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Raising Capital Flashcards

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1
Q

What are the two primary methods for raising capital in company law?

A

Companies raise capital through debt (e.g., loans and bonds) and equity (e.g., issuing shares).

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2
Q

What does Section 755 of the Companies Act 2006 prohibit?

A

Section 755 prohibits private companies from offering shares to the public.

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3
Q

What is the minimum share capital required for a public company under Section 763 of the Companies Act 2006?

A

Public companies must have a minimum share capital of £50,000.

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4
Q

What distinguishes listed public companies from non-listed public companies?

A

Listed public companies have their shares traded on stock exchanges like the LSE, while non-listed companies do not.

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5
Q

What are the two main markets operated by the London Stock Exchange (LSE)?

A

The Main Market for established companies and AIM (Alternative Investment Market) for smaller, growth-oriented companies.

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6
Q

What is the role of the Financial Conduct Authority (FCA) in capital-raising?

A

The FCA regulates the issuance of securities, reviews prospectuses, enforces listing rules, and ensures market transparency.

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7
Q

What is a prospectus, and why is it required?

A

A prospectus is a detailed document outlining a company’s financials, risks, and governance. It informs potential investors and ensures transparency.

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8
Q

What is an ‘offer for subscription’ in the context of raising capital?

A

An offer for subscription is when a company offers shares directly to the public, often using advertisements to attract investors.

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9
Q

What is a ‘rights issue,’ and what statutory provision governs it?

A

A rights issue offers new shares to existing shareholders in proportion to their holdings. It is governed by Section 561 of the Companies Act 2006.

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10
Q

What are pre-emption rights under Section 561 of the Companies Act 2006?

A

Pre-emption rights give existing shareholders the first opportunity to purchase new shares before they are offered to others.

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11
Q

How does the FCA ensure compliance with disclosure rules?

A

The FCA enforces the Disclosure and Transparency Rules under Section 96 of FSMA, requiring companies to disclose material information affecting share prices.

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12
Q

What is the role of the UK Corporate Governance Code in capital-raising?

A

The Code promotes governance standards for listed companies, such as having independent directors and transparent audit committees.

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13
Q

What is the purpose of Section 417 of the Companies Act 2006?

A

It mandates listed companies to produce a business review detailing performance, risks, and stakeholder impacts.

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14
Q

What is the purpose of the City Code on Takeovers and Mergers?

A

The Code ensures fair treatment of shareholders during takeovers, promoting equality and transparency.

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15
Q

What triggers a mandatory cash offer under the City Code on Takeovers and Mergers?

A

A bidder acquiring 30% or more of a company’s voting shares must make a mandatory cash offer to all shareholders.

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16
Q

What does Section 979 of the Companies Act 2006 allow in takeovers?

A

It allows majority shareholders with 90% ownership to compel minority shareholders to sell their shares.

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17
Q

What constitutes insider dealing under the Criminal Justice Act 1993?

A

Insider dealing involves trading based on non-public, price-sensitive information to gain an unfair advantage.

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18
Q

What are the penalties for insider dealing under the Criminal Justice Act 1993?

A

Insider dealing can lead to fines, imprisonment, or both.

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19
Q

How does the Market Abuse Regulation (MAR) address insider dealing?

A

MAR imposes civil sanctions, such as fines and public censures, for insider dealing and market manipulation.

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20
Q

What is the Prospectus Regulation (EU) 2017/1129, and how does it affect small offers?

A

It simplifies disclosure requirements for small offers under €1 million and reduces compliance costs.

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21
Q

How does the FCA enforce investor protection in public offers?

A

By reviewing prospectuses, penalizing misleading disclosures, and ensuring timely information disclosure under FSMA.

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22
Q

What is an ‘offer for sale’ in capital-raising?

A

In an offer for sale, the company sells shares to an issuing house, which then sells them to the public.

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23
Q

What is the role of institutional investors in a placing?

A

Institutional investors are offered shares directly in a placing, which is a quicker method to raise funds without a public offer.

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24
Q

What are the continuing obligations for listed companies under FSMA?

A

Listed companies must disclose price-sensitive information and comply with governance standards to maintain investor confidence.

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25
Q

How do takeovers contribute to corporate governance?

A

Takeovers incentivize efficient management and allow control to shift to more competent parties if management underperforms.

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26
Q

What is the role of the Panel on Takeovers and Mergers?

A

The Panel administers the Takeover Code, ensuring fair treatment of shareholders and transparency in takeover processes.

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27
Q

What are the consequences of breaching FSMA listing rules?

A

Breaches can lead to fines, public censures, and, in severe cases, suspension or delisting of a company.

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28
Q

How does the FSMA address misleading prospectuses?

A

It imposes liability for damages, restitution, or rescission of contracts when investors rely on false or misleading information.

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29
Q

What is the role of AIM (Alternative Investment Market)?

A

AIM provides a platform for smaller, growth-oriented companies to raise capital with lighter regulatory requirements.

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30
Q

How do investor protection mechanisms under the Transparency Directive enhance market confidence?

A

By requiring timely disclosure of significant shareholdings and ensuring that ownership changes are promptly communicated.

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31
Q

What is the minimum share price required for a public offering under LSE listing rules?

A

The share price must be at least £1 to meet the minimum denomination for listing on the Main Market.

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32
Q

How does a ‘lock-up period’ affect new capital issuances?

A

A lock-up period restricts initial investors from selling their shares for a set period after issuance to stabilize share prices.

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33
Q

What is the key requirement for pre-emptive offers under Section 561 of the Companies Act 2006?

A

Existing shareholders must be given the right to buy new shares proportionate to their current holdings before they are offered to others.

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34
Q

What does Section 585 of the Companies Act 2006 address regarding share allotments?

A

It prohibits public companies from allotting shares unless the minimum subscription has been met.

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35
Q

What are the penalties for non-compliance with insider trading rules under MAR?

A

Civil penalties include fines, suspension from trading, and compensation orders, while criminal penalties may involve imprisonment.

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36
Q

What does a ‘green shoe option’ allow in capital-raising?

A

It permits underwriters to issue additional shares to stabilize share prices when demand exceeds expectations.

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37
Q

How do share repurchase programs impact capital structure?

A

Share repurchases reduce the number of outstanding shares, increasing the value of remaining shares and potentially signaling financial strength.

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38
Q

What role do underwriting agreements play in share offerings?

A

Underwriters guarantee the purchase of shares not sold during a public offering, reducing risk for the issuing company.

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39
Q

How does Section 585 protect public investors during a share offering?

A

By requiring that shares are not allotted unless the minimum subscription amount is met, ensuring sufficient funding for the company.

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40
Q

What is the effect of a ‘stabilization period’ after an IPO?

A

It allows underwriters to buy shares in the market to support the price, preventing excessive volatility immediately after listing.

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41
Q

What are convertible bonds, and how do they assist in raising capital?

A

Convertible bonds are debt instruments that can be converted into shares of the company at a later date, combining fixed income with potential equity upside.

42
Q

What is the purpose of Section 755 of the Companies Act 2006 for private companies?

A

It prohibits private companies from offering shares to the public, limiting their capital-raising options to private funding sources.

43
Q

What is a ‘bookbuilding process’ in the context of capital-raising?

A

It is a method used during public offerings to determine the price and demand for shares by collecting bids from institutional investors.

44
Q

How does the Alternative Investment Market (AIM) support smaller companies?

A

AIM provides a lighter regulatory framework, enabling smaller companies to raise capital and list their shares with fewer compliance burdens.

45
Q

What does Section 586 of the Companies Act 2006 require in terms of share payment?

A

It mandates that public company shares must be paid for in cash or other readily valuable consideration before allotment.

46
Q

What is the difference between a primary market and a secondary market?

A

The primary market involves issuing new securities directly from the company to investors, while the secondary market involves trading existing securities between investors.

47
Q

How does a ‘rights issue’ differ from a ‘bonus issue’?

A

A rights issue offers additional shares to existing shareholders at a discount for payment, while a bonus issue provides free shares from reserves to shareholders proportionately.

48
Q

What is the significance of a ‘trading suspension’ for listed companies?

A

It temporarily halts trading of a company’s shares, often to protect investors from volatile or uncertain market conditions related to the company.

49
Q

What does the term ‘market capitalization’ mean in the context of raising capital?

A

Market capitalization refers to the total market value of a company’s outstanding shares, reflecting its size and investment potential.

50
Q

How does shareholder dilution occur during capital-raising?

A

Dilution happens when a company issues new shares, reducing the ownership percentage of existing shareholders unless they participate in the issuance.

51
Q

What is the impact of a ‘capital reduction’ under the Companies Act 2006?

A

A capital reduction allows companies to decrease their share capital, often to return funds to shareholders or eliminate accumulated losses.

52
Q

What are ‘ordinary shares,’ and how do they differ from ‘preference shares’?

A

Ordinary shares grant voting rights and dividends based on profitability, while preference shares offer fixed dividends but typically no voting rights.

53
Q

How does the principle of ‘equal treatment’ apply during a takeover?

A

All shareholders must be treated equally, ensuring that no preferential terms are offered to certain shareholders over others during a bid.

54
Q

What is a ‘shelf registration,’ and how does it facilitate capital-raising?

A

It allows a company to register securities in advance and issue them later, providing flexibility and speed in raising funds when market conditions are favorable.

55
Q

How does Section 981 of the Companies Act 2006 support compulsory acquisitions?

A

It enables majority shareholders to acquire the remaining minority shares once 90% of shares in a company are owned.

56
Q

What is the function of a ‘placing agreement’ in a public offering?

A

It outlines the terms under which shares are allocated to selected institutional investors, streamlining the capital-raising process.

57
Q

What is the significance of ‘pre-IPO funding’?

A

Pre-IPO funding involves raising capital from private investors before going public, helping companies build financial strength and credibility.

58
Q

How do ‘dividend reinvestment plans (DRIPs)’ indirectly assist in raising capital?

A

DRIPs allow shareholders to reinvest dividends into additional shares, providing the company with retained earnings for growth without external funding.

59
Q

What role does a ‘sponsor’ play in the listing process?

A

Sponsors are financial institutions that guide companies through the listing process, ensuring compliance with regulatory and disclosure requirements.

60
Q

How does the London Stock Exchange’s ‘free float’ requirement impact capital-raising?

A

The free float rule mandates that a minimum percentage of shares must be publicly available for trading, ensuring sufficient liquidity for listed companies.

61
Q

What is the purpose of a ‘green shoe option’ in public offerings?

A

It allows underwriters to sell additional shares if demand exceeds expectations, stabilizing the share price post-IPO.

62
Q

How does a ‘reverse takeover’ differ from a traditional takeover?

A

In a reverse takeover, a smaller company acquires a larger one, often using the larger company’s public listing to gain stock market access.

63
Q

What is the importance of Section 593 of the Companies Act 2006 for non-cash considerations?

A

It requires that non-cash assets used to pay for shares in public companies are independently valued, ensuring fair valuation.

64
Q

What is the ‘minimum subscription’ requirement in public offerings?

A

It is the minimum amount of capital that must be raised for a share offer to proceed, protecting investors from underfunded ventures.

65
Q

How does the ‘lock-up period’ work in capital-raising?

A

A lock-up period restricts insiders from selling shares for a specified time post-IPO to stabilize the share price and build market confidence.

66
Q

What is a ‘placing document,’ and when is it used?

A

A placing document outlines key details about shares offered through a private placing, targeting institutional investors instead of the public.

67
Q

How does the ‘prospectus passporting’ system under EU law (pre-Brexit) assist companies?

A

It allowed companies to use an approved prospectus in one EU member state to raise capital in others, simplifying cross-border capital-raising.

68
Q

What are the FCA’s penalties for breaches of the Market Abuse Regulation?

A

Penalties include fines, public censures, and bans from market activities to deter insider trading and market manipulation.

69
Q

What is the function of an ‘initial public offering (IPO)’?

A

An IPO allows a private company to raise capital by offering shares to the public for the first time, enabling broader investor participation.

70
Q

How does a ‘debt-for-equity swap’ impact a company’s capital structure?

A

It converts debt into equity, reducing liabilities while increasing shareholder base, often used during financial restructuring.

71
Q

What is the role of an ‘anchor investor’ in capital-raising?

A

Anchor investors commit to purchasing a significant share of the offering, boosting confidence and attracting other investors.

72
Q

How does Section 561 of the Companies Act 2006 protect pre-emption rights?

A

It ensures existing shareholders are offered new shares before outsiders, maintaining their proportional ownership.

73
Q

What is a ‘capital call’ in private companies?

A

A capital call requires shareholders to contribute additional funds as agreed, often used in startups and investment funds.

74
Q

How does the ‘weighted average anti-dilution clause’ protect investors?

A

It adjusts conversion ratios during down-round financing, protecting early investors from excessive dilution when shares are issued at lower prices.

75
Q

What does Section 585 of the Companies Act 2006 stipulate regarding capital subscriptions?

A

It mandates that subscriptions must be fully paid in cash or assets before shares are allotted in a public company.

76
Q

How does ‘private equity’ differ from ‘venture capital’?

A

Private equity focuses on mature companies for buyouts or restructuring, while venture capital targets early-stage startups with high growth potential.

77
Q

What is the purpose of a ‘roadshow’ in public offerings?

A

A roadshow involves presentations to potential investors to generate interest.

78
Q

What is the purpose of a ‘roadshow’ in public offerings?

A

A roadshow involves presentations to potential investors to generate interest and gauge demand before a public offering.

79
Q

How does ‘crowdfunding’ facilitate raising capital for startups?

A

Crowdfunding pools small investments from a large group of people via online platforms, democratizing access to capital for early-stage ventures.

80
Q

What is the ‘price discovery process’ during a public offering?

A

It determines the offer price of shares based on demand, market conditions, and institutional investor feedback.

81
Q

How does the FCA ensure fairness in capital markets?

A

The FCA enforces regulations like the Prospectus Rules and Market Abuse Regulation, ensuring transparency, fair trading, and investor protection.

82
Q

What is the role of a ‘syndicate’ in an IPO?

A

A syndicate is a group of investment banks collaborating to underwrite and distribute the shares being offered in an IPO.

83
Q

How does a ‘share premium account’ arise in equity raising?

A

It arises when shares are issued at a price higher than their nominal value, with the excess recorded in a share premium account.

84
Q

What is the purpose of a ‘stabilization mechanism’ in an IPO?

A

It involves buying back shares post-listing to reduce price volatility and maintain investor confidence.

85
Q

How does a ‘convertible bond’ work in capital-raising?

A

It is a hybrid security that allows bondholders to convert debt into equity at a predetermined price, balancing debt with potential ownership.

86
Q

What is a ‘shelf registration’ under the Prospectus Directive?

A

It allows companies to issue multiple tranches of securities under a single prospectus over a specified period, simplifying capital-raising.

87
Q

What protections do pre-emption rights offer to shareholders?

A

They ensure that existing shareholders have the first right to purchase new shares, preventing dilution of their ownership stakes.

88
Q

How does the ‘Bookbuilding’ process assist in IPO pricing?

A

Bookbuilding collects investor demand at various price levels, helping underwriters set the final offer price for shares.

89
Q

What is the role of the ‘Alternative Investment Market (AIM)’ in capital-raising?

A

AIM provides a less regulated environment for small and medium-sized enterprises to raise capital compared to the main market.

90
Q

What is the significance of ‘free float’ in public listings?

A

It refers to the percentage of shares available for public trading, affecting liquidity and investor interest in the stock.

91
Q

How does a ‘green bond’ support sustainable capital-raising?

A

Green bonds raise funds for environmentally friendly projects, appealing to socially responsible investors.

92
Q

What is the effect of ‘call options’ in equity capital markets?

A

Call options give investors the right to purchase shares at a set price, often used in employee stock options.

93
Q

How does ‘dual listing’ benefit a company?

A

Dual listing allows a company to list shares on multiple exchanges, increasing access to global investors and enhancing liquidity.

94
Q

What is ‘share buyback,’ and how does it impact shareholders?

A

Share buybacks reduce the number of outstanding shares, increasing the value of remaining shares and returning cash to shareholders.

95
Q

What is the purpose of a ‘rights issue’ in capital-raising?

A

A rights issue raises funds by offering additional shares to existing shareholders, often used to strengthen a company’s financial position.

96
Q

How does Section 90A of FSMA protect investors during capital-raising?

A

It provides a remedy for investors who suffer losses due to misleading or false statements in prospectuses or public announcements.

97
Q

What is ‘cumulative preferred stock,’ and why might a company issue it?

A

It is a type of equity that guarantees unpaid dividends accumulate until paid, attracting investors seeking stable returns.

98
Q

How does the ‘employee stock ownership plan (ESOP)’ assist in raising capital?

A

ESOPs allocate shares to employees, aligning their interests with the company and motivating performance while raising capital.

99
Q

What is the ‘underwriting agreement’ in an IPO?

A

It is a contract between the issuing company and underwriters, outlining terms for distributing and guaranteeing the sale of shares.

100
Q

How does ‘crowdlending’ differ from traditional bank loans?

A

Crowdlending pools loans from multiple individuals via online platforms, often bypassing traditional financial institutions.

101
Q

What are the ‘Listing Rules’ under the FCA, and how do they govern companies?

A

The Listing Rules set standards for companies seeking admission to public markets, ensuring transparency, governance, and investor protection.

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