Primary Markets
Underwriter: An entity that evaluates and assumes the risk of issuing securities, facilitating the sale of stocks and bonds to investors.
Best Efforts Underwriting: underwriter acts as an agent for the issuer, agreeing to sell as much of the issue as possible, but without guaranteeing the entire amount will be sold.
sell shares in public or private
closed by collecting client funds into escrow account
All or None: the underwriter agrees to sell the entire issue or none at all, ensuring that the issuer receives the full amount desired or no funds are collected.
Mini- max: Issuer sets a min to be raised and max amount of securities to be sold. Underwriter must find min amount of investors before proceeding to max.
Firm commitment underwriting: the underwriter buys the entire issue of securities from the issuer at a set price and then resells them to the public, assuming full financial responsibility for any unsold shares.
Syndicates: A group of investment banks that come together to underwrite a large issue of securities, spreading the risk and combining resources to ensure successful distribution.
Selling Group: BDs assist the syndicate in the sale of securities. Do not commit capital, or hold securities, no liability for unsold shares.
Institutional Investors: Banks, Insurance companies, employee pensions, hedge funds, investment advisers, and mutual funds.
Qualified Institutional Buyers: owns and invests a minimum of 100 Million in securities on a discretionary basis.
Retail investor: Anyone that does not qualify as an institution is a retail investor. Tend to invest their own assets, be less knowledgeable, higher communication and disclosure expectations.
Accredited Investors: Designation used exclusively in primary market transactions. Have a higher sophistication level than the average retail investor and will not need the same level of protection.
Insider of the security’s issuer, (board member, major stockholder, officers)
Financial criteria- at least 200K Income for the past 2 years, 300K if purchase is made with joint account. Net worth of 1Mil, not including equity of their primary residence.
Qualified persons with certain certifications
Holders of Series 7,65,& 82
Municipal Advisors: Investment Banker that advise municipalities on the issuing of municipal debt and other types of municipal securities. May assist in underwriting functions, preparing official notice. Cannot be compensated as part of the underwriting sale of any issue.
Securities Act 1933: (paper act) ensures investors are fully informed about a security and its issuing company when sold on primary market
requires, new issues to be register
issuer provide dull and fair disclosure about itself and the offerings
make all necessary ino available to investor to judge
regulation of underwriting
criminal penalties for fraud
Registration Statement: first step in the IPO process, Issuer must file an S-1 with SEC. Underwriters may help with the statement but the issuer is still responsible for its accuracy
Must Contain:
description of business,
names of officers and directors,addresses, salaries, 5 year business history of each
Amount of corporate securities the insiders own and anyone that owns more than 10 percent of the company
company’s capitalization, equity and debt
description of how the proceeds will be used
whether the company is involved in any legal proceedings
Cooling Off Period: Period between the filing and effective date, minimum 20 days usually more.
Tombstone advertisement: Advertisement allowed during cooling off period, limited information of the security. Name of issuer, Type of security, number of shares sold, Primary Price or range, underwriters. Followed by advisory statement.
Preliminary Prospectus: (Red Herring) document discloses info to investors before the effective date of IPO
Blue Sky Filings: coordinating the federal and state registrations, registration with the state occurs same day it is open for sale by SEC
Final Prospectus: contains information from issuing company relevant to IPO. description of offering, offer price, selling discounts, effective date, use of proceeds, description of underwriting, history of business, risks to purchasers, description of management, material info, legal info concerning the formation of corp, SEC disclaimer
Effective Date: when SEC allows for the IPO to be sold, offering period begins
Primary Offering: the issuer of the security is receiving the funds from an offering, from IPO or APO
Combination Offerings: corporation allows existing shareholders to sell their shares along with the newly issued shares. Also known as hybrid or split offering, most money goes to company with some to the individuals for their shares
Shelf Offering: an issuer who is already a publicly traded can register new securities without selling the shares until later. They have 2 years to sell the shares, allows issuers to raise capital quickly when the market conditions are favorable. Supplemental prospectus must be filed with SEC before each sale.
Well- known seasoned Issuer: any security listed on a major exchange, are allowed to extend shelf offering to 3 years
Secondary Market Final Prospectus: investors are entitled to a final when…
IPO of NMS Securities Purchase happens-25 days after IPO
For APO of NMS - 0 days ( no requiremnet)
IPO of non NMS - 90 Days
APO of non nms - 40 days
will be delivered on sec website
NMS securities: stocks that are listed on an exchange or nasdaq
Nonexempt Securities: securities required to be registered in order to be sold to the public
Exempt Issuers: Exempt from registering becasue they are issued by government, banks, nonprofits, common carriers (railroad equipment trust certificate)
Exempt Issues: securities exempt from registering and prospectus requirements. Securities that have maturities of 270 days or less, commercial paper, and bankers’ acceptances. Insurance policies and fixed annuity contracts, not variable annuities.
Regulation A: Small- and Medium-Sized Offerings:
Tier 1: securities offering up to $20 million in a 12 month period, no more than 6 million can be sold on behalf of the existing shareholders. (combo offering)
Securities offeing up to 7 million in a 12 month period will be allowed in Tier 2, no more than 22.5 million can be sold on behalf of existing selling shareholders. Subject to rigorous disclosure requirements by SEC.
Must be a qualified investor to invest in tier 2.
Accredited Investor
Limit the investment to a max of 10 percent of the investors net worth
Rule 147: Offerings that take place in one state are exempt from registration.
Principal office registered in the state and purchasers are residents of that state.
80 percent of income in the state, Issuers assets are located in state, offering proceeds are used within the state.
majority of employees work in the state
BD must be based in the state
may not be resold to nonresidents for first 6 months after initial purchase.
Regulation D: Exempt Transactions
Private Placements: Under Rule 506(b)
SEC does not require offering to register if there is no more than 35 non accredited investors, . Offering can have unlimited accredited investors, and unlimited amount of capital can be raised.
PP stock is also called letter stock. Investors must sign letter stating their intention to hold the stock.
Private placement also known as : Restricted, unregistered, letter stock, Legend Stock
General Solicitations and Advertising Private Placements
Under Rule 506(c
To advertise private placements they must qualify under registration D
All purchasers must be accredited
business must take steps to verify the purchasers are accredited
Official Statement: primary disclosure statement for municipal securities
Offering Circular: common term for the disclosure statement of exempt securities, also notice of sale
Securities Act 1934: regulates the secondary market, gave authority to SEC to regulate exchanges and the OTC market.
OTC market: inner dealer computer and telephone network where market makers in stocks show the bid and ask prices for stocks in which they make a market
Trades unlisted stocks, bonds, municipal bonds, and treasury debt
Designated Market Maker: member that acts as a dealer on the floor for a specific security. Maintains inventory of the security and guarantees liquidity.
Floor Broker: represent the firm and the firm’s clients on the floor.
Two Dollar Broker: Assist floor brokers by placing trades for them and receive a fee for performing the service.
Floor Traders: members that buy or sell on the floor for their firm’s accounts ( not outside customers). Help maintain liquidity on the exchange.
Market Maker: BD that maintains an inventory of a given security and buys and sells the security throughout the day.
Bid Price: Price When a customer sells to a dealer, always less than ask price
what the seller receives
Ask Price: Price when a customer buys from a dealer
what the buyer pays
Spread: difference between ask and bid
Third Market: trading market in which exchange listed securities are traded in the OTC market
BD registered as market makers can make transactions in 3rd market
Fourth Market: market for institutional investors in which large blocks of stock both listed and unlisted, trade in transactions unassisted by BDs.
Electronic Communication Networks: Open 24 hrs a day, where large blocks of stock are traded
Dark Pools: trading liquidity that is not openly available to the public mainly large volume transactions made by institutions anonymously.
Trading Hours: 9:30 am - 4:00 pm, business days
Custodians: a person who manages a minors account under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA). Also a firm that holds assets in a qualified retirement account (IRA).
Trustee: fiduciary that oversees a trust, living trust, pension trust etc
Guardians: normally court appointed custodians over a minor or an incapacitated adult
Investment Adviser: anyone who gives investment advice, as a part of their business, does so for compensation must register as an adviser under the Investment adviser Act of 1940 and the uniform securities act
Must register and pass series 65, 66
Carrying Firm: type of broker dealer, carries customer accounts and accepts funds and securities from customers. Capable to do trade executions, clear and settle transactions, take custody of customer funds and securities, and handle sending trade confirmations and statements. can not commingle firms assets with the customers assets
Fully Disclosed Firms: also known as introducing BD, they introduce clients to a carrying firm or clearing firm. Doesn’t take custody of customer funds, but is allowed to execute trades on behalf of the customer.
Prime Account: accounts for institutions, member firms provide custody and other services while other firms execute trade. customer signs agreement of the business relationship, customer names all executing brokerage firms.
Benefits: trade with multiple brokerage accounts with one main account
Services: Securities lending, margin financing, trade processing, cash management, and operational support.
Prime Broker: member firm, take accounts with institutions, often execute trades for customers but can also use an executing broker for trades.
Transfer Agents: Responsible for, ensuring that its securities are issued in the correct owners name; canceling old and issuing new certificates; maintaining records of ownership and handling problems relating to lost, stolen or destroyed certificates.
Registrars: licensed by the states and provide audit and oversight services for the transfer agents. Maintains count of outstanding and authorized shares.
Clearing Agency: intermediary between the buy and sell sides of a transaction.
Depository Trust and Clearing Corporation (DTCC): world’s largest securities depository, providing custody services for virtually all securities except those subject to transfer or ownership restrictions. Member of fed not retail banking
Options Clearing Corporation: clearing agent for listed options contracts. Functions to standardize and grantee the performance of and issue contracts.
Quote: consists of a bid and ask, with size or volume of shares available, size is usually in round lots (units of 100s).