For
the company, there are 2 options available. Going public with an initial public
offering or selling equity to investors or bonds worth $135 million. These 2
options are very different than each other. Let us first explore what will
happen if they want to sell equity in the company.
Through
an Initial Public Offering or IPO, a company raises capital by issuing shares
of stock, or equity in a public market (Fuhrmann, 2013). But this is a family
business and privately held company so they never had to make their financial
results public or any information such as a change in the board of directors’
public, but going public means this company will have to make all these
information public. To be precise they will have to file this information with
SEC. But before they can file IPO they will have to hire an Investment Bank.
Hiring investment bank starts 12 months before going public, and the fees and
experience play crucial roles in selection.
Before going public the company
needs to make sure it has experienced management team since equity sale is
essentially selling stakes in the company, the management will have to be
accountable to investors/shareholders. And the company would need accounting
and legal team to meet SEC requirement to stay listed.
To comply with regulations the
company has to review and publish last 5 years financial statements
(Investopedia, 2018). This process starts with 6-12 before going public.
The company has to engage
investment bank for underwriting, who has prior experience with the same market
sector. The underwriting, account and any legal work will be done by the
investment bank to comply with SEC regulations.
The underwriters come up with S-1
which is required by SEC for IPO filing, S-1 is the main disclosure document
and it contains the business model, organization structure, financial
statements, competition information, employee information and the risks company
foresees. And then the company has to submit the S-1 to SEC for review and
approval until review and approval is done the company cannot come out in
public with their IPO plan.
Once SEC approves S-1, the CEO or
executives and investor relations can start road shows to increase awareness
and generate buzz. This step starts 20 days before listing.
Based on the response received from
potential investors during the roadshow, the underwriting team and company
decide on offer price and amend the prospectus to update the offer price and
date(Investopedia, 2018). 10 days before going public, underwriters start
advertising the IPO. Once everything I finalized, the company decides to list
on NYSE or NASDAQ and start trading.
Any
public company has to spend $1.5 million to comply with financial, legal and
regulatory burdens ( Fuhrmann, 2013).
Selling
share is selling the stake in the company, so the company has to publish
quarterly financials and annual financials to SEC for the regulators and
investors, the forms are known as 10-Q and 10 – K respectively.
And common
stockholder has voting right in management decisions, so selling too much share
might mean losing control from the company. Even another competitor can buy the
controlling stake from an open market, so it is important to consider how much
stake to sell.
The
process of Issuing Corporate Bonds –
The other option is to issue
corporate bonds. And selling corporate bonds do not give away ownership to the
company (SEC, n.d.). In order to issue corporate bonds, first, the company
needs to hire underwriters from Investment Bank.
First step Underwriting - The underwriters / Investment
Bank tend to initially buy the bonds. The company will not issue one single
bond worth $135 million, but many bonds worth par value or face value $1000.
The investment bank will bring in legal counsel too, which will require
throughout the journey.
Regulatory Compliance – The Company has to file the
preliminary prospectus with SEC informing them the intention to issue and sell
the bond, and this has to be done at least 20 days prior to bond issuance.
(Hoyes, n.d.).
Structuring the Bond – is another major step and the
underwriters mostly drive this. The underwriters work with potential major
institutional investors and fix coupon rate, maturity etc. The underwriter has
to inform the final outcome to trade report and compliance engine too (Hoyes,
n.d.).
Bond Market – The underwriters have to file certain paper
works with Depositary Trust and Clearing Corporation before then can commence
public selling of the bonds. And underwriter can collect their fees. (Hoyes,
n,d,)
A bond comes with a coupon rate, and this is a promise to
the bondholder that the company would pay the interest/coupon rate to the
bondholder and will return the par/face value to the bondholder upon maturity
of the bond.
And even if the company makes losses it has to make these
payments, both coupon payment and payment of maturity amount. In case the
company goes out of business and goes for bankruptcy and liquidation,
bondholder will still be able to claim the money owed to them. But, on the
bondholder do not have any claim on ownership of the company, so they do not
have any claim or say in management decision or companies upside when the
company goes public.
Credit rating agencies will periodically look into
company’s financials and may or may not revise credit rating based on outlook.
(Investor.gov, 2013).
Although the bondholder does not take part in management,
the company needs to make coupon payments and that will take away part of
earning, and that means less money to reinvest back in business, and a higher
coupon rate can damage earning and slow down company growth.
References
FuhrMann,
R. (August 2013).The Road To create An IPO. Retrieved from
https://www.forbes.com/sites/investopedia/2013/08/29/the-road-to-creating-an-ipo/#3edbc024631e
Investopedia.
(2018, April 08). Going Public. Retrieved from
https://www.investopedia.com/terms/g/goingpublic.asp
Investopedia.
(2018, January 24). Underwriting Agreement. Retrieved from
https://www.investopedia.com/terms/u/underwriting-agreement.asp
Retrieved
on 5/22/2018. Retrieved from
https://www.sec.gov/fast-answers/answers-bondcrphtm.html
Hoyes,
S(n.d.). How To Issue a Corporate Bond. Retrieved from
http://smallbusiness.chron.com/issue-corporate-bond-73963.html
Retrieved
on 5/23/2018. Retrieved from
https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/what-are-corporate-bonds
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