SPAC v. Direct Listing v. IPO?

What’s the difference between an IPO, a special purpose acquisition company (SPAC), and a direct listing?

[By staff reporters]

IPOs are a 6–12 month journey where a company works with investment banks and underwriters, who buy a bunch of shares and then sell them to investors in the public market during the actual IPO. Early investors are able to liquidate their shares, and the company raises new funds.

CITE: https://www.r2library.com/Resource/Title/0826102549

Direct listings skip the underwriting hullabaloo. But without that stability guarantee, direct listings can result in a more volatile opening. Some companies, like Coinbase, find that it’s worth it to keep their hard-earned money out of bankers’ hands.

SPACs, aka “blank-check companies,” offer yet another alternative path to public markets. A SPAC is a shell company that raises money through the traditional IPO process, then merges with a private company and takes it public. 

MORE: https://medicalexecutivepost.com/2019/06/24/what-is-a-direct-listing-process-on-wall-street/

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Your thoughts are appreciated.

THANK YOU

***

40 Years – MICROSOFT Corp.

Microsoft's biggest moments throughout the years in a chart

https://images.routledge.com/common/jackets/amazon/978148224/9781482240283.jpg

ASSESSMENT: Your thoughts are appreciated.

ORDER TEXTBOOK: https://www.routledge.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

THANK YOU

***

ASK A FINANCIAL ADVISOR? About Company “Vesting”

A YOUNG PHYSICIAN INQUIRES ABOUT NON-PUBLIC COMPANY SHARES AND VESTING?

***

***

QUESTION: I am a physician and work for a startup healthcare IT company with shares in a non-public company that vests over time. What does that mean, and will the shares only be worth something if we go public or are acquired?

Shelly from Boston, MA

****

ANSWER: In most cases, startups dangle equity compensation over employees like a just-out-of-reach cupcake in front of a treadmill. Vesting means some condition needs to be met before you fully own your shares, whether it’s staying at the company for a period of time, reaching a target valuation, or both.

Once your shares have fully vested, you’d think you can finally cash in. But that’s not always the case. It’s a hassle to sell private company shares because there are far fewer buyers compared to selling shares in a publicly traded company. 

If you want to sell your stake before the company goes public, you can ask the execs at your company to buy back your shares. If they say no—and they might, because once they let one employee sell, it’s hard to turn down others—you need another buyer, like an outside investor.

There are eBay-like marketplaces for selling private company shares, but it’s not like posting a picture of your old iPod and offering free shipping. You can only sell to accredited investors (aka hedge funds and other rich folks), and your company needs to authorize the sale. 

It’s way easier to sell your shares if and when your company goes public or is acquired by another company.

Thanks for the query.

Citation: https://www.r2library.com/Resource/Title/0826102549

***

ASSESSMENT: Your thoughts are appreciated.

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

ORDER TEXTBOOK: https://www.routledge.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

INVITE DR. MARCINKO: https://medicalexecutivepost.com/dr-david-marcinkos-

THANK YOU

***

Understanding investment banking rules, securities markets, brokerage accounts, margin and debt

Join Our Mailing List

A Primer for Physician Investors and Medical Professionals

By: Dr. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief] http://www.CertifiedMedicalPlanner.org

[PART 1 OF 8]

BC Dr. Marcinko

NOTE: This is an eight part ME-P series based on a weekend lecture I gave more than a decade ago to an interested group of graduate, business and medical school students. The material is a bit dated and some facts and specifics may have changed since then. But, the overall thought-leadership information of the essay remains interesting and informative. We trust you will enjoy it.

Introduction

The history, function and processes of the investment banking industry, and the rules and regulations of the securities industry and their respective markets, as well as the use of  brokerage accounts, margin and debt, will be briefly reviewed in this ME-P series.

An understanding of these concepts is required of all doctors and medical professionals as they pursue a personal investment strategy.

INVESTMENT BANKING AND SECURITIES UNDERWRITING

New economy corporate events of the past several years have provided many financial signs and symptoms that indicate a creeping securitization of the for-profit healthcare industrial complex. Similarly, fixed income medical investors should understand how Federal and State regulations impact upon personal and public debt needs. For, without investment banking firms, it would be almost impossible for private industry, medical corporations and government to raise needed capital.

Introduction

When a corporation such as a physician practice management company (PPMC), or similar entity needs, to raise capital for growth or expansion, there are two methods. Raising debt or equity. If equity is used, the corporation can market securities directly to the public by contacting its current stockholders and asking them to purchase the new securities in a  rights offering, by advertising or by hiring salespeople. Although this last example is somewhat exaggerated, it illustrates that there is a cost to selling new securities, which may be considerable if the firm itself undertakes the task.

For this reason, most corporations employ help in marketing new securities by using the services of investment bankers who sell new securities to the general public.  Although the investment banking is an exciting and vital industry, many SEC rules regulating it are not. Nevertheless, it is important for all physician executives to understand basic concepts of the industry if raising public money is ever a possibility or anticipated goal. It is also important for individual healthcare investors  to understand something about securities underwriting to reduce the likelihood of fraudulent investment schemes or ill-conceived transactions which ultimately result in monetary loss.

Fundamentals of the Investment Banking Industry

Investment bankers are not really bankers at all. The fact that the word banker appears in the name is partially responsible for the  false impressions that exist in the medical community regarding the functions they perform.

For example, they are not permitted to accept deposit, provide checking accounts, or perform other activities normally construed to be commercial banking activities. An investment bank is simply a firm that specializes in helping other corporations obtain the money they need under the most advantageous terms possible.

When it comes to the actual process of having securities issued, the corporation approaches an investment banking firm, either directly, or through a competitive selection process and asks it to act as adviser and distributor.  Investment bankers, or under writers, as they are sometimes called, are middlemen in the capital markets for corporate securities.

The medical corporation requiring the funds discuss the amount, type of security to be issued, price and other features of the security, as well as the cost to issuing the securities. All of these factors are negotiated in a process known as known as negotiated underwriting. If mutually acceptable terms are reached, the investment banking firm will be the middle man through which the securities are sold to the general public. Since such firms have many customers, they are able to sell new securities, without the costly search that individual corporations may require to sell its own security. Thus, although the firm in need of  additional capital must pay for the service, it is usually able to raise the additional capital at less expense through the use of an investment banker, than by selling the securities itself.

The agreement between the investment banker and the corporation may be one of two types. The investment bank may agree to purchase, or underwrite, the entire issue of securities and to re-offer them to the general public. This is  known as a firm commitment.

When an investment banker agrees to underwrite such a sale,  it  agrees to supply the corporation with a specified amount of money. The firm buys the securities with the intention to resell them. If it fails to sell the securities, the investment banker must still pay the agreed upon sum. Thus, the risk of selling rests with the underwriter and not with the company issuing the securities.

The alternative agreement is a best efforts agreement in which the investment banker makes his best effort to sell the securities acting on behalf of the issuer, but does not guarantee a specified amount of money will be raised.

When a corporation raises new capital through a public offering of stock, on might inquire from where does the stock come? The only source the corporation has is authorized, but previously un-issued stock. Anytime authorized, but previously un-issued stock (new stock) is issued to the public, it is known as a primary offering. If it’s the very first time the corporation is making the offering, it’s also known as the Initial Public Offering (IPO). Anytime there is a primary offering of stock, the issuing corporation is raising additional equity capital.

A secondary offering, or distribution, on the other hand, is defied as an offering of a large block of outstanding stock. Most frequently, a secondary offering is the sale of a large block of stock owned by one or more stockholders. It is stock that has previously been issued and is now being re-sold by investors. Another case would be when a corporation re-sells its treasury stock.

Prior to any further discussions of investment banking, there are several industry terms that’s should  be defined.

For example, an agent buys or sells securities for the account and risk of another party, and charges a commission. In the securities business, the terms broker and agent are used synonymously. This is not true of the insurance industry.

On the other hand, a principal is one who acts as a dealer rather than an agent or broker. A dealer buys and sells for his own account Finally, the dealer makes money by buying at one price and selling at a higher price. Thus, it is easy to understand how an investment banking firm earns money handling a best efforts offering; they make a commission on every share they sell.

  Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

The Securities Act of 1933 (Act of Full Disclosure)

When a corporation makes a public offering of its stock, it is bound by the provisions of the Securities Act of 1933, which is also known as the Act of Full Disclosure. The primary requirement of  the Act is that the corporation must file a registration statement (full disclosure) with the Securities and Exchange Commission (SEC); containing some of the following items:

  • Description of the business entity raising the money.
  • Biographical data regarding officers and directors of the issuer.
  • Listing of share holdings of officers, directors, and holders of more than 10% of the issuer’s securities (insiders).
  • Financial statements including a breakdown of existing capitalization (existing debt and equity structure).
  • Intended use of offering proceeds.
  • Legal proceedings involving the issuer, such as suits, antitrust actions or strikes.

Acting in its capacity as an adviser to the corporation, the investment banking firm files out the registration statement with the SEC. It then takes the SEC a period of time to review the information in the registration statement. This is the “cooling off period” and the issue is said to be “in registration” during this time. When the Act written in 1933, Congress thought that 20 days would be enough time from the filing date, until the effective date the sale of  securities is permitted.

In reality, it frequently takes much longer than 20 days for the SEC to complete its review. But, regardless of how long it lasts, it’s known as the cooling off period. At the end of the cooling off period, the SEC will either accept the issue or they will send a letter back to the issuer, and the underwriter, explaining that there is incomplete information in the registration statement. This letter is known as a deficiency letter. It will postpone the effectiveness of the registration statement until the deficiency is remedied. Even if initially, or eventually approved, an effective registration does not mean that the SEC has approved the issue.

For example, the following well known disclaimer statement written in bold red ink, is required to be placed in capital letters on the front cover page of every prospectus:

###

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

###

During the cooling off period, the investment bank tries to create interest in the market place for the issue. In order to do that, it distributes a preliminary prospectus, more commonly known as a “red herring”. It is known as a red herring because of the red lettering on the front page.  The statement on the very top with the date is printed in red as well as the statements on the left hand margin of the preliminary prospectus.

The cost of printing the red herring is borne by the investment bank, since they are  trying to market it.. The red herring includes information from the registration statement that will be most helpful for potential medical investors trying to make a decision. It describes the company and the securities to be issued; includes the firm’s financial statements; its current activities; the regulatory bodies to which it is subject; the nature of its competition; the management of the corporation, and what the expected proceeds will be used for. Two very important items  missing from the red herring are the public offering price and the effective date of the issue, as neither are known for certain at this point in time.

The public offering price is generally determined on the date that the securities become effective for sale (effective date). Waiting until the last minute enables the investment bankers to price the new issue in line with current market conditions. Since the investment banker uses the red herring to try to create interest in the market place, stock brokers [aka: Registered Representatives (RRs) with a Series # 7 general securities license –  After a 2 hour multiple-choice computerize test, I held this license for a decade ) will send copies of the red herring to their clients for whom they feel the issue is a suitable investment. The SEC is very strict on what can be said about an issue, in registration.

In fact, during the pre-filing period (the time when the negotiations are going on between the issuer\and underwriter), absolutely nothing can be said about it to anyone.  For example, if the regulators find out that your stock broker discussed with you  the fact that his firm was negotiating with an issuer for a possible public offering, he could be fined, or jailed.

During the cooling off period (the time when the red herring is being distributed), nothing may be sent to you; not a research report, nor a recommendation from another firm, or even the sales literature. The only thing you are permitted to receive is the red herring. The red herring is used to acquaint prospects with essential information about the offering. If you are interested in purchasing the security, then you will receive an “indication of interest”, but you can still not make a purchase or send money.

No sales may be made until the effective date; all that can be used to generate interest is the red herring.

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

LEXICONS: http://www.springerpub.com/Search/marcinko

PHYSICIANS: www.MedicalBusinessAdvisors.com

PRACTICES: www.BusinessofMedicalPractice.com

HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731

CLINICS: http://www.crcpress.com/product/isbn/9781439879900

ADVISORS: www.CertifiedMedicalPlanner.org

PODIATRISTS: www.PodiatryPrep.com

BLOG: www.MedicalExecutivePost.com

Product DetailsProduct DetailsProduct Details

Product Details  Product Details

Product DetailsProduct Details

Product Details

What is a “Direct Listing” Process on Wall Street?

On The “Direct Listing” Process

[By staff reporters]

We’ve talked about Wall Street, IPOs, the OTC market and secondary public offerings before. So, now may be a good time to discuss the direct public listing.

The Direct Public Listing

Companies that want to do a public listing may not have the resources to pay underwriters, may not want to dilute existing shares by creating new ones or may want to avoid lockup agreements. Companies with these concerns often choose to proceed by using the “direct listing” process, rather than an IPO.

Direct Listing Process (DLP) is also known as Direct Placement or Direct Public Offering (DPO)

In DLP, the business sells shares directly to the public without the help of any intermediaries. It does not involve any underwriters or other intermediaries, there are no new shares issued and there is no lockup period.

The existing investors, promoters and even employees holding shares of the company can directly sell their shares to the public.

***

***

However, the zero- to low-cost advantage also comes with certain risks for the company, which also trickle down to investors.

For example there is no support or guarantee for the share sale, no promotions, no safe long-term investors, no possibility of options like greenshoe and no defense by large shareholders against any volatility in the share price during and after the share listing.

Assessment:

The greenshoe option is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than originally planned by the issuer if the demand proves particularly strong.

MORE: https://www.bing.com/news/search?q=Direct+Wall+Street+Listing&qpvt=direct+wall+street+listing&FORM=EWRE

Conclusion: Your thoughts are appreciated.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Investing “Tips” on Initial Public Offerings [IPOs]

Some Investing Tips and Pearls

By Dr. David Marcinko MBA

Initial public offerings, known as IPOs, tend to attract a lot of investor interest – especially when the company is well-known. However, that excitement isn’t always matched by investment returns.

“Tips and Pearls”

So, here are some tips to consider before you decide to invest in an IPO:

• Don’t let the excitement surrounding an IPO cloud your judgment. Too often, there is little financial information about the companies themselves, and many are not profitable. This can translate into extremely volatile stock prices.

• While an IPO’s stock price tends to rise on the day it begins trading, investors who bought shares at the end of the first day haven’t always fared well. The stocks have often fallen below the closing first-day price after six months.

High volatility and a falling stock price are not generally a recipe for attractive investor returns.

So what steps should you take if you’re still interested in an IPO?

1. Understand that the opening price will likely be different from the official IPO price. New issues can experience extreme volatility in the first few hours and days of trading in the secondary market. When the company’s stock opens for secondary trading and becomes more widely available, the price can be significantly different from the IPO price set by the security underwriters. In addition, new issues often do not begin trading the moment the market opens.

2. Use a limit order. This can help you avoid paying more for the stock than you intended. Once you understand the risks of purchasing a stock during its first public trading days, work with your financial advisor to determine the highest price you’re willing to pay for the stock, and then set that amount as your limit.

3. Remember that an IPO must be priced before an order can be accepted. For example, Edward Jones typically does not accept orders until after an IPO has been priced, which is usually the morning the new issue begins trading. In addition, your financial advisor is not permitted to accept market orders for any IPO prior to its trading in the secondary market.

***

https://www.amazon.com/Comprehensive-Financial-Planning-Strategies-Advisors/dp/1482240289/ref=sr_1_1?ie=UTF8&qid=1418580820&sr=8-1&keywords=david+marcinko

***

Assessment

Remember to always do your homework before deciding on any investment, including an IPO. This includes working with your financial advisor or accountant to determine whether the investment is suitable for your portfolio.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko: https://medicalexecutivepost.com/dr-david-marcinkos-bookings/

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

About Tombstone Securities Advertising and the “New Issue” Propsectus

Join Our Mailing List

http://www.CertifiedMedicalPlanner.org

A Primer for Physician Investors and Medical Professionals

By: Dr. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief]

[PART 2 OF 8]

BU Dr. Marcinko

NOTE: This is an eight part ME-P series based on a weekend lecture I gave more than a decade ago to an interested group of graduate, business and medical school students. The material is a bit dated and some facts and specifics may have changed since then. But, the overall thought-leadership information of the essay remains interesting and informative. We trust you will enjoy it.

Introduction

Despite the SEC restrictions, noted in Part I of this series, some idea of potential demand for a new security issue can be gauged and have a bearing on  pricing decisions.

For example, as CEO of a medical instrument company, or interested investor, would you rather see a great deal of interest in a potential new issue or not very much interest?  There is however, one kind of advertisement that the underwriter can publish during the cooling off period. It’s known as a tombstone ad.  The ad makes it clear that it is only an announcement and does not constitute an offer to sell or  solicit the issue, and that such an offering can only be made by  prospectus.  SEC Rule 134 of the 1933 Act  itself, refers to a tombstone ad as “communication not deemed a prospectus”  because it makes reference to the prospectus in the ad. Tombstones have received their name because of the sparse nature of details found in them.

However, the most popular use of the tombstone ad is to announce the effectiveness of a new issue, after it has been successfully issued. This promotes the success of  both he underwriter, as well as the company.

Since distributing securities involves potential liability to the investment bank, it will do everything possible to protect itself.  So, near the end of the cooling off period, a meeting is held between the underwriter and the corporation. It is known as a due diligence meeting. At this meeting they both discuss amendments that are going to be necessary to make the registration statement complete and accurate. The corporate officers, and the underwriters sign, the final registration statement. They have civil liability for damages that result from omissions of material facts or

Mis-statements of fact. They also have criminal liability if the distribution is done by use of fraudulent, manipulative, or deceptive means. Due diligence takes on a whole new meaning when  incarceration from a half-hearted effort underwriting efforts can occur. The investment bank strives to ensure that there have been no material changes to the issuer or the terms of the issue since the registration statement was filed.

Again, as a physician, how would you feel if you were an investment banker raising capital for a new pharmaceutical company that had developed a drug product that was highly marketable. But, on the day after the issue was effective, there was a major news story indicating that the company was being sued for patent infringement? What effect do you think that would have on the market price of this new issue? It would probably plunge. How could this situation have been prevented? The due diligence meeting is more than a cocktail party or a gathering in a smoke filled room. Otherwise, the company would require specially trained people, to do a patent search lessening the likelihood of this scenario. At the due diligence meeting, work is done on the preparation of the final prospectus, but the investment bank does not set the public offering price or the effective date at this meeting. The SEC will eventually set the effective date for the registration and it is on that date that the final offering price will be determined.

Once the SEC sets the effective date, sales may be executed and money can be accepted by the investment bank. It is at this time that the final prospectus, similar to the red herring but without the red ink and with the missing numbers, is issued. A prospectus is an abbreviated form of the registration statement, distributed to purchasers, on and after the effective date of  the registration. It is not the same as the registration statement. A typical registration statement consists of papers that stand more than a foot high; rarely does a prospectus go beyond 40 or 50 pages. All purchasers will receive a final prospectus and then it becomes permissible for the underwriter to provide sales literature.

In addition to the requirement that a prospectus must be delivered to a purchaser of new issues no later than with confirmation of the trade, there are two other requirements that healthcare executives investors should know.

90-day: When an issuer has an initial public offering (IPO), there is generally a lack of publicly available material relating to the operations of that issuer.  Because of this, the SEC requires that all members of the underwriting group make available a prospectus on an IPO for a period of 90 days after the effective date.

4O-day: Once an issuer has gone public, there are a number of routine filings that must be made with the SEC so there is publicly available information regarding the financial condition of that issuer. Since additional information is now available, the SEC requires that, on all issues other than IPOs, any member of the underwriting group must make available a prospectus for a period of 40 days after the effective date.

In the event that the investment bankers misgauged the marketplace, and the issue moves quite slowly, it is possible that information contained in the prospectus would be rendered obsolete by the SEC. Specifically, the SEC requires that any prospectus used more than 9 months after the effective date, may not have any financial information more than 16 months old. It can however, be amended or stickered, with updated information, as needed.

###

  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

###

Syndication Among Underwriters

Because the investment banking firm may be underwriting (distributing) a rather large dollar amount of securities, to spread its risk exposure, it may form a group made up of other investment bankers or underwriters, known as a syndicate. The syndicate is headed by a syndicate manager, or lead underwriter, and it is his job to decide whether to participate in the offering. If so, the managing underwriter will sign a non-binding agreement called a letter of intent. .

If all has gone well and the market place is sufficiently interested in the security, and the SEC has been satisfied with respect to the registration statement, it is time for all parties to the offering to formalize their relationships with a contract including the basic understandings reflected in the letter of intent. Three principal underwriting contracts are involved in the usual public offering, each serving a distinct purpose. These are the: Agreement among Underwriters, Underwriting Agreement, and the Dealer Agreement.

In the Agreement Among Underwriters (AAU), the underwriters committing to a portion of the issue, enter into an agreement establishing the nature and terms of their relationship with each other. It designates the syndicate manager to act on their behalf, particularly to enter into an Underwriting Agreement with the issuer, and to conduct the offering on behalf of each  of them. The AAU will designate the managing underwriter’s compensation (management fee) for managing the offering.

The authority to manage the offering includes the authority to: agree with the issuer as to the public offering price; decide when to commence the offering; modify the offering price and selling commission; control all advertising; and, control the timing and effectiveness of the registration statement by quickly responding to deficiency letters. Each underwriter agrees to purchase a portion of the underwritten securities, which is known as each under-writer’s allotment (allocation).  It is normally signed severally, but not jointly, meaning each underwriter is obligated to sell his allocation but bears no financial obligation for any unsold allotment of another underwriter. This is referred to as a divided account or a Western account. Much less frequently, an undivided or Eastern account, will be used. Each underwriter is responsible for unsold allotments of others, based upon a  proportionate share of the offering.

The above comments referred to firm commitment underwriting. Another type of underwriting commitment  however, is known as best efforts underwriting. Under the terms of  best efforts underwriting, the underwriters make no commitment to buy or sell the issue, they simply do the best they can, acting as an agent for the issuer, and having no liability to the issuer if none of the securities are sold. There is no syndicate formed with a best efforts underwriting. The investment bankers form a selling group, with each member doing his best to sell his allotment. Two variations of a best efforts underwriting are: the all-or-none, and the mini-max (part-or-none) underwriting. Under the provisions of an all-or-none offering, unless all of the shares can be distributed within a specified period of time, the offering will terminate and no subscriptions or orders will be accepted or filled. Under mini-max, unless a set minimum amount is sold, the offering will be terminated.

SEC Rule 15c2-4 requires the underwriter to set up an escrow account for any money received before the closing date, in the event that it is necessary to return the money to prospective purchasers. If the “minimum”, or the “all” contingencies are met, the monies in escrow go to the issuer with the underwriters retaining their appropriate compensation. In order to make sure that investors are properly protected, the escrow account must be maintained at a bank for the benefit of the investors until every appropriate event or contingency has occurred. Then, the funds are properly returned to the investors. If the money is to be placed into an interest bearing account, it must have a maturity date no later than the closing date of the offering, or the account must be redeemable at face with no prepayment penalty as regards principal.

Underwriter Compensation Hierarchy

As we have seen, in a firm commitment the underwriter buys the entire issue from the issuer and then attempts to resell it to the public. The price at which the syndicate offers the securities to the public is known as the public offering price. It is the price printed on the front page of the prospectus.

However, the managing underwriter pays the issuer a lower price than this for the securities. The difference between that lower price and the public offering price is known as the spread or underwriting discount. Everyone involved in the sale of a new issue is compensated by receiving part of the spread. The amount of the spread is the subject of negotiations between the issuer and the managing underwriter, but usually is within a range established by similar transactions between comparable issuers and underwriters. The spread is also subject to NASD [now FINRA] review and approval before sales may commence. The spread is broken down by the underwriters so that a portion of it is paid to the managing underwriter for finding and packaging the issue and managing the offering (usually called the manager’s fee); and a portion is retained by each underwriter (called the underwriting or syndicate allowance) to compensate the syndicate members for their expenses, use of money, and assuming the risk of the underwriting. The remaining portion is allocated to the selling group and is called selling concession. It is often useful to remember the compensation hierarchy pecking order in the following way:

  • Spread (syndicate manager).
  • Underwriters allowance (syndicate members)
  • Selling concession (selling group members)
  • Re-allowance (any other firm)

While the above deal with corporate equity, the only other significant item with respect to corporate debt is the Trust Indenture Act of 1939. This Federal law applies to public issues of debt securities in excess of $5,000,000. The thrust of this act is to require an indenture with an independent trustee (usually a bank or trust company) who will report to the holders of the debt securities on a regular basis.

Successful marketing of a new issue is a marriage between somewhat alien factors: compliance and numerous Federal, state, and self-regulatory rules and statutes; along with finely honed and profit-motivated sales techniques. It’s not too hard to see that there could be a real, or apparent, conflict of interest here. Most successful investment bankers have built their excellent reputations upon their ability to properly balance these two objectives consistently, year after year.

PART ONE:

Understanding investment banking rules, securities markets, brokerage accounts, margin and debt

Channel Surfing the ME-P

Have you visited our other topic channels? Established to facilitate idea exchange and link our community together, the value of these topics is dependent upon your input. Please take a minute to visit. And, to prevent that annoying spam, we ask that you register. It is fast, free and secure.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Product DetailsProduct DetailsProduct Details

Product Details  Product Details

Product DetailsProduct Details

Product Details

Invite Dr. Marcinko

***

%d bloggers like this: