Advantages and disadvantages when a company offering stocks and bonds?

During its operations, a business must always meet its capital needs to expand production and business activities. Among the various capital raising tools, offering stocks and bonds issuances are the two most flexible and widely used methods. Each method is associated with its own legal mechanism, directly affecting the ownership structure, financial obligations, and risk level of the business. Therefore, it is necessary to fully assess the advantages, limitations, and legal risks of each type of tool so that businesses can choose a safe and suitable capital raising option for themselves.

1.Overview of stocks and bonds

According to clause 2, Article 4 of the 2019 Securities Law, stocks are securities that confirm the legal rights and interests of the owner to a portion of the issued capital of the issuing organization.

Clause 3, Article 4 of the 2019 Securities Law also stipulates that bonds are securities that confirm the legal rights and interests of the owner to a portion of the debt of the issuing organization.

Thus, from the above two concepts, it can be understood that both stocks and bonds are securities that confirm the legal rights and interests of the owner in relation to the issuing organization. However, while stocks reflect the equity capital of the enterprise, bonds reflect the debt that the enterprise must repay to the owner when due.

2.Advantages of offering stocks and bonds

a.Advantages of stocks:

• Increase equity capital: Offering stocks is a way for a company to raise capital quickly by selling new shares to investors. This directly adds capital to the equity capital of the issuing company.
• No periodic interest payments: Unlike bonds, stocks do not have a fixed interest rate. Stockholders only receive dividends when the company makes a profit. If the business encounters difficulties, the company is not under pressure to make periodic interest payments.
• No maturity date: Common stocks typically has no fixed term for repayment of principal; as long as the company continues to operate, the owner’s capital contribution is maintained. As a result, the company does not have to prepare large amounts of cash to repay principal at maturity as it would when offering bonds.

b.Advantages of bonds:

• Fixed interest rate, no fluctuations: Bonds have a fixed interest rate as agreed. The company only has to pay the agreed interest rate, and this interest is deductible when calculating corporate income tax in accordance with the law.
• No impact on management structure: Bond buyers are only creditors and have no right to participate in the management of the company. Therefore, the owners and existing shareholders of the issuing company do not see a reduction in their ownership ratio or shares, nor do they need to share profits in excess of the agreed interest rate.

3.Disadvantages of offering stocks and bonds

Disadvantages of stocks:

• Impact on the internal structure of the company: Issuing new shares for offering reduces the ownership ratio of existing shareholders. This means that existing shareholders must share control and profit distribution with new shareholders.
• Complex, time-consuming, and costly procedures: The IPO (initial public offering) process is very strict. Companies must prepare numerous legal documents and audited financial reports, and comply with information disclosure regulations. This process consumes a significant amount of the company’s time and resources.
• Strict requirements for information disclosure and financial reporting: After offering stocks to the public, the company must disclose financial statements, management reports, and comply with public company governance regulations. This requires the company to establish a robust internal governance system and strictly comply with reporting obligations.

b.Disadvantages of bonds:

• Commitment to periodic debt repayment: When offering bonds, the company is obliged to repay the principal in full upon maturity and pay interest on time as committed. While stock dividends can be deferred or reduced depending on profits, bonds do not offer this flexibility. Ensuring timely payments can cause significant financial pressure, especially when the company’s revenue fluctuates.
• Increased debt and financial risk: Offering bonds increases the company’s debt ratio. Large amounts of debt can reduce the ability to borrow more in the future and make the company more susceptible to liquidity problems when interest rates rise or revenues decline. In the event of business losses, the pressure to repay debt can push the company into bankruptcy risk.

4.Recommendations for businesses when offering stocks and bonds 

Thus, based on the analysis of the advantages and disadvantages, businesses can consider choosing a capital raising method that suits their needs and specific operations. However, to ensure that the securities offering is conducted in accordance with the law and to minimize legal risks, businesses need to pay special attention to the following issues:

a.Thoroughly review conditions before offering: Before offering stocks or bonds, businesses need to proactively check their compliance with the offering conditions specified in Article 15 of the 2019 Securities Law. Reviewing from the early stages helps businesses avoid the risk of having their applications rejected, their offerings suspended, or being penalized for offering without meeting the legal conditions.

b.Fully comply with information disclosure obligations: Pursuant to Articles 122 to 128 of the 2019 Securities Law, companies are obligated to disclose information fully, accurately, and timely throughout the entire offering process, including three stages: before the offering, during the offering, and after the offering concludes. Therefore, enterprises need to establish internal control mechanisms to ensure proper and full compliance with information disclosure obligations, limiting the risk of administrative penalties or damage to their reputation among investors.

c.Prepare offering documents in accordance with legal regulations: Article 18 of the 2019 Securities Law specifies the components of securities offering registration documents. Therefore, enterprises must ensure that the documents are complete and valid in accordance with legal requirements to avoid situations where the documents are requested to be supplemented or revised multiple times, leading to prolonged review periods or rejection of the documents.

The above are analyses of the advantages and disadvantages of offering stocks and bonds and legal recommendations for businesses before offering. Understanding the advantages and disadvantages of offering stocks and bonds, along with the legal regulations on related conditions and procedures, is a key factor in helping businesses choose the optimal capital raising method while minimizing risks during implementation. Businesses need to carefully review current legal regulations, build transparent files, and fully comply with information disclosure obligations to ensure a safe and effective offering process.

If you need further discussion on legal solutions during the preparation of documents, offering procedures, or related legal obligations, please contact TNTP for timely advice and support.

Sincerely,