Australia’s vibrant business landscape offers great potential for companies in almost all sectors and industries to grow. With a robust economy and a supportive investment climate, most Australian companies have leveraged different avenues to secure funds for their ventures through capital raises.
Capital raisings come in a variety of different formats. Whether it’s accessing public markets, engaging with institutional investors, or providing opportunities for existing shareholders, there are different types of capital raises from traditional methods such as initial public offerings (IPOs) and share placements to more tailored approaches like entitlement offers and convertible notes, each with different goals and eligibility criteria.
To ensure you fully understand which capital raise you could consider and would be eligible for, here are some guidelines to the five types of capital raises that are regularly done within ASX-listed companies:
Initial Public Offering (IPO)
An IPO refers to the process of a company offering its shares to the public for the first time on an Australian Stock Exchange (ASX). This process involves several key steps such as meeting regulatory requirements set by the Australian Securities and Investments Commission (ASIC) and the ASX. It also needs to provide a Prospectus that discloses important information about its business, financials, risk factors, and future plans. It undergoes thorough due diligence to ensure accuracy and compliance with regulatory requirements.
Once the IPO is completed, the company’s shares are listed on the stock exchange. They become tradable and can be bought and sold by investors on the open market. The company becomes a publicly-traded entity, subject to ongoing disclosure and reporting requirements. The share price will be influenced by market forces, including investor demand, company performance, and broader market conditions.
Placement
Share placement refers to the process through which a company offers its shares at discounted price to institutional investors or sophisticated investors without conducting a public offering. It is a way for companies to raise capital quickly and efficiently by selling shares directly to selected investors. Sophisticated investors are accountant-certified investors who have a high net-worth and extensive experience in financial markets. It is assumed that they have understood all risks associated with the investments, therefore the company does not need to issue a Prospectus hence speeding up the process.
Companies normally go onto a two-day trading halt to complete the Placement process. Once the Placement is completed, the company issues and settles the shares with the investors. The newly issued shares are then listed on the stock exchange and become freely tradable.
Share Purchase Plan (SPP)
A Share Purchase Plan (SPP) allows existing shareholders of a public-listed company to purchase additional shares directly from the company, without the need for a full public offering. It is a way for companies to offer their existing shareholders the opportunity to increase their shareholding in the company. Each shareholder can buy up to $30,000 worth of stock at the offered price.
Shareholders who wish to participate in the SPP need to submit their applications and payment within the specified timeframe. The application process is typically facilitated through an online platform or payment to the company’s share registry. If the SPP is oversubscribed (more applications are received than the company is willing to allocate), the company may scale back the applications proportionally to ensure a fair distribution. However, some companies may have specific rules for the allocation process, which are outlined in the SPP documentation.
Participation in an SPP is optional, and shareholders can choose whether or not to participate based on their investment goals and individual circumstances.
Entitlement Offer
Similar to a SPP, an Entitlement Offer is a capital raising method used by publicly-listed companies to raise funds from existing shareholders. Shareholders can purchase additional shares in proportion/reflective to the current number of shares that they have at the Offer Price. The purpose of an Entitlement Offer is to provide existing shareholders the opportunity to maintain their proportional ownership in the company and participate in the capital raising initiative.
As Entitlement Offers are offered to all existing shareholders (including retail and sophisticated investors), it requires a Prospectus. The Entitlement offer period normally takes place for about a month.
As previously mentioned, the entitlement ratio applies in entitlement offers. It determines the number of shares each shareholder is entitled to purchase based on the number of shares held by the shareholder before the offer and the overall size of the capital raising. For example, if the entitlement ratio is 1:3, a shareholder will be entitled to purchase one new share for every three shares held.
Convertible Note
A convertible note is a financial instrument used by companies to raise capital, usually in early-stage or startup environments, in a form of debt that has the potential to convert into equity in the future, typically upon the occurrence of a specified event or at a predetermined time. It is only offered to institutional and sophisticated investors,
The company will issue a convertible note to investors who provide funds to the company, and the note represents a loan or debt obligation that the company promises to repay to the investor at a future date. When the investor purchases a convertible note, they will be eligible to be paid a certain interest by the company. It also includes a conversion feature that allows the investor to convert the outstanding debt into equity in the company. The conversion may be triggered by predetermined events, such as a future equity financing round or the maturity date of the note.
The convertible note has a deadline for repayment if the conversion event does not occur, which is often called maturity date. At the maturity date, the investor has the option to either convert the note into equity/shares or request repayment of the principal and any accrued interest. Converting the note into equity is preferred when the convertible note’s principal is lower than current trading price, while repayment request normally occurs if the principal is higher than current trading price.
Convertible notes offer flexibility to both companies and investors, providing a financing option that combines elements of debt and equity. For companies, convertible notes can be an alternative to traditional equity financing, allowing them to raise capital without immediately determining the valuation of the company. For investors, convertible notes offer potential upside if the company’s value increases, while still providing some downside protection in the form of debt repayment if the conversion event does not occur.
Which capital raising option that the company chose will eventually depend on their shareholder objective, how urgently they need the extra funds, and how much confidence they have in their shareholders. Placement or Convertible Note might be the more flexible and faster options as they only need a couple of days to be done without having to issue a Prospectus, while the rest might be suitable if the Company looks forward to retain share price, maintain existing shareholders, increase the shareholder base and target newbie investors, or to satisfy a minimum number of required retail investors (e.g. having minimum of 300 investors for an IPO to succeed).
Clara is a Business Reporter for The Sentiment.
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