What are Issuance Costs?

Issuance costs 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.

Characteristics of Issuance Costs

The characteristics of issuance costs are as follows:

Linked to a securities issuance. Issuance costs are directly associated with the the issuance of specific securities.
One-time nature. Issuance costs are generally one-time expenses incurred at the time of the capital raise.
Size and complexity dependence. Issuance costs often scale with the size and complexity of the offering. Thus, larger offerings may incur higher absolute costs but benefit from economies of scale, thereby reducing the percentage cost. Also, complex securities (e.g., convertible bonds) typically have higher issuance costs than simpler ones (e.g., equity).
Impact on net proceeds. Issuance costs reduce the net proceeds from the offering, which is the amount of capital the company ultimately receives.
Affected by market conditions. In volatile or bearish markets, underwriting fees may increase due to higher risk for underwriters, and marketing costs may rise to attract investors. Conversely, strong investor demand can lower issuance costs as underwriters face less risk in selling the securities.

Example of Issuance Costs

Alfred Corporation’s board of directors decides to issue bonds to raise capital for a new production facility. This involves hiring an investment banker, who charges a 3% underwriting fee on the $5 million of bonds that the board wants to issue. This is a $150,000 fee (calculated as $5,000,000 x 3%).

In addition, the board hires an audit firm to conduct an audit of its financial statements, for which the fee is $50,000. It also hires a law firm to assist with writing the bond indenture agreement, for which the price is $35,000. Therefore, the total issuance cost incurred by Alfred Corporation is $235,000.

The company then issues the bonds to investors. As a result of this transaction, the company’s controller records a bond liability in the net amount of $4,765,000, which is the bond proceeds minus the issuance costs. The $235,000 of issuance costs are then amortized over the life of the bonds.