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Chapter 14

Chapter 14. PRIMARY MARKETS AND THE UNDERWRITING OF SECURITIES. Functions of Investment Bankers. Advising issuer on terms and timing of offering advisor Buying securities from issuer underwriting Distributing issue to public distributor. Public Sale of New Securities. Underwriting

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Chapter 14

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  1. Chapter 14 PRIMARY MARKETS AND THE UNDERWRITING OF SECURITIES

  2. Functions of Investment Bankers • Advising issuer on terms and timing of offering • advisor • Buying securities from issuer • underwriting • Distributing issue to public • distributor

  3. Public Sale of New Securities • Underwriting • Firm-commitment underwriting • Best-efforts underwriting • Underwriting Syndicate

  4. Investment Banking Firms • Commercial Banks • underwrite securities • Securities Houses • distributor • market makers • brokers

  5. Classification of Securities Firms • Bulge-Bracket Firms • Major Bracket Firms • Submajor Bracket Firms

  6. Regulation of the Primary Market • Securities and Exchange Commission (SEC) • regulates underwriting activities • Securities Act of 1933 • governs issuance of securities • Rule 415: Shelf Registration Rule • file single registration document for selling securities on a continuous basis

  7. Variations in the Underwriting Process • Bought Deal • underwriting of bonds • Auction Process • underwriting of stocks and bonds • Preemptive Rights Offering • underwriting common stock

  8. Bought Deal • Investment banking firm or group of firms offers to buy an entire issue from the issuer. • Attractive features: • quick in bringing issue to market • lower risk of capital loss

  9. Auction Process • Competitive Bidding Underwriting • Single-Price Auction or Dutch Auction • Multiple-Price Auction

  10. Preemptive Rights Offering • Existing shareholders have the right to buy new common stock at a price below market value. • Elements of a rights offering: • Subscription price • Number of rights • Option to transfer rights • Right’s expiration time • Standby Underwriting Arrangements

  11. Private Placement of Securities • Sale of securities to a limited number of institutional investors. • SEC specified conditions to be met for private placement. • Issuers work with investment bankers. • Rule 144A offering or non-Rule 144A offering

  12. Rule 144 A • SEC rule permitting large institutions to trade securities acquired in a private placement among themselves without having to register these securities with the SEC. • SEC Rule 144A improves liquidity of privately placed securities. • Encourages non-U.S. firms to issue securities in the U.S. private placement market.

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