PRIMARY MARKETS AND THE UNDERWRITING OF SECURITIES

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Presentation transcript:

PRIMARY MARKETS AND THE UNDERWRITING OF SECURITIES 4/20/2017 Chapter 14 PRIMARY MARKETS AND THE UNDERWRITING OF SECURITIES

Functions of Investment Bankers 4/20/2017 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 4/20/2017 Public Sale of New Securities Underwriting Firm-commitment underwriting Best-efforts underwriting Underwriting Syndicate

Investment Banking Firms 4/20/2017 Investment Banking Firms Commercial Banks underwrite securities Securities Houses distributor market makers brokers

Classification of Securities Firms Bulge-Bracket Firms Major Bracket Firms Submajor Bracket Firms

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

Variations in the Underwriting Process 4/20/2017 Variations in the Underwriting Process Bought Deal underwriting of bonds Auction Process underwriting of stocks and bonds Preemptive Rights Offering underwriting common stock

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

Auction Process Competitive Bidding Underwriting Single-Price Auction or Dutch Auction Multiple-Price Auction

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

Private Placement of Securities 4/20/2017 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

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.