The Primary Market

Question 1

Primary Market

Answer 1

the sales of securities for the first time (ALL proceeds go back to the issuer)

Question 2

Four Key Participants of Primary Market

Answer 2

• Issuers
• Underwriters
• Investors
• SEC

Question 3

Issuers

Answer 3

companies / organizations that raise capital through selling securities (Ex: US Government, Microsoft, Verizon, etc.)

Question 4

Underwriters

Answer 4

hired by issuers to market and facilitate the sale of securities, can be viewed as investment banks (Ex: JPMorgan, Goldman Sachs)

Question 5

Investors

Answer 5

purchase securities in the primary market (Ex: individuals, institutions, governments, etc.)

Question 6

SEC

Answer 6

responsible for overseeing the primary market & regulating professionals

Question 7

What is a syndicate?

Answer 7

Lead underwriter creates a group of several financial firms that will assist with the sale in exchange for fees attached

Question 8

What is underwriting commitment? What types are there?

Answer 8

Liability of the underwriter, consists of FIRM underwriting commitment & BEST-EFFORTS underwriting commitment

Question 9

Firm Underwriting Commitment

Answer 9

makes the underwriter liable for any unsold shares, investment bank purchases security from the issuer and sells it (PRINCIPAL / DEALER transaction)

Question 10

Best-Efforts Underwriting Commitment

Answer 10

investment bank does its best to sell the security, but any unsold units go back to the issuer (AGENCY transaction)

Question 11

Different Types of Best-Effort Underwriting

Answer 11

• Mini-Max underwriting -> specifies a minimum & maximum amount of shares (Ex: Issuer has 1M shares to sell + requires the underwriter to sell at least 750k for sale to go through)
• All-or-None underwriting -> underwriter must sell ALL securities for sale to go through (Ex: Issuer has 1M shares to sell, so ALL 1M shares must be sold for sale to go through)

Question 12

Which type of underwriting is more risky (firm or best-efforts)?

Answer 12

Firm underwriting is riskier since he firm takes on all of the securities and could be stuck with unsold shares (tends to have lower % return, too)

Question 13

What are primary market offerings?

Answer 13

IPO’s & APO’s

Question 14

IPO

Answer 14

Initial Public Offering, when an issuer sells a security for the first time to the public

Question 15

APO

Answer 15

Additional Public Offering, the issuer offers more shares in the primary market after the IPO

Question 16

What is a secondary offering?

Answer 16

Typically doesn’t involve the issuer, when large shareholders offer shares they obtained from the issuer

Question 17

PIPE

Answer 17

Private Investment in Public Equity: a private transaction of a publicly traded company at a DISCOUNT to the current market value
- Raise capital quicker + cheaper than IPO
- Often have lockup of shares for 6-12 months