Issuance Fees are those expenditures associated with underwriting and issuing debt securities and equity securities. Issuance costs include audit fees, investment banking fees, legal fees, marketing expenses, and Securities and Exchange Commission (SEC) registration fees.
Issuance costs do not include any expenditures that must be made by a publicly-held company on an ongoing basis, such as control audits, annual financial statement audits, quarterly reviews, stock exchange fees, or ongoing SEC filings.
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 base of shareholders.
In financial markets, an equity issuance is the sale of new equity or stock by a firm to investors. Equity issuance can involve a private sale, in which the transaction between investors and the firm takes place directly, or publicly, in which case the firm has to register the securities with the authorities and the sale takes place in an organized market, open to any registered investor, a process more akin to an auction.
Two common types of public equity issuance are initial public offerings (IPOs) and secondary equity offerings (SEOs or FO). This is one of the ways firms finance themselves, that is, they obtain funds from investors in order to engage in business.
Accounting for Issuance Fees
There are two basic ways that issuance fees can be accounted for, namely:
As a reduction to 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.
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.
Companies will issue capital stock to raise funds that can be subsequently used to expand business operations and create additional shareholder value. When issuing stock to investors, corporations will incur a number of costs, including:
- Professional Fees: include those for attorneys, as well as certified public accountants.
- Commissions: underwriters that place the securities with investors will charge both fees for this service as well as sales commissions.
- Clerical: includes both administrative and clerical costs associated with preparing regulatory filings as well as registrations.
- Filings: expenses and fees associated with filing the issue with the Securities and Exchange Commission.
- Marketing: advertising, mailing, and marketing costs associated with promoting the securities to investors.
Generally, a company has two options to account for stock issuance costs:
- Debit to Paid-in Capital: treats issuance costs as a reduction to paid-in capital in excess of the security’s par value. Subscribers to this approach believe issue costs are not part of normal operations and are a function of financing activities.
- Organization Cost: treats issuance costs as an intangible asset that is written off over a period of time (not to exceed 40 years). Subscribers to this approach believe in maintaining the integrity of paid-in capital in excess of par.