Equity Securities Flashcards
How do you differentiate short term vs long term assets?
Short term = held less than one year
Long term = held more than one year
What does IPO stand for?
Initial Public Offering
What is the initial prospectus to potential investors for an IPO called?
A red herring
Describe the IPO process
-Company sells stock to investment bank at x price
-IB forms syndicate of other investment firms to sell the stock
-Syndicate sells stock to public (price will depend on “factors”)
What is a private placement?
-The sale of securities directly to private investors (eg pension funds, investment pools, banks, insurance companies, and EVEN individuals)
-LEGAL
What does Regulation D (Reg D) state?
Private placements of up to $5 mil can be offered to 35 or less non-accredited investors and infinite accredited investors
Pros & Cons of IPO
Pros:
-Broad distribution in secondary market
-Fluctuating market means prices CAN rise
CONS:
-Time & cost of initial registration
-Subject to ongoing reporting requirements of SEC
Pros & Cons of private placements
Pros:
-No registration with SEC
-No prospectus requirement
-NO investment banking fees
-potentially quicker way to raise money than IPO
-stable price
CONS:
-Limited distribution
-Resale of securities by investors is restricted
-Rules of restricted securities are governed by intricate regulations
-No secondary market to enable an increase in stock price
Pros & Cons of Crowdfunding
Pros:
-Investment minimums are generally low
-Opportunity to invest in companies not listed on the exchange
-Potential for outsized returns
CONS:
-Investment risk can’t generally be determined
-Increased risk of business failure
-Increased risk of fraud
SEC Requirements for crowdfunding (5 things)
- Must file disclosure statement w/ SEC
- Investments must take place “online, through an SEC-registered intermediary, either a broker/dealer or funding portal.”
- A max of $5mil (2022) in capital may be raised in a 12-month period
- A non-accredited investor’s investment during any 12 month period is limited to as little as $2,200 (2022) or as much as 10% of investor’s income or net worth
- Investor generally may not resell any securities for 1 year
True or False
Anti-fraud penalties do not apply to fraudulent practices
False; the SEC is allowed to get you
True or False
The issuing company receives money from the exchange of securities on the secondary market
False
2 types of secondary markets (AKA aftermarkets)
- Auction Market
- Over the counter market
Auction Market
vs
Over the Counter Market
Auction Market - (eg NYSE) physical location where prices of securities are determined by buyers & sellers (supply + demand, intensity of desire, etc)
OTC Market - (eg NASDAQ) Public stock issues not traded on any domestic stock exchange; no physical location
Features of Auction Market (3 things)
- Simultaneous competitive bids (bid price)
- Intermediary/broker
- Specialists to create orderly /efficient market
