Equity financing entails raising operating capital through the issuing of stocks. This occurs in myriad ways in the world of business financing. Venture capital firms, for instance, invest large sums of capital through the purchase of majority shares at the inception of a business in order to generate capital through returns. In other instances, companies raise money by publicly trading equity through the stock market. In other equity modes, large companies invest in small companies by purchasing large sums of stock, sometimes enough to become majority owner and influence the decision-making process of a company.
Reserve Equity Financing
Reserve equity financing constitutes a specialized form of equity financing in which an investment firm enters into a long-term relationship with a fledgling or otherwise small company looking to develop and generate capital through public markets. Unlike standard equity investment relationships, firms providing funding through reserve equity financing do not take control of the smaller firm, but simply provide financial assurance to use as leverage in trading equity. In 2011, for instance, investment firm AGS Capital Group invested $50 million in USA Synthetic Fuel Corporation through reserve equity financing. USA Synthetic Fuel does not get this money directly, but rather receives a $50 million foundation for which it may create and sell equity. Basically, the investor creates a reserve of capital from which to create equity.
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