Corporate Underwritings Flashcards
What is a firm underwriting commitment?
Investment banker acts as principal, buying issue from the company and then resells to the public, earning the spread. The underwriter assumes FULL financial liability
What is a best efforts commitment?
Investment banker acts as “agent” taking no liability. If part of the issue is unsold it remains w/ issuer
What are the 2 types of best efforts commitments, and give an explanation for both
All or none - deal is contingent on entire deal being sold; deal is canceled otherwise
Mini-maxi - minimum must be sold, underwriter continues to sell issue up to a max portion of deal (the maximum)
What is stand-by underwriting?
Used when company attempts to sell additional shares through a RIGHTS offering. Underwriter stands-by on a FIRM commitment basis to “pick up” unsubscribed shares at subscription price
What is a negotiated underwriting?
Typical for corporations - terms are just negotiated
What is the formal agreement between members of the syndicate?
Agreement Among Underwriters
Who has full control over syndicate decisions?
Managing underwriter
What is due diligence?
Managing underwriter is responsible for researching issuer and for insuring full disclosure of investors
What is the management fee?
Manager determines each member’s share of profit or loss after underwriting completed - for handling the underwriting, the manager gets a fee
What are the 2 types of Syndicate account types, and what are characteristics of each?
Western and Eastern:
Western - divided as to responsibility and liability
Easter - United as to dividing responsibility and liability
What is a Selling Group?
Used to help issue if underwriting is very large; earn SELLING CONCESSION
What is the Underwriter’s Concession?
The profit that the managing underwriter concedes to the syndicate members if they sell issue directly to public
What is the Selling Concession?
The profit that the Selling Group earns for helping syndicate sell bonds; comes out of Underwriter’s Concession
What is a reallowance?
Small amount given to firms NOT in syndicate or selling group
What is a Prospectus?
Part of the registration that is filed with the SEC - it gives complete disclosure about the issue
What is the 20 day cooling off period?
Once a registration statement is issued, there is a 20 day period where sales of the issue are prohibited. Only the preliminary prospectus may be issued during this time
What is blue skying?
Requirement that a company registers the issue in EACH state it wishes the security to be sold
What is a red herring?
A preliminary prospectus - it states “THIS IS NOT AN OFFER TO SELL” in red ink. It is used by brokers to gauge an interest from potential buyers.
What is a market out clause?
If there is insufficient interest and the bottom falls out of the market due to unforeseen events, the underwriter can be released from commitment
What is the effective date?
When the final price amendment is filed with the SEC, and the issue can be sold with a Final Prospectus. (delivered as a printed document OR electronically)
What is a Tombstone announcement?
When registration is effective, sale of the issue is permitted with final prospectus. Does NOT have the Selling Group names (it also cannot be structured as an advertisement)
How long does the final prospectus have to be sent for:
- IPO in pink sheets or OTCBB
- Company listed on Pink Sheets or OTCBB
- Issuers w/ securities on listed stock exchange
- 90 days
- 40 days
- 25 days
What persons are prohibited from buying IPO’s
- FINRA Member firms, officers, employees, immediate family
- Fiduciaries to member firms (lawyers, accountants, etc.) and Finders
- Portfolio managers
- Passive owners of broker dealers
What is the green shoe clause?
Clause in the underwriting agreement that states that the underwriter may request up to 15% additional shares to cover oversales
What is a sticky issue?
i.e: P.O.P. is set at $20 and opening quote on NASDAQ is $17. No one will want to buy from issuer for immediate loss
What is a stabilizing bid?
Used to prevent this. Makes sure exchange opens with bid at equal to or just under POP
What is a penalty bid clause?
Used to influence syndicate to sell only to long-term investors, not speculators
States that if manager buys back too many shares at stabilizing bid, the member loses his underwriting concession
What is a Secondary offering?
A large offering of a currently trading issue that still must be sold under prospectus offering
What is Rule 415 - Shelf registration?
Allows established/seasoned issuers to keep a blanket registration statement filed with the SEC for 3 years. During this period, the company can sell issues whenever it sees fit, and there is NO 20-day cooling period. This is cheaper and faster than regular S-1 Filing
What is a horizontal merger?
Companies that are merging that are in the SAME business
Vertical merger
Merging of companies that are in a DIFFERENT business
What is a leveraged buy out?
IB’s help to arrange investors to take a company private by having these investors assume a substantial portion of debt
What is a holding company?
Buys stock of another company and then gets representatives on the company’s BOD, influencing MGMT policies and decisions
