THE PRIMARY
MARKETS

Financial markets can be categorized as those
dealing with newly issued financial claims, called the
primary market; and those for exchanging financial
claims previously issued, called the secondary
market, or the market for seasoned securities.We
will focus on the primary market for securities.
Regulation of the issuance of securities:

Underwriting activities are regulated by the
Securities and Exchange Commission. The
Securities Act of 1933 governs the issuance of
securities. The act requires that a registration
statement be filed with the SEC by the issuer of
a security. The type of information contained in
the registration statement is the nature of the
business of the issuer, key provisions or features
about the security, the nature of the investment
risks associated with the security, and the
background of management.

The registration is actually divided into two parts.
Part I is the prospectus. This part is typically
distributed to the public as an offering of the
securities. Part II contains supplemental information,
which is not distributed to the public as part of the
offering but is available from the SEC upon request.
SHELF REGISTRATION RULE

In 1982 the SEC approved Rule 415, which
permits certain issuers to file a single
registration document indicating that it intends
to sell a certain amount of a certain class of
securities at one or more times within the next
2 years

Rule 415 is popularly referred to as the shelf
registration rule because the securities can be
viewed as sitting on a "shelf' and can be taken
off that shelf and sold to the public without
obtaining additional SEC approval.
CONTINUED REPORTING

Any company that publicly offers a security in
the United States becomes a reporting
company and, as such, is subject to the
Securities Exchange Act of 1934. This act
specifies that a reporting company file with the
SEC annual and periodic financial reports. The
financial reports must be prepared according to
generally accepted accounting principles
(GAAP).
PRIVATE PLACEMENT OF
SECURITIES

Public and private offerings of securities differ in
terms of the regulatory requirements that must
be satisfied by the issuer. The Securities Act of
1933 and the Securities Exchange Act of 1934
require that all securities offered to the general
public must be registered with the SEC, unless
given a specific exemption. The securities acts
allow three exemptions from federal
registration.

First, intrastate offerings that is, securities sold only
within a state are exempt. Second, a small-offering
exemption (Regulation A) specifically applies if the
offering is for $1 million or less, then the securities
need not be registered. Finally, Section 4(2) of the
1933 Act exempts from registration "transactions by
an issuer not involving any public offering." However,
the 1933 Act does not provide specific guidelines to
identify what is a private offering or placement.
RULE 144 A

In the United States, one restriction imposed on
buyers of privately placed securities is that they
may not be resold for 2 years after acquisition.
Thus, the market contains no liquidity for that
time period. Buyers of privately placed
securities must be compensated for the lack of
liquidity, which raises the cost to the issuer of
the securities.
Variations in the Underwriting of
Securities:

we described the traditional syndication
process; however, not all deals are underwritten
using the traditional syndicate process.
Variations include the "bought deal" for the
underwriting of bonds, the auction process for
both stocks and bonds, and a rights offering for
common stock.
Bought Deal

The bought deal was introduced in the
Eurobond market in 1981 when Credit Suisse
First Boston purchased from General Motors
Acceptance Corporations a $ 100 million issue
without lining up an underwriting syndicate
prior to the purchase.
Auction Process

Another variation for the issuance of securities
is the auction process.In this method, the issuer
announces the terms of the issue, and
interested parties submit bids for the entire
issue.The auction form is mandated for certain
securities of regulated public utilities and many
municipal debt obligations
An issuer is offering $500 million of a bond issue, and
nine bidders submitted the following yields bids:
Bidder
Amount($ million)
Bid
A
$ 150
5.1%
B
110
5.2
C
90
5.2
D
100
5.3
E
75
5.4
F
25
5.4
G
80
5.5
H
70
5.6
I
85
5.7

The next question is the yield that all of the 6
winning bidders will have pay for the amount of
the issue allocated to them.One way in which a
competitive bidding can occur is all bidders pay
the highest winning yield bid(or,equivalently , the
lowest winning price).In our example, all bidders
would buy the amounts allocated to them at 5.4%.
This type of auction is referred to as a single
price auction or Dutch auction. Another way
is for each bidders to pay whatever they bid. This
type of auction is called a multiple price
auction.
Preemptive Rights Offering
A corporation can issue new common stock
directly to existing shareholders via a
preemptive rights offering. A preemptive rights
grants existing shareholders the rights to buy
some proportion of the new shares issued at a
price below market value.The price at which
new shares can be purchased is called the
subscription price.
For the shares sold via preemptive rights
offering, the underwriting services of an
investment banker are not needed.However
the issuing corporation may use the services
of an investment banker for the distribution
of common stock that is not subscribed to.
A stand by underwriting arrangement will be
used in such instances.This arrangement
called for the underwriter to buy
unsubscribed shares.
World Capital Market Integration and
Fund Raising Imlications

An entity may seek funds outside its local
capital market with the expectation of doing so
at a lower cost than if its funds are raised in its
local capital market. Whether lower costs are
possible depends on the degree of integration
of capital markets. At the two extremes, the
world capital markets can be classified as either
completely
segmented
or
completely
integrated.

In the former case, investors in one country are not
permitted to invest in the securities issued by an
entity in another country. As a result, in a
completely segmented market, the required
return on securities of comparable risk traded in
different capital markets throughout the world will
be different even after adjusting for taxes and foreign
exchange rates. An entity may be able to raise funds
in the capital market of another country at a cost
that is lower than doing so in its local capital market.
Motivation For Raising Funds Outside Of
the Domestic Market

A corporation may seek to raise funds outside
of its domestic market for four reasons. First, in
some countries, large corporations seeking to
raise a substantial amount of funds may have no
other choice but to obtain financing in either
the foreign market sector of another country
or the Euromarket, because the fund-raising
corporation's domestic market is not fully
developed enough to be able to satisfy its
demand for funds on globally competitive
terms.

The second reason is the opportunities for
obtaining a reduced cost of funding (taking into
consideration issuing costs) compared to that
available in the domestic market. As explained in
Chapter 17, in the case of debt the cost will
reflect two factors: (1) the risk-free rate, which
is accepted as the interest rate on a U.S.
Treasury security with the same maturity or
some other low-risk security (called the base
rate); and (2) a spread to reflect the greater
risks that investors perceive as being associated
with the issue or issuer.

The third reason to seek funds in foreign markets is a
desire by corporate treasurers to diversify their source
of funding in order to reduce reliance on domestic
investors. In the case of equities, diversifying funding
sources may encourage foreign investors who have
different perspectives of the future performance of the
corporation. Two additional advantages of raising foreign
equity funds, from the perspective of U.S. corporations,
include (1) some market observers believe that certain
foreign investors are more loyal to corporations and
look at long-term performance rather than short-term
performance as do investors in the United States;6 and
(2) diversifying the investor base reduces the dominance
of U.S. institutional holdings and its impact on corporate
governance.

Finally, a corporation may issue a security
denominated in a foreign currency as part of its
overall foreign currency management. For
example, consider a U.S. corporation that plans
to build a factory in a foreign country where
the construction costs will be denominated in
the foreign currency. Also assume that the
corporation plans to sell the output of the
factory in the same foreign country.Therefore,
the revenue will be denominated in the foreign
currency.
NESLİHAN İREVÜL
FATMA SÖYLER
ASIM TUNÇEL
FATMA USLU