Bringing a new issue to market

Corporate Charter

• For an entity to become a corporation, the founders must file this document in the home state of the business.
• inculded are the number of founders, the type of business, the place of the business, the amount of shares to be issued, and so on.

Registering with the SEC

When a company wants to go public, it has to file a prospectus and a registration statement with the SEC

The registration statement includes:

• the issuers name
• the names and addresses of all the companys officers and directors
• what the proceeds of the sale will be used for
• the compants capitalization

Blue Sky Laws

The state laws that apply to security offerings and sales, say that in order to sell a security to a customer, the broker-dealer (brokerage firm), the registered representative, and the security must be registered in the customers state.

3 methods of state registration

• Notification (register by filing)
• Coordination
• Qualification

notification (register by filing)

Coordination

Qualification

Whos involved in the securities registration and selling process?

• Invstment banking firm
• underwriter
• syndicate
• managing (lead) writer
• selling group

Investment banking firm

• an institution that is in the business of helping issuers raise money
• they are the brains of the operation, because they help the issuer decide what securities to issue, the selling price, and so on.
• they usually underwrite the issue and may also become the managing underwriter in the offering of the new security

Underwriter

a broker-dealer that helps the issuer bring new securities to the public.  They purchase the securities from the issuer and sell the to the public for a nice profit

• the process employed by investment bankers to raise investment capital on behalf of a corporation. Done mainly through stock offerings but also may be accomplished through selling bonds
• the process of issuing insurance policies

Syndicate

• When an issue is too large for one firm to handle, the syndicate manager (managing underwriter) forms a syndicate to help sell the securities and relieve some of the financial burden on the managing underwriter.
• Each memeber of the syndicate is responsible for selling a portion of the securities to the public.

Managing (lead) Underwriter

• responsible for putting together the syndicate and dealing directly with the issuer.
• Receives financial compensation for each and every share sold

Selling Group

• used in the event that the syndicate members feel that they need more help selling securities.
• They are brokerage firms that arnt part of the syndicate
• they help distribute the shares tom the public but dont make a financial commitment and therefore receive less money per share when selling shares to the public

Distributing the profits

The Spread

• The difference between the amount the syndicate pays the issuer when purchasing new shares or bonds and the public offering price for each share or bond sold.
• Thus the spread is just the initial profit from selling the security, you still have to divvy it up amongst the sales people.
• The syndicate splits the spread into the managers fee and the take down, so you get the follwing equation:

Spread = syndicate managers fee + takedown

Takedown

• The profit that each syndicate member makes when selling shares or bonds to the public.
• Syndicate members are taking the greatest financial risk so they deserve the lion's share of the sales proceeds.

Takedown = additional takedown + concession

• You can use the spread forumula to calculate the value of the takedown in order to find either the additional takedown or concession if the value is not given

Concession

• the profit that the selling group makes when sellign shares or bonds to the public.
• the concession is paid out of the takedown

Additional Takedown

• The profit made by syndicate members on shares or bonds sold by the selling group

Reallowance

• the portion of the takedown that's available for firms that arnt part of the syndicate or selling group.
• Example: a customer wants to purchase a share of XYZ, but your not one of the financial distributors of the stock. You'd contact the syndicate manger, who'd give you a discount of the public offering price (POP). That discount is the reallowance

Syndicate managers fee

• the part of the spread that is the profit that the syndicate manager makes on shares or bonds sold by anyone.
• The fee is usually the smallest of all the listed fees

Syndicate Agreement

• Also called the agreement among underwriters
• Is the conract among syndicate members.
• The agreement includes the fee structure
• It also lays out each syndicate members amount of commitment  (how many shares or bonds each party will sell); the syndicate manager can set up underwritings on a Western or Eastern account basis

Western (divided) Account

• the syndicate agreement states that each syndicate member is responsible only for the shares or bonds originally allocated to it.
• If the syndicate member commits to selling 500,000 shares and sells them all, the syndicate member doesnt have to sell any more

Eastern (undivided) Account

• the syndicate agreement states that each syndicate member is responsible not only for the shares or bonds originally allocated to it but also a portion of the shares or bonds left unsold by other members.
• If a syndicate member was originally responsible for 10% of the new issue, it would be responsible for 10% of the shares or bonds left unsold by the members

Tip!

• to distinguish an eastern and western account, remember the phrase wild, wild, West, because back in the day each man (syndicate member in this case) was for himself.

Registering the Securities

• unless the securities are expent from registration, the issuer has to go through the registartion process with the SEC.

Cooling-off period

• a 20-day cooling off period beings after the issuer files a registration statement with the SEC.
• the SEC reviews the registration during this period
• At the end of the period the issue will hopefully be cleared for sale to the public
• during this period, the underwriter can obtain indicators of interest from investors
• Registered reps try to get indications from prospective purchasers of the securities

Tombstone Ad

• an advertisement allowed during the cooling off period that is simply an announcement of a new security for sale.
• the only advertisement allowed during the cooling off period
• contain only the simple facts about the new issue ( the issuer, type of security, amount of shares or bonds available

Due Dilligence Meeting

• a meeting held towards the end of the cooling off period held by the underwriter
• underwriter provides information about the issue and what the issuer will use the proceeds of sale for
• the meeting is designed to provide the information to syndicate members, selling groups, brokers, analysts, institutions and so on

Remember!

• The last time a syndicate member can back out of an underwriting agreement is toward the end of a cooling off period
• You can assume that if syndicate members are backing out, its most likely due to negative market conditions

The Prospectus

• sent in with the registration statement
• must be available for potentail purchasers when the issue is in registration (the cooling-off period) with the SEC
• contains all the essential facts about the issuer and issue EXCEPT for the final offering price (POP) and the effective date (the fate that the issue will first be sold)
• sometimes called a red herring, because there is red lettering on the front of it stating that it is NOT the final prospectus

The Final Prospectus

• prepared toward the end of the cooling off period
• must be available to all potential purchasers of the issue
• it inculdes:
• the final offering price
• the underwriters spread (profit the underwriters make per share)
• the delivery date (when the securities will become available)

Registrar

• an independent entity that works along with a company's transfer agent and maintains a record of stock and bond owners.
• main job is to make sure that the number of outstanding shares dont exceed the amount of stock the issuer authorizes under its corporate charter

Transfer Agent

• maintains records of a corporations stock and bond owners but also mails and cancels stock certificates as necessary

Initial Public Offering (IPO)

• the first time an issuer sells stock to the public to raise capital; issuer usually holds back some stock for future primary offerings
• the bulk of the money raised goes to the issuer, and the rest goes to the underwriters
• for IPO's a final prospectus needs to be available to all purchasers for 90 days after the effective date

Primary Offering

• an offering of new securities from an issuer that has previously issued securities; a company can have an IPO and several primary offerings if it wants
• The proceeds of the sale go to the issuer and the underwriters

Secondary Offering

• A sale of a large block of outstanding (stock-holder owned) securities or previously oustanding securities (treasury stock, or stock the issuer has repurchased)
• Typically made by one or more major stockholders of a corporation
• new investors are essentially buying used, so the number of shares outstanding doesnt change
• The sales proceeds dont go to the issuer (except treasury stock); it goes to the big shots selling the securities

Split (combined) Offering

• a combination of a primary and secondary offering, with both new and outstanding securities
• a portion of the sales goes to the issuer, and a portion goes to the selling stockholders

Remember!

• a final prospectus has to be available 25 days after the effective date for all issuers whose securities are already listed on an exchange or NASDAQ regarding primary, secondary, or combined offerings.
• If an issuer has already issued securities but not on an exchange or NASDAQ, the final prospectus has to be available for 40 days after the effective date

Exempt Securities

• are exempt from registering with the SEC because the issuers have a high credit worthiness or another government regulatory agencey has some sort of jurisdication over the issuer of the securities
• These securities include:
• Securites issued by the U.S government of federal agencies
• Municipal bonds
• Securities issued by banks, savings institutions, and credit unions
• Public utility stock or bonds
• securities issued by religious, educational, or nonprofit organizations
• Nots, bills of exchange, bankers acceptances, and comemrcial paper with an intial maturity of 270 days or less
• Insurance policies and fixed annuities

4 Exempt Transactions

• Intrastate Offerings (Rule 147)
• Regulation A (Reg A) offerings
• Regulation D (Reg D) offerings
• Rule 144

Intrastate Offerings (Rule 147)

• an intrasate offering is an offering of securities within one state
• in order to be exempt the company must be incorporated in the state in which it is selling securities
• 80% of its business has to be within the state
• may sell securities only to residents of the state

Warning! dont confuse will interstate offerings which do need SEC registration

Regulation A Offerings

• an offering of securities worth $5,000,000 or less within a 12 month period
• still have to file a simplified registration

Regulation D Offerings

• an offering to no more than 35 unaccredited investors per year
• also known as private placement
• sales of regualtion d securites are subject to the sales limitations of Rule 144

Accredited Investor

• an investor with a net worth of $1,000,000 or more or an investor who's had a yearly income of at least $200,000 or $300,000 for joint income (spouce) for the previous two years and is expected to earn at least that much in the current year

Rule 144

• covers the sale of restricted, unregistered, and control securities.
• occording to the rule sellers of these securities must wait at least one year prior to selling the securities to the public
• the most an investor can sell at one time is 1% of the oustanding shares or the average weekly trading volume for the previous 4 weeks, whichever is greater

Negotiated Underwriting

• A process in which both the purchase price and the offering price for a new issue are negotiated between the issuer and a single underwriter

competitive underwritings

• A process whereby an underwriter submits a sealed bid to the issuer.
• The issuer awarsd the contract to the underwriter with the best price and contract terms
• This process is used from everything from IPO's to large contruction projects

Firm Commitment

• An underwriters agreement to assume all inventory risk and purchase all securities directly from the issuer for sale to the public at the price specified
• underwriters act as dealers and are responsible for any unsold inventory
• The dealer profits from the spread between the purchase price and the POP
• Also known as firm commitment underwriting

Best Efforts Underwriting

• an agreement an underwriter makes to act as an agent between an issuing company and investors
• the underwriter agrees to use all efforst to sell as much of an issue as possible to the public
• the underwriter can purchase only the amount required to fulfull its clients demand or the entire issue
• If the underwriter is unable to sell all securities, it is not responsible for any unsold inventory
• These are used mainly for securities with higher risk, such as unseasoned offerings

All Or None (AON)

• a condition used on a buy or sell order to instruct the broker to fill the order completley or not at all.  If there is insufficient supply to meet the quantity requested by the order then it is cancelled at the close of the market

Shelf Offering Rule 415

• a corporation can evoke to comply with the SEC registration requirements for a new stock offering up to three years before doing the actual public offering
• The corporation must still file the required annual and quarterly reports to the SEC
• used when market conditions are not favorable at the current time for the issuer

Deficiency Letter

• A letter issued by the SEC indicating a significant deficiency or omission in a registered statement or prospectus
• this will disrupt the process when issuing securities
• the letter will halt the registration process, postponing the date of the issue
• A stop order may also be issued with the letter which will prevent the sale of the securities in the issue until the deficiency is handled

Penalty Bid

• A bid, or offer to purchase securities, provided by a lead underwriter or other member of a syndicate as part of early IPO trading
• the bid comes with the restrictions that if it is used a penalty will be assesed to the broker offering the shares back to the underwriter
• was created to deter investors from "flipping" IPO shares shortly after trading begins

Pegging

• A practice of an investor buying large amounts of an underlying commodity or securty close to the expiry date or a derivative held by the investor
• This is done to encourage a favorable move in the market place

Market Out Clause

• A clause in an underwriting agreement allowing the underwriter to cancel the agreement for certain specified reasons without penalty
• The most common reason for cancellation is an unexpected change in securities markets that would make it difficult to sell the issue.

Rule 144A

• A SEC rule modifying a two-year holding period requirement on privately placed securities to permit qualitified institutional buyers to trade these positions among themselves
• Has increased the liquidity of securities affected because institutions can trade these securities amongsth themseelves, side-stepping limitations that are imposed to protect the public

Rule 145

• designed to make available the protection by registration under teh Securities Act of 1933 to investors that are offered securities in a merger or business transaction

Rule 2790

• Prohibits certain individuals from performing trades in hot-issue IPO equity.
• Desinged to help make the IPO market more equitable for all traders and dealers involved.
• ensures that members of the NASD cannot purchase IPO equity at the cost of another investor, sell IPO equity for anything less than the offering price, and cannot trade IPO equity for personal gains

Qualified Institutional Buyer (QIB)

• institutions that manage at least $100 million in securities including banks, savings and loan instiutions, insurance companies, investment companies, employee benefit plans, or an entity owned entirely by qualified investors.
• Are eligible to participate in the Rule 144A market