Question

Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50% and because family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $18.3 million. However, the family wants to retain voting control. You have been asked to brief family members on the issues involved by answering the following questions. What agencies regulate securities markets? How are start-up firms usually financed? Differentiate between a private placement and a public offering. Why would a company consider going public? What are some advantages and disadvantages?

Answer 1

securities markets in the U.S. are regulated by these agencies :

• SEC
• FINRA
• CFTC

start-up firms are usually financed by a mix of preferred stock and common stock. Debt is rarely used for start-up finance since startups usually do not have the cash flows to service debt obligations. Preferred stock is a convenient way to finance startups since it carries the characteristics of debt as well as equity

A private placement is when a company issued stock privately to a select investor or group of investors. There is no public issue involved. In a public offering, the stock is issued to the general public and any investor can apply to purchase the shares.

A company could consider going public because it requires a large amount of funds for future expansion. A private placement may not be feasible in some cases, due to the amount of funds required. In such cases, a public offering would be considered.

Advantages of public offering :

• large amount of funds can be raised
• publicity about the company is disseminated in financial markets and the general public
• there is no obligation to pay dividends, which is not the case with mandatory interest payments for debt funds

Disdvantages of public offering :

• there is a lot of compliance and regulatory requirements
• After a company goes public, financial statements are required to be publicly disclosed