The Issuance of Securities: Selected Issues
| Author | Christopher C. Nicholls, Jeffrey G. Macintosh |
| Pages | 123-138 |
CHAPTER
5
THE
ISSUANCE
OF
Business enterprises, such
as
corporations, partnerships,
and
limited
partnerships, raise capital through
a
variety
of
means.
In
particular,
they borrow money
from
banks
or
other lending
institutions,
or
they
sell securities.
If a
corporation chooses
to
raise capital through
the
issuance
of any
type
of
security,
its
capital-raising activities
are
gov-
erned
by
securities legislation. Because
of the
broad definition
of
"secu-
rity"
canvassed
in
chapter
2,
securities legislation covers almost
all
types
of
capital raising, except borrowing funds
from
banks
or
other
similar kinds
of
lenders.
It
is
conventional
to
divide
the
discussion
of
securities
issuances
into
the two
broad categories
of
public
offerings
and
private place-
ments
(or
exempt
distributions).
We
follow
that convention with
our
review
of
these subjects
in
chapters
6 and 7,
respectively. But, there
are
a
number
of
important topics surrounding
the
sale
of
securities
by
issuers
and the
purchase
of
securities
by
investors that
are not
neces-
sarily confined
to
either
of
these categories. Those matters
are the
sub-
ject
of
this chapter,
in
which
we
canvass
a
number
of
legal
issues
and
regulatory
initiatives relating
to the
following:
Rights
offerings
Future-Oriented Financial Information
(FOFI)
123
SECURITIES:
SELECTED
ISSUES
A.
INTRODUCTION
Alternative
distribution methods (including direct purchase plans
and
sales
to
shareholders holding small blocks
of
shares)
The
Multijurisdictional Disclosure System
Mutual
funds
(investment vehicles that,
as
issuers themselves, raise
unique policy concerns
from
the
public-offering
perspective,
and
provide
to
investors
an
alternative
to
direct
investment
in
tradition-
al
securities issued
by
industrial corporations)
A
rights
offering
refers
to a
distribution
by an
issuer
to its own
securi-
tyholders
of
rights
to
acquire additional securities
of the
issuer
at a
price
stated
in the
offering
document.
The
advantage
of a
rights
offer-
ing
from
the
issuer's
perspective
is
that
the
offerees
(i.e.,
the
prospec-
tive
purchasers
of the
securities)
are
already
familiar
with
the
issuer
because
they have previously chosen
to
purchase
its
securities.
The
advantage
of a
rights
offering
from
the
perspective
of
securityholders,
particularly
when
the
offering
involves rights
to
acquire common
shares,
is
that
the
securityholders may,
if
they wish, maintain their pro-
portionate
interest
in the
issuer.
Consider
the
following example.
A
corporation, Rightsco Ltd.,
has
a
total
of ten
common shareholders, each holding exactly
ten
Rightsco
shares
(i.e.,
each shareholder
has a 10
percent equity interest
in the
firm).
Rightsco needs
to
raise capital
by
issuing
an
additional
100
shares. Rightsco
can
either
offer
these shares
to new
investors
or it
may,
by way of a
rights
offering,
offer
to
sell
the new
shares
to its
existing
shareholders.
If
Rightsco chooses
to
conduct
a
rights
offering,
each
of
the ten
current
shareholders
is
granted,
free
of
charge,
the
basic
right
to
subscribe
for
(i.e.,
to
purchase
from
the
issuer)
up to ten of the new
shares.
It
must
be
emphasized
that
it is
only
the
right
to
purchase
shares that
is
distributed
free
of
charge,
not the
shares themselves,
which will
be
issued only
to
shareholders
who
choose
to
exercise their
rights,
and who pay the
share subscription price. Thus,
if
every
share-
holder chooses
to
take
full
advantage
of his or her
rights, then when
the
transaction
is
over, Rightsco
will
have
200
shares outstanding,
and
each
of its ten
shareholders will
own
twenty
(or 10
percent)
of
those
shares. Each
shareholder's
proportionate stake
in
Rightsco
shares,
in
other
words, remains unchanged. However, some shareholders might
124
SECURITIES
LAW
1)
Introduction
B.
RIGHTS
OFFERINGS
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