Raising Capital Constantine’s Grocery



For expansion the company needed $135 million, and they have two options, although the company sounds small with operation is only in one city, but IPO or selling shares of the company to public is one option, but that is giving up control on company and comply with regulations and another option is corporate bonds. This is debt, not necessarily giving up stake but in this case, the company has to make consistent coupon payments to bondholders. We will explore the processes and explore the risks.


Keywords: IPO, corporate bonds








For the company, there are 2 options available. Going public with an initial public offering or selling equity to investors or bonds worth $135 million. These 2 options are very different than each other. Let us first explore what will happen if they want to sell equity in the company.


Through an Initial Public Offering or IPO, a company raises capital by issuing shares of stock, or equity in a public market (Fuhrmann, 2013). But this is a family business and privately held company so they never had to make their financial results public or any information such as a change in the board of directors’ public, but going public means this company will have to make all these information public. To be precise they will have to file this information with SEC. But before they can file IPO they will have to hire an Investment Bank. Hiring investment bank starts 12 months before going public, and the fees and experience play crucial roles in selection.

Before going public the company needs to make sure it has experienced management team since equity sale is essentially selling stakes in the company, the management will have to be accountable to investors/shareholders. And the company would need accounting and legal team to meet SEC requirement to stay listed.

To comply with regulations the company has to review and publish last 5 years financial statements (Investopedia, 2018). This process starts with 6-12 before going public.


The company has to engage investment bank for underwriting, who has prior experience with the same market sector. The underwriting, account and any legal work will be done by the investment bank to comply with SEC regulations.

The underwriters come up with S-1 which is required by SEC for IPO filing, S-1 is the main disclosure document and it contains the business model, organization structure, financial statements, competition information, employee information and the risks company foresees. And then the company has to submit the S-1 to SEC for review and approval until review and approval is done the company cannot come out in public with their IPO plan.

Once SEC approves S-1, the CEO or executives and investor relations can start road shows to increase awareness and generate buzz. This step starts 20 days before listing.

Based on the response received from potential investors during the roadshow, the underwriting team and company decide on offer price and amend the prospectus to update the offer price and date(Investopedia, 2018). 10 days before going public, underwriters start advertising the IPO. Once everything I finalized, the company decides to list on NYSE or NASDAQ and start trading.

Any public company has to spend $1.5 million to comply with financial, legal and regulatory burdens ( Fuhrmann, 2013).

Selling share is selling the stake in the company, so the company has to publish quarterly financials and annual financials to SEC for the regulators and investors, the forms are known as 10-Q and 10 – K respectively.

And common stockholder has voting right in management decisions, so selling too much share might mean losing control from the company. Even another competitor can buy the controlling stake from an open market, so it is important to consider how much stake to sell.


The process of Issuing Corporate Bonds –

The other option is to issue corporate bonds. And selling corporate bonds do not give away ownership to the company (SEC, n.d.). In order to issue corporate bonds, first, the company needs to hire underwriters from Investment Bank.

First step Underwriting – The underwriters / Investment Bank tend to initially buy the bonds. The company will not issue one single bond worth $135 million, but many bonds worth par value or face value $1000. The investment bank will bring in legal counsel too, which will require throughout the journey.

Regulatory Compliance – The Company has to file the preliminary prospectus with SEC informing them the intention to issue and sell the bond, and this has to be done at least 20 days prior to bond issuance. (Hoyes, n.d.).

Structuring the Bond – is another major step and the underwriters mostly drive this. The underwriters work with potential major institutional investors and fix coupon rate, maturity etc. The underwriter has to inform the final outcome to trade report and compliance engine too (Hoyes, n.d.).

Bond Market – The underwriters have to file certain paper works with Depositary Trust and Clearing Corporation before then can commence public selling of the bonds. And underwriter can collect their fees. (Hoyes, n,d,)

A bond comes with a coupon rate, and this is a promise to the bondholder that the company would pay the interest/coupon rate to the bondholder and will return the par/face value to the bondholder upon maturity of the bond.

And even if the company makes losses it has to make these payments, both coupon payment and payment of maturity amount. In case the company goes out of business and goes for bankruptcy and liquidation, bondholder will still be able to claim the money owed to them. But, on the bondholder do not have any claim on ownership of the company, so they do not have any claim or say in management decision or companies upside when the company goes public.

Credit rating agencies will periodically look into company’s financials and may or may not revise credit rating based on outlook. (Investor.gov, 2013).

Although the bondholder does not take part in management, the company needs to make coupon payments and that will take away part of earning, and that means less money to reinvest back in business, and a higher coupon rate can damage earning and slow down company growth.





FuhrMann, R. (August 2013).The Road To create An IPO. Retrieved from https://www.forbes.com/sites/investopedia/2013/08/29/the-road-to-creating-an-ipo/#3edbc024631e

Investopedia. (2018, April 08). Going Public. Retrieved from https://www.investopedia.com/terms/g/goingpublic.asp

Investopedia. (2018, January 24). Underwriting Agreement. Retrieved from https://www.investopedia.com/terms/u/underwriting-agreement.asp

Retrieved on 5/22/2018. Retrieved from https://www.sec.gov/fast-answers/answers-bondcrphtm.html

Hoyes, S(n.d.). How To Issue a Corporate Bond. Retrieved from http://smallbusiness.chron.com/issue-corporate-bond-73963.html

Retrieved on 5/23/2018. Retrieved from https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/what-are-corporate-bonds

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