Chapter 19 Initial Public Offerings, Investment Banking, and Financial Restructuring a. A closely held corporation goes public when it sells stock to the general public. Going public increases the liquidity of the stock, establishes a market value, facilitates raising new equity, and allows the original owners to diversify. | Chapter 19 Initial Public Offerings Investment Banking and Financial Restructuring ANSWERS TO END-OF-CHAPTER QUESTIONS 19-1 a. A closely held corporation goes public when it sells stock to the general public. Going public increases the liquidity of the stock establishes a market value facilitates raising new equity and allows the original owners to diversify. However going public increases business costs requires disclosure of operating data and reduces the control of the original owners. The new issue market is the market for stock of companies that go public and the issue is called an initial public offering IPO . b. A public offering is an offer of new common stock to the general public in other words an offer in which the existing shareholders are not given any preemptive right to purchase the new shares. A private placement is the sale of stock to only one or a few investors usually institutional investors. The advantages of private placements are lower flotation costs and greater speed since the shares issued are not subject to SEC registration. c. A venture capitalist is the manager of a venture capital fund. The fund raises most of its capital from institutional investors and invests in start-up companies in exchange for equity. The venture capitalist gets a seat on the companies boards of directors. Before an IPO the senior management team and the investment banker make presentations to potential investors. They make presentations in tent to twenty cities with three to five presentations per day over a two week period. The spread is the difference between the price at which an underwriter sells the stock in an IPO and the proceeds that the underwriter passes on to the issuing firm. In other words it is the fee collected by the underwriter and it usually is seven percent of the offering price. d. The Securities and Exchange Commission SEC is a government agency which regulates the sales of new securities and the operations of securities exchanges. The SEC .
