1. Chapter 13 – Primary Markets for Equity BA 543 Financial Markets and Institutions

2. Chapter 13 – 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

3. Chapter 13 – 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

4. Chapter 13 – 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

5. Chapter 13 – Primary Markets Variations in the Traditional Process Traditional Auction – Prorated to last filled price 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

6. Chapter 13 – 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

7. Chapter 13 – 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