Chapter 13: Investment Banking

Front 1

Investment Banker

Back 1

Broker dealers hired by corporations to help them with various financing and corporate related matters.

Front 2

Primary Functions of Investment Bankers:

Back 2

1. Raise Capital - for the corporation through the issuance of securities and they give advice on what type of security to issue

2. For New Issues of Securities

the investment banking firm will serve as the: underwriter, sponsor, distributor, or a syndicate member

3. Advise corporations on mergers and acquisitions.

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Primary Distribution

Back 3

the distribution of authorized but previously un-issued shares to the public

Proceeds paid to issuer

New stock that has never been publicly held

Cannot be purchased on Margin

IPOS are considered a primary offering

Requires SEC registration before sold to the public

Front 4

Secondary Distribution

Back 4

The redistribution of a large block of securities held by a few owners

Insider selling, institutional selling

Proceeds paid to the sellers

***secondary shares may be purchased on margin

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"The Chinese Wall Rules" or "The Information Wall"

Back 5

an imaginary barrier between the investment banking department, research department, and trading/market-making departements. Its main purpose is to prevent material, non-public information from being shared between the departements within a broker dealer.

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"The Chinese Wall:**********

Back 6

Personnel working in a broker dealers research department cannot be supervised or compensated by the firms investment banking departemnt

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1. Selling Syndicate Member

2. Selling Group Member

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1. have already made a financial commitment and HAVE a financial liability

2. "groupies" do NOT put in any money upfront and do NOT carry any financial liability

Front 8

Western Account Agreement

Back 8

Most corporate investment banking agreements are western

Front 9

Selling Syndicate Sale to Public

Back 9

Issuer-->Managing Underwriter-->SS-->Public

Price Example/Breakdown;

Issuer proceeds $18/share--> Public Offering Price $20..Managers fee..$.40/share...Selling Syndicate $1.60/share called "underwriters compensation"

Front 10

Selling Group Member Sale to Public

Back 10

Issuer-->Managing Underwriter-->SS--SG (selling group member)-->Public

Issuer Proceeds $18/share->Public Offering $20/share Managers Fee->$.40/share

SS member gets $1/share "retention or risk bearing fee"-->SG Member gets $.60/share "selling concession"

Front 11

Outside B/D Sale to Public

(ANYONE in the syndicate can allocate funds to the outside broker dealer, but if they do they have to give up part of what they paid)

Back 11

Issuer->Managing Underwriter-->SS-->SG->Outside B/D

OR

Issuer-->Managing Underwriter-->SS->Outside B/D

***Outside B/D compensation is called "re-allowance"

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Factors that determine the amount of the spread:

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1. Size of the issue

2. Type of security involved

3. Financial strength of the issuer

4. Type of commitment made by the investment banker

Front 13

"the underwriting spread"

Back 13

is the difference between the public offering price and the price of the new issue

Front 14

Adding a selling group to a new issue underwriting enhances it by...

Back 14

adding marketing and distribution outlets

Front 15

The Agreement Among Underwriters

Back 15

an agreement between managing underwriter and syndicate members. Two types:

1. Eastern Agreements are signed severally and jointly

2. western Agreements are signed severally but NOT JOINTLY

*most corporate deals are structured as Western Account Agreements

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1. Firm Commitment

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1. the syndicate buys the ENTIRE issue and resells it to the public.

-firm acts as a dealer and takes shares into their own inventory

-this type of agreement carries the greatest risk because the underwriters could end up with all unsold shares

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2. Stand-By Agreement (Rights Offering)

***STANDING BY waiting to purchase left over shares that were not subscribed to in the rights offering

The syndicate acts as a Dealer

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2. The underwriter agrees to purchase and distribute any part of an issue not purchased by stockholders who received pre-emptive rights

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3. Best Efforts Agreement

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3. the underwriting group acts as an agent in trying to distribute the new issue to the public.

-it does not buy or take the securities in its inventory

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4. All or None Agreement

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4. The issue is cancelled unless it can be completely sold to the public

-Always an escrow account established

-Firm acts as an agent

Front 20

The Registration Statement

Back 20

-filed with the SEC by the managing underwriter for the corporation

-must be a full and fair disclosure of all relevant facts

-describes the issuers business and the use of the proceeds

-***it is NOT sent to the investors

-***investors get a prospectus once the registration is "effective"

-SEC does not approve or disapprove of the registration but may reject the statement if it finds that the statement is deficient

Front 21

20 Day Cooling Period

(AKA the Quite Period)

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-is the minimum waiting period required by the SEC before the issue can become "effective"

***this does NOT mean that the SEC approves the issue, the accuracy of the issue, or anything else

***the SEC takes responsibility for NOTHING

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What happens during the 20 Day Cooling Period

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1. The Selling Group is formed.

2. Blue Sky the issue (qualifying the issue with State laws, in each State it is to be sold)

3. Due Diligence Meeting - held to review issue deficiency letters, and the final prospectus

***Public offering price is NOT determined at this meeting

***New issues are always priced the night before or the morning of the distribution

Front 23

Red Herring/Preliminary Prospectus

(***on cover there is always a statement in RED that states the SEC does not approve, disapprove, or take any responsibility)

Back 23

***the best bait when fishing is red herring; PP is fishing for investors

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Red Herring/Preliminary Prospectus

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-is an initial version of the prospectus included with the registration statement and is used to solicit indications of buyer interest in the distribution.

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The Red Herring/Preliminary Prospectus can NOT:

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1. Confirm a sale or accept funds for the issue with a preliminary prospectus

2. Be altered in any way (attach biz cards etc)

3. Cannot be accompanied by the firms research report

4. Does not include or declare a final public offering price (it may include a potential price range)

Front 26

The Red Herring/Preliminary Prospectus

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5. Must be sent to clients who have given the registered representative an indication of interest in the offering

6. Indications of interest are NOT binding commitments on the prospective clients, syndicate members or the corporation

7. will include a brief history about the issuer, its management, and use of the proceeds

Front 27

Pricing of a New Issue - factors used to determine price

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1. Comparison with similar issues in the market

2. the outlook and attractiveness of the new issues industry classification

3. Estimate of the EPS for the next year

4. Estimate of the dividends per share the new issue will probably pay

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****Selling Group Members do NOT have a say in the pricing of the new issue...they have NO financial responsibility

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Stabilization or Pegging the Price

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the managing underwriter attempts to halt the decline in the market price of a new issue by stepping away from the syndicate and becoming a buyer in the secondary market to offset the effect of an immediate and unexpected flow back of securities into the market

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Stabilization or Pegging the Price

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1.Can ONLY be done by managing underwriter at or below the **public offering price**. This would be done if the market price fell below its original offering price

2. After purchasing shares to stabilize, the manager may only resell the shares at the **public offering price**

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Final Prospectus MUST INCLUDE:

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1. the date of the prospectus

2. a statement as to possible stabilizing transactions

3. a statement that the SEC neither approves nor disapproves of the securities

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Prospectus Delivery Requirements

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1. The final prospectus must be received by all customers who purchase the new issue not later than with their purchase confirmation

2. The prospectus delivery requirements continue to apply to broker-dealers that participate in the distribution of a new issue and then become market makers in the issue (acting as principals) for 90 days from the closing date of the syndicate

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Tombstone Ads

Back 33

announce the availability of a new issue for sale.

1. the only form of advertising permitted to announce the new issue

2. not required to be filed with the SEC or FINRA prior to publication

3. Contain the

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Quiet Period

***Quiet Periods are ELIMINATED F

Back 34

No member may publish research reports regarding a subject company for which the member acted as manager or co-manager of:

1. an initial public offering for 40 calendar days following the date of the offering or

2. a Secondary Offering, for 10 calendar days following the date of the offering

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JOBS Act

Back 35

issuer or b/d representing issuer may contact potential investors before a registration statement is filed with the SEC and engage in oral or written communications with Qualified Institutional Buyers (QIB) and Accredited Investors (AI's) to ascertain investor interest

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Restricted Persons:

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1. member firms or other broker/dealers

2. broker/dealer personnel:

a. any officer, director, general partner, associated person, or employee of a MEMBER or any other broker/dealer and their immediate family members

b. any agent of a member or any other broker/dealer and their immediate families or one who is supported by an immediate family memebrs

3. Finders (the person or company that talked "ABC" into going public and brought the deal to the managing underwriter) and Fiduciaries and their immediate families

4. Portfolio Managers and their immediate families

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"Immediate Family Members" does NOT include:

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Aunts, Uncles, and Grandparents

Front 38

FINRA Rule 5130

Back 38

Covers restrictions on the Purchase and Sale of Initial Equity Public Offerings (IPOs) by "restricted persons" and their immediate family members

Front 39

Caveat for Restricted Persons Rule

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RP's may purchase shares if such a purchase is done to maintain a proportionate share of ownership in a company in which the restricted person ALREADY has ownership

Front 40

Standby Purchasers

(persons who are normally restricted would be allowed to purchase or sell shares of the new issue provided that):

Back 40

1. The standby agreement is disclosed in the prospectus

2. The standby agreement is a written agreement

3. The managing underwriter represents, in writing, that it was unable to find any other purchasers for the securities

4. Securities sold pursuant to the standby agreement are subject to a 3 month "locked up" period, meaning the securities cannot be sold for 3 months after purchase.

Front 41

"Retention"

Back 41

the difference between the underwriters compensation and selling concession is the retention