Q&A - What are the main ways a public company can raise finance from shareholders?

Both private and public companies can raise finance by selling new shares in the company. For the purpose of this note, we concentrate on the main options open to a publicly-quoted company – i.e. a company whose shares are quoted and traded on a recognised stock exchange.

The two main options available are:

Flotation (new issue of shares)

A stock market flotation is a costly way of raising new capital which involves selling a percentage of a company’s on a stock market for the first time. However, a flotation provides a way to raise substantial new capital for a business and to allow existing shareholders to achieve a full or partial disposal of their investments.

In reality, a stock market flotation is only an option for businesses with a value usually over £25-50million, given the costs involved. In recent years, the number of flotations has declined dramatically. It is a lot easier for larger private companies to achieve an “exit” for their shareholders or raise substantial finance by selling some or all of the business to venture capital funds.

The major change that arises from a flotation is that the shareholder base of the company becomes much wider; potentially many thousands of private shareholders invest in the business alongside the larger “institutional” investors such as pension and insurance scheme funds.

Rights issue or open offer

A rights issue is a relatively common way for a public company to raise fresh capital. The company issues new shares, offering them first to existing shareholders.

Shares in a rights issue will often be offered at a significant discount to the current market price, particularly if the shareholders’ appetite for the shares needs to be encouraged.

An alternative to a rights issue is an open offer where shareholders are simply invited to subscribe for new shares based on their existing holdings. This can be less complex than a rights issue but it does not give shareholders the opportunity to trade their rights to take up shares and so benefit from the discount.