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Chapter 13 – Primary Markets for Equity

Chapter 13 – Primary Markets for Equity. BA 543 Financial Markets and Institutions. Chapter 13 – Primary Markets. Primary Markets Newly Issued Securities Typically Bonds and Stocks Also, Commercial Paper, Repurchase Agreements (Repos), etc. Distributed Through Investment Bankers

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Chapter 13 – Primary Markets for Equity

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  1. Chapter 13 – Primary Markets for Equity BA 543 Financial Markets and Institutions

  2. Chapter 13 – Primary Markets • Primary Markets • Newly Issued Securities • Typically Bonds and Stocks • Also, Commercial Paper, Repurchase Agreements (Repos), etc. • Distributed Through Investment Bankers • Now Commercial Banks are allowed to participate • Syndicates formed for marketing • IPOs Initial Public Offerings

  3. Chapter 13 – Primary Markets • Traditional Process • Underwriting (Investment Bankers) • Investment Banker and Firm are Partners in the Issue • Investment Banker selected by either • Negotiated - Solicitation of a firm (best in the field) • Bids by Investment Bankers – Select a firm • Investment Banker either • Buys the entire deal (firm commitment) or • Provides Marketing Service with Commission on the Sale of the IPO (best efforts) • SYNDICATE – Lead Bankers and Others

  4. Chapter 13 – Primary Markets • Regulation in the IPO Process • Registration Statement with SEC • Part One: Prospectus • Part Two: Supplemental Information • Letter of Comments • Due Diligence • The role of the underwriter in verifying • Accuracy of Information • No Material Omissions • Waiting Period (Cooling Off Period) • Preliminary Prospectus – Red Herring

  5. Chapter 13 – Primary Markets • Variations in the Traditional Process • Traditional Auction – Prorated to last filled price • Bought Deal • Credit Suisse First Boston and GMAC issue • Short Window from Investment Banker • Issue bought before markets are lined up for the sale of the bonds or stock • Private Placement • In State, Less than $1 million, no Public Offering • SEC Regulation D – Exemption from Registration

  6. Chapter 13 – Primary Markets • Private Placement Restrictions • ONLY SOPHISTICATED BUYERS ALLOWED • Millionaires (excluding house and car) or • Income of $200,000 (single) or $300,000 (couple) annually • Restrictions on Re-Sale of Stock • Must hold for two years • Rule 144A • By-pass waiting for re-sale • Between Large Institutions • Makes Issue more liquid and thus sells better

  7. Chapter 13 – Primary Markets • Pre-Emptive Rights • Offering to Current Shareholders • Allows owners to maintain current percentage of ownership in the company • Subscription price is below current market value of the existing shares • Uncommon in U.S. but common in other countries • Standby Agreement • If not fully subscribed by the current shareholders • Investment Banker will sell remaining shares

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