Investment Banking Flashcards
Investment banking
How to raise money from the public
Negotiated offering
Issuer chooses the IB directly, most common
Competitive offering
IB chosen through auction, letter of intent
UW
Buys securities from issuer, sells them to the public
Syndicate
Group of UW’s chosen by IB of issuer, risk is subdivided
Managing (lead) UW
Manages syndicate and negotiates with issuer
Selling group
No underwriting, no risk, just helps sell
Chinese wall
Separates IB from B/D
3 types of UW agreements
- Firm commitment - unsold securities retained by syndicate, must maintain escrow acct
- Best efforts - unsold securities returned to issuer includes A. AON entire offering sold or cancelled and returned to issuer B. Min/Max minimum amount sold to avoid cancellation, unsold returned to issuer, must maintain escrow acct
- Stand-by rights - purchases shares not bought during rights offering, firm commitment
Investments not regulated by SEC
LI , fixed annuities, commodities, futures, regular CDs, currencies, real estate
Options and RETs ARE securities and regulated
Primary offering
Authorized but unissued securities, shelf registration 2 or 3 yrs
Well known seasoned issuer
At least 700mm public float or 1bill of non convertible bonds issued w/in last 3 yrs, shelf registration 3 yrs
Seasoned issuer
An issuer w/at least 75mm in public float, shelf registration valid for 3 yrs
Unseasoned issuer
Less than 75mm in public float, files qtrly and annual w/SEC, 2 yr shelf registration
Non-reporting issuer
Not required to file with SEC i.e. Private company, not publicly traded
Public float
Outstanding stocks not held by insiders
Secondary offering
Stock held by insiders or treasury stock
Combined (split) offering
Primary and secondary offering
Red herring
Preliminary prospectus, not final, subject to completion, cannot be delivered electronically
Effective registration date
1st day the offer starts trading, set by the SEC
Issuer directed sales
No need for syndicate or selling group
Securities act 1933
Regulated federal registration of new issues, requires issuer to make full disclosure of relevant info
Corporate charter
Purpose, place, type of security, amount of securities, mgt rules
Trust indenture act 1939
Indenture filed w/SEC for new issues of corporate bonds over $50mm
Price of new issues determined by:
- Earnings
- Comparisons
- Mkt conditions
Exempt securities
Govt securities, munis, commercial paper, non profit, bank issued securities, rail & trucking issued securities, small business investment co’s, intrastate offerings,
Reg A
Offering of $50mm or less w/in 12 month period
Exempt Transaction
Reg S
US companies offering securities outside the US
exempt transaction
Reg D
Private Placement - no promotion allowed unless targeting accredited investors, website ok with password
PPM private placement memo AKA PROSPECTUS
Exempt transaction
Accredited investors
Financial institutions, insiders (and family of), annual income of 200k (300k jt) for previous 2 yrs and coming yr, net worth $1mm excluding residence
Restricted stock
Stock purchased through private placement
Exempt transaction
State registration (blue sky)
B/D, rep, and security must all be registered in the customer’s state, unless exempt
Methods of state registration
- Notification - filing, simplest form
- Coordination - registration effective w/SEC (same time), used for IPO
- Qualification - used for federal exempt, not state, hardest
Cooling off period
Starts when filed w/SEC, lasts about 20 days, SEC reviews, may send stop order, can send red herring, cannot send money though
Allocation of orders
- Pre sale
- Syndicate (group net)
- Designated
- Member
Distribution of profits, Spread:
Difference btwn POP and amount paid to issuer includes takedown and managers fee
Spread = takedown + managers fee
Takedown
Part of the spread, this is the biggest part which goes to the syndicate
Part 1 concession - profit to the selling group
Part 2 reallowance - profit paid to those outside selling group
Types of syndicates
- Western (divided) account - members do not assist each other “Wild West”
- Eastern (undivided) account - unsold reallocated based on original allocation %
Market out clause
Allows UW to w/d from offering due to negative mkt conditions, can happen up through the due diligence mtg
Sticky issue
New issue, difficult to sell, cannot be sold at a discount to firms outside the syndicate or selling group w/o UW permission.
Hot issue
New issue in high demand, trades at a premium w/in 1st 5 minutes
Over allotment (oversubscribed)
Take indications of interest for securities than available
Greens how clause - can sell additional 15% of securities due to over allotment, still must register with SEC
Corporate financing department rule
Part of FINRA that examines compensation to UW, looks at 6 month window for comp, cannot include registration or legal fees, UW must report comp to CFD w/in 1 day after docs filed w/ SEC
stock, options, warrants, are included but cannot be more than 10% of outstanding shares, 6 month holding period
