indirect issue

Indirect issuance

Indirect issuance is a way for an entity to issue its securities to retail investors without pressing directly from the issuer. It is a process where the securities are sold and bought on the secondary market and indirectly transferred to the investors. Through indirect issuing, the companys securities are vended through the market, through middlemen such as underwriters, intermediaries or dealers, which is a less expensive and more convenient approach compared with direct issuance.

Advantages of Indirect Issuance

The primary benefit of indirect issuance is that it does not require the issuer to approach individual or institutional investors directly for the securities. As an intermediating entity is used, the company can issue its securities to a broader range of investors. Using indirect issuance also eliminates the need for the issuer to have detailed knowledge about the securities holdings of prospective investors and the issuer does not have to provide information regarding investor profiles.

In addition, indirect issuance allows the issuer to indirectly enter a larger market base. This could potentially enable the issuer to procure a wider range of investors for their securities, which generally results in higher liquidity of the securities. This can be especially useful for smaller companies, which might not be able to afford to approach larger investors on their own.

Finally, indirect issuance is typically cheaper and less time-consuming compared to direct issuing. There are fewer legal and administrative costs involved with indirect issuance compared to direct issuance. As a result, the issuer may be able to quickly raise funds needed for the companys operations.

Disadvantages of Indirect Issuance

One of the primary drawbacks of indirect issuance is that the market risk associated with the securities remains with the issuer. For example, if the market value of the securities is less than what was anticipated by the issuer, then the issuer is liable for any potential losses incurred by investors. In addition, the issuer may not have complete control and visibility into what type of investors are buying the securities and what their profiles may be.

Moreover, indirect issuance could potentially lead to greater competition in the market for the securities. This could result in lower liquidity and pricing of the securities, due to the increased supply and decreased demand for the securities. Lastly, indirect issuance could potentially lead to the loss of potential investors if the issuer does not have the information regarding who has purchased the securities.

Conclusion

Indirect issuance can be a more attractive and convenient method of issuing securities than direct issuance. It can lead to greater liquidity of the securities and is typically cheaper and less time-consuming compared to direct issuance. However, there are some drawbacks associated with indirect issuance, such as increased competition, market risk and lack of visibility into who is buying the securities. Thus, it is important to carefully evaluate the advantages and disadvantages of indirect issuance before deciding to enter the market.

Indirect Issuance of Equity Securities

Indirect issuance is a way of selling equity without having to go through the traditional route of a formal initial public offering (IPO). Companies use indirect issuance when they want to raise capital without undertaking the effort, expense and public visibility associated with a full-scale public offering. Companies single out specific investors who are willing to purchase the newly issued shares. These investors may then resell the shares to their clients, resulting in the indirect issuance of the securities.

This method of raising capital may be especially attractive for small companies, or those that have financial restrictions such as a limited strategic purpose or a poor history of operation. Because of the limited public visibility, indirect issuance allows companies to reach a small group of investors and potentially receive a higher profit margin due to the lower number of buyers in the market. Furthermore, direct issuances can also be completed at a faster rate than an IPO as they are generally easier to process.

However, an indirect issuance is usually limited to high-net worth or institutional investors, commonly referred to as “sophisticated investors”. A company that wishes to obtain capital through this method must face fewer challenges than usual. These challenges include clear communication of the benefits and risks associated with their investments; properly constructed disclosure documents outlining all information needed to assess the securities; and compliance with applicable securities law, as well as corporate law, to ensure all regulatory requirements are met.

In conclusion, indirect issuance is a viable capital raising option for companies, particularly those with limited financial resources. However, it does require companies to be prepared to meet the challenges associated with reaching a small group of investors and fulfilling the necessary regulatory requirements.