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AFM 121 > Chapter 11: Financing & Listing Securities > Flashcards

Chapter 11: Financing & Listing Securities Flashcards

1
Q

what are the basic forms of business organization

A
  • proprietorship
  • partnership
  • corporation
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2
Q

what is a proprietorship

A
  • The most basic form of business ownership
  • Exists for very simple, one-person businesses
  • Proprietor is owner and operator of business
  • The business is not a separate legal entity – therefore owner is personally liable from a legal perspective
  • personal assets are used as collateral
  • Difficult for owners to generate / obtain capital to grow business
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2
Q

what is a partnership

A

Similar to proprietorship except that there are 2 or more owners

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2
Q

what is the process if you were an employee and were asked to become a partner of the company

A
  • need to first resign and are no longer an employee
  • you would then need to buy equity in the company (since you are an owner, you need ownership in the business; partnerships are private companies)
  • the company may give you a loan to purchase shares in the company if needed
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2
Q

since shareholders own the corporation, what can they do

A

they have ultimate say in how the company is run

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2
Q

what are the different types of partnerships

A
  • limited partnerships
  • general partnerships
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2
Q

what is a limited partnership

A
  • must include one general partner who has to be involved in the business and has personal liability
  • Limited partners cannot be involved in the running of business and liability is limited to their investment
  • Many hedge fund are structured as limited partnerships
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2
Q

what is a general partnership

A
  • Partners have unlimited liability and partners are liable for the actions of all partners
  • Most partnerships have moved away from this model in recent years given the liability issues
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2
Q

what is a corporation

A
  • By far, the most dominant form of organization when measured by dollars of assets or sales
  • Ownership is separate from management
  • Ownership is transferred by the buying and selling of shares
  • Separate legal entity – therefore owners do not have legal liability for the actions of the corporation or its employees
  • Much easier to corporations to access capital vs. other forms of organization
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3
Q

what governs the regulation of corporations

A
  • Government act of incorporation
  • The corporation’s charter (original act of incorporation setting out basic rules and regulations)
  • By-laws (subsequent to charter, these are rules and regulations set by the corporation’s board of directors and approved by shareholders
    Ex. compensation policies, payments of dividends, authority of senior management)
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3
Q

what is a proxy

A

allows someone else to vote on behalf of a shareholder (if that shareholder gives that person the right to do so)

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3
Q

what are shareholder rights like in a corporation

A
  • Most decisions within a corporation are decided by the board of directors and / or management
  • Significant events such as electing directors, selling the corporation (or even a lot of shares)
    requires shareholder approval
  • Most decisions are passed with 50.1% approval from shareholders
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3
Q

who engage in proxy fights

A

Increasingly activist investors

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3
Q

what does the COB do

A

oversees and chairs board meetings and typically has greater influence on its actions

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3
Q

who elects the BOD

A
  • shareholders
  • to ensure that corporate decisions are made are done in the best interests of shareholders
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3
Q

what is a proxy fight

A
  • proxy contest
  • when you are a shareholder and you try to get other shareholders’ proxies
  • done to influence boards or management teams
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3
Q

who are activist investors

A
  • investors who are active
  • actively trying to change management
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3
Q

what does it mean when a director is independent

A

directors who are not management or aligned with a very large shareholder

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3
Q

who is often the COB

A

CEO is often the chairman although some shareholders don’t like this, the BOD would be more independent when the CEO isn’t the COB

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3
Q

who is usually on the BOD

A

the CEO

4
Q

what is something more boards are required to have

A

are required to have a minimum # of independent directors

4
Q

why would shareholders insist on a minimum # of independent directors

A
  • makes sure they care about the shareholder’s interests
  • make sure they are making decisions objectively for other shareholders
5
Q

who needs capital/money and who has it

A
  • governments and corporations need it
  • investors have it
5
Q

what are private placements

A
  • Sale of corporate debt or equity to private investors
  • when there are one on one negotiations
  • Not available to the general public
  • Managed by investment dealers
  • Typically do not require a prospectus
5
Q

who facilitates the raising of capital

A
  • investment firm/investment dealers/brokerage firms
  • they act as a “go-between”
6
Q

what kind of process is raising capital

A

a negotiated one

6
Q

what is the government’s cost of capital

A

the investor’s return

6
Q

what are public offerings

A
  • The sale of securities (generally debt or equity) to the public from corporations
  • Investment dealers manage the process
7
Q

why do private placements sometimes generate controversy

A
  • because retail investors are not given access / fear that large institutions are given preferential access / valuation for securities
  • because retail investors don’t have access to invest in the corporations
7
Q

what is a prospectus

A

sets out the terms of the offering (timing, price, what the proceeds will be used for); it is a lengthy legal document

7
Q

what is a greensheet

A

a marketing document that summarizes the offering and is used by the investment dealer to sell the offering

8
Q

who drafts prospectuses and greensheets

A

analysts or associates at an investment bank

8
Q

what is an IPO

A
  • Initial public offerings
  • Sale of corporate equity for the first (initial) time
  • This is when equity is first listed on a stock exchange or when they “go public
9
Q

how is value per share determined when pricing an IPO

A
  • set to balance:
    1. high enough to maximize proceeds for corporation
    2. low enough to ensure that all shares are sold and that there is positive buying in the market after the IPO
9
Q

how is the share price for an IPO determined

A
  • Investment dealer / underwriter will do extensive investigating (“due diligence”) about the corporation’s operations and financial viability
  • From this, future financial projections are made
  • Other similar companies are reviewed to see how they are valued
  • Other similar IPOs are reviewed to see how they were valued
  • From these investigations and valuation discussions, a total value of the company is estimated
  • A discount to this total value may be applied given that equity in the corporation is being sold for the first time
  • Typically only a certain % will be sold via an IPO
  • That value is divided by a certain # of shares to get to a price range
  • Company management will go on a “road show” to meet prospective investors to gauge interest
  • Investment dealer will gather feedback and “build a book”
  • Investors will indicate interest at various prices based on how much you want to sell and the price potential investors are willing to buy for
9
Q

what are secondary issues (equity issues)

A

Issuance of equity after the first (or initial sale)

10
Q

who gets the proceeds from the sale of stock if its from newly issued shares? & what do they do with it

A

the corporation gets the proceeds and uses them to pay down debt, invest in new products / markets

11
Q

who gets the proceeds from the sale of stock if its from existing shares owned by current holders?

A

those holders get the proceeds

12
Q

what system are secondary issues done

A

Secondary issues are often done under the Short-Form Prospectus Distribution (SFPD) System

13
Q

what is the short-form prospectus distribution (SFPD) system

A
  • Allows companies to issue “short-form” prospectuses which are much shorter than prospectuses for IPOs
  • Saves a great amount of time, hassle and money
14
Q

when are short form prospectuses commonly used for

A
  • most often used for “bought deals”
  • Investment dealers / underwriters “buy the deal”, hence the name
  • Corporation is guaranteed proceeds
  • Investment dealers (consisting of the Financing Group and Banking Group)
15
Q

how does a bought deal work

A
  • the stock will trade at an amount
  • the investment dealers will “buy” the stock at the stock price - the typical 4% commission and also a discount to protect them against the stock declining
  • Stock is typically “bought” after 4:00 pm markets close and sold to investors that evening or in the morning before 9:30 am market open
16
Q

what are investors contacted about in a bought deal

A
  1. the # of shares they would buy
  2. at what price they would buy
17
Q

what would an investment dealer want in a bought deal

A

will want to get rid of all of the # of shares at the highest price

18
Q

what happens after the bought deal

A
  • Corporation gets money
  • Investors gets stock
  • Investment dealer gets commission
19
Q

What if overnight markets decline or investors are not interested in buying the issue?

A
  • if the share price declines, investment dealers will loose the amount it declined by
  • if investment dealers cannot sell all of the offering and have to hold the shares and if their value continues to decline, tens of $$$ millions can be lost (and a few jobs for those that made the decisions for that bought deal)
20
Q

what is done to protect investment dealers against declines in a share price after an IPO or equity issue

A

several after-market stabilization procedures

21
Q

what are the after-market stabilization procedures

A
  • Underwriters sell more shares than was originally intended (usually about 5%)
    • If the share price declines after the equity issue, the underwriters exercise their “over-allotment” or “green shoe” option that allows them to buy shares in the market to cover this “short” position (they have sold shares that they don’t own); This is very common
  • Penalize other underwriters whose customers sell shares in aftermarket (not common)
  • Establish a “stabilizing bid” to purchase shares less than the offering price (not common)

AFM 121 (12 decks)

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