Chapter 5- Investment Banking Flashcards
Investment Bankers
firms hired by corporations to help them with various financing and corporate related manners
Raise Capital
Advise corporation on mergers and acquisitions
Serve as underwriter, sponsor, distributor, and/or a syndicate member
Issuers
Companies that sell securities (stocks and bonds) to the general public for the purpose of financing its new ventures or operations
Includes: Domestic and foreign corporations
US government
State and local government
Corporations distributing new issues are considered to be issuer not customer
Primary vs secondary distribution
Primary is stock that has not been issued previously and the proceeds from the sale of the security goes to the issuer (can not be purchased on margin)
Secondary is a large block of securities that are sold by a few owners. Proceeds are paid to the seller (can be purchased on margin)
Chinese Wall
Imaginary barrier between investment banking, research, and trading departments.
Prevents material that is not public knowledge from being shared between departments
Personnel working in the broker-dealers research department can not be supervised or compensated by the investment banking department
Syndicate Group or Syndicate desk
group of broker dealers who agree to be distributors for a new issue of common stock by an issuer to the general public
Does research, advise about required filings, maintains records, and allocates new issues to sell
Managing Underwriter
Brokerage Firm chosen by the corporation to issue their securities
Choose by negotiated or competitive bids
Negotiated vs. Competitive bids
Negotiated are typically used for selling stocks
Competitive bidding is typically done for bonds
Who helps Managing underwriter selling securities
Selling Syndicate, They can either selling directly to the public or they can bring on smaller groups to help with sales refereed to as selling groups
Broker/Dealer purchasing New Issues
The broker dealer can go to any level, managing underwriter, Selling syndicate or the selling group to purchase shares for their customers
Selling Syndicate VS selling group
Selling Syndicate- has made a financial commitment and share in the financial liability
Selling group has not put any money upfront and do not carry any financial risk
IPO: what is the spread
The spread is the difference between what the issuer receives for each security and how much the public pays for them
Fee for issuing securities
Issuer proceeds- goes to issues
Manger’s Fees- goes to managing underwriter
Underwriter compensations (AKA retention) - goes to selling syndicate
Selling concession- goes to selling group
Reallowance- goes to the broker dealer
Factors that determine the amount of the spread
size of the issue
Type of security involved
Financial strength of the issuer
Type of commitment made by the investment bank
Agreement between underwriters
Agreement between Managing underwriters and all syndicate members
Managing Underwriters responsibilities
Forming syndicate and selling groups
Running the books
Establishing underwriter retention
allocate issues to syndicate members
Stabilize the issue if needed
Agreement between underwriters can be either
Easter- signed severally and jointly (undivided liability)
western - signed severally but not jointly (divided liability)
Types of underwriting agreements
Firm commitment
Stand-by agreement
Best efforts agreement
All or none agreement
Firm Commitment
The syndicate buys the entire issue and resells it to the public
greatest risk to underwriter
Stand-by agreement
The underwriter agrees to purchase and distribute any part of an issue not purchased by stockholders who received preemptive rights (rights offering)
Best efforts Agreement
Underwriter acts as an agent, does not buy the shares themselves
The issues is the owner of any unsold shares
Most Common used
All or None agreement
The issue is canceled unless the entire issue is sold to the public
Always has an escrow account established
A market-out clause
AN escape clause for the underwriter if a material adverse development affects the securities market
Used with all types of agreements
Registration Statements
Files with the SEC by the underwriter on behalf of the issuing corporation
Full and fair disclosure of all relevant facts about the issuing company
Describes issuers business as well and the use of the proceeds
Registration and the prospectus
Investors get a prospectus once the registration becomes effective
Registration and the SEC
SEC does not approve or disapprove of a registration
they may reject a registration if they feel there is missing information
Types of registration Statement filings
S-1 IPO- full registration for domestic issues
F-1 IPO- full registration for foreign based issuers
S-3 - Follow-on Short-form registration for domestic issuers
F-3 - Follow on - short-form registration for foreign issuers
Cooling off Period
20 days- Minimum waiting period before the issue can become effective. No sales before issue date.
The selling group is formed
Blue sky the issue -qualified in each state in which it will be sold
The due diligence meetings is held by the issuer and investment bank to review the offering deficiency letters, and the final prospectus
New issue is priced…
either the night before or the morning of the issue
Red Herring or Preliminary Prospectus
It is used to solicit indications of buyers interest
Following a red herring
a RR can not confirm a sale or accept funds
indication of interest is not binding on anyone
red herring can not be altered in anyway
Can not be accompanied by a research report
will not include or declare a final offering price (potential price range is allowed but is also not binding)
Must be sent to people that have given rep indication of interest in the offering
brief history of issue, its management and the use of the proceeds
Pricing of a new issue
Once the price is set, all new issues must be sold at that price. Selling group does not have any say over the price of the new issue
If price begins to drop during offering…
The managing underwriter will step in and purchase shares under the initial offering price to help stabilize the market by becoming a buyer
Selling shares purchased during stabilization
Must be done only at the public offering price
Final Prospectus
Includes the date, stabilization transactions, any penalty clauses
And a statement saying the SEC does not approve of Disapprove of the security
Access equals delivery
Once the final prospectus is delivered on to the SEC it will be available at EDGAR on the SEC’s website. Therefore the investor will have access to this and the SEC will count this as them having had delivery of the prospectus.
Prospectus violations
Misstatements in the prospectus
Sending sales literature with the preliminary prospectus
Altering the prospectus in any way
Sending excerpts of the prospectus
Accepting an order to purchase before the effective date of the registration statement
New Issues and margin
Securities can not be purchased on margin for their first 30 days
New issue of a firms own stock
Can only be sold through unsolicited orders
Tombstone ads
Announce the availability of new issues for sale
only form of advertising permitted
not required to be filed with the SEC
Contains the Name of the issuer, managing underwriter, and the amount of the new issue
can only contain statements of facts
must indicate where a prospectus could be found
do not show selling group members
DO show public offering price
Quiet period
No acting member of the public offering can publish a research report on the subject of the new issue for:
10 calendar days for an IPO
3 calendar days from a secondary offering
Eliminated for Emerging growth companies under the JOBS act
Issuers and Brokers under the JOBS act
may communicate with qualified institutional investors and accredited investors to ascertain investor interest
FINRA rule 5130
If you work for, are related to someone or live with someone who works or a broker dealer (restricted persons), you may not buy IPO stock
Restricted Persons
People who are employed by a member firm or broker-dealer (And their immediate family)
Finders and Fiduciaries (attorneys, account and financial consultants) and their immediate families
Portfolio managers and their immediate family
Immediate family means
Parents, spouses, and siblings
In-laws
Children
And any other person to whom the individual provides material support
Does NOT include Aunts, uncles and grandparents
Restrictions on sales of IPO
Can not be sold to an account where a restricted person has a beneficial interest
Preconditions for sale
The member firm can sell the new issue so long as they have made a good faith effort to confirm that the account is eligible to purchase new issues
Not Restricted persons
Investment company registered under investment company act of 1940
Trust fund formed from 1,000 or more accounts and not primarily restricted persons
Insurance company with at least 1,000 policyholders and not primarily made of restricted persons
Investment club where restricted persons make up less then 10% of account value
Exception to a restricted persons rule
A restricted person may purchase shares if they already hold the security and are buying to maintain their proportionate share of ownership in the company
Stand By Purchasers
Are restricted purchasers that are allowed to by shares if the managing underwriters can not find any other purchasers for the shares as long as additional requirements are met
Stand by purchasers requirements
agreement must be disclosed in the prospectus
Must be a written agreement
Securities sold through this are “locked up” for 3 months after purchase
Under subscribed IPO
Underwriter may purchase portion of a public offering into their own account if they are unable to sell those shares to the public
Retention…
is the difference between the underwriters compensation and the selling concession for a public offering
