ch. 11 [the primary market]

primary market

• Initial sale of a security by the issuer to investors

• Proceeds always go to the issuer

issuers

Sell securities to raise capital

underwriters

• Hired by issuers to sell new issues

• Also known as investment banks

securities exchange commission (SEC)

Requires issuers to register securities unless an exemption exists

firm underwriting commitment

• Underwriter liable for unsold shares

• Also known as:

  • Principal transactions

  • Dealer transactions

best efforts underwriting commitments

• Issuer liable for unsold shares

• Also known as agency transactions

mini-max commitments

• Type of best efforts commitment

• Minimum shares must be sold, up to a maximum

all or none commitments

• Type of best efforts commitment

• All shares must be sold

initial public offerings (IPO)

First public sale of a security

additional public offerings (APOs)

• Also known as a follow-on offering

• Public sale of security after initial sale

private placements

Security sales to private audiences

primary offerings

• Sales proceeds go to the issuer

• Examples:

  • IPOs

  • APOs

  • Private placements

secondary offerings

• Sales proceeds go to a party other than the issuer

• Typically involve officers or directors selling personally-owned shares

PIPES

• Private placement of public equity

• Offered to accredited investors only

• Typically at a discount to market value

securities act of 1933

• Governs the primary market

• Requires disclosures on new issues

exemptions

• “Exempt” securities and transactions don’t have to follow the regulations

• “Non-exempt” securities and transactions must follow the regulations

registration form

• Issuers file with SEC prior to IPO

• Details issuer’s background and financials

• SEC checks for completeness

• SEC does not check the accuracy

prospectus

• Created with registration form info

• Gives investors details on security

20 day cooling off period

Begins when the registration form is filed

cooling off period legal activities

• Distribute preliminary prospectus

• Take indications of interest

• Publish a tombstone

cooling off period illegal activities

• Recommend the new issue

• Advertise the new issue

• Sell the new issue

• Take a deposit for the new issue

indications of interest

• Collected to forecast demand

• Allowed during cooling off period

• Not binding on customer or firm

tombstones

• Legal advertising in cooling off period

• Contain this information:

  • Name of issuer

  • Type of security

  • # of shares or units to be sold

  • Gross proceeds of the offering

  • Name of lead underwriter

  • Name of syndicate members

  • Estimated public offering price

difciency letter

• Issued by SEC

• Pauses the cooling off period

• Provided if the registration form incomplete

effective date

• The first day the new issue can be legally sold

• SEC provides when the registration form is reviewed and deemed complete

common stock IPO investor restrictions

• Industry insiders may not purchase common stock IPOs

• Industry insiders are known as “restricted persons”

restricted persons

• Member firms

• Member firm employees, and:

  • Immediate family members

  • Dependents

exceptions to common stock IPO restrictions

Accounts not exceeding 10% ownership by a restricted person

public offering price

Sale price of new issues

prospectus

Provided to investors buying IPOs

access equals delivery

• Prospectus considered delivered if available publicly online

• Issuers post prospectuses to EDGAR

exempt securities

• Not required to register in any circumstance

• List:

  • Government securities

  • Insurance company securities (unless a variable contract)

  • Bank securities (not bank holding company securities)

  • Non-profit securities

  • Commercial paper and banker’s acceptances

  • Railroad ETCs

bank holding companies

• Companies that own banks

• Not exempt from SEC registration

exempt transactions

• Security is exempt only if sold in a specific way

• List:

  • Regulation A+

  • Regulation D

  • Rule 147

Regulation A+

• Small-dollar offering rule

• Sell up to $75 million in 12 month period

• Disclosures made in offering circular

Regulation D

• Private placement rule

• Unlimited sales to accredited investors

• No more than 35 non-accredited investors

• Disclosures made in offering memorandum

Accredited Investors

• Income-based (annual)

  • Single: $200k income for 2+ years

  • Joint: $300k income for 2+ years

• $1 million of net worth, excluding residence

• Holding the Series 7, 65, or 82 licenses

• Officer or director of the issuer

• Institution with $5 million+ in assets

• Any entity where all owners are accredited investors

rule 147 offering

• Avoid SEC registration if sold intrastate

• No holding period for resale within the state

• 6-month holding period for resale out of state

Registration by filing (notice filing)

• federal registration only

• they are called federal covered securities

• exchange-listed securities and mutual funds go through SEC registration only

• notice filing: letting the administrator know security will be sold in that state

registration by coordination

• register with SEC and state

• sold across different states

• doesn’t qualify for federal registration

registration by qualification

• register w/state administrator only

• sold in one state only

rule 144

Rule covering restricted and control stock

restricted stock

• Stock not registered with the SEC

• Subject to a 6 month holding period

control stock

• Stock owned by an affiliate (insider)

• Subject to volume limitations

affiliate

• Officer, director, or 10% shareholder

• Security sales subject to volume limitations

form 144

• Filed if control or restricted stock intended to be traded in the next 90 days

• Only must be filed if more than

  • 5,000 shares, or

  • $50,000 total value sold

form 4

• Filed if an insider trades control stock

• Must be filed within 2 business days of the trade

EDGAR

• Electronic filing system for SEC forms

• Form 144 and Form 4 are filed on this system

qualified institutional buyer

$100 million or more of investable assets

rule 144A

• QIBs are not subject to rule 144

• QIBs avoid holding periods and volume limitations

shelf registration rule

• Allows issuers to quickly offer securities

• Issuer files “blank” registration form

  • Reviewed by the SEC

  • Granted as effective if all required disclosures provided

• The security may be sold quickly within the next 3 years

• When the security is ready to be sold:

  • Issuer contacts SEC, provides information left “blank”

  • The security can then be sold 48 hours later

  • Allows avoidance of the 20 day cooling off period

stabilizing bids

• Underwriter buys IPO securities back from the market

• Bids must be at or below POP