Unit 7 - Issuing Securities

Primary market

where corporations sell their stocks and bonds to the public to raise money (capital), where securities are born (aka new issue or primary offer)

Securities Act of 1933

sets most of the rules for primary markets, requires a full and fair disclosure so that all investors have complete and accurate information when a new issue is sold to the public and requires new issue (unless exempt) be registered with the SEC before sale

Persons

in securities law is a natural person (human being) or a legal entity (corporation or government), either can enter into a contract

Underwriters (investment bankers)

a type of BD that works with an issuer to bring its securities to the market and sell them to the investing public

Broker dealers (BDs)

help the issuer to structure (set the rules of the bond, like maturity schedule, coupon rate, etc.) new issues and, at times, form a syndicate (temporary group) with other underwriters to perform the capital-raising process

Investors

those who purchase the new issue and intend to hold the security for a period of time, divided into three groups (institutional, retail and accredited)

Institutional investors

large entities with pooled funds, can include banks, insurance companies, employee benefit plans like pensions, hedge funds, investment advisers, and mutual fund

Qualified institutional buyers

institutional investor permitted under SEC rule to trade privately placed security without registering securities with the SEC, owns and invest a minimum of $100 million in securities

Retail investors

any individual/private person other than an institutional investor that is investing their own assets, can range from small to larger investors, and require higher communication and disclosure due to their generally lower investment knowledge

Accredited investors

subset of investors including all institutional and retail investors, must meet specific criteria indicating higher investment knowledge and experience (considered more sophisticated and require less protection)

Criteria to be an accredited investor (must meet at least one)

• Insiders of the security's issuer (officers, board members, major stockholders)

• Certain financial criteria > income of $200K or more for two years and expect to do so in the current year ($300k for married couples or a net worth of $1 million not including equity in primary residence)

• Natural persons who qualify based on certain professional certifications >holders in good standing of the Series 7, Series 65, or the Series 82 licenses

Municipal advisors

BD who provides advice to state and local governments on issuing municipal bonds and other municipal securities by helping municipalities with debt structure, bond features, and capital-raising decisions, but cannot serve as the underwriter for the same issue they advised on

Initial public offering (IPO)

when an issuer sells a specific type of security for the first time. These stocks or bonds have never been traded on the markets before

Additional public offering (APO)

when an issuer sells more shares of a security that has already been sold to the public in the past, issuer is selling more of its shares to raise capital (aka follow-on offer)

Best efforts underwriting

underwriter acts as an agent and agrees to use its best efforts to sell the issuer's securities, they do not buy the securities from the issuer so they take on very little risk, and is paid only for the securities it successfully sells (two contingencies AON or mini-max)

All or none (AON) underwriting

form of best efforts underwriting where underwriter agrees that if they are unable to sell all the shares the issuer will cancel the offering, all funds collected are held in escrow until shares are sold

Mini-max underwriting

form of best efforts underwriting where underwriter must sell a minimum amount of the shares offered or cancel the underwriting, all funds collected are held in escrow until the minimum amount of the securities are sold

Firm commitment underwriting

underwriter acts as principal purchasing the securities from the issuer and then reselling them to the public using their own money, issuer is guaranteed to receive the agreed-upon proceeds and the underwriter assumes the risk of selling the securities (think inventory)

Spread

difference between discount the amount paid (discount price) and POP, the money the underwriter makes

Syndicate

group of BDs that each contribute capital and will each assume some of the inventory and some of the risk in exchange for a portion of the profit from the sale of the shares, have a short window of time to sell their inventory and any unsold they will get stuck with

Managing underwriter

brokerage firm responsible for organizing a syndicate, preparing the issue, and negotiating with issuer and underwriters, and allocating stock to the selling group

Selling group

selected BDs who contract to acts as selling agents for syndicate members but are not part of the syndicate, do not commit capital or hold shares so they have no liability for unsold securities and have very little risk (compensated by portion of spread on newly issued securities)

Steps for public offering

include distribution of a registration statement, the passing of a cooling-off period, and the effective date

Registration statement (Form S-1)

required by SEC when an issuer wants to sell an nonexempt security, includes material information about the issue and issuer (i.e. business, financial health, owners, any legal issues, and how money will be used), underwriters may assist but responsibility is on issuer and its officers

Cooling-off (waiting) period

after filing registration statement, a minimum of 20 calendar days, if registration statement needs revising the 20-days period resumes when corrected registration statement is submitted (does not start over)

Deficiency letter

SEC notification of additions or corrections that a issuer must make to a registration statement before they will clear offering for distribution (Bedbug letter)

Effective date

when the SEC releases/allows the offer for sale to the public (aka release date) ending the cooling-off period, when final prospectus becomes available to investors

Final prospectus

includes the information from the preliminary prospectus plus the release date and the final public offering price, including an SEC disclaimer that the SEC does not approve, disapprove, or make any representations about the security

Tombstone advertisements

only advertisement allowed during cooling-off period, a very basic announcement that may be placed by issuer or underwriter containing issuer, security, amount to be sold, names of underwriters, POP, and disclaimer

Red herring (preliminary prospectus)

preliminary prospectus including information found in final prospectus except the final POP, used to solicit indications of interest before the effective date

Indications of interest

investor's declaration of a nonbinding potential interest to purchase some of the issue after the security comes out of registration (after the effective date)

Blue-sky laws

state laws that pertain to the issuance and trading of securities within that state

Shelf offering

registration allowing an issuer that is already a publicly traded company to register new securities now and sell the shares later allowing issuers to quickly raise capital when needed or when market conditions are favorable, once filed with SEC the registration is for 2 years allowing issuer to sell portion over two-year period without having to reregister the security (most qualify for 3 years)

Private investment in public equity (PIPE)

financing method where a public company sells additional shares directly to institutional or accredited investors through a private offering, offering is exempt from SEC registration thus it is faster and less expensive than a public offering

IPOs of national market system (NMS) securities

25 days, purchase timeline where final prospectus is required

APOs of NMS securities

0 days (no requirement for final prospectus)

IPOs of non-NMS securities

90 days, purchase timeline where final prospectus is required

APOs of non-NMS securities

40 days, purchase timeline where final prospectus is required

Exempt issuers from registration

• U.S. government and agencies of the U.S. government

• municipalities 

• national- and state-registered banks (NOT bank holding companies)

• building and loan associations (B&Ls) and savings and loan associations (S&Ls)

• charitable, religious, educational, and not-for-profit organizations

• common carriers (railroads are the most common example)

Securities exempt from registration

• short-term debt issues that are 270 days or less to maturity (commercial paper & banker’s acceptance)

• insurance policies (fixed life insurance policies and fixed annuities)

Regulation A of Securities Act of 1933

put into place to ease requirements for small- and medium-sized companies to raise capital, providing two offering tiers that are open to the public and general solicitation is permitted

Tier 1

offerings up to $20 million in a 12-month period of which no more than $6 million can be sold on behalf of existing shareholders (Regulation A security), subject to review by individual states and the SEC with no investment limits required to file a Form 1-A

Form 1-A

abbreviated notice of sale providing basic information about issuer and proposed offering to investors in lieu of a full prospectus 48 hours before sale, must be qualified by state regulators in any state which issuer plans to offer securities

Tier 2

offerings up to $75 million in a 12-month period of which no more than $22.5 million can be sold on behalf of existing shareholders, subject to SEC review only with no review required at the state level (investors must be qualified investors)

Rule 147

offerings that take place entirely in one state are exempt from registration when the issuer has its principal office (headquarters) in the state and all purchasers are residents of the state, securities sold may not be resold to nonresidents of the state for 6 months after initial purchase

Private placement

exempt transaction under Reg D, issuers may sell a new issue under Reg D by filing a Form D with the SEC, no limit to amount of capital that may be raised but there are restrictions on who may invest and how the offer is marketed

Lettered stock (or legend stock)

private placement stock issued with a notification stamp that requires the fulfillment of a 6-month holding period before it can be sold

Rule 506 (b)

no general solicitation (advertisement) is allowed, offer may be sold to an unlimited number of accredited investors up and may be sold up to 35 nonaccredited investors

Rule 506(c)

advertisement is allowed and all investors must be accredited investors limiting private placement to investors with more experience or resources, issuer must make reasonable effort to verify that all investors are accredited at time of the sale

Offering circular (or notice of sale)

disclosure document for securities sold in exempt transactions has most of the same information as a prospectus but is not called a prospectus