Issuing shares in practice
How can a company issue shares in order to raise funds? Limited liability companies can be classified as either private (Ltds) or public (Plcs); a key difference between them is that Ltds cannot sell shares on a recognised stock exchange whereas Plcs can.
Issuing shares as a private limited company
Even though Ltds cannot sell shares on a recognised stock exchange, this doesn’t mean that there are no options for private limited companies to raise funds through the sale of shares. Broadly speaking, there are two options for Ltds looking to raise finance through the sale of equity:
- Ltds can sell their shares without the mediation of a stock exchange. Shares in private limited companies can be bought and sold, usually to existing shareholders, but also to other private investors, such as venture capitalists
- Ltds can decide to ‘go public’. Such a decision can be relevant to companies that plan to grow significantly. Going public is a decision that entails huge organisational efforts, since the management has to spend time on the preparation of the public offering of the company’s shares. Moreover, after going public, the company will regularly have to make information about the business, such as financial records and remuneration policies, publicly available.
Issuing shares as a public limited company
Plcs have the great advantage of being able to raise a large amount of capital by offering shares to the wider public, hence reaching a larger number of investors compared with Ltds. When a company is listed on a stock exchange it can also attract the interest of large-scale investors such as mutual funds and hedge funds. Selling extra shares after the ‘initial offering’ will need a resolution to be voted on by the company shareholders. Nonetheless, issuing new shares will further dilute the control of the company.