Share Issuance Process Quiz

Share issuance is a significant event for companies looking to raise capital. This process involves the sale of new shares to investors, which can increase the company's total number of outstanding shares. There are two main types of share issuances: primary and secondary.

Authorized Shares

Authorized shares refer to the maximum number of shares a corporation can issue, as stated in its charter. These shares are not necessarily issued immediately; they serve as contingency for future capital needs. However, if a company wants to issue more shares than it has authorization for, it must first amend its charter or articles of incorporation, often referred to as "restating the certificate of incorporation".

The concept of authorized shares arises because each state has specific laws governing how many shares may be issued by each corporation formed under its jurisdiction. For example, Delaware law permits corporations to have unlimited authorized shares, while Californiaand other states restrict the amount of authorized shares to 100 million per corporation.

Issuance Process

The share issuance process typically follows these steps:

1. Underwriting Agreement: Companies usually hire investment bankers who act as underwriters to help with the issuance. The underwriter purchases the newly issued shares from the company at a discounted price and resells them to investors at a higher price known as the offering price.

2. Registration Statement: Before issuing shares, companies must file registration statements with federal and state securities agencies. These statements contain detailed financial information about the company's operations, including financial statements, management discussion and analysis, and other relevant documents.

3. Securities Act of 1933: Under the Securities Act of 1933, the registration statement must include information about the number of shares offered, their price range, underwriting discounts, and any risks associated with investing in the company.

4. Prospectus: The prospectus is essentially a summary of the information contained in the registration statement. It's designed to provide investors with enough information to make informed decisions about whether they want to invest in the company.

5. Offering Price: Once the Securities and Exchange Commission (SEC) declares the registration statement effective, the underwriter can determine the offering price based on market conditions, such as demand for the shares and the prevailing interest rates.

6. Road Show: Before making an official offer to the public, investment bankers often hold preliminary talks with potential large institutional investors in what is known as a road show. This gives them an idea of how much capital they are likely to raise from this particular group of investors.

7. Market Test: Based on the feedback from the road show, underwriters will perform a market test by sending out research notes to their clients. This allows them to gauge the level of interest among retail brokers and portfolio managers to decide if their offering price is too high or too low compared to market expectations.

8. Formal Offering: After completing these steps, the underwriter makes a formal offer to sell the securities to the general public through brokerage firms, which then distribute the securities to their clients.

Share issuance plays a crucial role in the growth and development of many companies. By understanding the process and factors involved, one can better appreciate its significance in corporate finance.