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14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock

Equity Financing​

Equity Financing:

  • Raising capital by selling ownership interests
  • Issuing shares to investors
  • Investors become owners (shareholders)
  • No repayment required (unlike debt)
  • Investors share in profits and losses

Advantages:

  • No repayment obligation
  • No interest payments
  • Share risk with investors
  • Can raise significant capital
  • Investors may provide expertise

Disadvantages:

  • Dilutes ownership
  • Share profits with investors
  • May lose control
  • More complex than debt
  • Must comply with corporate law

Share Capital​

Share Capital:

  • Amount invested by owners
  • Recorded at par value or issue price
  • Represents ownership stake
  • Cannot be withdrawn (unlike loans)
  • Permanent capital

Par Value:

  • Nominal value per share
  • May be €1, €10, or other amount
  • Set in corporate documents
  • May differ from market value

Issue Price:

  • Price at which shares are sold
  • May equal par value
  • May exceed par value (premium)
  • Determined by market or agreement

Issuance of Stock​

Process:

  1. Company decides to issue shares
  2. Sets price per share
  3. Sells shares to investors
  4. Receives cash
  5. Records share capital
  6. Updates share register
  7. Files with RCS (if required)

Example:

  • Issue 1,000 shares at €10 per share
  • Receive €10,000 cash

Journal Entry:

510000 Cash                       €10,000
101000 Share Capital                          €10,000
To record issuance of shares

PCN Account:

  • 101000: Share Capital (Capital Social)

Share Register:

  • Must maintain list of shareholders
  • Track share ownership
  • Record transfers
  • Required for compliance

Luxembourg Compliance Note​

Share issuance in Luxembourg:

  • Must comply with corporate law
  • Must use proper PCN accounts (Class 1)
  • Must maintain share register
  • Must file with RCS
  • Must follow corporate form requirements
  • Minimum capital requirements apply
  • Must be properly documented

Think It Through​

Why might a company choose equity financing over debt financing? What are the advantages and disadvantages? When is each most appropriate?