Browse Corporation

12.3.1 Method Of Offering

Explore the different methods of offering securities in corporate financing, including private placement, public offerings, and the distinctions between primary and secondary offerings.

The Method Of Offering

In corporate financing, a key aspect is determining how an issue will be distributed or sold. This chapter explores the different methods of offering, including private placements, primary offerings (such as initial public offerings, or IPOs), and secondary offerings.

Private Placement

A private placement involves selling the entire issue to one or several large institutional investors. Here, the issuer targets major financial entities such as banks, mutual funds, insurance companies, or pension funds. Private placements are generally aimed at sophisticated investors and institutional clients; therefore, the requirements for detailed disclosure and public notice are typically waived, negating the need for a formal prospectus. This waiver significantly reduces the cost for the issuing company. Private placements are often declared only after completion, usually through advertisements in the financial press.

Public Offerings

Public offerings involve preliminary agreements between the corporation and the dealer to decide whether the dealer will act as an agent or as a principal.

Types of Underwriting Agreements

  • Best Efforts Underwriting Agreement: Here, the dealer acts as an agent and makes its best efforts to sell the securities to the public. If the securities do not sell, the issuer does not receive the proceeds, and the unsold securities return to the issuer. The issuer faces the risk of not raising the intended capital.

  • Firm Commitment Underwriting Agreement: Also known as a bought deal, the underwriter acts as a principal, commits to buying a specified number of securities at a set price, and then resells them to the public. The issuer receives the full proceeds of the sale regardless of whether all securities are sold. The underwriter assumes the risk of selling the security and thereby advantages from a presumed lower risk after due diligence.

Primary Offering

A primary offering of securities requires significant expertise and finesse, particularly in terms of the pricing and marketing of the issue. The process details, such as the dealer’s commission, offering price, and volume of issued securities, depend on market conditions.

Secondary Offering

A secondary offering involves the resale of previously issued stock by shareholders, often those in control positions. Investment dealers or syndicates usually manage these offerings.

Repurchasing Shares

Companies may repurchase outstanding shares, known as treasury shares, which do not have voting rights or dividend entitlements but can be resold back to the market with restored rights.

Bond Issuance

Bond issuance usually involves multiple groups. The issuing company initially sells bonds to a financing group or lead underwriter, which then offers them for public resale.

Groups Involved in Bond Issuance

  1. Financing Group: This group led by the managing underwriter arranges the prospectus preparation, securities commission clearance, and selling documents. The group members have direct liability for the issue on behalf of the entire syndicate.

  2. Banking Group: These additional dealers agree to participate on pre-set terms, accepting a certain degree of liability.

  3. Selling Group: Other dealers who are not part of the central banking group but assist with sales.

  4. Casual Dealers: Non-members who may include broker-dealers and foreign banks.

  5. Special Group Orders: Considerations for specific dealers or bankers, sometimes dictated by the issuer.

  6. Exempt List: Primarily large financial institutions exempt from prospectus requirements.

Debt and Equity Financing

Differences Between Debt Financing and Equity Financing

In debt financing, companies raise funds by borrowing money, typically through issuing bonds, which must be repaid over time with interest. Equity financing, on the other hand, involves raising funds by issuing shares of the company’s stock, giving shareholders ownership stakes without guaranteed repayment.

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Key Takeaways

  1. Private Placements: Target institutional investors with minimal disclosure requirements for lower costs
  2. Public Offerings: Can involve best efforts or firm commitments, each with its own risks and benefits
  3. Primary vs. Secondary Offering: Primary involves new stock issuance; secondary involves resale of existing shares
  4. Bond Issuance: Involves multiple groups, from financing to casual dealers
  5. Debt vs. Equity Financing: Debt demands repayment with interest, while equity shares company ownership risks and rewards.


Q1. What is a private placement? A private placement refers to selling securities directly to large institutional investors, largely bypassing extensive disclosure requirements and reducing issuing costs.

Q2. What is the difference between a best efforts underwriting agreement and a firm commitment underwriting agreement? In a best efforts agreement, the dealer acts as an agent with no sale guarantee, while a firm commitment agreement sees the underwriter buy securities outright, assuming resale risk.

Q3. What is a primary offering? A primary offering refers to the sale of new securities, often as IPOs, to raise fresh capital for the issuing company.


  • Underwriter: A financial specialist who administers and ensures the proper conduct of issuing securities, assuming various levels of risk.
  • Prospectus: A legal document offering comprehensive details about an investment offer to potential buyers.
  • Treasury Shares: Shares repurchased by the issuing company, holding no vote or dividend rights, but can be resold later.
  • Bond: A fixed-income instrument representing a loan made by an investor to a borrower (typically corporate).

CSC® Exams Practice Questions

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Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

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## What is a primary offering commonly known as if a corporation issues shares to the public for the very first time? - [ ] Private placement - [x] Initial public offering (IPO) - [ ] Secondary offering - [ ] Treasury shares > **Explanation:** A primary offering is commonly referred to as an initial public offering (IPO) when a corporation issues shares to the public for the first time. ## What type of investors are typically involved in a private placement? - [ ] Retail investors - [ ] General public - [ ] Casual investors - [x] Large institutional investors > **Explanation:** In a private placement, the entire issue is sold to one or several large institutional investors such as banks, mutual fund companies, insurance companies, or pension funds. ## In a best efforts underwriting agreement, who assumes the risk of unsold securities? - [x] Issuer - [ ] Underwriter - [ ] Institutional investors - [ ] Dealer syndicate > **Explanation:** In a best efforts underwriting agreement, the dealer acts as an agent and makes its best efforts to sell the securities. The issuer faces the risk of not selling all the securities and therefore not raising the intended capital. ## What is another name for a firm commitment underwriting agreement? - [ ] Private placement - [ ] Best efforts underwriting - [x] Bought deal - [ ] Secondary offering > **Explanation:** A firm commitment underwriting agreement, also known as a bought deal, involves the underwriter acting as a principal and committing to buy a specified number of securities at a set price. ## Who typically announces private placements after they occur? - [ ] Securities commissions - [x] The issuer - [ ] Retail investors - [ ] The general public > **Explanation:** Private placements are generally announced after they have occurred, usually through advertisements in the financial press. ## What is the role of the financing group in bond issuance? - [x] Lead underwriter - [ ] Ordinary brokers - [ ] Individual investors - [ ] Selling group > **Explanation:** The financing group is the lead underwriter in bond issuance, responsible for recommendations, handling documents and ensuring compliance. ## What do treasury shares lack compared to other issued shares? - [ ] Market value - [ ] Resale potential - [x] Voting rights and dividend entitlements - [ ] Underwriting > **Explanation:** Treasury shares are repurchased shares that do not have voting rights or dividend entitlements until they are sold again to the market. ## In a public offering, who decides the record commission and spread between offering and dealer’s cost price? - [x] Corporation and dealer - [ ] Government regulators - [ ] Only the dealer - [ ] Institutional investors > **Explanation:** In a public offering, the corporation and the dealer establish the dealer’s commission or the spread between the offering price and the dealer's cost price. ## What does the selling group consist of in the context of bond issuance? - [ ] Lead underwriters - [x] Dealers who help sell the bonds but are not part of the financing group - [ ] Only foreign dealers - [ ] Institutional investors > **Explanation:** The selling group consists of dealers who are not part of the financing group but agree to help distribute the bonds. ## How does a firm commitment underwriting agreement mitigate risk for the issuer? - [x] The underwriter assumes the risk of selling the securities - [ ] The issuer sells securities directly to public - [ ] By only approaching institutional buyers - [ ] By conducting a private placement > **Explanation:** In a firm commitment underwriting agreement, the underwriter acts as a principal, purchasing all securities, and therefore assumes the risk of selling them to the public, mitigating the risk for the issuer.

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