Chapter 14 Primary Markets

1
Chapter 14 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

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Chapter 14 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

3
Chapter 14 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

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Chapter 14 Primary Markets

• Variations in the Traditional Process
• 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

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Chapter 14 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

6
Chapter 14 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