What are Equity Issuance Fees?
“Equity issuance fees” is the accounting term used to reference the costs a company incurs when they introduce securities into the market. A company commonly introduces shares of capital stock when it’s looking to grow its business, expand its operating footprint, and establish a broader value base for shareholders.
The Fees (Costs) Accrued During Issuance
There are a variety of fees – or costs – that a company incurs when issuing new securities into the market on behalf of their company. Among the costs are:
1. Clerical fees
There are clerks responsible for preparing the forms that must be filled out and filed when new securities are introduced. There are also forms for registering said securities. These clerks must be paid, and the forms must be paid for.
2. Filings with the Securities and Exchange Commission
Separate from the clerical filing fees, new securities must be registered with the Securities and Exchange Commission (SEC) on behalf of the company. The fees associated with the SEC filings are a part of equity issuance fees.
3. Underwriting fees
Individuals – or more often, companies such as an investment bank – who act as middlemen, getting new securities to the appropriate investors, charge a commission (a fee) for both finding appropriate investors and for finalizing the sale of the securities to the investors.
4. Marketing costs
There are costs associated with the marketing of new securities which involve advertising and promoting the securities being introduced into the market. Promotional activities are a key component for securities because a successful marketing campaign is what helps underwriters find the best investors for the securities and enable the securities to be sold successfully at the highest possible price.
Accounting for Issuance Fees
There two basic ways that issuance fees can be accounted for, namely:
1. As reduced paid-in capital
Equity issuance fees may be listed as a reduction of paid-in capital. The reduction is taken from paid-in capital (the amount paid by investors during common or preferred stock issuance) that exceeds the par value of the security. This accounting approach is used by those who believe that issuance fees shouldn’t be considered part of the company’s regular operations, but instead, are part of its financing activities.
2. As part of organizational costs
The second way that equity issuance fees can be accounted for is as part of a company’s organizational costs. With this method of accounting, issuance fees are viewed as intangible assets. This means that the fees (costs) may be expensed over the course of time. However, they must be entirely written off within a 40-year limit. The theory behind this accounting method is that the fees created an ongoing benefit for the issuer.
Whenever a company issues new securities into the market, there are fees associated with the efforts made to successfully introduce the securities into the marketplace. Everything, from auditing fees to advertising costs is part of the issuance fees that a company must account for when putting out new securities.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: