How Buyers Evaluate Risks associated with seasoned equity offerings?

The capital increase in stock corporations includes increasing equity through the issue of new shares. In this article, we will consider risks associated with seasoned equity offerings.

What is a seasoned equity offering?

The experience of the world economy has shown that the securities market is a phenomenon that is objectively determined by the functioning of finance as a subsystem of the economy, an important mechanism for managing it, achieving balance in the development of material, labor, and financial resources.

A seasoned equity offering is the procurement of equity by increasing the share capital of a stock corporation. It must always have been preceded by a resolution by the general meeting. In the case of a capital increase against cash contributions, the existing shareholders are given subscription rights to so-called “new shares” at a fixed price and in a certain ratio to their previous share ownership. A seasoned equity offering involves the placement on the stock exchange of a large block of shares owned by incumbent shareholders. Seasoned equity offerings do not entail an increase in the authorized capital of the company, in contrast to the IPO, but make the issuing company public.

There are many reasons for a capital increase via seasoned equity offering in the stock corporation:

  • The company needs fresh capital because it is planning a takeover or needs money for investments, but the capital base is too low.
  • The company has debts that it has to pay off.
  • The company is committed to growth and aims to reach a wider investor base by issuing new shares.

Common risks associated with seasoned equity offerings

There are financial (market) risks on the seasoned equity offerings market, which are the risks of real damage arising in the implementation of financial transactions due to the possible adverse effect of some market factors on them. Market risk manifests itself in an unfavorable change in the prices of financial instruments owned by the client, including due to systemic risks: an unfavorable change in the political situation, a sharp devaluation of the national currency, a crisis in the government debt market, a banking and currency crisis, force majeure circumstances, mainly natural and military character, and as a result, leads to a decrease in profitability or even losses.

Virtual Data Room to evaluate the risks

To reduce market risk, the customer should carefully consider the choice and diversification of financial instruments, in addition, carefully read the terms of interaction between the customer and the broker to assess the costs associated with the ownership and operation of financial instruments and make sure that the fact that they are acceptable to the customer and do not deprive him of the expected income. In this case, Data Room due diligence is the most suitable solution.

Due diligence procedures involve the compiling and transferring of large amounts of information about the target business and its employees. An important consideration throughout the due diligence exercise is confidentiality. Documents being requested by a potential buyer will often contain sensitive information which you may wish to keep confidential for as long as possible. For this purpose, Data Room provides from ensure a secure collaborative workspace.

Data Room due diligence includes:

  • Analysis of accounting policy and accounting system;
  • Inventory of key assets;
  • Assessment of the internal control system;
  • Analysis of the document management system;
  • Analysis of income in terms of business segments and major counterparties;
  • Analysis of assets and liabilities.