Equitycapitalmaintenance
Equity capital maintenance is the financial strategy of issuing and allocating shares of a company to maintain the same level of equity capital value. This strategy helps in meeting a companys goals of expanding its operations, repaying its debt and conserving cash. It helps in increasing the tangible net worth of a company and also enables it to create and manage its capital expense budget.
Incorporated in 1868, The U.S. Securities and Exchange Commission (SEC) regulates the financial markets by promulgating rules and regulations pertaining to the issue and sale of securities, such as stocks and bonds, to protect public from fraudulent schemes. The SEC also presides over the disclosure requirements of publicly-traded companies. A critical portion of securities regulation deals with equity capital maintenance.
Under the SECs General Rules and Regulations, companies must maintain a certain level of equity capital by allocating or issuing shares regularly or annually. This way, companies keep their equity capital base value consistent.
There are two primary types of equity capital maintenance: annual and cumulative. In the annual method, companies can issue and allocate shares in a certain amount each year to maintain their equity capital base level. This method allows the company to maintain control of its financial resources, as the company can dictate how much capital is required to meet its financial obligations.
Cumulative equity capital maintenance allows companies to issue and reallocate shares when required to meet the desired level of equity capitalization. This is usually done in response to a demand for additional capital from markets or other stakeholders.
The main purpose of equity capital maintenance is to sustain the same level of equities at all times. If companies fail to allocate and issue appropriate amounts of new shares and maintain the same level of equity capital in the long-term, they will not be able to finance strategic projects, sustain growth and develop financially.
To ensure that companies meet their obligations to maintain the same level of equity capital, the SEC and various stock exchanges, such as the NYSE, NASDAQ and AMEX, regulate the issuance and sale of securities. Companies must comply with certain disclosure requirements and obtain approval from these exchanges, before they can issue or reallocate shares.
In summary, equity capital maintenance is a crucial financial strategy for companies, which enables them to attract equity or debt capital from the markets. It helps in meeting a companys goals of expanding its operations, repaying its debt, conserving cash and increasing its tangible net worth. Moreover, with appropriate equity capital maintenance, companies can also maintain a certain level of equity capital at all times. The SEC and stock exchanges regulate the disclosure requirements when issuing and reallocating shares, making it important that companies comply with the relevant rules and regulations.
