We all know what a share or stock is, equity financing, however, involves selling your shares in an enterprise or a particular organization in order to raise capital.
Equity financing is more than sales of common equity such as shares but it goes further into the sales of other equity as well as a quasi-equity instrument; quasi-equity, however, involves preferred stock, equity units and convertible preferred stock.
An equity financing is always accompanied by an offering memorandum or prospectus, which contains a great deal of information that will help the investor make an informed decision about the merits of the financing. Such information includes the company’s activities, details on its officers and directors, use of financing proceeds, risk factors, financial statements and so on.
Equity financing is best for startup organizations or enterprise that just started as it will help them to raise capital for the enterprise or organizational activities. While growing in the startup enterprise, the organization can basically make use of the different types of equity instruments for its financial needs.
The equity instruments can be classified into numerous categories, but the most common ones include
• Common Stock: this particular instrument is issued by a public organisation to raise funds from the public. The shareholders have the proportion of shares they are entitled to; co-ownership and censors, rights to make a decision in on an important issue in the organization, rights to vote at the shareholders meeting based on the proportion or level of owned shares. The shareholder is allowed to apply for new shares when the company increases its capital or issuing of new shares to the shareholders
• Convertible Debenture: this instrument is similar to the Common Stock but this instrument can, however, be converted into common stock during the particular rates mentioned in the prospectus. Convertible debentures are known to be quite profitable because their kind of stock is higher than the profit from the common bonds.
• Preferred stock: this is another equity instrument that involves shareholders’ participating as a business owner in common stock and in this they are entitled to receive repayment of capital, unlike the normal shareholders.
• Depository receipt: this instrument gives the shareholder the right to reference common bonds, ordinary debentures, and convertible debentures. Investors holding this depository receipt get benefits as shareholders of listed companies in every respects, be it the voting rights or financial rights in the listed companies based on the characteristics of this instrument.
• Transferable Subscription Rights (TSR) is an equity instrument issued by a company to all their shareholders in level or number of shares already held by them. The main reason for this instrument is to serve as evidence in shares of the company. In this instrument, the existing shareholder can decide to sell or transfer their rights to another shareholder if they don’t want to exercise their shares.
There is no financial marketing without regulations and jurisdictions. The equity financing process is governed by regulations imposed by local or national securities authority, either of the state or cities or of the country itself.
These regulations and jurisdictions are created to protect the investing public from dishonest, corrupt and deceitful operators who may raise funds from unwary or naive investors and then disappear with their financing proceeds.