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12.5.1 Junior Company Distributions

An in-depth exploration of junior company distributions, focusing on the capital raising strategies of junior mining and oil companies. Aimed at helping candidates prepare for the Canadian Securities Course (CSC) certification exam.

Introduction

A listed junior company may decide that it must raise new capital through a distribution of treasury shares to the public. The company must find a dealer member to act either as its underwriter or agent for the offering. Historically, listed junior mining and oil companies have raised millions of dollars through such distributions.

Key Concepts

Treasury Shares

Treasury shares are previously issued shares that have been reacquired by the issuing company and are now available for resale. For junior companies, bringing these shares to the market is a common approach to raising funds.

Underwriter or Agent

The company must employ a dealer member who will act as either an underwriter or an agent to facilitate the sale of shares to the public.

  • Underwriter: An underwriter guarantees to the issuing company that a specific amount will be raised by buying the shares themselves and reselling them to the public.
  • Agent: An agent facilitates the sale of shares without guaranteeing the amount of money that will be raised.

Historical Context

Junior companies, particularly those in the mining and oil sectors, have historically raised significant amounts of capital through the distribution of treasury shares. These funds are typically required for exploration and development, which come with high inherent risks.

Risk Capital

Junior companies usually do not have the earnings record or substantial assets to qualify for traditional lending. The funds needed are often referred to as risk capital. This capital is dedicated to ventures with a high failure rate such as exploration and development activities.

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Frequently Asked Questions (FAQs)

What are Junior Companies?

Junior companies are small, often newly established firms primarily involved in high-risk ventures such as mining and oil exploration. They generally lack a history of consistent earnings.

What is the Role of an Underwriter?

An underwriter buys the shares from the company and then sells them to investors. By doing so, they guarantee that the company will raise a certain amount of capital.

Why is the Capital Called ‘Risk Capital’?

The term ‘risk capital’ refers to the funds earmarked for ventures with a high probability of failure, making them higher risk as compared to conventional investments.

Diagrams and Visuals

    graph TD
	    A[Junior Company] -->|Issues Treasury Shares| B[Public]
	    A -->|Engages| C[Underwriter/Agent]
	    C -->|Facilitates Sale of Shares| B
	    B -->|Provides Capital| A

Key Takeaways

  • Junior companies frequently raise funds through the distribution of treasury shares.
  • These companies often engage a dealer member as an underwriter or agent for the shares’ sale.
  • The raised funds, termed risk capital, are typically allocated for high-risk ventures like mining and oil exploration.

Glossary

  • Treasury Shares: Previously issued shares repurchased by the company and available for resale.
  • Underwriter: Entity that guarantees the sale of a specified amount of shares, buying them from the issuer and selling to the public.
  • Risk Capital: Funds allocated for high-risk ventures often characterized by a high failure rate and no guaranteed returns.
  • Junior Company: A relatively small and new firm, often with unstable earnings and high-risk projects, especially in industries like mining and oil.

Chapter Summary

In this section, you learned about the strategies that junior companies employ to raise new capital. Their use of treasury shares and the role of underwriters and agents in distributing these shares were discussed. You should now better understand the concept of risk capital and why these types of investments carry a high risk of failure.

Chapter 12: Financing and Listing Securities continues


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## What is the primary reason junior companies raise new capital through distributing treasury shares to the public? - [ ] To improve their credit rating - [x] To raise funds necessary for exploration and development - [ ] To distribute profits to shareholders - [ ] To pay off existing debt > **Explanation:** Junior companies raise new capital by distributing treasury shares to the public to fund exploration and development which come with high risks. ## Why are the funds needed by junior companies referred to as "risk capital"? - [ ] Because they are held in a high-yield savings account - [ ] Because they are insured by the government - [x] Because they are earmarked for high-risk exploration and development projects - [ ] Because they are backed by collateral > **Explanation:** These funds are considered risk capital because they are designated for high-risk activities such as exploration and development. ## Why are junior companies often unable to secure conventional sources of credit? - [ ] They prefer equity financing - [x] They generally have no record of earnings and few qualifying assets for collateral - [ ] They have excess collateral - [ ] They are overly regulated > **Explanation:** Junior companies typically lack earnings records and sufficient assets to qualify for traditional loans or credit sources. ## What role does a dealer member play in the distribution of treasury shares for a junior company? - [ ] Acting as a consultant - [x] Acting as underwriter or agent for the offering - [ ] Acting as the primary investor - [ ] Allocating government assistance > **Explanation:** A dealer member acts as an underwriter or agent for the offering, helping the junior company distribute its treasury shares to raise capital. ## In what industry do listed junior companies typically raise millions of dollars through share distributions? - [ ] Technology - [x] Mining and oil - [ ] Retail - [ ] Agriculture > **Explanation:** Listed junior companies in the mining and oil industries have historically raised millions of dollars through share distributions. ## What are junior companies least likely to use the raised capital for? - [ ] Exploration and development - [ ] High-risk projects - [x] Paying off existing debt - [ ] Risk capital investments > **Explanation:** The capital raised by junior companies is typically allocated for exploration and development, not for paying off existing debt. ## What makes it difficult for junior companies to qualify for bank loans and other conventional credit sources? - [ ] High interest rates - [ ] Poor market conditions - [x] Lack of earnings record and qualifying assets for collateral - [ ] Regulatory compliance > **Explanation:** Junior companies usually lack the earnings record and qualifying assets required to obtain conventional loans or credit from banks. ## What kind of assistance are junior companies least likely to qualify for? - [ ] Government assistance - [ ] Bank loans - [ ] Mortgage or funded debt - [x] All of the above > **Explanation:** Junior companies often have difficulty securing any of the conventional credit sources due to their lack of earnings and collateral. ## Which of the following best describes the nature of the projects typically funded by junior company distributions? - [ ] Low-risk - [ ] Government-funded - [ ] Fully insured - [x] High-risk exploration and development > **Explanation:** The projects typically funded by junior company distributions are high-risk exploration and development initiatives. ## What historical method have junior mining and oil companies used to raise new capital? - [ ] Issuing bonds - [ ] Borrowing from international banks - [x] Distributing treasury shares to the public - [ ] Receiving government grants > **Explanation:** Junior mining and oil companies have historically raised new capital by distributing treasury shares to the public.

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Tuesday, July 23, 2024