Raising Capital: Equity Offerings v. Debt Offerings

Both private and public companies seeking to raise capital by selling securities, do so by offering either debt or equity securities to investors. Companies can also offer a combination of debt and equity through the sale of units comprised of common stock and a convertible note.

What is an Equity Offering?

A company selling equity is most often accomplished through the sale of common stock or membership interest for a limited liability company. In return for the investment, the investor receives a form of equity ownership of the Company typically represented by shares of stock.

What is a “Debt Offering”?

A Debt Offering of securities involves a ‘promise’ or a commitment from the company to pay back the principal investment or to pay some type of interest payment. Debt securities can be represented by various instruments including bonds, notes and debentures. When a company sells debt securities it must designate the interest rate, maturity date and when interest payments will be made to the investor.

Considerations for Debt & Equity Offerings

• Because the investor in a Debt Offering does not receive equity or shares, a debt will not dilute the ownership interest of the company’s existing shareholders.
• Interest on a Debt Offering is deductible on the company’s tax return, lowering the cost of the Debt Offering to the company.
• Generally, with a Debt Offering, the investor is entitled to repayment of the principal invested plus an agreed upon rate of interest. As a result, the investor will not typically have a claim for future profits of the company’s business.
• Except where the investment is a variable rate loan, the company’s obligations under a Debt Offering are known and can be planned for.

What are the Advantages of an Equity Offering?

• Stockholders are generally allowed to vote on certain matters involving the company.
• Equity Offerings do not have to be repaid.
• Interest is a fixed cost that can increase the risk of insolvency. Companies that are too highly leveraged may find it difficult to service the cost of their Debt Offering.
• Cash flow is required for both principal and interest payments.
• Debt instruments often contain restrictions that prevent the company from receiving other financings.
• The higher a company’s debt to equity ratio, the more difficult it is to raise capital from investors or other lenders.
• The company may be required to pledge its assets as collateral in a Debt Offering.
• The controlling stockholders of the company may be required to personally guarantee repayment of the funds received in a Debt Offering.

For further information about raising capital and going public, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.