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CISI: Securities > Chapter 4: Primary Markets > Flashcards

Chapter 4: Primary Markets Flashcards

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SIE Exam flashcards
1
Q

What is a greenshoe, or over-allotment clause?

A

Enables companies to increase the number of shares offered at IPO.

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2
Q

What are the 3 broad stages to an IPO?

A

The decision
The preparation of the prospectus
The sale of securities

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3
Q

Who underwrites the offer?

A

Investment bank or banks that manage the sale

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4
Q

What is a “firm” underwriting?

A

Where there is a guarantee in place to purchase the securities

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5
Q

What is a “best-efforts” underwriting?

A

Where banks will do their best to sell the shares from the offering

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6
Q

What is the risk the underwriter may take on in a “best-efforts” underwriting?

A

If the IPO is under subscribed, they may suffer reputational damage - meaning less likely to be involved in future IPOs

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7
Q

What is a follow-on offering commonly referred to as?

A

Secondary offering

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8
Q

When would a company not do a secondary offering?

A

In a bear market

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9
Q

What are the 3 ways that a company can use IPOs?

A

Offers for sale
Placings
Introductions

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10
Q

What is an offer for sale?

A

Issuing company sells its shares to a issuing house (usually investment bank), who then take on the role at selling them to to public at a higher price

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11
Q

What is a fixed-price offer?

A

Price is usually fixed at just below where it is believed the issue should be fully subscribed

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12
Q

What is the benefit of a fixed-price offer?

A

Encourages an active secondary market

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13
Q

What is a tender offer?

A

Company sets a minimum tender price
Investors state the number of shares they wish to purchase and which price they are willing to pay

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14
Q

What happens when a tender offer closes?

A

A single settlement price is determined by the issuing house, and all applications at or above will be accepted at that price

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15
Q

Which offer type is more common?

A

Fixed-price

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16
Q

What is the benefit of tender offer over fixed-price?

A

More efficient way of allocating shares and maximising proceeds

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17
Q

What is the downside of tender offers?

A

More complex to administer

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18
Q

Where does the term greenshoe come from?

A

Green Shoe Manufacturing Company is 1919 was the first company to be permitted to do a over-allotment option

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19
Q

What does the over-allotment option allow underwriters to do?

A

Sell up to an additional 15% more shares if demand is in excess

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20
Q

How can the underwriter to support the stock price in case of adverse market conditions?

A

They can buy shares on the open market

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21
Q

What is a selective placing?

A

Company markets issue directly to broker/issuing house which in turn places the shares with selected clients

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22
Q

Why is a placing sometimes referred to as selective marketing?

A

Because the intermediary is selecting the clients on who to offer to

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23
Q

What is a private placement?

A

A placement offered directly to a restricted class of investors, known as “sophisticated, qualified or accredited”

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24
Q

Why are private placements not allowed to be offered to the public?

A

They have not filed a formal prospectus or offering document that is required by regulation to offer shares to regular investors

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25
Q

What does a prospectus outline?

A

Details regarding the offering
Detailed business plan
How the proceeds will be used
Director details
Risks disclosure

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26
Q

What are the regulations for private placements in the UK, EU, US?

A

UK - Prospectus Regulations (reflect EUs regs)
EU - Prospectus Directive (PD)
US - Reg D

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27
Q

What is an introduction?

A

A direct listing of a company shares into a new secondary market
A way of gaining liquidity by offering into a new market - e.g. ADR?

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28
Q

What is a hybrid instrument?

A

One that has characteristics of bonds and equities

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29
Q

What does an exchangeable bond offer to the investor?

A

Right to exchange the bond for a set number of shares, but the shares are not those of the bond issuer - but of another companies shares held by the issuer.

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30
Q

What benefits do exchangeable bonds offer to investors?

A

Safety of coupons and repayments, combined with the potential upside of equity growth

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31
Q

What benefits do exchangeable bonds offer to issuers?

A

Can raise borrowed funds more cheaply, as they are more attractive to investors

32
Q

What is the negative of IPO to the company?

A

Loss of company control, higher disclosure requirements

33
Q

How are exchangeable bonds similar to IPOs?

A

The offer can be underwritten by banks

34
Q

What is a listing agent sometimes known as?

A

Sponsor

35
Q

Who can be a listing agent?

A

Investment bank, stockbroker, financial services firm

36
Q

What does a listing agent do?

A

Assessing company suitability for IPO
Best method of listing
Organising prospectus

37
Q

What is the listing agent / sponsor known as in LSE’s AIM?

A

Nominated advisor (nomad)

38
Q

What do reporting accountants sometimes known as?

A

Public auditors

39
Q

What do reporting accountants do?

A

Attest to validity of financial information provided in the prospectus

40
Q

What is the origination team?

A

Corporate broker
Acts as an intermediary between the company and the stock market, advises on market conditions

41
Q

How would corporate governance be modified for an IPO?

A

Reducing the influence of a single individual
Qualified financial director

42
Q

What is a Syndicate Group?

A

Listing agent gathers together a syndicate of investment banks and institutional clients to market shares to their clients

43
Q

When are Syndicate Groups used?

A

For large listings

44
Q

What is a road show?

A

Marketing events held by institutions pitching IPOs to clients

45
Q

What is the process of finding buyers for issuing company’s know as?

A

Book-building

46
Q

What is a lead manager

A

Manager taking responsibility of an area (geographical etc) in a Syndicate Group

47
Q

How much can price ranges differ between different lead managers in a Syndicate?

A

10-15%

48
Q

What is a book runner?

A

Lead managers who coordinate overall demand across a Syndicate

49
Q

How does price finalisation occur in a Syndicate?

A

Syndicates will market shares at a price range, and price will be set based on demand

50
Q

What is underwriting?

A

Contracts with financial institutions that guarantee share purchase if demand is insufficient
Commonly at a discount to what is to be offered to the public

51
Q

What is stabilisation?

A

Lead managers agreeing to support the price by buying in the secondary market if the price falls below a certain level

52
Q

What happens to the shares purchased during stabilisation?

A

Sold into the open market over time

53
Q

What does the FCA require during stabilisation?

A

Disclosure to investors that it is occuring

54
Q

How else is stabilisation enforced?

A

Volatility circuit breakers
Greenshoe options

55
Q

What are the 3 major constituents for regulation in the LSE?

A

The law - UK Companies Act
FCA
LSE Rule Book

56
Q

What does the FCA have to give before an exchange is allowed to be operated in the UK?

A

Recognition, becomes a recognised investment exchange (RIE)
Lays down rules that have to be met before a company can be listed

57
Q

What are the two stages of listing?

A

Prospectus documentation
Application to stock exchange

58
Q

What are the two markets on the LSE?

A

The Main Market
AIM

59
Q

What are the requirements for entering the main market?

A

Must be plc
>£30m market cap
3 years books
10% of shares in public hands
prospectus
cannot issue warrants for more than 20% of share capital

60
Q

Who do you have to appoint to enter the AIM?

A

Appoint two people
Nomad - Nominated Advisor - exchange expert
Broker, ensure sufficient liquidity

61
Q

What is a supranational?

A

Global organisations, e.g. World Bank

62
Q

What are agencies? (bonds)

A

Issue bonds for particular purposes, usually gov backed
E.g. Fannie Mae

63
Q

What is the most common pricing method for the DMO?

A

Auction

64
Q

What are the two pricing methods for bond issuance?

A

Tender
Auction

65
Q

Who can bid on bond issuances?

A

GEMMs - Gilt-edged market makers

66
Q

What happens if auction is not fully taken up?

A

DMO can take the gilts ono its own books

67
Q

How does a tender offer work?
Imagine the auction is for £1 million nominal and the minimum price is £100 for £100 nominal. The
bids submitted are:

  • A offers to buy £0.5 million nominal, paying £101.50 for every £100 nominal.
  • B offers to buy £0.5 million nominal, paying £100.75 for every £100 nominal.
  • C offers to buy £0.5 million nominal, paying £100.50 for every £100 nominal.
A
  • A offers to buy £0.5 million nominal, paying £101.50 for every £100 nominal.
  • B offers to buy £0.5 million nominal, paying £100.75 for every £100 nominal.
  • C offers to buy £0.5 million nominal, paying £100.50 for every £100 nominal.

In this instance, A and B are awarded the gilts, but both pay the lower price: £100.75 (the highest
price at which all the gilts could be sold).

68
Q

What was introduced to allow companies to regularly issue bonds in the U.S.?

A

Shelf registration, allows companies to issue bonds over two years

69
Q

What term have shelf registrations commonly been used for?

A

MTNs
2-10 years

70
Q

What is it called when investors request bond terms from a company?

A

Reverse inquiries

71
Q

What is pitching?

A

Investment banks interested in assisting in the issue will pitch to the issuer

72
Q

What is the indicative bid?

A

Banks will detail their view during pitching on how much the issuer is likely to raise given the terms of the bond issue

73
Q

What is the mandate announcement?

A

Issuer announces which bank(s) have been given the mandate to arrange the issue

74
Q

What is a co-lead manager

A

Situation where lots of interest so a lead manager role is split out - maybe by geographical areas

75
Q
A

CISI: Securities (10 decks)

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