Chapter 6 PRIMARY MARKETS

Regulation of the Issuance of Securities Underwriting activities are regulated by SEC in US.Underwriting activities are regulated by SEC in US. The act requires that a registration statement must be filled by the issuer.The act requires that a registration statement must be filled by the issuer. Information in the registration statement;Information in the registration statement; –Nature of business of the issuer –Features of the security –Nature of the inv. risks of the security –Background of management. Fin. Statements must be included in the registration statement and must be certified by an independent public accountant.Fin. Statements must be included in the registration statement and must be certified by an independent public accountant.

The registration is divided into two parts;The registration is divided into two parts; –Part I: Prospectus: It is distributed to the public as an offering of the securities. –Part II: It contains suplemental information which is not distributed to the public. The act provides for penalties if the information provided is inaccurate.The act provides for penalties if the information provided is inaccurate.

The registration statement must be reviewed and approved by the SEC’s Division of Corporate Finance before it can be offered to the public.The registration statement must be reviewed and approved by the SEC’s Division of Corporate Finance before it can be offered to the public. If they find a problem with the statement, they send a “letter of comments” or “deficiency letter” to the issuer.If they find a problem with the statement, they send a “letter of comments” or “deficiency letter” to the issuer. The issuer must then solve any problem.The issuer must then solve any problem. If the SEC is then satisfied, they will issue an order declarating that the registration statement is “effective” and the underwriter can solicit sales.If the SEC is then satisfied, they will issue an order declarating that the registration statement is “effective” and the underwriter can solicit sales.

The time interval btw the initial filling of reg. statement and the time it becomes effective is referred to as the waiting period.The time interval btw the initial filling of reg. statement and the time it becomes effective is referred to as the waiting period. During this period;During this period; –SEC allows the underwriters to distribute a preliminary prospectus. –The underwriter can not sell or accept buying orders of the security.

Continued Reporting Any company that publicly offers a security in U.S. Becomes a reporting company. They have to report annual and periodic financial reports to SEC. The financial reports must be prepared according to GAAP.Any company that publicly offers a security in U.S. Becomes a reporting company. They have to report annual and periodic financial reports to SEC. The financial reports must be prepared according to GAAP.

Variations in the Underwriting Process Bought DealBought Deal –underwriting of bonds Auction ProcessAuction Process –underwriting of stocks and bonds Preemptive Rights OfferingPreemptive Rights Offering –underwriting common stock

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

Auction Proces The issuer announces the terms of the issue, and interested parties submit bids for the entire issue. (Competitive bidding underwriting).The issuer announces the terms of the issue, and interested parties submit bids for the entire issue. (Competitive bidding underwriting). Single price auction: All bidders would buy the amount allocated to them at the same price.Single price auction: All bidders would buy the amount allocated to them at the same price. Multiple price auction: Each bidder pay whatever they bid.Multiple price auction: Each bidder pay whatever they bid.

Preemptive Rights Offering Existing shareholders have the right to buy new common stock at a price below market value.Existing shareholders have the right to buy new common stock at a price below market value. For the shares issued by preemptive rights offering, the underwriting services are not needed. However the firm may use the services of investment banker for distribution of the common stock that is not subscribed to. (Stand by underwriting)For the shares issued by preemptive rights offering, the underwriting services are not needed. However the firm may use the services of investment banker for distribution of the common stock that is not subscribed to. (Stand by underwriting)

World CM Integration and Fund- Rasing Implications Completely Segmented Market: The costs of funds will be different.Completely Segmented Market: The costs of funds will be different. Completely Integrated Market: The costs of funds will be the same.Completely Integrated Market: The costs of funds will be the same. Mildy Segment or Integrated Market: It offers opportunities to raise funds at a lower cost outside the local market.Mildy Segment or Integrated Market: It offers opportunities to raise funds at a lower cost outside the local market.

Motivation for raising funds outside the domestic market: Large corp’s seeking to raise a substantial amount funds because the domestic market is not fully developed enough to satisy its demand.Large corp’s seeking to raise a substantial amount funds because the domestic market is not fully developed enough to satisy its demand. Opportunities for obtaining a reduced cost of funding compared to that available in the domestic market.Opportunities for obtaining a reduced cost of funding compared to that available in the domestic market. Desire by corp. treasurers to diversify their source of funding in order to reduce reliance on domestic investors.Desire by corp. treasurers to diversify their source of funding in order to reduce reliance on domestic investors. A corp. may issue a security denominated in a foreign currency as part of its overall foreign currency management.A corp. may issue a security denominated in a foreign currency as part of its overall foreign currency management.

IPO’S In order to issue the CM instruments and trade them at exchanges, issuers have to prepare the registration statements and apply to the CMB in Turkey Registration stements may consist of more than one documents such as –issuer information document, –Capital market instrument note –Summary

Sale of CM Instruments IPO Rules in Turkey: If public offering is intented then one of the following sales procedures must be pursued: The shares can be sold –Without public offerings Private placements Sales to qualified customers (nitelikli yatırımcı) - With public offerings By collecting orders Without collecting orders Sales at exchanges

Orders can be collected, –At fixed price –Receiving price offers (bidding) –With a price interval.

Right Issues Right Issues: Capital Raises Registered capital system allows the board of the campanies to call for capital increases without having to go-through the stipulation of Turkish Commercial Code.

Publicly held (owned) companies If the securities of the company are listed on exchange whatever the nr. of its shareholders, it will subject to the CM Law and called as publicly held companies. If the nr. of the shareholders of a joint stock company exceed 500, it will be considered as publicly held company and subject to CM Law.

It gives its holder the right of first initiate to buy new shares to be issued by the company. Dilution Effect. Pre-emptive Right (Subscription Warrant)

When the companies believe that the price of their stock exceeds the amount smaller individual investors would afford to pay for the stock, they split their stock. Stock Split

Scrip Issues Extra shares awarded by the company to its investors. The number of shares that the investor receives is based on: –The number of shares investor already have in the company and –The company's ratio for awarding scrip issues.