What Is a New Issue?
A new issue refers to a stock or bond offering that is made for the first time. Most new issues come from privately held companies that become public, presenting investors with new opportunities.
The typical route for a new issue via a stock offering is known as an initial public offering (IPO), where a company's stock is offered to the public through various exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq for the first time. New issues of bonds work the same way. Both forms of new issues are intended to raise capital for the issuing company.
A new issue may be contrasted with a seasoned issue.
- New issues, whether stocks or bonds, are a means of raising capital for a company.
- New equity shares are often issued via an initial public offering (IPO), allowing investors to buy the stock of a previously private company for the first time.
- Bonds, preferreds, and convertible securities may also be disseminated as new issues to raise debt capital for a firm.
- Bonds as new issues are considered a form of debt financing, while stocks and IPOs as new issues are considered a form of equity financing.
- Investors should be aware of the "hype" surrounding a new issue like an IPO, as it could go one way or the other.
- Companies that are already public can make a new issue through a secondary offering.
Understanding a New Issue
A new issue is conducted as a means of raising capital for a company. Firms have two main choices: issuing debt (i.e., borrowing) or issuing equity in the form of stock (i.e., selling a portion of the company).
Regardless of which route they take, they will be making a new issue when those securities are offered for sale. Governments will also create new issues of sovereign debt in the form of Treasury securities in order to raise funds for government operations.
Using the debt route (i.e., issuing bonds), the new issue will be scrutinized based on the creditworthiness of the issuer to repay its obligations and its overall financial strength. If the firm is a startup with no revenue, issuing bonds may be an option that is not readily available.
There is a risk of "hype" around a new issue, sometimes causing a company's shares to surge after its IPO, and then only plummet after the hype has worn off. Investors need to be careful when investing in new issues.
However, the stock route may still be available if they are able to convince investors that the company has long term potential. This is where venture capital (VC) and private equity firms may become involved, helping the company to develop and thrive in exchange for ownership in the new firm.
If successful, the company may then seek to make a new issue through an IPO and go public. Companies that are already public may originate another new issue later on via a secondary offering.
Example of a New Issue
Say a new IT company has developed a program to make cash exchanges easily available worldwide. It has been successful in both generating revenues and garnering interest from the venture capital community. To grow, however, it believes it needs more capital, approximately $30 million, which it doesn't have on hand. As such, it needs to raise this capital through external sources.
The company engages with investment banks to see what their shares could be worth on the open market, and the banks' underwriters indicate that $19 per share would be a fair IPO price, valuing the company at just under $100 million.
The company’s board of directors agrees to list shares of the company and they file for an IPO to release a number of shares worth half the total valuation, so $50 million. With the new issue, the company raises capital and becomes listed on a stock exchange where its shares are freely tradeable.
The new issue resulted in the company raising $50 million, slightly more than the $30 million they estimated that they needed for growth. Because the company did not list all of its shares, it still has retained a significant portion of ownership.