Raising Capital Flashcards
What are the two primary methods for raising capital in company law?
Companies raise capital through debt (e.g., loans and bonds) and equity (e.g., issuing shares).
What does Section 755 of the Companies Act 2006 prohibit?
Section 755 prohibits private companies from offering shares to the public.
What is the minimum share capital required for a public company under Section 763 of the Companies Act 2006?
Public companies must have a minimum share capital of £50,000.
What distinguishes listed public companies from non-listed public companies?
Listed public companies have their shares traded on stock exchanges like the LSE, while non-listed companies do not.
What are the two main markets operated by the London Stock Exchange (LSE)?
The Main Market for established companies and AIM (Alternative Investment Market) for smaller, growth-oriented companies.
What is the role of the Financial Conduct Authority (FCA) in capital-raising?
The FCA regulates the issuance of securities, reviews prospectuses, enforces listing rules, and ensures market transparency.
What is a prospectus, and why is it required?
A prospectus is a detailed document outlining a company’s financials, risks, and governance. It informs potential investors and ensures transparency.
What is an ‘offer for subscription’ in the context of raising capital?
An offer for subscription is when a company offers shares directly to the public, often using advertisements to attract investors.
What is a ‘rights issue,’ and what statutory provision governs it?
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.
What are pre-emption rights under Section 561 of the Companies Act 2006?
Pre-emption rights give existing shareholders the first opportunity to purchase new shares before they are offered to others.
How does the FCA ensure compliance with disclosure rules?
The FCA enforces the Disclosure and Transparency Rules under Section 96 of FSMA, requiring companies to disclose material information affecting share prices.
What is the role of the UK Corporate Governance Code in capital-raising?
The Code promotes governance standards for listed companies, such as having independent directors and transparent audit committees.
What is the purpose of Section 417 of the Companies Act 2006?
It mandates listed companies to produce a business review detailing performance, risks, and stakeholder impacts.
What is the purpose of the City Code on Takeovers and Mergers?
The Code ensures fair treatment of shareholders during takeovers, promoting equality and transparency.
What triggers a mandatory cash offer under the City Code on Takeovers and Mergers?
A bidder acquiring 30% or more of a company’s voting shares must make a mandatory cash offer to all shareholders.
What does Section 979 of the Companies Act 2006 allow in takeovers?
It allows majority shareholders with 90% ownership to compel minority shareholders to sell their shares.
What constitutes insider dealing under the Criminal Justice Act 1993?
Insider dealing involves trading based on non-public, price-sensitive information to gain an unfair advantage.
What are the penalties for insider dealing under the Criminal Justice Act 1993?
Insider dealing can lead to fines, imprisonment, or both.
How does the Market Abuse Regulation (MAR) address insider dealing?
MAR imposes civil sanctions, such as fines and public censures, for insider dealing and market manipulation.
What is the Prospectus Regulation (EU) 2017/1129, and how does it affect small offers?
It simplifies disclosure requirements for small offers under €1 million and reduces compliance costs.
How does the FCA enforce investor protection in public offers?
By reviewing prospectuses, penalizing misleading disclosures, and ensuring timely information disclosure under FSMA.
What is an ‘offer for sale’ in capital-raising?
In an offer for sale, the company sells shares to an issuing house, which then sells them to the public.
What is the role of institutional investors in a placing?
Institutional investors are offered shares directly in a placing, which is a quicker method to raise funds without a public offer.
What are the continuing obligations for listed companies under FSMA?
Listed companies must disclose price-sensitive information and comply with governance standards to maintain investor confidence.
How do takeovers contribute to corporate governance?
Takeovers incentivize efficient management and allow control to shift to more competent parties if management underperforms.
What is the role of the Panel on Takeovers and Mergers?
The Panel administers the Takeover Code, ensuring fair treatment of shareholders and transparency in takeover processes.
What are the consequences of breaching FSMA listing rules?
Breaches can lead to fines, public censures, and, in severe cases, suspension or delisting of a company.
How does the FSMA address misleading prospectuses?
It imposes liability for damages, restitution, or rescission of contracts when investors rely on false or misleading information.
What is the role of AIM (Alternative Investment Market)?
AIM provides a platform for smaller, growth-oriented companies to raise capital with lighter regulatory requirements.
How do investor protection mechanisms under the Transparency Directive enhance market confidence?
By requiring timely disclosure of significant shareholdings and ensuring that ownership changes are promptly communicated.
What is the minimum share price required for a public offering under LSE listing rules?
The share price must be at least £1 to meet the minimum denomination for listing on the Main Market.
How does a ‘lock-up period’ affect new capital issuances?
A lock-up period restricts initial investors from selling their shares for a set period after issuance to stabilize share prices.
What is the key requirement for pre-emptive offers under Section 561 of the Companies Act 2006?
Existing shareholders must be given the right to buy new shares proportionate to their current holdings before they are offered to others.
What does Section 585 of the Companies Act 2006 address regarding share allotments?
It prohibits public companies from allotting shares unless the minimum subscription has been met.
What are the penalties for non-compliance with insider trading rules under MAR?
Civil penalties include fines, suspension from trading, and compensation orders, while criminal penalties may involve imprisonment.
What does a ‘green shoe option’ allow in capital-raising?
It permits underwriters to issue additional shares to stabilize share prices when demand exceeds expectations.
How do share repurchase programs impact capital structure?
Share repurchases reduce the number of outstanding shares, increasing the value of remaining shares and potentially signaling financial strength.
What role do underwriting agreements play in share offerings?
Underwriters guarantee the purchase of shares not sold during a public offering, reducing risk for the issuing company.
How does Section 585 protect public investors during a share offering?
By requiring that shares are not allotted unless the minimum subscription amount is met, ensuring sufficient funding for the company.
What is the effect of a ‘stabilization period’ after an IPO?
It allows underwriters to buy shares in the market to support the price, preventing excessive volatility immediately after listing.
What are convertible bonds, and how do they assist in raising capital?
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.
What is the purpose of Section 755 of the Companies Act 2006 for private companies?
It prohibits private companies from offering shares to the public, limiting their capital-raising options to private funding sources.
What is a ‘bookbuilding process’ in the context of capital-raising?
It is a method used during public offerings to determine the price and demand for shares by collecting bids from institutional investors.
How does the Alternative Investment Market (AIM) support smaller companies?
AIM provides a lighter regulatory framework, enabling smaller companies to raise capital and list their shares with fewer compliance burdens.
What does Section 586 of the Companies Act 2006 require in terms of share payment?
It mandates that public company shares must be paid for in cash or other readily valuable consideration before allotment.
What is the difference between a primary market and a secondary market?
The primary market involves issuing new securities directly from the company to investors, while the secondary market involves trading existing securities between investors.
How does a ‘rights issue’ differ from a ‘bonus issue’?
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.
What is the significance of a ‘trading suspension’ for listed companies?
It temporarily halts trading of a company’s shares, often to protect investors from volatile or uncertain market conditions related to the company.
What does the term ‘market capitalization’ mean in the context of raising capital?
Market capitalization refers to the total market value of a company’s outstanding shares, reflecting its size and investment potential.
How does shareholder dilution occur during capital-raising?
Dilution happens when a company issues new shares, reducing the ownership percentage of existing shareholders unless they participate in the issuance.
What is the impact of a ‘capital reduction’ under the Companies Act 2006?
A capital reduction allows companies to decrease their share capital, often to return funds to shareholders or eliminate accumulated losses.
What are ‘ordinary shares,’ and how do they differ from ‘preference shares’?
Ordinary shares grant voting rights and dividends based on profitability, while preference shares offer fixed dividends but typically no voting rights.
How does the principle of ‘equal treatment’ apply during a takeover?
All shareholders must be treated equally, ensuring that no preferential terms are offered to certain shareholders over others during a bid.
What is a ‘shelf registration,’ and how does it facilitate capital-raising?
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.
How does Section 981 of the Companies Act 2006 support compulsory acquisitions?
It enables majority shareholders to acquire the remaining minority shares once 90% of shares in a company are owned.
What is the function of a ‘placing agreement’ in a public offering?
It outlines the terms under which shares are allocated to selected institutional investors, streamlining the capital-raising process.
What is the significance of ‘pre-IPO funding’?
Pre-IPO funding involves raising capital from private investors before going public, helping companies build financial strength and credibility.
How do ‘dividend reinvestment plans (DRIPs)’ indirectly assist in raising capital?
DRIPs allow shareholders to reinvest dividends into additional shares, providing the company with retained earnings for growth without external funding.
What role does a ‘sponsor’ play in the listing process?
Sponsors are financial institutions that guide companies through the listing process, ensuring compliance with regulatory and disclosure requirements.
How does the London Stock Exchange’s ‘free float’ requirement impact capital-raising?
The free float rule mandates that a minimum percentage of shares must be publicly available for trading, ensuring sufficient liquidity for listed companies.
What is the purpose of a ‘green shoe option’ in public offerings?
It allows underwriters to sell additional shares if demand exceeds expectations, stabilizing the share price post-IPO.
How does a ‘reverse takeover’ differ from a traditional takeover?
In a reverse takeover, a smaller company acquires a larger one, often using the larger company’s public listing to gain stock market access.
What is the importance of Section 593 of the Companies Act 2006 for non-cash considerations?
It requires that non-cash assets used to pay for shares in public companies are independently valued, ensuring fair valuation.
What is the ‘minimum subscription’ requirement in public offerings?
It is the minimum amount of capital that must be raised for a share offer to proceed, protecting investors from underfunded ventures.
How does the ‘lock-up period’ work in capital-raising?
A lock-up period restricts insiders from selling shares for a specified time post-IPO to stabilize the share price and build market confidence.
What is a ‘placing document,’ and when is it used?
A placing document outlines key details about shares offered through a private placing, targeting institutional investors instead of the public.
How does the ‘prospectus passporting’ system under EU law (pre-Brexit) assist companies?
It allowed companies to use an approved prospectus in one EU member state to raise capital in others, simplifying cross-border capital-raising.
What are the FCA’s penalties for breaches of the Market Abuse Regulation?
Penalties include fines, public censures, and bans from market activities to deter insider trading and market manipulation.
What is the function of an ‘initial public offering (IPO)’?
An IPO allows a private company to raise capital by offering shares to the public for the first time, enabling broader investor participation.
How does a ‘debt-for-equity swap’ impact a company’s capital structure?
It converts debt into equity, reducing liabilities while increasing shareholder base, often used during financial restructuring.
What is the role of an ‘anchor investor’ in capital-raising?
Anchor investors commit to purchasing a significant share of the offering, boosting confidence and attracting other investors.
How does Section 561 of the Companies Act 2006 protect pre-emption rights?
It ensures existing shareholders are offered new shares before outsiders, maintaining their proportional ownership.
What is a ‘capital call’ in private companies?
A capital call requires shareholders to contribute additional funds as agreed, often used in startups and investment funds.
How does the ‘weighted average anti-dilution clause’ protect investors?
It adjusts conversion ratios during down-round financing, protecting early investors from excessive dilution when shares are issued at lower prices.
What does Section 585 of the Companies Act 2006 stipulate regarding capital subscriptions?
It mandates that subscriptions must be fully paid in cash or assets before shares are allotted in a public company.
How does ‘private equity’ differ from ‘venture capital’?
Private equity focuses on mature companies for buyouts or restructuring, while venture capital targets early-stage startups with high growth potential.
What is the purpose of a ‘roadshow’ in public offerings?
A roadshow involves presentations to potential investors to generate interest.
What is the purpose of a ‘roadshow’ in public offerings?
A roadshow involves presentations to potential investors to generate interest and gauge demand before a public offering.
How does ‘crowdfunding’ facilitate raising capital for startups?
Crowdfunding pools small investments from a large group of people via online platforms, democratizing access to capital for early-stage ventures.
What is the ‘price discovery process’ during a public offering?
It determines the offer price of shares based on demand, market conditions, and institutional investor feedback.
How does the FCA ensure fairness in capital markets?
The FCA enforces regulations like the Prospectus Rules and Market Abuse Regulation, ensuring transparency, fair trading, and investor protection.
What is the role of a ‘syndicate’ in an IPO?
A syndicate is a group of investment banks collaborating to underwrite and distribute the shares being offered in an IPO.
How does a ‘share premium account’ arise in equity raising?
It arises when shares are issued at a price higher than their nominal value, with the excess recorded in a share premium account.
What is the purpose of a ‘stabilization mechanism’ in an IPO?
It involves buying back shares post-listing to reduce price volatility and maintain investor confidence.
How does a ‘convertible bond’ work in capital-raising?
It is a hybrid security that allows bondholders to convert debt into equity at a predetermined price, balancing debt with potential ownership.
What is a ‘shelf registration’ under the Prospectus Directive?
It allows companies to issue multiple tranches of securities under a single prospectus over a specified period, simplifying capital-raising.
What protections do pre-emption rights offer to shareholders?
They ensure that existing shareholders have the first right to purchase new shares, preventing dilution of their ownership stakes.
How does the ‘Bookbuilding’ process assist in IPO pricing?
Bookbuilding collects investor demand at various price levels, helping underwriters set the final offer price for shares.
What is the role of the ‘Alternative Investment Market (AIM)’ in capital-raising?
AIM provides a less regulated environment for small and medium-sized enterprises to raise capital compared to the main market.
What is the significance of ‘free float’ in public listings?
It refers to the percentage of shares available for public trading, affecting liquidity and investor interest in the stock.
How does a ‘green bond’ support sustainable capital-raising?
Green bonds raise funds for environmentally friendly projects, appealing to socially responsible investors.
What is the effect of ‘call options’ in equity capital markets?
Call options give investors the right to purchase shares at a set price, often used in employee stock options.
How does ‘dual listing’ benefit a company?
Dual listing allows a company to list shares on multiple exchanges, increasing access to global investors and enhancing liquidity.
What is ‘share buyback,’ and how does it impact shareholders?
Share buybacks reduce the number of outstanding shares, increasing the value of remaining shares and returning cash to shareholders.
What is the purpose of a ‘rights issue’ in capital-raising?
A rights issue raises funds by offering additional shares to existing shareholders, often used to strengthen a company’s financial position.
How does Section 90A of FSMA protect investors during capital-raising?
It provides a remedy for investors who suffer losses due to misleading or false statements in prospectuses or public announcements.
What is ‘cumulative preferred stock,’ and why might a company issue it?
It is a type of equity that guarantees unpaid dividends accumulate until paid, attracting investors seeking stable returns.
How does the ‘employee stock ownership plan (ESOP)’ assist in raising capital?
ESOPs allocate shares to employees, aligning their interests with the company and motivating performance while raising capital.
What is the ‘underwriting agreement’ in an IPO?
It is a contract between the issuing company and underwriters, outlining terms for distributing and guaranteeing the sale of shares.
How does ‘crowdlending’ differ from traditional bank loans?
Crowdlending pools loans from multiple individuals via online platforms, often bypassing traditional financial institutions.
What are the ‘Listing Rules’ under the FCA, and how do they govern companies?
The Listing Rules set standards for companies seeking admission to public markets, ensuring transparency, governance, and investor protection.
