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Stock Underwriting Investment Banking Group #5 Market overview • Stock Offering Market – Initial Public Offering (IPOs) – Secondary Offering Underwriting fee for IPOs $4.0 $3.5 $ (billion) $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 1991 1992 1993 1994 Year 1995 1996 1997 Market overview 1. Registration Statement Begin the SEC registration process. This done with the company, accountant, And counsel. Support documents such as underwriting agreement, legal document, and financial data. 2. Fitting Date The day IB turn in the registration statement with SEC. If there are no further Changes, registration becomes effective. 3. Shelf Registration If certain condition are met, the issuer may file for shelf registration. The securities expect to sell within 2 years. Market overview คำศัพท์ ทคี่ วรทรำบ 4. Underwriting Agreement 4.1 Firm Commitment – IB agree to purchase the entire issue and reoffer to public. 4.2 Best Offering – IB agree to sell the securities but does not guarantee the price. 5. Red berring (printed and distributioned) The stock certificates are printed and the listing exchange and the transfer agent are selected, form the underwriting group, promote the issue in a roadshow. Differences between IPOs and Secondary Offering 1. 2. 3. Motivation are often quite different. IPOs are typical smaller but more lucrative for underwriter. The process for a secondary offering is faster because the management team, listing exchange, transfer agent are already in place. Motivation of issuers - Advantage • Raise Capital • Greater public exposure and the improvement of corporate image. • Higher degree of public confidence because of disclosures required of public companies. • The benefits are distributed to the founder manager who have received share. • Attractive employment inducement. Motivation of issuers - Disadvantage • • • • • Lack of operation confidentiality The management is under constant pressure to enhance S-T prformance. Original owner could lose control of the company. Dividend policy. Possible change in accounting practice and reduction in management perquisites. • Diffusion of corporate ownership could increase the possibility of hostile takeover. • Process of going public is expensive and time consume. • After going public, SEC reporting requirement add significant to the cost of operation. ASSEMBLING THE IPO TEAM • • • • • Management and Company’s legal counsel Underwriter and Underwriter’s legal counsel Independent accountants Financial consultants and advisors Attorneys Machanics and Process 1. 2. 3. 4. 5. 6. 7. 8. Registration Statement SEC Review and Comments Amended Registration Statement The Preliminary Prospectus or Red Herring The Roadshow Due Diligence Price Amendment and Underwriting Agreement Closing Registration statement • Used form S-1 and Form SB-2 • Form S-1 requires the most extensive disclosure. Major items required in part I and part II are as follows: Registration Statement Forepart of the registration Statement and Outside Front Cover page of Prospectus. 1. Inside Front and Outside Back Cover page of Prospectus 2. Summary information 3. Use if Proceeds. 4. Determination of offering Price 5. Dilution 6. Selling Securities Holders 7. Plan of Distribution 8. Description of Securities to be Registered 9. Interest of Name Experts and Counsel 10. Information with respect to the Registrant 11. Disclosure of Commission Position on Indemnification for Securities Act Liabilities Registration Statement Part II 1. 2. 3. 4. 5. Other Expense of Issuance of distribution Indemnification of Directors and Officers Recent Sales of Unregistered Securities Exhibits and Financial Statement Schedules Undertaking Sample • Form s-1 • Form 69-1 • Form 77-1 Machanics and Process 2. SEC Review and Comments • • • SEC Staff specialists: Attorney, accountant, financial analyst (may include other staff experts familiar with a particular industry) To determine full and fair disclosure Four basic types of SEC reviews 1. Deferred review >> Poorly and advise the registrant to withdraw 2. Cursory review >> Not often used / has not found any glowing deficiencies 3. Summary review >> Not often used / few comments based on limited review 4. Customary review >> Most preferred review / full review Machanics and Process 3. Amended Registration Statement • Each comment in SEC letter of comments must be addressed and resolved. • Common amendments 1. Delaying amendments >> Request a new effective date if the company has not been able to reply the deficiencies. 2. Substantive amendments >> Correct deficiencies in a registration statement. 3. Price amendments >> Used when price and size of offering are not determined until the day of or the day prior to the offering. Mechanics and Process 4. The Preliminary Prospectus or Red Herring • After the filing, a preliminary prospectus is distributed to brokers and prospective purchasers. • The purpose is to gather an indication of interest from investors. • This is the main document the underwriting syndicate uses to sell the stock. • Cover page must bear the caption “Preliminary Prospectus” in red ink. • Once the effective date arrives, the offering price and effective date will be added to prospectus, then the final prospectus is issued. • Each state has its own securities laws, called blue-sky laws. Machanics and Process 5. The Roadshow • The key marketing event that precedes the IPO by several weeks. • It is arranged to meet with financial analysts and brokers in order for potential purchasers to learn more about the company, which hopefully will improve price performance in the aftermarket. • By the end of the roadshow, the lead manager should have a good idea of the investor’s interest, which assists in determining the final price and size of the IPO. Machanics and Process 6. Due Diligence • • • Before the registration statement becomes effective, the underwriter will hold a due-diligence meeting attended by members of the IPO team. The purpose is to list, gather, and authenticate matters such as articles of incorporation, bylaws, patents, completeness and correctness of minutes, and verification of corporate existence. Due-diligence meetings are held to reduce the risk of liability associated with filing by ensuring that all material matters have been fully and fairly disclosed in the registration statement. Machanics and Process 7. Price Amendment and Underwriting Agreement • The negotiation and final determination of offering size and price are influenced by a number of factors, including financial performance, stock market conditions, prices of comparable companies, market perception, and anticipated aftermarket share value. • The underwriting agreement is signed when the registration statement is about to become effective. Also at this time the final amendment to the registration statement is filed. The price amendment includes the agreed price, underwriter discount, and the net proceeds to the company. Machanics and Process 7. Price Amendment and Underwriting Agreement (Continue) There are 3 primary underwriting contracts 1. Agreement Among Underwriters >> Establishes the relationship among the underwriters. 2. Dealer Agreement (or selling agreement) >> The agreement in which securities dealers who are not part of the syndicate are contracted to distribute the securities. 3. Underwriting agreement >> Establishes the contractual relationship between the corporate issuer and the syndicate. >> Generally contains introductions, warranties, terms of offering, conditions, covenants, indemnifications, and cancellation. Machanics and Process 8. Closing • The closing meeting includes all key players. • The company delivers the registered securities to the underwriter and receives payment for the issue. • For small, best-efforts offering, the closing takes place after the selling period has been completed. The selling period is usually 60 to 120 days after the effective date with extension allowance of 60 to 90 days by mutual consent. • For larger, firm commitment, the closing is usually a week or two after the effective date. Machanics and Process Tombstones • • • Tombstones ad is considered as an essential ingredient of the process. This is more in the nature of announcement than advertisement. A tombstone is a boxed-in ad that appears in financial sections of newspaper and magazines that announces the particulars of the issue. It contains the name of the company, the issuing price and size, the lead underwriter, and other members of the underwriting group. The tombstone ads are a good means to introduce the company to the public and to pique the public’s interest. Timetable Summary 1 10 Mgmt select counsel, underwriter , printer and sign letter of content 15 35 Prepare Draft of Underwriting agreement Determine type of structure of statement And also Gathering necessary information and Financial Statement 50 70 Mgmt send fist draft of registration statement to financial printer, and appoint stock agency Draft of Financial Statement Included registration statement are complete 100 108 SEC comment letter arrive Broad of director sign registration statement and prospectus 110 120 This is offer ring date, underwriting agreement is signed notify stock exchange and NAS of effective Correct registration statement before this day ,On this day Mgmt and underwriter finalize the offering price Closing date, company complete settlement with underwriter, stock is issued and collect proceed from offering Valuation and Pricing • Offering price should be attractive enough to encourage purchaser to buy it. • Valuation is estimate the value of the company, by survey of comparable of • Public company in area of efficiency, leverage, profit margin, operation history etc. • Pricing is setting an offering price. The main concern is how much the market will bear • Most underwriting is follow the historical tradition in pricing. • May be use method of discount for pricing to find the fair value. • May be use price/earning ratio for pricing. (always do in secondary pricing) Underwriting Risk and Compensation Distribution Syndicate consist of : Lead Underwriter Underwriting Syndicate Selling Group Commit to buy shares No risk Lead Underwriter Benefit : Positive Negative • Share portion of underwriting risk • Have to share underwriting spread • help make market • Member may outshine the lead. Underwriting Risks Flotation Risk occur when market shifts after firm commitment on price been made. • Waiting Risk : borne by issuer • Pricing Risk borne by underwriter • Marketing Risk • • • • Flotation Risk be reduced by Building “book of interest” before effective date. Aftermarket trading Forming a syndicate Institutional Sales Compensation Underwriting spread = Price to public – Price issuer receive Lead Underwriter • Manager’s fee • Underwriting allowance • Selling concession Underwriting Syndicate • Underwriting allowance • Selling concession Selling Group • Selling concession Manager’s fee : compensation for managing underwriter, participating in due-diligence, putting the deal together. Underwriting allowance : advertising, legal expense, other expense. Selling concession : compensate base on amount of securities sell. The Price of Going Public Total cost depend on size of offering and the company’s ability to market offering smoothly and efficiently. • Direct Cost • Under Pricing Cost • Hidden and Future Cost Direct Costs • Direct Expense • Underwriting Spread * Gross Spread : negotiable, depend on factor (size, type of commitment, type of securities,…) and additional compensation (warrant, stocks) * Legal fee : depend on complexity of company,… * Accounting fee * Printing costs * Other : registration fee, registrar and transfer agent fee, miscellaneous fee. Under Pricing Costs Normally IPO be underpricing at average about 16%. The underpricing helps the underwriter by reduce the risk of under-writing and gains them the gratitude of in-vestors who buy the IPO issues. Hidden and Future Costs Occur during process of preparing the first listing of the company. • Extra transportation cost • Meal and Entertainment • Postage, phone calls, faxes, messenger deliveries. • Promotion : the important item • Directors’ and officers’ liability insurance • Management time take to complete the offering • Further expense of being public company : significant cost and executive time in preparing and filing annual and quarterly reports. SEC REGULATION AND EXCHANGE LISTING •The invsetment bank cannot provide reseach reports,recommendations,sales literature, or anything from any other firm about company during the quiet period. •Communications only proceed before the preparations for the offering •After IPO ,SEC prohibit distribution of any written sales literature about the offering •After quiet period , SEC prohibit the company or the under writer distribution news stories on the pending offering •The trading practices rules are aimed at preventing manipulative trading in securities during an offering •The rules prohibit persons in connection with offering include underwritter,issuer bid or purchase any securities during restricted period NYSE LISTING REQUIREMENTS Round-lot holders 2,000 U.S. or Total shareholders and average monthly trading volume for most recent 6 month 2,200 U.S. 100,000 share or Total shareholders and 500 average monthly trading volume for most recent 12 month 1,000,000 public share 1,100,000 U.S. Market value of public shares $4000000 Net tangible assets $4000000 Pretax income Most recent year $2500000 Each of 2 preceding years $2000000 or Aggregate for the 3 years $6500000 Minimum in most recent year $4500000 or For companies with not less than $ 500 M. market capitalizationand $ 200 m. in revenues in the most recent year Aggregate for the 3 years $25000000 Aftermarket Trading • The underwriters typically want to stabilize the stock • The underwriters will support the market price of new issue to keep it from becoming a broken deal or falling below the initial offering price. • The SEC requires detailed reports if stabilization is used. • Underwriter will make every attempt to place stock in strong hands among the syndicate member to avoid the necessity for stabilization. • On the other hand , a hot new issue will require underwriter to exercise the over-allotment or green shoe option. Direct Offering, Shells, and Equity takedown • Direct Offering • Shells • Equity takedowns Direct Offerings - Now Internet offering (or direct offering) is available ,through which the issuing company bypasses the underwriter and brokerage. - However , the web’s uses will be limited until the legal and regulatory issues are resolved. - Major Wall Street firm think that most corporation still need investment bank to do the bulk of there financing. Shells A shell is an inactive public company with securities traded in the marketplace. It can be used as a backdoor way of becoming a public company. The easiest way to become a public company is to merge into the public shell. – One big advantage is the time and money saved. The entrepreneurs pay little to “acquire” the shell. The entrepreneurs essentially purchase control of the shell by buying stocks from the existing controlling shareholders. – After completing the acquisition, the company could meet the objective of raising money in the capital markets by issuing stock. – Shells have been around for a long time. Shell brokers have negotiable fees and often retain some of the stock. This approach is legal. – The next step is to dress up the company by pumping in money and in some cases also acquiring other ventures. Meanwhile, the scheme operators take control of the board. The purpose is to authorize issuing millions of shares and to register them through SEC loopholes. Equity Takedowns (Super block trader) • The aggressive tactic take by invester • The investment banker commits to buy stock at discount from the issuing • The investment to redistribute share to client • The investment banking use primary in the secondary offering “spot secondary offerings” • The markets remain robust ,spot secondary likely to grow in frequency • The approach is unlike stock underwriting;No roadshow ,Nor a lengthy • This method under cut the old line invesment banking relationship • The wall street firm have cultivated there are significant advantage for the issuing Members • • • • • • • • Butsaya Napalai Pumin Panitsada Pantira Harit Mongkon Sawitee Kansarn Kedwan Limamornrat Wiriyateerakij Laobssarakul Limpasirisuwan Piyawisutkul Sritakul 4920224020 4920224029 4920224070 4920224083 4920224084 4920224096 4920224109 4920224110