Lesson 8: Issuing Securities

Raising capital

• businesses can raise capital by selling securities

• an offer or sale of a security must either be registered with the SEC or conducted under an exemption

Securities Act of 1933

• securities must be registered for lawful public sale, unless exempt

• companies register by filing a registration statement that provides disclosures to investors

Pre-Registration (Pre-filing/quiet period)

• issuer hires underwriting bank

• underwriter prepares registration statement (disclosure)

• no gun-jumping or discussing/marketing of deal

Cooling-off/waiting period

• SEC reviews registration statement

• underwriter markets the new securities and distributes the preliminary prospectus

• no sales (no orders or money)

Post-Effective

• underwriter sells shares

• the prospectus is delivered to all investors who buy the IPO (and any investors who buy on the exchange for first 25 days)

IPO

the first time a company offers its shares to the general public

Follow-on offering

any subsequent offering of securities to the public (after IPO)

primary offering

the company is creating new shares to sell and receiving all proceeds from the sale

secondary offering

existing shareholders (founders, execs, VC) are selling the shares and receiving the sale proceeds

split offering

• both the company and selling shareholders sell the shares

• ex. company sells shares and a VC exits

going public - underwriting

• hire an investment bank to underwrite the deal → AKA “bookrunner”, “lead left”, or “managing underwriter”

• then other firms join the syndicate

• the syndicate enters a firm commitment or best efforts

• underwriters sell the shares → can stabilize at or below the IPO price to prevent a decline in price

lead manager

• part of the syndicate that manages the deal

• directs and leads the entire underwriting process

syndicate members

financially committed to underwrite shares (will buy/own unsold shares)

Selling group

helps sell shares (as agent) and have no financial commitment to deal

buying common stock IPO shares

• IPO shares must be sold to the public and FINRA prohibits restricted persons from investing in common stock IPOs

• restricted persons = broker-dealer firms, employees of broker-dealers and their immediate family members

Regulation D - private placement

• a way for companies to raise capital without registering their securities

• any business can raise unlimited capital whenever but only accredited investors and up to 35 non-accredited investors can invest

PIPE

refers to a private investment in a public company

accredited investors

• officers and directors of the issuer

• institutional investors with over $5 million in total assets

• high-net worth individuals

Rule 144 - control stock

• allows insiders to sell their holdings of company stock

• holders of control stock can sell the greater of 1% of the outstanding shares or the average weekly trading volume in the 4 weeks prior to the sale once every 90 days

Control stock

• shares held by an affiliate of the issuing company

• officer, member of the board or individual owning more than 10% of voting shares

restricted stock

• stock that has never been SEC-registered

• investors can receive it through private placements, employee stock benefit plans, compensation for professional services, or in exchange for providing seed money or start-up capital to the company

Rule 144 - Restricted stock

• allows holders of unregistered securities to sell to the public

• they can sell can unlimited amount after a 6 month holding period

• the company must already be public

Rule 144A - QIB

allows any business to raise unlimited capital whenever but only from qualified institutional buyers (QIB)

QIB (qualified institutional buyer)

institution with at least $100M in discretionary assets

Rule 147 - intrastate

• allows in state businesses to raise unlimited capital whenever from in-state residents

• in-state residents can then sell securities across state lines after 6 months

• doing in-state business means at least 80% of revenues, assets, or net proceed are in-state or the majority of employees are based in-state

tender offer

• an offer by the issuer (share buyback) or an outside investor (takeover) to purchase at least 5% of the company’s shares directly from company shareholders

• price is typically fixed and at a premium to current market price → “all holders best price”

• shareholders must be net long to tender shares (must own more shares than they’ve sold)

• the offer may be conditional and require a minimum number of shares

exempt securities under ‘33

• US gov securities

• Us gov agency securities

• municipal bonds

• securities issued by nonprofits

• commercial bank securities

• commercial paper

oversubscribed tender offers

• if a tender offer is oversubscribed the shares are accepted proportionally from those shareholders who tendered

• ex. if investor seeks to purchase 10 million shares in a tender offer but shareholders tender 100 million, only 10% of each shareholder’s shares will be accepted

shelf registration

• allows an issuer to preregister securities today and sell them later when marker conditions are favorable

• a shelf is good for up to three years and can be used for both debt and equity follow-on offerings, but never an IPO

best efforts

a type of underwriting where the underwriters acts as agents and have no financial responsibility for any unsold securities

Regulation M

an SEC rule that aims to prevent market manipulation of IPOs and follow-on offerings by broker dealers

stabilization

• allows an underwriter to bid on securities in the open market to prevent the price from declining following an IPO

• can do so at or below the public offering price (POP)

offering circular

• a shorter disclosure that is distributed to potential investors in certain types of offerings

• highlights the key points of the offering and is used as a marketing tool

FINRA’s Corporate Financing Rules

• compel firms that participate in public offerings of securities to fulfill three requirements:

1. Firms must file documents and other info in connection w/ public offerings including registration statements, offering circulars, and exhibits/amendments

2. Firms may not make unfair terms/agreements

3. Firms have specific requirements on offerings in which there is a specified conflict of interest

Form 144

under Rule 144, an insider is required to file this form with the SEC prior to selling control stock into the open marker

offering memorandum

• provided to investors for disclosure like a prospectus, except it is used for offerings that are exempt from SEC registration like private placements

• audited financial statements are not required in this document

Regulation S

an exempt transaction which allows an issuer to raise money outside the US and avoid SEC registration

Regulation A

an exempt transaction which allows an issuer to raise a maximum of $75 million publicly in a 12-month period without having to go through the full SEC registration process