Chapter 13 Q&A

(10b) Why do you think rule 144A has has increased foreign private placements?

2 reasons. 1) It will attract new large institutional investors into the market that were unwilling previously to buy private placements because of the requirement to hold the securities for two years. (2) Foreign entities were unwilling to raise funds int he US prior to establishment of Rule 144A because they had to register their securities and furnish the necessary disclosure set forth by U.S. Securities laws.

(3a) What is meant by a bought deal?

A deal underwritten not using the traditional syndicate process. It is an auction process for both stocks and bonds and a rights offering for underwriting common stock

(2) What is the difference between a firm commitment underwriting arrangement and a best efforts arrangement?

A firm commitment is where the investment banking firm agrees to buys the securities from the issuer at a set price. Vs. A best efforts arrangement the investment banking firm agrees only to use its expertise to sell the securities -- it does not buy the entire issue from the issuer

(9) What does due diligence mean?

Due to heavy penalties from the Gov't or potential for being sued, the underwriter must conduct a reasonable investigation of the information reported to them by the issuer. The public relies on the underwriting to check the accuracy of the statements and the soundness of the offer.

(10b) What is rule 144A?

Eliminates the two year holding period and allows large institutions to trade securities gained in private placement among themselves without having to register them with the SEC.

(3b) Why do bought deals expose investment banking firms to great capital risk than traditional underwriting?

Syndication diversifies the capital risk exposure associated with underwriting. A consequence of accepting bought deals is that underwriting firms need to expand their capital so that they can commit great amount of funds to such deals.

(7) What is a registration statement

The Securities Act of 1933 governs the issuance of securities and requires that this be filed with the SEC by the issuer of the security. It contains: (1) The nature of the business of the issuer, (2) key provisions or features of the security, (3) the nature of the investment risk associated with the security, (4) and the background of the management. It has two parts. Part I is the prospectus. Part II contains supplemental info.

(8) What is meant by the term the waiting period?

The time interval between the initial filing of the registration statement and the time the registration statement becomes effective. This is where the red herring prospectus can be distributed. The underwriting cannot sell the security, nor may it accept offers?

(10a) What are the key distinctions between a private placement and a public offering?

They differ from the regulatory requirements that the issuer must satisfy. Securities Act of 1933 and Securities Exchange act of 1934 require all securities offered to gen public must be registered with the SEC unless they meet an exemption. Regulation D is a guidance on what issue is exempt fro registration.

Understand the components of rights offering by how to value "one right," dilution, and demonstrate the dilution effect of the right of issue

see hand written notes

Understand the components of the auction

see hand written notes