What is Floatation Cost?

Floatation cost is the expenditure incurred when issuing new securities. It is expressed as a percentage of the total issue price. An issuer must subtract all floatation costs from the total issue price, resulting in a reduced amount of funding from any securities issuance. Floatation cost can be quite high as a proportion of the total proceeds from the sale of securities when the proceeds are not expected to be that large. Consequently, issuers have an incentive to issue more securities than are actually necessary, thereby lowering the proportional cost of floatation.

Examples of Floatation Costs

Examples of the floatation costs associated with the issuance of securities are as follows:

Accounting fees. Accountants must prepare the financial reports and disclosures associated with a securities issuance, which are then audited by external auditors.
Legal fees. Attorneys are heavily involved in preparing and reviewing securities-related filings, and so will charge substantial fees for their services.
Printing fees. A financial printer will charge for the documents that it prints as part of a securities issuance.
Registration fees. This fee is charged by the Securities and Exchange Commission to those registering securities with it.
Underwriting spread. This amount will depend on the total value of the securities being sold, since bankers will reduce this spread for larger issuances.