The common method of selling securities for the firms through who wants to raise fund is referred as the general cash offer. While the firm seeks helps of investment banking to accomplish the sales function. The investment banking gives consultancy regarding terms of issue, evaluates the situation of financial market and makes the actual sale of securities.
Those investment banking charges fees for making public sale. Most of these general cash offer is underwritten by investment banking. Now, if the fund is very large, a group of investment banks make the act of underwriting which is commonly called syndicate. The investment bank boons all the risks in the final distribution of securities as the investment bank or syndicate purchases the underwritten securities with the firm.
It should be notes that the investment bank does not underwrite in all issues. If the issue is very risky or if the security is being issued by new, unknown company the investment bank agrees to sale the securities only on the basis of ‘best efforts’ or ‘all or none basis’.
However in best efforts, investment bank tries to sell new security as far as possible. And the securities not sold are returned to the issuing firm. While in all-or-none-basis, if all the securities are not sold at the marked selling price, the investment bank returns all securities to the firm.
To talk about the process of issuing new security. It is a very long process where at first, the new security should be first approves by firm’s board of directors. After being approves, the security registration statement should be sent to the government agency that looks after the activities of financial market such as Security Exchange Board. this statement contains the information about history of the firm, new security, existing business and statement of future prospect. Now, only after being finally approved by the registration, the security is issued.
registration, the security is issued.
This registration process is carried out for preparing the prospectus and to give information to the investors regarding new security. This issued prospectus is called the ‘red-herring’. After the actual sale of security gets started, this prospectus is distributed to all the potential buyers. Most of the information are about registration in this prospectus.
Like every aspects in finance the public sale through general cash offer also has its advantages and disadvantages. Among wide varieties of variation in advantages and disadvantages, here are few listed below.
- The fund are available from different sources. Hence, even small savers can participate in the securities of a company.
- The sales of security are widely published through different media and communication channel. This causes an automatic publisity of the respective company.
- As funds are available from different source there is a wide participation in sale. Due to which there is no possibility of the concentration of economic power and there are numerious potential benifits from it.
- In this issue, the firm benifits from competition between investment banks. The competition occurs between these banks to get right of issuing new security. Now as there is competition in bidding it increases the price of security and reduces the interest rate.
- It has high administrative and issuing cost to bear.
- It is a very time consuming method.
- All investors might not get the opportunity to invest.