Issue of Share Capital to Raise Funds: When a business has decided to form a public company, it will begin the procedures required for issue of shares to the public. The initial offering of shares to the public to invest in the new company is called an Initial Public Offering (IPO).
To arrange the sale or issue of shares to public, the business that wishes to float the company generally employs a promoter, such as a stockbroker or a financial institution, with expert knowledge of the legal requirements and expertise in this particular area. Once the promoter and the managers to the issue agree on the structure of the new company, a prospectus is drawn up and lodged with the regulating authority. The prospectus contains information about the present status of the business and its future prospects.
In order to make sure that the statements in the prospectus are accurate, a process of due diligence is undertaken by an accounting firm and a report attached. To ensure that the sale/issue of shares is successful, an underwriter may be employed. The role of the underwriter is to advise on such matters as the pricing of the issue of shares, the timing of the issue and how the issue will be marketed. One of the principal reasons for using an underwriter is to ensure that all the shares are sold, as the underwriter agrees to acquire all shares that are not taken up by the public.
The costs of the issue of shares can then be quite substantial and could amount to 10 to 12% of the amount raised. The costs include costs associated with preparing and printing the relevant documentation and marketing the share issue, as well as the fees charged by the various experts consulted which could include accountants, lawyers and taxation specialists.
An entity usually incurs various costs in issue of shares or acquiring its own equity instruments. Those costs might include registration and other regulatory fees, amounts paid to legal, accounting and other professional advisers, printing costs and stamp duties.
Any costs associated with the formation of the company that cannot be directly related to the issue of shares, such as registration of the company name, are expended as the cost is incurred. These outlays do not meet the definition of an asset as there are no expected future economic benefits associated with these outlays that can be controlled by the company.