Red Herring
Red Herring - The preliminary prospectus. It
includes a legend in red on the front page
stating that the registration statement has not
yet become effective.
• SEC reviews the registration statement to see
that all the required information is presented
and that it is not misleading.
• Deficiencies are communicated in a comment
letter. •Once the SEC is satisfied, it approves
the registration. If not, it issues a stop order.
• The term reflects the stark, black-bordered
look of the ad.
Includes the company's name, a brief
description of the security, the offering price,
and the names of the investment bankers in the
underwriting syndicate.
Sarbanes-Oxley Act of 2002 - addresses Among
other issues, corporate governance, auditing
and accounting, executive compensation, and
enhance and timely disclosure of corporate
information.
REGULATION OF SECURITY OFFERINGS - STATE
Registration Statement Effective Date
•Registration statements become effective on
the 20th day after filing (or on the 20th day
after filing the last amendment).
• The SEC, at its discretion, can advance the
date. Typical time from filing to approval is 40
days.
• Sky Blue laws - states laws regulating the
offering and sale securities.
Security offerings reform - SEC adopted new
rules to improve registrations, communications,
and offering process.
• Divided public company into tiered groups of:
Regulation of Security Offerings - Federal
Impact with shelf registration:
• A shelf registration allows a company to
register with the SEC "in advance" of a security
offering.
• The company can sell "off the shelf" by filing a
simple amendment and having the SEC
accelerate the "normal" 20-day waiting period
accorded amendments.
Typically, the waiting period following this
simple amendment is only a day or two.
Tombstone Advertisement - An announcement
placed in newspapers and magazines giving just
the most basic details of a security offering.
a. Well-knowed seasoned issuers (WKSI)
b. Seasoned issuers
c. Unseasoned issuers
d. Nonn-reporting issuers
e. Ineligible issuers
•WKSI - Essentially large, actively traded
companies with established US public track
records.
• Automatic shelf registration - a more flexible
form of shelf registration only available to
WKSIs that become automatically effective
upon filling with the SEC.
• Free writing prospectus (FWPs) - written or
electronic communications, other than
preliminary or final prospectuses, that
constitutes an offer of securities related to a
registered offering.
having to go through a public market
registration.
Private Placement
• Private Placement with Registration Rights – It
combines a standard private placement with a
contract requiring the issuer to register the
securities with the SEC for possible resale in the
public market.
Private (or direct) Placement- The sale of an
entire issue of unregistered securities usually
bonds directly to one purchaser or a group of
purchasers (usually financial intermediaries)
•Eliminates the underwriting function of the
investment banker.
• The dominant private placement lender in this
group is the life-insurance category (pension
funds and bank trust departments are very
active as well).
Private Placement Features
•Allows the firm to raise funds more quickly.
• Eliminates risks with respect to timing.
• Eliminates SEC regulation of the security.
• Terms can be tailored to meet the needs of
the borrower.
• Underwritten Rule 144a Private Placement –
The issuer sells its securities initially to an
investment bank that resells them to the same
institutional buyers that are candidates for a
regular private placement. Often includes
registration rights.
Initial Financing
Venture Capital
- wealthy investor and financial institutions are
the primary providers of funs for a new
enterprise(usually a common stock)
- Rule 144 and the 1933 Act require privately
place to be held for at least 2 years or be
registered before they can be resold
Letter Stock
- privately place common that cannot be
immediately resold.
• Flexibility in borrowing smaller amounts more
frequently rather than a single large amount.
Initial Financing - Initial Public offerings
Private Placement and Other Development
• Event Risk – The risk that existing debt will
suffer a decline in creditworthiness because of
the issuance of additional debt securities,
usually in connection with corporate
restructuring.
-Often prompted by venture capitalist who wish
to realize a cash return on their investment.
- founders of the firm may wish to go through
IPO to establish a value for their company.
Possible Explanation for Price Reactions
• Qualified Institutional Buyers (QIBs) – Eligible
purchasers, by SEC Rule 144a, of previous
securities from a private placement without
Expectations of Future Cash Flow
- the unexpected sale of securities may be
associated with lower than expected operating
cash flow and interpreted as bad news.
Asymmetric (unequal) Information
- potential investors have less information than
management ( particularly in common stock).
- exchange of different types of securities
shows that increases ( decreases) in financial
leverage associated with positive (negative)
abnormal returns.
The Secondary Market
- purchases and sales of existing stock and
bonds occur in the secondary market.
- transaction in the secondary market do not
provide additional funds to the firm.
- the secondary market increases the liquidity of
securities outstanding and lowers the required
return of investors.