Chapter 12 - Financing and Listing Securities (Done)

Question 1

Can you describe the competitive tender system, and the role that government securities distributors play?

Answer 1

• The competitive tender system is used by governments to sell securities like bonds to institutional investors through an auction process. Investors submit bids indicating the yield or interest rate they are willing to accept. The government then accepts the lowest yield bids until the desired amount of securities is sold. This process ensures that the government borrows at the lowest possible cost.
• Government securities distributors, such as banks and brokerage firms, play a crucial role in this system. They act as intermediaries, distributing the securities to a broad range of investors, ensuring efficient market operations, and providing liquidity. They also offer advisory services and help with the marketing and sale of the securities.

Question 2

What is a non-competitive tender?

Answer 2

A non-competitive tender allows investors to purchase government securities without specifying a yield or price. Instead, they agree to accept the yield determined by the competitive auction process. This option is typically available to smaller investors and ensures they receive an allocation of securities, providing an easy way to participate in government securities markets.

Question 3

Can you explain why the government would award bids from lowest yield to highest?

Answer 3

The government awards bids from the lowest yield to the highest to minimize its borrowing costs. Yield represents the interest rate the government will pay to bondholders. By accepting the lowest yield bids first, the government ensures it pays the least amount of interest possible on the debt it issues, thereby reducing the overall cost of borrowing.

Question 4

What is a guaranteed bond?

Answer 4

A guaranteed bond is a type of bond for which another entity, usually a government or a financial institution, promises to cover the payment of principal and interest if the issuer defaults. This guarantee enhances the bond’s creditworthiness and often results in a lower yield because the risk to investors is reduced.

Question 5

Can you compare authorized shares, issued shares, outstanding shares, and the public float?

Answer 5

• Authorized Shares: The maximum number of shares a company is legally allowed to issue, as specified in its corporate charter.
• Issued Shares: The number of shares that have been sold to and are held by shareholders, including those held by the company’s officers and insiders.
• Outstanding Shares: The number of shares that are currently held by all shareholders, excluding any treasury shares (shares repurchased by the company).
• Public Float: The portion of outstanding shares that are available for public trading, excluding shares held by insiders and major shareholders.

Question 6

What are the advantages and disadvantages to issuing bonds?

Answer 6

Advantages:

• Fixed Interest Payments: Predictable costs due to fixed interest payments.
• Preserves Ownership: Issuing bonds doesn’t dilute ownership or control.
• Tax Benefits: Interest payments on bonds are tax-deductible.

Disadvantages:

• Obligation to Pay Interest: Regular interest payments are required, regardless of company performance.
• Debt Obligation: Increases the company’s debt load, potentially impacting credit ratings.
• Redemption: The principal amount must be repaid at maturity.

Question 7

What are the advantages and disadvantages to issuing debentures?

Answer 7

Advantages:

• Unsecured Debt: No need to pledge assets as collateral.
• Flexibility: Can be used to raise large amounts of capital with flexible terms.

Disadvantages:

• Higher Interest Rates: Generally carry higher interest rates due to the lack of collateral.
• Creditworthiness: Dependent on the issuer’s credit rating and financial stability.

Question 8

What are the advantages and disadvantages to issuing preferred shares?

Answer 8

Advantages:

• Fixed Dividends: Provides predictable income for investors.
• No Voting Rights: Issuing preferred shares doesn’t dilute control.
• Priority: Preferred shareholders have priority over common shareholders for dividends and asset liquidation.

Disadvantages:

• Higher Cost: Dividends on preferred shares are typically higher than interest on debt.
• Limited Appreciation: Less potential for price appreciation compared to common shares.

Question 9

What are the advantages and disadvantages to issuing common shares?

Answer 9

Advantages:

• No Repayment Obligation: Unlike debt, common shares don’t require repayment.
• Attracts Investment: Can raise significant capital from investors seeking growth potential.

Disadvantages:

• Dilution of Ownership: Issuing more shares dilutes existing ownership.
• Dividends: Dividends are not guaranteed and depend on profitability.

Question 10

Can you define a trust deed?

Answer 10

A trust deed, also known as a deed of trust, is a legal document that establishes a trust. It outlines the terms and conditions under which the trust operates, the duties of the trustee, and the rights of the beneficiaries. In the context of bonds, a trust deed is used to specify the responsibilities of the trustee, who acts on behalf of the bondholders to ensure the issuer complies with the terms of the bond.

Question 11

Can you explain what a private placement is?

Answer 11

A private placement is the sale of securities to a relatively small number of select investors, such as institutional investors or accredited individuals, rather than the general public. This method allows companies to raise capital more quickly and with fewer regulatory requirements compared to a public offering. However, it often involves higher risks for investors due to the lack of public disclosure.

Question 12

Can you explain the roles of the financing group, the banking group, and the selling group?

Answer 12

• Financing Group: Consists of institutions that provide the funds necessary for a transaction, often involving underwriters and financial advisors.
• Banking Group: Includes investment banks that underwrite and distribute the securities, ensuring they are sold to investors.
• Selling Group: Comprises brokers and dealers who sell the securities to the public or institutional investors, often acting as intermediaries between the issuer and the investors.

Question 13

When is a prospectus required?

Answer 13

A prospectus is required when a company offers securities for sale to the public. It provides detailed information about the company, its financial condition, the securities being offered, and the risks involved, ensuring that investors can make informed decisions.

Question 14

What is a red herring prospectus?

Answer 14

A red herring prospectus is a preliminary version of a prospectus filed with securities regulators, often during the registration phase of an initial public offering (IPO). It includes most of the information about the company and the offering but omits certain key details, such as the price and number of shares being offered. The document is labeled with a red legend to indicate that it is not yet final.

Question 15

Can you define a greensheet?

Answer 15

A greensheet is a document prepared by underwriters that summarizes the key points of a securities offering. It is typically used internally by brokers and dealers to help them understand and market the offering to potential investors. The greensheet includes information on the issuer, the terms of the offering, and the selling points to highlight to investors.

Question 16

Can you explain the purpose of the passport system?

Answer 16

The passport system is a regulatory framework that allows issuers of securities to obtain a single set of approvals from one jurisdiction, which can then be used to offer securities in multiple jurisdictions. This system simplifies and streamlines the process of offering securities across different regions, reducing administrative burdens and costs for issuers.

Question 17

What kinds of activities are permitted during the prospectus waiting period?

Answer 17

During the prospectus waiting period, also known as the “quiet period,” certain activities are restricted to prevent influencing the market. However, the following are typically permitted:

• Preliminary Marketing: Distribution of the red herring prospectus and limited advertising.
• Due Diligence: Conducting due diligence meetings with potential investors.
• Testing the Waters: Gauging interest from qualified institutional buyers and accredited investors.

Question 18

When does a prospectus become blue skyed?

Answer 18

A prospectus becomes “blue skyed” when it meets the regulatory requirements for approval in each state or jurisdiction where the securities will be sold. This term originates from U.S. state securities laws, known as blue sky laws, designed to protect investors from fraud. The prospectus must comply with these laws before the securities can be legally offered to the public.

Question 19

Can you list and explain the details of an offering?

Answer 19

An offering refers to the issuance of securities by a company to raise capital. Key details include:

• Type of Securities: Whether they are stocks, bonds, or other financial instruments.
• Amount: The total value or number of securities being offered.
• Price: The price at which the securities will be sold.
• Use of Proceeds: How the company plans to use the funds raised.
• Underwriting Details: Information about the underwriters and their role in the offering.
• Risks: A detailed description of the risks associated with the investment.
• Financial Information: The company’s financial statements and performance history.

Question 20

What is a market out clause?

Answer 20

A market out clause is a provision in an underwriting agreement that allows the underwriter to withdraw from the agreement if certain adverse conditions occur in the financial markets. This clause protects underwriters from being obligated to purchase securities if market conditions deteriorate significantly, making it difficult to sell the securities at the agreed-upon terms.

Question 21

What is the purpose of the short form prospectus system and under what conditions can it be used?

Answer 21

The short form prospectus system is designed to expedite the process of issuing securities by allowing companies that meet certain criteria to use a simplified prospectus. This system is typically available to companies with a strong regulatory compliance history and sufficient public disclosure.

Conditions include:

• Eligibility: The issuer must be a reporting issuer in good standing.
• Disclosure: The company must have a history of continuous disclosure filings.
• Market Capitalization: There may be minimum market capitalization requirements.

Question 22

Can you list and explain the three types of after-market stabilization activities?

Answer 22

• Over-Allotment Option (Greenshoe): Allows underwriters to sell more shares than initially planned and buy them back at the offering price to stabilize the market.
• Syndicate Short Covering: Underwriters may sell shares short and then purchase them in the open market to cover these short positions, supporting the stock price.
• Stabilizing Bids: Underwriters may place bids to buy shares at or below the offering price to prevent or slow a decline in the stock price.

Question 23

Can you define a bought deal?

Answer 23

A bought deal is an agreement in which an underwriter purchases all the securities from the issuer before marketing them to investors. This provides the issuer with immediate funds and shifts the risk of selling the securities to the underwriter. It is often used for large, well-known issuers with high demand for their securities.

Question 24

Can you describe escrowed shares?

Answer 24

Escrowed shares are shares held by a third party (escrow agent) and are subject to certain conditions before they can be released to the shareholders. These conditions might include the achievement of specific business milestones, the expiration of a lock-up period, or regulatory approvals. Escrow arrangements protect investors by ensuring that the conditions are met before the shares become freely tradable.

Question 25

How does a Capital Pool Company work?

Answer 25

A Capital Pool Company (CPC) is a shell company that raises funds through an initial public offering (IPO) with the purpose of acquiring an existing business. Once a suitable business is identified, the CPC merges with it, allowing the private company to go public without an IPO. This process provides private companies with a faster and more cost-effective way to access public markets.

Question 26

What is the purpose of crowdfunding?

Answer 26

Crowdfunding is a method of raising small amounts of money from a large number of people, typically through online platforms. It is used to finance various types of projects, ventures, or causes. The purpose of crowdfunding is to provide access to capital for entrepreneurs, artists, and nonprofits without relying on traditional financial institutions. It also allows individuals to support causes they believe in directly.

Question 27

By signing a listing agreement, what regulations does a company agree to abide by?

Answer 27

By signing a listing agreement, a company agrees to comply with the rules and regulations of the stock exchange where its securities will be listed. These regulations typically include:

• Timely Disclosure: Providing accurate and timely information about significant events and financial performance.
• Corporate Governance: Adhering to governance standards, including board composition and shareholder rights.
• Financial Reporting: Submitting regular financial statements and audits.
• Trading Rules: Complying with trading rules and practices set by the exchange.

Question 28

Can you list the advantages and disadvantages of listing?

Answer 28

Advantages:

• Access to Capital: Easier access to equity capital from a broad investor base.
• Liquidity: Shares become more liquid, allowing easier buying and selling.
• Visibility and Credibility: Increased visibility and credibility with investors, customers, and partners.
• Employee Incentives: Ability to offer stock options and other equity-based compensation to attract and retain talent.

Disadvantages:

• Regulatory Compliance: Significant costs and efforts to comply with regulatory requirements.
• Public Scrutiny: Increased scrutiny from investors, analysts, and the public.
• Market Pressure: Pressure to meet quarterly performance expectations.
• Dilution: Potential dilution of ownership and control.

Question 29

Can you compare a delayed opening, halt in trading, and suspension of trading?

Answer 29

• Delayed Opening: A temporary delay in the start of trading for a security, often due to high demand, pending significant news, or imbalance in buy and sell orders. This allows for orderly price discovery before trading begins.
• Halt in Trading: A temporary pause in trading initiated by the exchange to allow for the dissemination of significant news or to address imbalances. Trading resumes once the information is absorbed, ensuring a fair and orderly market.
• Suspension of Trading: A longer-term stoppage of trading due to severe issues such as regulatory concerns, financial irregularities, or other significant problems. It protects investors from potential harm while the issues are investigated and resolved.