8.) Raising Capital using the London Stock Exchange Flashcards
Define why New Issues (IPOs) occur
New Issues (IPOs - Initial Public Offerings) occur when a company is seeking to raise capital from investors for the first time via the primary market on the LSE. The company is looking to float its shares on a public market
Define the acronym IPOs
Initial Public Offerings
Define the 2 markets which enable companies to make their shares available to the public
The listed securities market (the official list or a full listing)
The alternative investment market (AIM)
Define the acronym AIM
Alternative investment market
Define the benefits of a company being listed on the stock market
Access to a wider capital base, therefore making it potentially easier to raise capital
Company gains prestige from being quoted due tot he extensive listing requirements
Shares become freely marketable, enabling the company to consider future takeovers and mergers as its shares become consideration
Company may find it easier to raise debt finance due tot greater confidence/credit rating
Can raise further capital via secondary offerings, I.e. rights issues
Improved marketability of the company’s shares, I.e. employee share scheme
Define the drawbacks of a company being listed on the stock market
A listing requires a high degree of regulation and disclosure of information, with any adverse factors quickly becoming public knowledge and reflecting in the share price
Adhering to the regulation requirements requires bets practices to be implemented in systems, documentation and employee qualifications and competency levels - this can all become costly for the company
Shareholders are the owners of the company, with investor power resting with the shareholders, and day-to-day management resting with the directors
Shareholders will expect a year on year increase in dividends, which will require the company to perform year on year and manage the expectations of the shareholders also
A listed company will be affected by general market conditions, with its share price being susceptible to volatile movements in markets not attributed specifically to the company
Define where one might find the listing requirements for a full listing or admission onto the ‘Official Market List’
Listing requirements for a full listing or admission onto the official list are laid down in the UK Listing Authority (I.e. The FCA’s) Purple Book. This details all the conditions which must be met by all companies before their securities can be quoted on the stock exchange.
Define Listing Particulars, in terms of gaining a full listing or admission onto the ‘Official Market List’, and the information included in them
Potential investors and the stock exchange itself must be provided with detailed information about the company to be listed, which takes the form of a published document, called the Listing Particulars
Information included in the Listing Particulars includes:
The name of the issuing house
Details of the capital structure of the company
Names and addresses of directors, bankers, lawyers, auditors
History and description of the company
Details of the directors and their interests
Statement regarding the adequacy of working capital
Full financial information, including profit and loss accounts, balance sheets and cash flow forecasts
Note that the details contained in the Listing Particulars appear in a prospectus for potential investors to review
Define why companies issue shares
To raise capital
Define the requirements that a company must comply with if it is to be admitted to the Official Market List of the Stock Market
The securities must be freely transferable
Total market capitalisation must be at least £700,000 in shares and £200,000 in debt securities
At least 25% of the issued ordinary share capital must be made available to the public
The company must have a 3 year trading record
Upon approval, the company must undertake to join in Continuing Onligations, I.e. matters which the company must continue to carry out in order to maintain its listing
Issues of securities for cash must be offered to the existing equity shareholders in proportion to their holdings
Define the purpose of the AIM
To meet the requirements of small, young and potentially fast-growing companies, which need simple, cost effective access to a capital market
Define the requirements that a company must comply with if it is to float on the Alternative Investment Market (AIM)
Appoint a nominated adviser who will be responsible for policing the company to ensure that it meets the markets regulatory requirements
Publish a prospectus which includes details of the company, directors, financial results
Enter into ongoing obligations with the LSE
There are NO minimum requirements for any percentage of share capital to be made available to the general public
A trading record is NOT essential
Define obligation
An obligation in finance is the responsibility to meet the terms of a contract. If an obligation is not met, the legal system often provides recourse for the injured party.
Define the Alternative Investment Market (AIM)
A sub-market of the London Stock Exchange that allows smaller companies to participate with greater regulatory flexibility than applies to the main market, including no set requirements for capitalization or the number of shares issued.
The Alternative Investment Market is the London Stock Exchange’s global market for smaller and growing companies.
As of 2010, more than 3,000 international companies have joined the Alternative Investment Market (AIM) since its launch in 1995.
AIM seeks to assist smaller and growing companies in raising growth capital.
Early stage businesses, venture capital-backed companies and more established businesses may join AIM to help raise the capital necessary for expansion.
AIM is owned by the London Stock Exchange Group.
Define the LSE’s Main (see: official) Market
The Main Market is London’s flagship market for larger, more established companies, and is home to some of the world’s largest and most well-known companies.
It is usually reserved for larger, more established companies, as it has exacting requirements that must be fulfilled in order to join.
Define the stages required in order to obtain for a company to obtain a listing on the LSE’s official (see: main) list
The method chosen will depend upon the advice given to the company by its advisors and the amount of capital the company wishes to raise
The stages that will have been undertaken before the shares are floated on the stock exchange include (Note that the following stages can take at least 6 months to complete):
Company securing an issuing house/sponsor
Accountants preparing a long-form report
Documenting the Listing Particulars
Filing the Listing Particulars with the U.K. Listing Authority for approval
Documenting a prospectus for potential investors
Issuing a pathfinder prospectus if required
Determining the number and issue price of the shares
Define the main features of using the ‘offer for sale’ method to float a company on the official (main) list of the LSE
If a company chooses to float, using the offer for sale method, the main features of this approach include:
An issuing house purchases the stages from the company
The shares are offered to the public, including institutions
Application forms and prospectuses are advertised in the national press
The offer can be at a fixed price or a tender price
The issue can be either over or under-subscribed. If under subscribed, underwriters will step in
Applications forms and prospectuses are advertised in the ahtionalmpress
Define the different methods in obtaining a stock exchange listing
Offer For Sale method
The placing method
The introduction method
Define the main features of using the ‘placing’ method to float a company on the official (main) list of the LSE
Also known as Selective Marketing
Shares offered to the public selectively by a sponsoring broker, I.e. to those clients that the broker knows will buy the shares (mainly large institutions)
A placing with financial intermediaries is known as an intermediaries offer
Private investors can apply for the shares through a stockbroker
Define the definition of and main features of using the ‘Introduction’ method to float a company on the official (main) list of the LSE
The introduction method is used when a company upgrades from a junior market to the official list, or when a company is already quoted on a foreign stock exchange, and wishes to obtain a UK listing on the LSE. Key features include:
The proportion of shares held in public hands already meets stock exchange requirements
No new capital is raised
Existing shares are simply listed, and there’s no opportunity for new investors to take part
Define a capitalisation issue, and why a company will make one
Also referred to as a bonus issue or scrip issue
Made by a company to increase the number of shares in issue, but no new capital is raised. The new shares are first offered to existing shareholders on a pro-rats basis, e.g. one new share for every four shares held (1 for 4)
A company will make a capitalisation issue for several reasons:
Share price is becoming extremely high and shares are less attractive to investors
Shareholder perk and/or replacement of a dividend payment
Book-keeping exercise to ‘tidy-up’ its balance sheet and reserve accounts
Define and describe the effect of a capitalisation issue on a company’s balance sheet
The effect of a capitalisation issue is to transfer the company’s reserves (share premium account, revaluation of assets, retained proctors, etc) to share capital, thereby increasing the number of shares and causing the price per share to fall.
The effect on a simplified balance sheet before and after a capitalisation (or bonus) issue is as follows:
Ordinary shares :
(Before)£200,000
(After) £250,000
Share Premium Account
(Before)£60,000
(After) £10,000
Reserves
(Before) £140,000
(After) £140,000
Net Assets
(Before) £400,000
(After) £400,000
Number of Ordinary Shares
(Before) 400,000 X 50p
(After) 500,000 X 50p
Note that the balance sheet is neither stronger nor weaker; the assets remain the same. The company has simply used its reserves (from the share premium account) to fund the capitalisation issue, and as a result there has been a change in the way the shareholder’s funds are shown
Define the effect that a capitalisation issue would have on the price of a company’s shares listed on the stock exchange
The price of shares in the market after the capitalisation issue, the ex-cap price, will, all things being equal, fall in direct proportion to the increase in share capital.
For example, a company whose shares were priced in the market at 250p before a 1 for 4 bonus issue, would likely see shares drop in value to 200p:
400,000 shares X 250 = 1,000,000
100,000 shares X free = 0
500,000 shares total = 1,000,000 total
One share is worth 200p
Note that there are a variety of factors that may prevent the ex-cap price from falling in direct proportion to the capitalisation (bonus) issue, e.g. market conditions at the time. The lower share price may make the shares more attractive and therefore increase demand and its price.
Define how the number of shares allocated to a shareholder following a capitalisation (bonus) issue are indicated
In order indicate the number of shares allocated to a shareholder following a capitalisation (bonus) issue, the shareholder receives a renounceable certificate showing the number of shares they are entitled to.
Should the shareholder wish to sell their allocated shares, they simply have to sign the reverse of the certificate
Define the difference between a share split and a consolidation
A share split occurs when a company REDUCES the nominal (par) value per share, without altering the value of its nominal share capital.
The effect on the share price is the same effect caused by a bonus issue, all things being equal.
A share split INCREASES the number for shares in issue
A consolidation, the opposite of a share split, occurs when a company INCREASES the nominal (par) value per share, without altering the value of its total nominal share capital.
A consolidation REDUCES the number of shares in issue
Define a consolidation
A consolidation, the opposite of a share split, occurs when a company INCREASES the nominal (par) value per share, without altering the value of its total nominal share capital.
A consolidation REDUCES the number of shares in issue
Define a share split
A share split occurs when a company REDUCES the nominal (par) value per share, without altering the value of its nominal share capital.
The effect on the share price is the same effect caused by a bonus issue, all things being equal.
A share split INCREASES the number for shares in issue
Define a rights issue
A rights issue is an issue of new shares to existing shareholders in proportion to the number of shares already held by each shareholder, I.e. 1 new share for every 4 shares held, in return for capital Invetsment
The existing shareholders are simply being asked to invest more in the company, and in doing so the company can raise more capital
Define the key features of a rights issue
Existing shareholders have a statutory first right to subscribe for the new shares
The new shares carry the same rights as the old shares - they rank equally with the old shares
The price to be paid for the new shares, subscription price, is usually below the market value of existing shares in order to encourage shareholder take up
The amount of new shares offered depends on the terms of the issue, and is usually expressed as ‘X’ number of shares for every ‘Y’ shares held
Companies will usually have their rights issue underwritten by banks (for a fee) to ensure success of the issues
Define the theoretical ex-rights price, and how it is calculated
The markets price of the shares after the rights issue is known as the theoretical ex-rights price. This is the price that all shares, new and old, will be expected to reach once the rights issue has been completed and the new shares are fully paid. It can be calculated as follows:
Company X makes a rights issue on a 1 for 4 basis. Current market price is 160p per share, with subscription price for new shares at 120p, the theoretical ex-rights price would be:
Step 1: 4 old shares at 160p = 640p
Step 2: 1 new share at 120p = 120p
Step 3: 5 shares worth = 760p
Step 4: 1 share worth = 152p is the theoretical ex-rights price
Since the new shares are expected to be worth 152p, and the payment made to the company is 120p, the price of the shares in their nil-paid form will be 32p, I.e. the amount that the company will not be paid, calculated by deducting the subscription price from the ex-rights price
Step 5: 152 - 120 = 32p nil paid form
If the shareholder were to sell the rights attached to an old share, the value of this would be the market price of share prior to the rights issue minus the ex-rights price:
Step 6: 160p - 152p = 8p
Define the 3 options an investor has in the way they deal with the extra shares they are entitled to after a rights issue
After a rights issue, the investor will receive a provisional allotment letter that details the extra shares that the investor is entitled to. The investor has roughly 2-3 weeks to decide which of the 3 following choices to make:
Take up the shares in full
Sell the rights
Let the rights lapse
Define the option to ‘take up shares in full’, it being one of the options an investor has when choosing how to deal with the extra shares they are entitled to after a rights issue
If the investor accepts the full entitlement, then the shares must be paid for in full.
The investor will pay the amount due and forward payment together with the allotment letter received (detailing the extra shares that the investor is entitled to).
A share certificate will replace the fully-paid allotment letter, which is receipted and returned to the investor
Define the option to ‘sell the rights’, it being one of the options an investor has when choosing how to deal with the extra shares they are entitled to after a rights issue
The investor’s rights to the extra shares can be sold through a stockbroker
The cash value of the rights less dealing costs will be he difference between the ex-rights price and the subscription price.
Selling the rights either in full or in part is referred to as ‘renouncing the rights’, and the form of renunciation on the allotment letter can be signed to put this into effect.
Some investors may decide to sell sufficient rights to finance the purchase of the balance of the allotted shares
Define the option to ‘let the rights lapse’, it being one of the options an investor has when choosing how to deal with the extra shares they are entitled to after a rights issue
If the investor decides to do nothing at all, or misses the deadline (2-3 weeks, for deciding which of the 3 actions to take regarding their entitlement to the new shares) the company who has undertaken the rights issue will automatically sell the investor’s entitlement and remit the proceeds to the investor.
Commission charges should be negligible as the company can combine numerous small transactions into one large transaction.
However, market forces may dictate that the price of the rights might fall due to a lot of unused rights being sold
Define the factors that could affect an investor’s decision on which of the 3 options, for dealing with the extra shares they are entitled to after a rights issue, to go for
The terms and reasons for the rights issue
How the financial press has greeted the news
The rights issue will depress the share price of the shares in the short term
