How to Issue Common Stock or Bonds

The Decision to Issue Securities Requires Much Work

The decision to issue common stock or bond must be preceded by several other strategic decisions. Management must decide whether the issue will be a public or private placement, what assets might be encumbered in a debt offering, and how much stock to sell in a private placement.

Instructions

1. Decide to raise funds depending on the purpose. Funds used to retire large short-term debt loads can be replaced with long-term debt issues or selling stock. The capital decision will be based on the net effect on the balance sheet and the ability to pay all debt service (principal and interest payments).

2. Issue stock if the company plans an expansion and needs to pay down debt in expectation of the need for new debt. The balance sheet will be more acceptable to investors. The result will be lower interest rates and lower costs of capital. Consider an asset backed debt offering where the bond issue is backed by specific assets and not the assets and revenues of the entire company.

3. Talk to a lawyer who specializes in corporate stock and debt issuance. Understand the process and what it means to the net worth and future earnings of the company. Have the lawyer understand what your corporate goal is, what you want the company to achieve. Have the lawyer explain to you what regulatory and due diligence will be required and an estimation of the legal fees you will incur.

4. Talk to a banker to get a professional, outside view of the company. Find out how much you can reasonably expect to raise and how expensive the cost of funds will be. Discuss whether a private market capital infusion versus the time and cost of a public offering makes most sense. Consider not just this one offering but the total corporate need over the next several years.

5. Consider whether to raise capital through institutional sources. For a first time offering convertible preferred stock is typically the financial instrument used. Preferred stock offers greater credit protection than stock but if the company is successful can be converted at a predetermined ratio into common stock. This hybrid also offers tax advantages to certain classes of buyers. The banker or investment banker guiding your deal will advise you appropriately. See Resources below.

6. Use all the information gathered to chart a course for your company. Use your treasurer to create balance sheets and expected earnings for a 3-5 year period. Understand how recessionary times or a change in product mix could affect earnings. Most of all, especially with stock offerings, understand that you will have a different set of investors to adjust to.

Tips & Warnings

• Speak with other companies and find an array of bankers, lawyers, and experts with whom you can share investment advice and ideas.

• Make certain to check the credentials and backgrounds of the bankers, lawyers, and professionals you employ. Experience counts for a lot to avoid mid-course corrections and mistakes.

Resources

• Review of the Public vs Private Stock Issuance
• Article on Convertible Preferred Stock