How exactly does a publicly traded company raise cash?

[Mighty-Dollar]

I see a lot of these publicly listed companies that have burned through their startup cash. They're basically like a shell company with an empty or near-empty bank account that exists, but hasn't declared bankruptcy.  Then something happens, perhaps the beginnings of a pump and dump or some other factor that hypes up the stock, and that causes the share price to go up. Then, how exactly does the company convert share price to cash to finance company activities? Or do they have to do a brand new share offering?

[Paul der Krake]

I see a lot of these publicly listed companies that have burned through their startup cash. They're basically like a shell company with an empty or near-empty bank account that exists, but hasn't declared bankruptcy.  Then something happens, perhaps the beginnings of a pump and dump or some other factor that hypes up the stock, and that causes the share price to go up. Then, how exactly does the company convert share price to cash to finance company activities? Or do they have to do a brand new share offering?

They can sell treasury stock if they have any, or do a new issue, or borrow in the debt markets saying look at us, investors believe in our vision, lend us some cash. Plenty of ways to skin this cat.

[Mighty-Dollar]

But, to buy back shares, the company needs money. Seems like a catch 22. Wouldn't the company need to SELL some of its shares to investors on the exchange in order to raise money?

And, in order to sell off stock, don't they need sufficient daily volume? A lot of these tiny companies have their stock going up on tiny volume (like $1,000 a day).

[EvenSteven]

But, to buy back shares, the company needs money. Seems like a catch 22. Wouldn't the company need to SELL some of its shares to investors on the exchange in order to raise money?

And, in order to sell off stock, don't they need sufficient daily volume? A lot of these tiny companies have their stock going up on tiny volume (like $1,000 a day).

When a company raises money through selling stock, they are issuing new stock that they create out of thin air. The result of this is that it dilutes the existing shares, which would then own less of the company.

As mentioned, they could also borrow money, in the form of issuing bonds. This is what corporate bonds are.

[terran]

Buying back shares is the opposite of raising money. They do that by using money they earn from selling their products/services. Alternatives would be paying off debt or issuing dividends.

[vand]

1. Sell something (radical idea, I know)
2. Issue debt
3. Issue equity
4. Sell off assets

[MustacheAndaHalf]

@Paul der Krake - What is "treasury stock"?  Do you mean treasury bonds?

@Mighty-Dollar - I've bet against AMC stock, so let me use them as an example:
https://ycharts.com/companies/AMC/shares_outstanding

See that sharp spike in early 2021?  That's AMC creating new shares, and selling them on the market.  In May 2020 they had 100 million shares, and they have since "printed" 350 million more.  Normally if you double the number of shares, the market cuts your price/share in half to reflect dilution.  But AMC was one of the WSB stocks, and is up well above fundamentals, so they printed 4x more shares and the stock fell by less than half.

Another option is bonds.  Bond rating agencies calculate the credit worthiness of companies, and assign them a grade.  That reflects the quality of their bonds - their ability to repay.  Normally companies near bankruptcy would issue "junk bonds" at high interest rates.  But the Fed stepped in last year, and said if nobody buys those junk bonds, the Fed would.  Seeing the Fed as a safety net, investors bought bonds with much lower risk.  So a lot of companies created bonds to stay afloat.

[norajean]

Selling assets is a common way to raise cash to, say, pay down debt.

[theoverlook]

Check this out:

https://www.investopedia.com/ask/answers/062315/what-difference-between-shares-outstanding-and-floating-stock.asp

A company will have, say, 100 million shares of stock. That's the "authorizes shares." Of those, they might only offer 10 million of them on the public market. Insiders will hold a certain number, say 20 million. That means 70 million shares are available for the company to sell to raise funds.

The article has a real world example, Microsoft. They have 24 billion authorized shares but only 7.55 billion outstanding so at any time they can issue up to 16.45 billion more shares to raise funds.

[Paul der Krake]

@Paul der Krake - What is "treasury stock"?  Do you mean treasury bonds?

Treasury stock is stock owned by the company itself.

[Mighty-Dollar]

2. Issue debt
3. Issue equity

Is "issuing debt" generally either offering bonds to investors or getting a bank loan?

When you issue debt or equity, do you need 51% approval from shareholders? Does the company need SEC approval to issue debt or equity?

If a company is such a bust, then I guess they could come up empty in trying to raise money in these ways.

[Paul der Krake]

Generally speaking, company managers do not need to consult shareholders before issuing debt. It'd be a nightmare because proxy voting has abysmal participation rates. Same thing for issuing equity.

That being said, there is nothing stopping a company from having legally binding bylaws that dictate that debt/equity can only be issued by getting approval from X Y and Z, or only if the stock price is above a certain threshold, or only during the second week of July.

And in turn, shareholders can present proposals to vote on to limit or oust a management that's not doing things how they think it should be done.

Structuring corporations is complex business. So long as you're not explicitly breaking the law or somehow infringing on some stakeholders' rights, you get to write your own rules! There are armies of investment bankers whose job it is to guide them.

[PDXTabs]

When you issue debt or equity, do you need 51% approval from shareholders? Does the company need SEC approval to issue debt or equity?

Not generally, and the reason is that they arguably didn't dilute the value of the shares. That is, they issued more shares, but they got money that they used to reinvest in the business.

Actually, most/all RSUs are created out of thin air with a similar line of reasoning: you gave them to an employee that invested in the business.

[marty998]

@Paul der Krake - What is "treasury stock"?  Do you mean treasury bonds?

Treasury stock is stock owned by the company itself.

To add to this, companies will frequently buy their own stock on market to hold for a short time before either cancelling the shares (buy-back) or for granting shares to employees as part of compensation plans.

Such shares that are held by the company are called Treasury shares. The accounting for these shares is quite interesting (actually most accountants find even this way too complicated too). Normally when a company holds something of value it is recorded as an Asset on the balance sheet, but Treasury shares are recorded as a reduction to Equity.

Companies can have some odd movements in equity reserves in their balance sheets if there is some volatility in the share price and a significant delay between purchasing shares and releasing them back to the market or to employees. Such movements will not ordinarily be captured in profit results but could have a material impact to the economic value of the company generated that year.

[Rob_bob]

TESLA raises billions by issuing new shares.