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What is a PIPE?
- A private investment in public equity which is the private raising of capital by a company that's publicly traded
- For example, BofA sold reg d stock to Warren Buffet during the financial crisis.
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What are the four parts of the primary market?
- Issuer
- Underwriting manager (investment banker)
- Syndicate members
- Selling group
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What does the issuer do?
They need capital and they hire an underwriter
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What does the underwriting manager do?
- They facilitate distribution and they assume varying degrees of liability (depending on the offering type)
- They sign an underwriting agreement with the issuer
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What do syndicate members do?
These are broker/dealers that assist in selling the shares. They share liability with the underwriting manager.
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What does a selling group do?
They are broker/dealers that accept no liability and only assist in sales. They sign a selling agreement with the manager and they accept no capital risk. They generally market to retail investors.
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What are the two types of agreements that a syndicate member can enter into during an IPO?
Firm commitment (capital risk) vs. best efforts (no capital risk)
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What are the stages of an IPO required by the Securities Act of 1933?
- Pre-registration
- Cooling-off
- Post-registration
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What is the pre-registration period?
- Securities Act of 1933
- Document preparation and due diligence begins.
- The registration statement is completed
- B/Ds and RRs may NOT communicate with the public
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What is the cooling-off period?
- The issuer files the registration with the SEC
- The issuer distributes the preliminary prospectus (red herring)
- They "blue sky" the issue - i.e. they file in states that require registration
- They hold a final due diligence meeting
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What is the post-registration period?
- The effective date has occurred
- Sales are confirmed and the final prospectus is delivered
- This prospectus must contain the SEC no-approval clause (saying that the SEC has registered, not approved).
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What are the types of prospectuses?
- Statutory
- Preliminary
- Summary
- Free Writing
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What is a statutory prospectus?
A condensed form of the registration statement that provides detailed information on the offering (includes the preliminary and final prospectuses)
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What is a preliminary prospectus?
- This is called a red herring. It is used during the cooling off period and it omits the offer price, underwriting/dealer discounts, and proceeds to the issuer.
- Once a final offering price is set, a final statutory prospectus must be filed.
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What is a summary prospectus?
- A short-form prospectus used ONLY for mutual fund offerings
- The investor must be informed that a statutory one exists.
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What is a free-writing prospectus?
- This is a communication that doesn't meet the standards of a statutory prospectus.
- This must include a legend recommending that investors read the statutory prospectus.
- E.g. emails, press releases, and marketing materials
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What securities are exempt from SEC regulation?
- US Gov't and agency securities
- Municipal securities
- Securities issued by banks
- Securities issued by non-profits (church bonds)
- Short-term corporate debt (maturities not exceeding 270 days) [corporate paper]
- Securities issued by small business investment companies (<100 members) [hedge funds]
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If an investor in a Reg D private placement trade is not accredited, what must happen?
- There must be a purchaser representative.
- They can be appointed by a non-accredited investor to evaluate the risks
- They may not be an officer, director or >10% owner/issuer unless they're related to the investor.
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What is a private placement memorandum?
- It is like a prospectus for a a private placement. It is required for all investors if any non-accredited investors are included (but if there are none, it's not needed)
- It includes the use of proceeds, suitability standards, and financials
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How can stock sold under Reg D be resold?
Rule 144
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How are GO bonds issued?
- They require voter approval
- They are subject to debt limitations placed on the municipality which limits its ability to add debt above its debt ceiling
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How are revenue bonds issued?
- No voter approval required
- Consultant must produce a feasibility study
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