Chapter 13 – Primary Markets for Equity

BA 543 Financial Markets and Institutions

Chapter 13 – Primary Markets

Primary Markets Newly Issued Securities

Typically Bonds and Stocks Also, Commercial Paper, Repurchase

Agreements (Repos), etc. Distributed Through Investment Bankers

Now Commercial Banks are allowed to participate

Syndicates formed for marketing IPOs

Initial Public Offerings

Chapter 13 – Primary Markets Traditional Process

Underwriting (Investment Bankers) Investment Banker and Firm are Partners in the

Issue Investment Banker selected by either

Negotiated - Solicitation of a firm (best in the field) Bids by Investment Bankers – Select a firm

Investment Banker either Buys the entire deal (firm commitment) or Provides Marketing Service with Commission on the

Sale of the IPO (best efforts) SYNDICATE – Lead Bankers and Others

Chapter 13 – Primary Markets

Regulation in the IPO Process Registration Statement with SEC

Part One: Prospectus Part Two: Supplemental Information Letter of Comments

Due Diligence The role of the underwriter in verifying

Accuracy of Information No Material Omissions

Waiting Period (Cooling Off Period) Preliminary Prospectus – Red Herring

Chapter 13 – Primary Markets

Variations in the Traditional Process Traditional Auction – Prorated to last filled

price Bought Deal

Credit Suisse First Boston and GMAC issue Short Window from Investment Banker Issue bought before markets are lined up for the

sale of the bonds or stock Private Placement

In State, Less than $1 million, no Public Offering SEC Regulation D – Exemption from Registration

Chapter 13 – Primary Markets

Private Placement Restrictions ONLY SOPHISTICATED BUYERS ALLOWED

Millionaires (excluding house and car) or Income of $200,000 (single) or $300,000 (couple)

annually Restrictions on Re-Sale of Stock

Must hold for two years Rule 144A

By-pass waiting for re-sale Between Large Institutions Makes Issue more liquid and thus sells better

Chapter 13 – Primary Markets

Pre-Emptive Rights Offering to Current Shareholders

Allows owners to maintain current percentage of ownership in the company

Subscription price is below current market value of the existing shares

Uncommon in U.S. but common in other countries

Standby Agreement If not fully subscribed by the current shareholders Investment Banker will sell remaining shares