Financing Tool In North American Capital Market (I)

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Financing Tool In North American Capital Market (I)

Financing in nature includes two categories, namely, the equity financing and debt financing and all financing tools can be basically included in the aforesaid two categories. To adapt to the market demand for the sake of financing, the North American capital market has diversified financing tools. These tools are introduced to widen the visual field of managers of Chinese companies and let such managers to know that the North American capital market can provide broader financing space for financing besides the issuance of shares.

(1) Equity financing

A. Common stocks and private placement

Common stocks are the financing modes familiar to us, which include the IPO, additional issuance, private placement and others. The financing by private placement shall be emphasized herein. The private placement should be not strange to the companies in Chinese Mainland, which is quite similar to directional fund-raising, whereas the North American capital market follows some certain procedures for private placement.

In USA, there is no need to obtain the approval from SEC for financing by private placement and the targets of private placement shall include the institutional investors, rich individual investors and overseas investors other than those from USA. SEC does not have any restrictive provision concerning the amount of private placement, whereas the amount under private placement is divided into three classes—below USD1 million, below USD5 million and open-end private placement. If a company plans to raise fund by means of open-end private placement, then the raiser of such fund shall provide the relevant audit document and other detailed financial reports to its investors. In accordance with the relevant provisions, investors of private placement shall not sell their acquired equity in the market within one year, but they can transfer such equity to others in private.

The features of private placement are shown hereinafter: firstly, the procedures for application are simpler and free of the approval from SEC; secondly, the targets of private placement are restricted to the certain scope of investors, and the targets of private placement mentioned hereinabove are those investors not to be protected with the information disclosure as deemed under the securities law; thirdly, private placement is subject to looser control of information disclosure, but it is necessary for the issuers to provide the necessary information prior to the issuance; fourthly, the circulation of securities by financing of private placement is subject to higher restriction. Of course, cost will incur to private placement and the commission for such financing will be at 10% or so if any private placement is implemented through a dealer or a securities broker.

B. Preference stock

Preference stock is included in the equity financing, but has more features of bond, such as, fixed interest—no change due to the change to company’s state of operation. Whenever the liquidation is conducted upon the bankruptcy of a company, the preference stock has priority over the common stock in claiming for the residual assets. There are many kinds of preference stock in North American capital market, for example, the convertible preference stock, redeemable preference stock and preference share with special safeguard clauses, etc. Such preference shares are designed for some special requirements of investors. Taking the convertible preference stock as an example, the investors holding such share may convert it to the common stock for the sake of return created by the added value of common stock. As to enterprises, the lower leverage ratio can be maintained if they select the preference stock for financing, so that the corporate financial reports meet more the requirements of banking institutions and then create the convenience for the continuous financing of companies.

Subscription warrant is a typical promotion for the issuance of preference shares, which ensure investors to buy the share of a company at the agreed price in the future. Generally, the price of a share issued officially is higher that of the share circulated in the market. Subscription warrant means a right and investors have to pay somehow for such right. Meanwhile, investors shall pay as provided under such warrant when such warrant is implemented, so the subscription warrant also has the function of financing. Furthermore, subscription warrant may be sold and transferred in the market.