“Floating an Issue” refers to the process by which a company or government entity offers new securities, such as stocks or bonds, for sale to the public. This is often done to raise capital for expansion, debt refinancing, or other financial needs. The entity floating the issue typically employs an underwriter, usually an investment bank, to help facilitate the offering by pricing and selling the securities.
The Underwriting Process
Role of Underwriters
Underwriters play a pivotal role in floating new issues. They assess the market, set an agreeable price, and sometimes guarantee the sale by buying the securities themselves, thereby assuming the risk. This underwriting process includes several methods, such as firm commitment, best efforts, and standby underwriting.
Steps in Issuance
- Preparation: This involves preparing the necessary legal documentation, like the prospectus, and obtaining regulatory approval.
- Marketing: The issue is marketed to potential investors through roadshows and presentations.
- Pricing: The underwriters, based on market analysis, determine the initial offering price.
- Allocation: Securities are allocated to investors.
- Settlement: Funds are exchanged for securities, completing the transaction.
Types of Underwriting
- Firm Commitment: The underwriter buys the entire issue and resells it to the public.
- Best Efforts: The underwriter sells as much of the issue as possible, without guaranteeing the sale of the entire issue.
- Standby: The underwriter agrees to buy any unsold shares after the initial offering.
Historical Context
Evolution of Securities Issuance
The concept of floating an issue traces back to the early capital markets in Europe during the 17th and 18th centuries. It evolved significantly with the establishment of formal stock exchanges, like the Amsterdam Stock Exchange and the London Stock Exchange. In the United States, the process became more structured with the formation of the New York Stock Exchange in the early 19th century.
Regulatory Developments
Regulatory frameworks were developed to protect investors and ensure fair market practices. Notable regulations include the Securities Act of 1933 in the United States, which set the groundwork for modern-day practices involving disclosure requirements and registration processes.
Applicability in Modern Finance
Corporate Use
Corporations float new issues to finance expansion, research and development, or other strategic initiatives. This could include Initial Public Offerings (IPOs) for going public or secondary offerings for already public companies.
Government Use
Governments issue bonds to finance infrastructure projects, manage debt, and fund various public sector activities. Sovereign bonds, municipal bonds, and treasury notes are common examples.
Comparisons and Related Terms
Comparison with Private Placement
- Floating an Issue: Securities are offered to the public and are tradable on public exchanges.
- Private Placement: Securities are sold directly to a limited number of accredited investors without a public offering.
Related Terms
- New Issue: A general term referring to any freshly issued securities.
- Underwrite: The process undertaken by underwriters to manage the issuance and sale of new securities.
- Prospectus: A legal document describing the details of the issue to inform potential buyers.
FAQs
What is the primary purpose of floating an issue?
How does an underwriter make money?
What are the risks involved in floating an issue?
References
- Fabozzi, F. J. (2020). Bond Markets, Analysis, and Strategies. Pearson.
- Mishkin, F. S. (2018). The Economics of Money, Banking, and Financial Markets. Pearson.
Summary
Floating an issue is a fundamental method of raising capital in the financial markets, involving the issuance of new securities to the public. The process is facilitated by investment banks acting as underwriters, who help determine the price, market the securities, and sometimes guarantee their sale. This mechanism is crucial for both corporations and governments to finance various needs and has a rich historical backdrop intertwined with the evolution of capital markets and financial regulations.
