Law Outlines Securities Regulations (Duke Cox) Outlines
Securities Regulations outline from Duke for Professor Cox...
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Absent an applicable exemption, §5 bars any offers to sell and sales of a security until a registration statement covering the security has become effective
The most salient parts of the registration statement are also set forth in the prospectus, which is an important medium to accompany any written offers to sell the registered security
§11: imposes liability upon the issuer, its principal officers, its directors, and its underwriters for any material omissions or misstatements in the registration statement when it becomes effective. The issuer’s outside accountants are also liable if they have certified materially misleading financial statements that are included in the registration statement
Firm commitment underwriting: one or more investment banking firms agree to purchase the securities from the issuer for resale to the public at a specified public offering price.
Typically, investment banking firms organize an underwriting syndicate. Each member of the syndicate agrees to purchase from the issuer a specified amount of the securities and to resell those securities at a specified public offering price. The syndicate is managed by a managing underwriter who, on behalf of the syndicate, executes with the issuer an underwriting agreement. The underwriting agreement spells out the terms of the offering and the amount of securities that each syndicate member is committed to buy or underwrite
The syndicate members also execute an agreement among underwriters that establishes the obligations of each member
The difference between the public offering price and the amount received by the issuer is known as the “gross spread”
The spread normally is composed of 3 parts:
the management fee for the managing underwriter;
the underwriting compensation received by the underwriters;
the “selling concession” received for any securities sold to the public by any broker-dealer participating in the distribution
You can earn some of the spread even if you are not a managing underwriter and even if you don’t sell any shares (True or False question)
You’re a standby for risk if someone doesn’t sell their shares, you accept the risk, you’re on the hook
The underwriters may elect to “stabilize” the market for the offered security during the distribution
The managing underwriter places in the primary market for the security a syndicate bid to purchase the security that is being underwritten. The bid price is usually set at or just under the public offering price. Stabilization is intended to facilitate an orderly distribution of securities by preventing or retarding a marked decline in the price of the offered security
Typically, each syndicate members retains control over and directly places only a portion of the securities it agrees to underwrite. This portion is known as its “retention.” The remainder of the underwritten securities is placed in a general syndicate account, often called the “pot,” under the control of the managing director. During the course of a distribution, the managing underwriter allocates and reallocates securities among syndicate and selling group members
A larger syndicate compensates for risk
If they can’t sell, they have to hold the shares
The more sellers, the less risk the risk is divided between more parties
Risk is determined by allotment (e.g. 500k shares) the more shares, the more risk
Never close on a Friday
The market might change over the weekend
The allotment is just a way of expressing your responsibility for any unsold shares
So even if you sell your shares, if there are still unsold shares, you must accept risk for your proportion of those unsold shares
Best efforts underwriting: broker-dealers do not purchase the securities from the issuer but instead agree for a fee to use their best efforts to sell the securities on behalf of the issuer at the offering price
Straight: any securities sold to investors remain sold; there is no minimum amount that must be sold as a condition to the deal closing
Mini/maxi: a stipulated minimum amount of all the shares to be sold must be sold during a specific period of time before the offering can close
All or none: all the securities must be sold before the deal is completed
Signaling
High-reputation underwriters may signal the security’s quality
Information asymmetry: insiders know more about their firm than the market
You like a firm commitment underwriting because banks are saying, “we’ll eat our own cooking”
The reputation of the lead underwriter affects nearly every aspect of an offering
Rights offerings: the issuer’s existing stockholders are granted the opportunity (i.e., right) to purchase the new offering of shares, usually at a discount below their current market price
Standby underwriting: the banker agrees to purchase any of the offering’s shares that are not subscribed for by the existing shareholders exercising their right.
The underwriters incur non-trivial market risks during this time as they stand by to acquire whatever shares remain unsold.
For many high-grade issuers, the presence of institutional buyers and the ability to satisfy the registration requirements quickly through use of the integrated disclosure system, have led to competitive bidding among underwriters for some or all of the shares the issuer will offer the “bought deal”
Dutch auction: issuer solicits bids from institutions and broker-dealers for any amount of securities each bidder wishes to acquire; the bidder states the amount of securities it wishes to purchase and the amount of securities. At closing, the bids are arrayed with the highest bid price first and the lowest bid price last. The issuer first accepts the bid with the highest price for the amount of securities covered in that bidder’s bid, and so on down the line until the issuer has placed all the registered securities. The lowest price accepted by the issuer through this process is the price...
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Securities Regulations outline from Duke for Professor Cox...
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