The main function of a stock market, or a stock exchange, is to enable private limited companies to raise capital by selling their shares (a part of the company) to the general public (anyone in the world) in exchange for money (new capital injected into the business).
The stock market also provides a market for trading second-hand shares which have already been own by current shareholders of public limited companies.
The largest stock exchanges in the world include New York Stock Exchange, London Stock Exchange and Tokyo Stock Exchange.
The Initial Public Offering (IPO) process
Many owners of private limited companies decide to ‘go public’ by floating (selling) their shares on a stock exchange for the first time. This is known as an Initial Public Offering (IPO). Popular IPOs are heavily oversubscribed which pushes up the share price.
But first, before any private limited company can ‘go public’, it must obtain the necessary authority to sell shares to the wider community of investors.
Selling shares on the stock market in the US
In the US, if you want to issue shares, this can be done in the following way.
The US capital markets have long been a favored destination for foreign companies wishing to raise capital or establish a trading presence for their securities. The following information provides a general overview of the relevant laws and regulations governing the US securities markets with which foreign companies wishing to access the US capital markets should be familiar.
Two of the most important laws applicable to companies wishing to access the US capital markets are the Securities Act of 1933 (the ‘Securities Act’) and the Securities Exchange Act of 1934 (the ‘Exchange Act’).
In very broad overview, the Securities Act requires companies wishing to offer and sell securities in the United States to register the transaction with the Commission or to follow the requirements of an exemption from the registration requirements. The Exchange Act requires companies to register classes of equity securities in order to list these securities on a national securities exchange in the United States, or if certain asset and shareholder thresholds are exceeded. The Exchange Act also requires companies to make periodic filings with the Commission to disclose information about their business operations, financial condition, and management.
In the discussion that follows, this overview outlines several considerations for foreign companies wishing to raise capital or establish a presence for their securities in the United States, specifically with reference to foreign private issuers. These include:
- Conducting a registered offering under the Securities Act.
- Conducting an offering exempt from registration under the Securities Act.
- Registering a class or classes of securities under the Exchange Act.
- Establishing and maintaining exemptions from registration under the Exchange Act.
- Meeting reporting obligations under the Exchange Act.
- Establishing an American Depositary Receipt (ADR) program.
This discussion does not address special regulatory provisions such as the Multijurisdictional Disclosure System available to Canadian issuers, the special regulations applicable to blank check or shell companies, the provisions of the U.S. federal securities laws relating to foreign governmental issuers eligible to register transactions on Schedule B, or the rules applicable to cross-border rights offers, tender offers, exchange offers, or business combinations.
SEC filings are important regulatory documents required of all public companies to provide key information to investors or potential investors. The public can review SEC filings by visiting the commission’s online database called EDGAR.
Registration statements are required when a company initially sells shares to the public. Among the most common SEC filings are: Form 10-K, Form 10-Q, Form 8-K, the proxy statement, Forms 3, 4, and 5, Schedule 13, Form 114, and Foreign Investment Disclosures.
The annual 10-K report, for instance, provides a comprehensive summary of a company’s financial performance. Proxy statements are presented prior to a shareholder meeting and before voting on the election of directors and other corporate actions.
Summary
Issuing shares on the stock market obviously gives private limited companies an opportunity to raise much more capital than from just the existing shareholders (usually family members and friends only). But, with the risk of some loss of control to the new shareholders.
