CHAPTER 7 Flashcards
(41 cards)
Primary Market
Where issuers sell their securities to the public for the first time.
Includes BOTH IPOs and APOs
If issuer is going to the public, that is the primary market
Corporations go to sell their stocks and bonds
NEW issues
What sets the rules for the primary market?
Securities Act of 1933
Full and Fair disclosure
New issues that are non-exempt must be registered with the SEC before sale
All investors in corporate issues must receive a detailed document called prospectus
What is the disclosure document for municipal securities?
Official statement
People involved in primary market
Issuers: Corporations, municipalities, Fed Gov
Underwriter (BDs, Investment Bankers): Works with an issuer to bring their security to the primary market and help with structure, and form a syndicate with other underwriters.
Investors: Those purchasing the securities, retail, and institutional, and accredited
Institutional Investors
Person that pools money to buy securities like banks, insurance companies, pensions, investment advisers, mutual funds, etc.
Qualified Institutional Buyers are those that have more than $100M of securities
Retail Investors
Typical person buying or selling
Can be large
More disclosure required for these
Accredited Investors
Set by regulation D
All institutional investors
Insiders of the security’s issuers (officers, BoD, major stockholders)
Meet either of these:
- Have income greater than $200k ($300k if MFJ) for past 2 years
- Have a net worth greater than $1M (not including home)
Professionals with certifications or designations issued by an accredited education system
Holders of Series 7, 65, or 82
Municipal Advisors
BD that advises municipalities on issuing securities. Work under contract but cannot be paid for part of underwriting. Only as advisors.
Initial Public Offering (IPO)
Selling a specific security for the first time, these have never been traded before
Additional Public Offering (APO)
Issuer sells more shares of a security that has already been sold in the past
Do both IPOs and APOs need to go through registration with SEC?
YES
Best Efforts Agreement
Underwriter will help the issuer get their shares to the public as an agent but won’t buy or hold the securities.
Very little risk for the underwriter.
Underwriter holds investors cash in escrow account until deal is done.
Two types of best efforts underwritings:
- All or None
- Mini-Max
All or None (AON)
Underwriter must sell all the securities offered or cancel the underwriting.
Mini-Max
Underwriter must sell a min amount or cancel the underwriting
Firm Commitment
Underwriter acts as principal meaning they purchase the securities and resell to investors
Syndicates are much more common to reduce capital commitment and risk
Underwriter buys securities from issuer at a discount
Underwriters then sell the shares at a slightly higher price called the public offering price (POP)
Hot IPOs are firm commitment agreements
More risk here
Syndicates
Group of underwriters working together
Common for large commitment underwritings
One member will take on a lead role
Sometimes bring in BDs as a selling group (not part of the syndicate) just to help sell
Selling group has no liability
STEPS for a public offering
Securities Act of 1933 comes in to:
Registration of new issues
Issuer provides full and fair disclosure about itself and offering
Issuer make available all material info for an investor to judge it
Regulating the underwriting and distribution of primary issues
Criminal penalties for fraud
Steps before primary issue can be sold
Registration statement (registration date)
Pass cooling off period
Effective date
Registration statement
S-1 registration with SEC
Includes material info about issue and issuer (issuer’s business, financial health, owners, legal issues)
Cooling Off Period
After filing registration statement, cooling off periods starts.
Minimum of 20 calendar days, can be longer
If SEC finds the statement needs revision, SEC can pause the period, when the cooling period resumes, it starts where it left off
Effective Date
SEC releases offer for sale to public on effective date
Release date, ends cooling off period
SEC releases or allows this to be sold
SEC never uses the word approve or endorse
Final prospectus becomes available to investors
Red Herring
Preliminary prospectus
Available during cooling off period
Final POP is not included
Delivered to investors who are interested
Final Prospectus
Include all material info
Activities during the cooling off period
Tombstone advertisements (very basic, issuer, security, amount to be sold, name of underwriter, POP or range, disclaimer that reads this is not a solicitation)
Preliminary prospectus (final POP not included)
Indications of interest may be gathered (non-binding)
Due diligence is carried out (examine the issue to determine suitability)
State registration is completed (blue-sky laws)
