price
and specified period of time
Rights (sometime called warrants) are often
traded on exchanges and OTC.
Efficient market theory dictates that there is
no long term price advantage to acquiring
shares via rights versus the open market.
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RIGHTS (CONT.)
Shareholders can exercise their rights or sell
them
In either case, the shareholders neither win or lose
19.10 DILUTION
Dilution is a loss in existing shareholder value
caused by issuance of more stock
Three types of dilution are extant:
Dilution of percentage ownership
Dilution of market value
Dilution of Book Value and EPS
Private placements
Similar to term loans with longer maturity
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QUICK QUIZ
1. What is venture capital and
what types of firms receive it?
2. What are some of the important
services provided by
underwriters?
3. What type of underwriting is the
most common in the United
States and how does it work?
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QUICK QUIZ
4. What is IPO underpricing and
why might it persist?
5. What are some of the costs
associated with issuing
securities?
6. What are some of the
characteristics of private
placement debt?
7. What is shelf registration?
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