Ideally, ASX-listed companies would have mountains of cash and never need to raise any more capital — but that’s rarely the case. So how do they raise capital?
Types of raises
Initial Public Offering (IPO)
This is when a private company is first listed on the stock exchange.
Before the company is listed, there will be an offer made to the public to buy shares. Once it is listed people can buy and sell shares freely.
To list on the ASX you need at least 300 non-affiliated shareholders, with each holding at least $2,000 worth of stock — this ensures minimum liquidity so people can trade.
Of those 300 shareholders, at least 20 percent must be available to the trading public — or ‘free float’ shares.
It is common for firms to undertake pre-IPO offerings where they will sell shares at a lower price than the indicative IPO price, which theoretically guarantees a profit.
These investors, as well as early management and employees with equity ownership in the business can now sell their stakes.
IPOs range from companies that are at relatively early stages to large firms that have only just decided to follow their global peers and go public.
Once a company has listed, there are a couple of methods for raising capital.
A placement involves creating new shares and in return for capital, issuing them to selected investors (usually new high net worth investors).
These are the preferred method of raising capital by companies and usually are not announced to the public until complete, although usually before such shares are listed on the ASX.
Placements dilute existing shareholdings, meaning their stake will be reduced and they will be entitled to less profit.
Additionally these are often sold at a discount to the current share price and may cause it to fall accordingly.
These are led by institutional investors who are able to put in a large chuck of funds and retail investors are often left diluted. On many occasions companies will also offer a Share Purchase Plan (SPP) alongside the Placement to allow existing retail investors to increase their holding and for the company to raise further funds.
Rights Issues (sometimes called Entitlement offers or Share Purchase Plans) are only offered to existing shareholders.
They may only be offered to institutional investors, or to both retail and institutional investors.
As with Placements, existing shareholdings will be diluted and it will be at a lower price than the current share price thereby giving them an incentive to purchase into the company.
However, there will be restrictions as to how many shares will be able to be purchased by individual shareholders.
These are always announced before they are conducted and may take one or two months to complete.
Nevertheless, rights issues are a unique opportunity for existing shareholders to ‘top up’ their holdings in the company without being diluted by outsiders as happens in placements.
Although companies can fall short of their targets, it is not uncommon for offers to be underwritten – meaning the financial firm leading the offer will cover the shortfall.
Are capital raisings good news or bad news?
In short, it depends. Companies may be funding long-term expenditure or may just be raising money to keep itself afloat.
Investors may respond in the short term but in all scenarios it is about the long term future of the company rather than the immediate future.
In the case of placements, which may only be announced when complete, it can be a sign of confidence in the company, that it can continue and outside investors had enough confidence to take a gamble on it.
However, the company has to eventually be profitable to be sustainable and the more times it has to raise capital (without traction or clear momentum to profitability), the harder it will be.
Ultimately, if investors do not have confidence in the company they will not risk their money on the company and if they have completed a Placement or Entitlement Offer, the bullish sentiment is there.
Additionally, the ASX can de-list companies if their financial condition is not “adequate to warrant the continued quotation of its securities and its continued listing”.
Every instance of capital raising has to be looked at on its merits and if successful an injection of capital can provide the company with the necessary capital to growth their business – particularly for emerging companies.
This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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