FINN CH 15

The important differences between direct private long-term financing and public issues of debt are:

1. A direct long term loan avoids the cost of SEC registration. 2. Direct placement is likely to have more restrictive covenants. 3. It is easier to renegotiate a term loan or a private placement in the event of a default 4. Life insurance companies and pension funds dominate the private-placement segment of the bond market. 5. The costs of distributing bonds are lower in the private market.

Types of underwriting

1. Firm commitment 2. Best efforts

Services performed by underwriters:

1. Formulating the method used to issue the securities 2. Pricing the new securities 3. Selling the new securities ~Price stabilization by lead underwriter in the aftermarket

Steps involved in issuing securities to go public

1. Obtain approval from the board of directors 2. The firm must prepare a registration statement and file with the SEC. 3. The SEC examines the registration statement during 20 day waiting period. 4. The company cannot sell the securities during wait period , However oral offers can be made. 5. A preliminary prospectus, called a red herring, is distributed during the wait period 6. Price per share determined on the effective date if the registration and the selling effort begins.

Cost of selling stock

1. the spread 2. other direct expenses 3. indirect expenses 4. abnormal returns 5. underpricing 6. the green shoe option

Venture Capital Stage Financing

1st: Ground floor or Seed Money ~Fund prototype and manufacturing type 2nd: "mezzanine" financing ~Begin manufacturing, marketing & distribution

Initial Public Offering (IPO)

A company's first equity issue made available to the public. Also unseasoned new issue.

Seasoned Equity Offering (SEO)

A new equity issue of securities by a company that has previously issued securities to the public

underpricing

For initial public offerings, losses arise from selling the stock below the true value

Equity overvalued

If management believes equity is overvalued, they would choose to issue stock shares

debt usage

Issuing stock may indicate firm has too much debt and can not issue more debt

choosing a venture capitalist

Key considerations 1. Financial strength 2. Compatible management Style 3. Obtain and check References 4. Contacts 5. Exit Strategy

Dutch Auction Underwriting

The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.

Indirect expenses

These costs are not reported on the prospectus and include the costs of management time spent working on the new issue.

IPO Underpricing Reasons

Underwriters want offerings to sell out. ~Reputation for successful IPOs is critical. Underpricing = insurance for underwriters.

Green Shoe Provision

a contract provision giving the underwriter the option to purchase additional shares from the issuer at the offering price. Also over allotment option.

syndicate

a group of underwriters formed to share the risk and to help sell an issue

prospectus

a legal document describing details of the issuing corporation and the proposed offering to potential investors

red herring

a preliminary prospectus distributed to prospective investors in a new issue of securities

rights offer

a public issue of securities in which securities are first offered to existing shareholders. Also known as rights offering

direct listing

a security offering in which the company offers securities directly to investors, by passing underwriters.

registration statement

a statement filed with the SEC that discloses all material information concerning the corporation making a public offering

tombstone

an advertisement announcing a public offering

general cash offer

an issue of securities offered for sale to the general public on a cash basis

private placement

are very similar to term loans with longer maturity.

spread

compensation to the underwriter, determined by the difference between the underwriter's buying price and offering price

the spread

consists of direct fees paid by the issuer to the underwriting syndicate - the difference between the price the issuer receives and the offer price.

stock prices tend to

decline when new equity is issued.

Issue costs for equity

direct and indirect, are significantly more than for debt,.

term loans

direct business loans of typically one to five years. Repayable during the life of the loan.

venture capital

financing for new, often high-risk ventures

dutch auctions eliminate

first day IPO price "pop"

costs associated with floating a new issue are generally called ____.

flotation costs.

two kinds of public issues

general cash offer and a rights offer

abnormal returns

in a seasoned issue of stock, the price of the existing stock drops on average by 3 percent upon the announcement of the issue. The drop is called the abnormal return.

underwriters

investment firms that act as intermediaries between a company selling securities and the investing public

Shelf Registration

permits a corporation to register an offering that it reasonably expects to sell within the next two years and then sell the issue whenever it wants during the two-year period. ~Reduces flotation costs ~ Allows company more flexibility to raise money quickly

Green shoe option

the green shoe option gives the underwriter the right to buy additional shares at the offer price to cover over allotments.

Determining the correct offering price is

the most difficult thing an underwriter must do for an IPO.

lockup agreement

the part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock

firm commitment underwriting

the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares

Best Efforts Underwriting

the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

Other direct expenses

these are direct costs incurred by the issuer that are not part of the compensation to underwriters. These cost include- filing fees, legal fees, and taxes all reported in the prospectus

in addition to sales of traditional debt and equity, a company can raise funds by selling

tokens

IPOs with a final price above the file range have been far more

underpriced than those with a final price below or inside the file range.

Requirements for Shelf Resistration

~Company must be rated investment grade. ~Cannot have defaulted on debt within last 3 years ~Market value of stock must be greater than $150 million. ~No violation of the Securities Act of 1934 in the preceding three years.

the partial adjustment phenomenon

~company sets a "file price range". ~the final price can be below, inside, or above the file price range

Signaling explanations:

~equity overvalued ~debt usage ~issue costs

underpricing causes the issuer to :

"leave money on the table"