Chapter 6
PRIMARY MARKETS
Regulation of the Issuance of
Securities
• Underwriting activities are regulated by SEC in US.
• The act requires that a registration statement must be
filled by the issuer.
• Information in the registration statement;
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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.
• 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 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.
• 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.
• 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;
– 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.
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 Proces
• 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.
• 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.
• 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 FundRasing Implications
• Completely Segmented Market: The costs of
funds will be different.
• 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.
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.
• 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.
• 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.
Pre-emptive Right (Subscription
Warrant)
• It gives its holder the right of first initiate to
buy new shares to be issued by the
company.
• Dilution Effect.
Stock Split
• 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.
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.