External funding is an unavoidable fact of life for a growing business. Equally unavoidable is TRANSPARENCY that the company must demonstrate to the outside investors in order to secure the funds. Regarding the debt finance, corporate transparency requirements are relatively moderate, owing mainly to the collateral protection of the debt instruments. The situation is different when the equity funding is involved – either a private placement or public offering of equity. Transparency requirements are more stringent in this case because the new investors are concerned about their future equity stake in the company. Such a stake is not protected by the collateral guarantees, restrictive covenants or performance warrants.
The new equity investors are entirely at the mercy of the company’s commercial fortunes – and this is the chief reason why they want to make sure that their shareholder rights are duly protected, that the company is willing to provide complete and fair information about its performance and all material events. In the case of a public offering of shares (IPO), the shareholder protection requirements are particularly rigorous. This is mostly due to the fact that public markets operate with a degree of trust that should be preserved at all costs. Therefore, misleading public investors and loss of public trust are the dangers against which the stockmarket authorities in all countries guard most zealously. It is for this reason that greater transparency is an unstoppable trend of equity markets around the world.