What it means
When a business needs money, it can sell a piece of itself by issuing shares or borrow by issuing bonds. Each batch offered at one time is called an issue, and the people who buy it become owners or lenders.
The issue therefore connects a business's need for funds with the savings of investors. Issues can be public or private.
A public issue is offered to the general market, often through a stock exchange listing and with a published prospectus, which is a legal document describing the offer. A private issue is sold to a small group of investors, such as institutions, with lighter disclosure rules.
An issue that raises funds from the market for the first time is called a primary issue, and later trading between investors is called secondary trading. The issuer receives money only from the primary issue.
After that, changes in the share price affect the investors but do not give the company any new cash. The price at which the securities are sold is the issue price, and it may differ from the nominal or par value, which is the face amount stated on the security.
If shares are issued above par, the surplus is recorded separately as share premium. Issuers also pay costs such as underwriting fees, legal fees and listing fees, which reduce the net proceeds.
Issuing new shares has consequences for existing owners. It increases the number of shares in circulation, which dilutes (reduces the percentage held by) existing shareholders unless they buy their share of the new ones.
A finance team therefore weighs the cost of issuing against other sources of funding such as borrowing or retained profit. Timing and market conditions also shape an issue.
Companies often prefer to issue shares when their price is high and investors are keen, and many hold back during market falls. Pricing too aggressively can leave an issue under-subscribed, while pricing too low leaves money on the table that the existing owners could have kept.
In practice
Real-world examples.
Example
A growing software company issues new shares to institutional investors to fund an acquisition. The finance director models the dilution to existing holders and the cost of the underwriters. The board approves the issue once the numbers have been checked.
Example
A city government issues bonds to build a water treatment plant. The bonds are offered in a public issue with a published prospectus. The treasurer records the proceeds and sets aside funds to pay interest.
Example
A start-up founder sells a new batch of shares to an angel investor in a private issue. The agreement fixes the issue price and the number of shares. The company updates its shareholder register and records the cash received.
Formula
Calculation
Net proceeds = (number of securities x issue price) - issue costs
Suppose a company issues 2,000,000 new shares at an issue price of $12. Gross proceeds = 2,000,000 x 12 = $24,000,000. Underwriting and other costs come to 5% of the gross amount, which is 24,000,000 x 0.05 = $1,200,000. Net proceeds = 24,000,000 - 1,200,000 = $22,800,000. If there were 10,000,000 shares before the issue, existing holders now own 10,000,000 / 12,000,000 = 83.3% of the company in total.Case study
Seen in the real world.
Lakeshore Brewing is an illustrative, fictional company that needed funds to open a second brewery. Its owners debated between a bank loan and issuing new shares to local investors.
The finance manager compared the two. The loan would keep ownership intact but add interest and repayments, while a share issue would raise cash with no repayment but reduce the founders' share of future profits. She modelled both under strong and weak sales.
The owners chose a small private issue combined with a smaller loan, which balanced dilution against fixed repayments. The illustrative lesson is that an issue is not just a way to raise money, because it also decides who owns the business afterwards. The finance manager recorded the dilution, the issue costs and the net cash received in a single schedule for the board, so that the full effect of the decision could be reviewed in one place.
Watch out
Common mistakes.
- Assuming the company receives money whenever its shares trade, when cash only reaches the issuer in the primary issue.
- Forgetting issue costs, when underwriting and legal fees reduce the net proceeds.
- Ignoring dilution, when new shares reduce the ownership percentage of existing holders.
Questions
People also ask.
What is the difference between an issue and an offering?
In everyday use they mean much the same thing, a sale of new securities by an issuer to investors.
What is the issue price?
The price at which each security is first sold to investors, which may differ from the face or par value.
Does issuing shares increase debt?
No, shares are equity and are not repaid, unlike bonds, which are debt that must be repaid with interest.
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