The Public Offering In General Outline

In General

1. § 5 of the Securities Act

   1. In broad overview, absent an applicable exemption, § 5 bars any offer to sell and sales of a security until a registration statement covering the security has become effective.

2. Underwriting and Underwriters

   1. Methods of Underwriting

      • (1) Firm Commitment

        • In a typical firm commitment offering of securities, investment banking firms organize an underwriting syndicate.

        • Each member of the syndicate agree 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.

          • This 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 managing underwriter may also select additional broker-dealers to assist the syndicate in selling the securities.

          • These dealers, who may be syndicate members (the selling group) will sign a selected dealer agreement setting forth their rights and obligations, including their agreement to sell the securities at the public offering price.

        • Both the underwriters and the selected dealers agree to sell the securities to the public at a fixed public offering price.

        • The difference between that price and the amount received by the issuer is known as the gross spread.

          • The spread may range in size from a fraction of 1% to more than 10% of the public offering price.

          • The spread is normally composed of three parts:

            • (1) the management fee for the managing underwriting,

            • (2) the underwriting compensation received by the underwriters, and

            • (3) the "selling concession" received for any securities sold to the public by any broker-dealer participating in the distribution.

              • Usually, the amount of the selling concession is set in advance by the managing underwriter and may be as much as 60 to 65% of the spread depending upon the effort required to sell the security.

        • In some cases, the underwriters may seek to stabilize the market

          • This means that the syndicate will place into the market a syndicate bid for the security being underwritten.

          • The bis is usually set at or slightly below 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 member retains control over and directly places only a portion of the securities it agrees to underwrite.

          • This is called retention

        • Purchaser, such as institutional investors, may purchase a large amount of securities at one time, but the purchaser may direct that the sale be credited to the account of one or more dealers that are syndicate or selling group members

          • These are called designated orders

      • (2) Best Efforts

        • (1) Straight

          • Under a straight best efforts offering, any security sold to investors remain sold; there is no minimum amount that must be sold as a condition to the deal closing.

        • (2) Mini/Maxi

          • Under a mini/maxi arrangement, a stipulated minimum amount of all the shares to be sold must be sold during a specific period...

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