Study Notes

Raising Finance by Issuing Share Capital

Level:
AS, A-Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Both private and public companies can raise finance by selling new shares in the company.

There are two main options open to a publicly-quoted company – i.e. a company whose shares are quoted and traded on a recognised stock exchange.

Flotation – new issue of shares

A stock market flotation is a costly way of raising new capital which involves selling a percentage of a company's on a stock market for the first time.

In reality, a stock market flotation is only an option for businesses with a value usually over £50 million, given the costs involved. In recent years, the number of flotations has declined. It is a lot easier for larger private companies to achieve an "exit" for their shareholders or raise substantial finance by selling some or all of the business to venture capital funds.

A flotation provides a way to raise substantial new capital for a business and to allow existing shareholders to achieve a full or partial disposal of their investments.

The major change that arises from a flotation is that the shareholder base of the company becomes much wider; potentially many thousands of private shareholders invest in the business alongside the larger "institutional" investors such as pension and insurance scheme funds.

Rights issue or open offer

A rights issue is a relatively common way for a company to raise fresh capital. The company issues new shares, offering them first to existing shareholders.

Shares in a rights issue will often be offered at a significant discount to the current market price, particularly if the shareholders' appetite for the shares needs to be encouraged.

An alternative to a rights issue is an open offer where shareholders are simply invited to subscribe for new shares based on their existing holdings. This can be less complex than a rights issue but it does not give shareholders the opportunity to trade their rights to take up shares and so benefit from the discount.

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