Floating an Issue

Definition

Floating an issue is the process of offering new shares or bonds to the public through the primary market. This process allows companies to raise capital to fund new projects, expansions, or other business activities. The steps involved typically include hiring investment banks for underwriting services, preparing a prospectus, registering the securities with the appropriate regulatory bodies, and finally offering the securities to the public.

Examples

Initial Public Offering (IPO): When a private company decides to go public by offering shares to the public for the first time, it engages in floating an issue. Facebook’s IPO in 2012 is a well-known example.
Secondary Offering: A company that is already publicly traded may choose to float an additional issue of stock to raise more capital. For example, a company might issue more shares to finance a significant acquisition.

Frequently Asked Questions

What are the primary steps involved in floating an issue?

Hiring Underwriters: Generally, a company starts by hiring one or more investment banks to underwrite the issue. Functions of the underwriters include pricing the security and buying the initial warrants.
Drafting a Prospectus: The company, along with its underwriters, prepares a detailed prospectus which provides all the relevant information about the offering to potential investors.
Regulatory Approval: The prospectus is submitted to regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States, for approval.
Marketing the Issue: Once approved, the offering is promoted through roadshows and other marketing efforts to attract potential investors.
Selling the Securities: Finally, the securities are sold to the public, either directly or through a stock exchange.

How do underwriters assist in floating an issue?

Underwriters play a crucial role in floating an issue by managing the risk and logistics associated with the new offering. They provide services such as:

Pricing guidance: Setting the initial price for the new issue.
Buying the issue: Underwriting banks may buy the issue from the company and then sell it to investors, mitigating the risk for the issuing company.
Marketing: Helping to market the issue to potential investors through roadshows and other marketing activities.

What is the difference between a primary and secondary offering?

A primary offering refers to the initial sale of securities by the issuing company to the public, typically in the form of an IPO. A secondary offering occurs when the company issues additional shares to raise more capital after the initial offering has been made.

Are there risks involved in floating an issue?

Yes, there are several risks involved:

Underpricing or Overpricing: If the security is not priced correctly, it can lead to substantial financial losses.
Market Conditions: Adverse market conditions can dampen investor interest and affect the success of the issue.
Regulatory Hurdles: Regulatory approval processes can be lengthy and complex, delaying the issuance.

New Issue

A new issue is a reference to a security that is being issued and sold to the public for the first time. This includes both stocks and bonds being offered.

Underwrite

Underwriting refers to the process by which investment banks buy all or part of a new issue of securities from a company and then resell them to the public. Underwriters assume the risk of distributing the securities and earn a fee for their services.

Online References

Suggested Books for Further Studies

Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions by Joshua Rosenbaum and Joshua Pearl
The New IPO: Taking Your Company Public, From Planning to Practice by Gregory K. Ericksen
The Complete Guide to Capital Markets for Quantitative Professionals by Alex Kuznetsov

Fundamentals of Floating an Issue: Finance Basics Quiz

### What is the primary purpose of floating an issue? - [x] To raise capital for business activities - [ ] To reduce the company's debt - [ ] To merge with another company - [ ] To distribute profits to shareholders > **Explanation:** Floating an issue primarily aims to raise capital for various business activities, such as funding new projects, expansions, or acquisitions. ### Which of the following steps typically comes first in the floating process? - [ ] Marketing the issue - [ ] Selling the securities - [x] Hiring underwriters - [ ] Drafting a prospectus > **Explanation:** The first step typically involves hiring investment banks, known as underwriters, who will help manage the issuance. ### Who plays a crucial role in determining the price of a new issue? - [ ] Shareholders - [x] Underwriters - [ ] Regulatory bodies - [ ] Customers > **Explanation:** Underwriters provide pricing guidance and set the initial price for the new issue based on market conditions and investor appetite. ### What document provides detailed information about a new security offering? - [ ] Balance sheet - [ ] Annual report - [x] Prospectus - [ ] Business plan > **Explanation:** A prospectus is prepared to provide potential investors with all relevant information about the new security offering. ### Which regulatory body in the United States oversees the approval of security offerings? - [ ] Federal Reserve - [ ] IRS - [ ] FTC - [x] SEC > **Explanation:** The Securities and Exchange Commission (SEC) is responsible for approving new security offerings in the United States. ### What is a primary offering? - [x] The initial sale of securities by a company to the public - [ ] The sale of securities between existing shareholders - [ ] A company's announcement of dividends - [ ] A company's repurchase of its own shares > **Explanation:** A primary offering refers to the initial sale of securities by the issuing company to raise capital. ### How do underwriters make money in the process of floating an issue? - [ ] Through dividends - [x] By earning a fee for their services - [ ] By buying back shares - [ ] Through government grants > **Explanation:** Underwriters earn a fee for their services which includes managing the risks and logistics of the new issue. ### What kind of marketing activities are typically involved in floating an issue? - [ ] Digital advertising - [ ] TV commercials - [x] Roadshows and investor meetings - [ ] Direct mail campaigns > **Explanation:** Roadshows and investor meetings are common marketing activities aimed at attracting potential investors. ### What is the potential consequence of underpricing a new issue? - [ ] Suspensions from trading - [x] Losses in potential capital - [ ] Legal penalties - [ ] Increase in tax liabilities > **Explanation:** Underpricing a new issue can result in losses in potential capital that the company could have raised. ### In which type of offering does a company re-issue additional shares after the initial offering? - [x] Secondary offering - [ ] Primary offering - [ ] Private placement - [ ] Direct listing > **Explanation:** In a secondary offering, a company issues additional shares to raise more capital after the initial offering has already been made.

Thank you for delving into this comprehensive guide on the nuances of floating an issue and for testing your knowledge with our sample quiz. Keep honing your skills in finance for continued success!