Securities offering
Encyclopedia
A securities offering is a discrete round of investment
, by which a business or other enterprise raises money to fund operations, expansion, a capital
project, an acquisition, or some other business purpose.
Because there are no public exchanges listing their securities, private companies meet venture capital firms and other private equity investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as "Speed Venturing", which is akin to speed-dating for capital, where the investor decides within 10 minutes whether s/he wants a follow-up meeting. Mass High Tech, September 5, 2008
Some specialized rounds include:
Offerings may be limited or open-ended. If limited, there is a cap on the number of investors, duration of the round, amount of money raised, number and nature of people to whom the offering is made, and/or the number of shares sold (if it is an equity
offering). The offering is ended and the securities are granted at one or more closings. When securities issuances happen from time to time rather than one or several discrete dates, it is sometimes known as a "rolling closing."
A single round usually involves multiple investors buying a company's securities in a distinct time period, at the same price and terms, for a single financial purpose. When multiple investments are close in price and terms, they are "merged" according to securities laws (in other words, they are treated as a single round under the law).
Rounds may have one or more lead investors who negotiate and enforce the terms of the agreement. These are usually the parties with the greatest sophistication, resources, reputation, and/or connection to the investment. There may or may not be other follow-on or silent investors who participate in the round. One other distinction is between public offerings for public companies
, which are widely advertised and subscribed, and private offerings made by private companies
, which have strict limits on the number and nature of the potential investors.
In the United States most offerings are regulated under the Securities Act of 1933
.
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, by which a business or other enterprise raises money to fund operations, expansion, a capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
project, an acquisition, or some other business purpose.
Components of a round
Hallmarks of an offering include the following (though none are an absolute requirement in every circumstance):- A prospectusProspectus (finance)In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements,...
, private placement memorandum, or other document used to advertise the availability and terms of the offering, and to provide disclosure of information investors will need for their due diligenceDue diligence"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
efforts - A securities filingSEC filingAn SEC filing is a financial statement or other formal document submitted to the U.S. Securities and Exchange Commission . Public companies, certain insiders, and broker-dealers are required to make regular SEC filings. Investors and financial professionals rely on these filings for information...
with relevant stateU.S. stateA U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
and/or federal regulators - Various contracts and documents by which the securities are sold such as a subscription agreement, a stock purchase agreement, and a convertible note (which documents a type of convertible securityConvertible securityA convertible security is a security that can be converted into another security. Most convertible securities are bonds or preferred stocks that pay regular quarterly interest and can be converted into shares of common stock if the stock price appreciates to a predetermined...
) or other loanLoanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
document - Various subsidiary or related agreements such as a buy-sell agreementBuy-sell agreementA buy–sell agreement, also known as a buyout agreement, is a binding agreement between co-owners of a business that governs what happens if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business. It may be thought of as a sort of premarital agreement between...
, investor rights agreement, proxy agreements, and proposed amendments to a company's articles of incorporationArticles of IncorporationThe Articles of Incorporation are the primary rules governing the management of a corporation in the United States and Canada, and are filed with a state or other regulatory agency.An equivalent term for LLCs in the United States is the Articles of Organization... - Underwriters, brokersInvestment brokerInvestment brokers are individuals who bring together buyers and sellers of investments. They need a license to operate. They act on behalf of buyers and sellers of stock...
, finders, and/or agents who help sell and otherwise facilitate the investment transaction. - Financial projections, financial statementsFinancial statementsA financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
, and projections and promises regarding the use of funds.
Types of rounds
Rounds are often described according to the nature of investors, the size of investment, and the stage of the enterprise.- Seed rounds (also called "friends and family" rounds) are used to launch an enterprise
- Angel rounds are early investments by angel investors.
- Venture roundVenture roundA venture round is a type of funding round used for venture capital financing, by which startup companies obtain investment, generally from venture capitalists and other institutional investors. The availability of venture funding is among the primary stimuli for the development of new companies...
s are large ($1M-$30M) investments led by venture capitalVenture capitalVenture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
firms. These are often denoted by the series of stock sold, e.g. "A round," "B round" and so on. The name of the round suggests the stage in the company's growth. A company that reaches a "D" or "E" round without achieving some success raises concerns; a company that has been through a major restructuring may renumber its series, e.g. an "AA round" or an "A' round." Informally, these rounds might be termed a "first round,"second round," and so on. - A mezzanine roundMezzanine capitalMezzanine capital, in finance, refers to a subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares...
is late stage private funding, meant to carry a company over until a public offering or major merger or acquisitionTakeoverIn business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
Because there are no public exchanges listing their securities, private companies meet venture capital firms and other private equity investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as "Speed Venturing", which is akin to speed-dating for capital, where the investor decides within 10 minutes whether s/he wants a follow-up meeting. Mass High Tech, September 5, 2008
Some specialized rounds include:
- A down round is an investment that is at a lower price per share (or unit) than a previous round. This may trigger the dilutionStock dilutionStock dilution is a general term that results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible bonds, preferred shares or warrants into...
protection provisions, if any, of contracts with earlier investors. - A bridge loanBridge loanA bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing.-Description:A bridge loan is interim financing for an individual or business until...
is a relatively small investment, short of a full-scale investment round, to help a company that would otherwise run out of money. - A crunch-down is an investment in a struggling company by which the company's earlier investors and other owners are bought out entirely at a discounted price, or the value and terms of their securities are greatly reduced.
- Public offerings are rounds of investments sold to the public and listed on a securities exchange rather than sold to a limited group of investors. An initial public offeringInitial public offeringAn initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
is the first such offering by which a formerly private company "goes public."
Offerings may be limited or open-ended. If limited, there is a cap on the number of investors, duration of the round, amount of money raised, number and nature of people to whom the offering is made, and/or the number of shares sold (if it is an equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
offering). The offering is ended and the securities are granted at one or more closings. When securities issuances happen from time to time rather than one or several discrete dates, it is sometimes known as a "rolling closing."
A single round usually involves multiple investors buying a company's securities in a distinct time period, at the same price and terms, for a single financial purpose. When multiple investments are close in price and terms, they are "merged" according to securities laws (in other words, they are treated as a single round under the law).
Rounds may have one or more lead investors who negotiate and enforce the terms of the agreement. These are usually the parties with the greatest sophistication, resources, reputation, and/or connection to the investment. There may or may not be other follow-on or silent investors who participate in the round. One other distinction is between public offerings for public companies
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
, which are widely advertised and subscribed, and private offerings made by private companies
Privately held company
A privately held company or close corporation is a business company owned either by non-governmental organizations or by a relatively small number of shareholders or company members which does not offer or trade its company stock to the general public on the stock market exchanges, but rather the...
, which have strict limits on the number and nature of the potential investors.
In the United States most offerings are regulated under the Securities Act of 1933
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
.
See also
- Private equityPrivate equityPrivate equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
- InvestmentInvestmentInvestment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
- Corporate FinanceCorporate financeCorporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
- List of finance topics
- Securities Act of 1933Securities Act of 1933Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...