Last updated 7 months ago
Key terms in Equity Capital Markets
A lot of terms used in Equity Capital Markets can be new and confusing. Here are some explanations of the key terms and links to further information on the topics.
Key terms contents
General Capital Market terms
Types of equity capital raises
Types of investors
Bidding entity terms
General Capital Markets terms
A share is a type of security or investment that allows the investor to take partial ownership of the company. Companies issue shares to raise funds to operate and grow. Shares are traded on exchanges like the ASX and new shares can be created to raise more funds.
Equity Capital Markets (ECM) defines the market in which shares are traded, both through exchanges like the ASX and over-the-counter market. ECM refers to both the primary markets where shares are first created with placements IPOs and other capital raises, as well as, the secondary market where shares are exchanged and traded. Fresh Equities gets access to capital raises for listed companies on the ASX.
A capital raise is when companies approach investors to provide additional capital to the business in the form of either debt or equity. Companies typically raise capital from investors for 3 primary purposes: acquisition, re-balancing the capital mix and growth.
Equity raising is when a company raises funds by issuing new shares. This allows the investor to take partial ownership in the business and, unlike with debt, the funds raised do not have to be repaid. This is the area that Fresh Equities currently operates in.
There are three different types of equity capital raises that Fresh participates in including placements, entitlements offers and share purchase plans.
An alternative form of capital is debt financing, where investors also pay funds into a business, but expect to be repaid along with interest at a future date.
A trading halt is a temporary suspension of a company's trading activity. This may occur at the request of the company or where the ASX receives an announcement from a related entity that is deemed to be market sensitive.
Capital raises such as placements can only occur during a halt as the result of the raise is market sensitive.
Types of equity capital raises
There are three main types of equity capital raises. Each has different structures and variations.
The most common form of equity capital raising that Fresh participates in is a placement. A placement is a method for listed companies to raise equity capital through creating new shares and offering these on the market to select investors.
Shareholder Purchase Plans
Shareholder Purchase Plans are equity capital raises conducted by a company, wherein the company offers existing shareholders the opportunity to purchase an additional parcel of shares in fixed dollar values, up to a maximum of $30,000 worth under ASX regulations.
An Entitlement Offer is an equity capital raise conducted by a company, wherein existing shareholders are offered the opportunity to purchase an additional parcel of shares, based on a pro-rata entitlement of their holding.
Types of investors
Not all investors can participate in placements because of requirements set out by the Australian Securities and Investments Commission (ASIC). The following outlines the different types of investors and who can participate in these types of offers.
Qualified investors are investors that meet the requirements from ASIC which assess your investor status. If the requirements are met, qualified investors are able to participate in placements and other offers that retail investors cannot. Fresh Equities provides access to sophisticated and professional investors.
Sophisticated investors are qualified investors and are defined as wholesale investors. To qualify they must:
Have or control net assets of at least $2.5 million, either in my own name or through an entity; or
Earned a gross income of $250,000 or more per annum in each of the previous two years.
Professional investors are qualified investors and are defined as wholesale investors. To qualify they must:
Have or control more than $10m in gross assets, either in my own name or through an entity; or
Hold an Australian Financial Service License or;
Control a company that employs more than 20 people (or if the business includes or is directly involved in the manufacturing of goods, 100 people) or;
Control a foreign entity that, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
An Experienced Investor, considered to be a retail investor, is a person who can be made an offer through a licensed broker when the broker is satisfied on reasonable grounds that the person to whom the offer is made has previous experience in investing in securities that allows them to assess:
the merits of the offer
the value of the securities
the risks involved in accepting the offer
their own information needs
the adequacy of the information given by the person making the offer
At the moment, Experienced Investors are unable to participate in placements through Fresh Equities as this qualification must be made on an offer by offer basis.
A retail investor is any person who does not qualify as a wholesale investor (Professional or Sophisticated investors are wholesale investors). Retail investors cannot participate in placements.
See below the key transactional terms for the ECM. Fresh will refer to these a lot in the bidding and settlement processes.
The term sheet is an official document created by the lead manager of the offer outlining the details of the offer including the offer price, deal structure, the lead manager and key dates.
Expressions of Interest
Expressions of interest (EOI) are an opportunity to represent your interest in making an investment into the offer. EOIs are not firm commitments.
An indicative bid is an unconfirmed bid that will not be considered in the book unless confirmed before the book's closure.
A firm commitment to participate in the offer at the terms outlined in the term sheet. The bid represents the amount up to which you would receive an allocation.
The ‘Book Build’ refers to the process of collating the bids in the offer and deciding on allocations, thus building the book. Companies get full discretion of the book allocations and many variables come into play.
A record of all bids into that offer when the offer is open to the public. This excludes cornerstone and other types of bids that occur before the trading halt. This is opened when the offer is announced and closed once enough bids have been received or the allowed time has expired.
Allocation refers to the amount of shares to be received once the offer is complete. The company completing the raise will decide the allocations based on many variables.
Allocation may be 0% if the book is over subscribed (there was a lot of demand and the amount of bids exceeds the amount of capital the company desired to raise).
Fresh distributes all allocations pro rata to its bidders to be as fair as possible. If fresh receives 75% of its bid into a placement, all bidders will be allocated 75% of their bid amount.
A cornerstone bid refers to a commitment of an investor in advance to the book opening to the public. In order to do this, the investor must be wall-crossed. When someone is wall-crossed they have information about a capital raise before it is made public. One of the benefits of being a cornerstone bid is that in most cases you will be able to secure allocation before general bidding opens.
Wall Crossed Offers
"Wall-crossing" refers to the process of sharing confidential information about an offer to investors about a publicly traded company. Investors are wall-crossed and bound to confidentiality so that no trading occurs in an uninformed market.
A lead manager is the person in charge of the book and manages the deal. They often liaise with other brokers to fill the book and mitigate risk. Every offer will have a lead manager running the deal.
A shareholder is a person or company that owns at least one share of a company's stock. This means they have partial ownership of the company and are entitled to the benefits of the company's success. This is usually realised in the form of dividends or a rise in the share price.
Companies like to ensure that their existing shareholders feel recognised, whether or not an investor is an existing holder will often factor into allocation decisions.
This refers to how long the investor is intending to hold their placement shares. Companies can take this into consideration when deciding who to include in the book if the offer is oversubscribed.
This is the ‘why’ behind an investor’s decision to make an investment. It can refer to the strategy the company is taking, the sector the company operates within, or anything else that helped the investor decide to invest. Companies like to understand the motivations of potential new shareholders.
Bidding entity terms
Bidding entities are the CHESS registration details attached to your brokerage account. Fresh requires at least one bidding entity per investor so that allocations can go to the right place - into your account! This will be re-confirmed with you before you receive your first allocation.
You can set up as many bidding entities you like so that you can settle multiple offers to multiple accounts. Set up your bidding entity here.
CHESS stands for Clearing House Electronic Subregister System and is the computer system used by the ASX to manage the settlement of share transactions and to record shareholdings. In practical terms, it allows brokers and other market participants to settle trades.
Bidding entities require the exact details on your CHESS statements as the details must be the same to ensure the correct account is used for settlement.
The PID (Participant Identification Number) is a unique identifier that identifies organisations authorised to trade on the market, to settle and to clear trades on the market. Fresh Equities requires your broker's PID to settle and clear DvP trades.
When shares are held with a broker (or online trading account) they are identified by a HIN (Holder Identification Number). A HIN is like a bank account number, it is used to identify your account with a broker where your shares are held.
When shares are not registered under a broker they are held with the company’s share registry and identified by an SRN (Securityholder Reference Number).
When participating in a capital raise that is using a Manual Settlement you may nominate to have your shares sent to an SRN. If you nominate for your shares to be allocated to a HIN but the details you provided do not exactly match what is in the CHESS system, then your shares will in most cases be automatically sent to an SRN
Settlement is the process of transferring the shares and funds once the offer has been accepted and finalised. Settlement usually takes place via two ways: DvP or EFT.
EFT or Manual Settlement
Manual or EFT (Electronic Funds Transfer) is a settlement method where an investor electronically transfers money directly to a company or its designated account. In return, the company will instruct their share registry to allocate the investors newly issued shares.
Delivery Versus Payment
Delivery Versus Payment (DvP) is the most common settlement method for placements that ensures shares are only delivered to an investor once payment has been secured. This form of settlement is affected by the ASX's CHESS system (Clearing House Electronic Subregister System). It does this electronically by simultaneously transferring legal ownership of the shares with the transfer of funds. This is distinct from a 'manual' settlement where an investor will transfer funds to an issuer and receive shares directly from the registry.
DvP is designed to avoid settlement risk, where one party might fail to deliver on their side of the transaction.
A letter sent to the investor that includes the details of the offer and the obligation the investor has to complete the offer. The investor must pass on their letter to their broker as proof they give permission to have their broker facilitate the transaction.
The card form is the Confirmation of Allocation and Registration Details and can be found at the bottom of the offer letter. It has all the key details brokers will need to book out the trade including the ISIN, Stock code, number of shares and offer price.
The 3 letter stock code followed by either “XX” or “YY'' as a placeholder. Temporary codes are used during settlement when the stock cannot be traded. When the shares are converted to ordinary shares the “XX” or “YY” will be removed from the code and they will be tradeable.
These will be transferred to the investors account one day after settlement on the allotment date. This date can be found on the offer letter.
Ordinary shares, also called common shares, are stocks sold on a public exchange and are tradable. Temporary shares are converted to ordinary shares a day after the allotment date.
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