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UNT FINA 3770 - Public Offers

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FINA 3770 1st Edition Lecture 6Outline of Last Lecture I. Sources of Funding by CorporationsII. Definitionsa. Primary vs Secondary Marketsb. Money vs Capital MarketsIII. Organized exchanges and OTC MarketsIV. Fund Raising by FirmsV. More in depth look at Secondary MarketsOutline of Current Lecture I. Types of Offers: Private and PublicII. Registration requirements for public offersIII. Methods of DistributionIV. Cost of Issuing SecuritiesCurrent LectureTypes of Offers: Private and PublicPrivate offers:- Small number of buyers- Flexibility for seller of securities- Quick to raise money w/ a lower flotation costPublic offers:- Large number of buyers- Limited flexibility because it must follow regulations/standard procedures- Time consuming w/ a higher flotation cost- Uses investment bankersWhat do investment bankers do?- Provide general advice- Help distribute and market securities. They utilize the large network of companies/people to help you out. - They can underwrite securities (which is buying a security from the original owner and selling it to another investor.) By underwriting securities, it takes away some risk from the These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.corporation and allows the investment banker to make a commission by allowing them to sell the securities at whatever price they can. Registration Requirements for Public Offers: The IBM (issuer of the shares) must get approval from the SEC by doing the following:o File registration statement with the SEC 20 days before approval may be granted by SEC.o Part of the registration statement contains the details of the offer and financial/operating info about the issuer. If the issues are not yet approved for sale by the SEC and is being investigated, "Red Herring" is printed on the document.  Once the SEC approves, the firm can offer the security for sale to investors.  If the SEC does not approve, the SEC issues a "Stop Order" that prevents the sale of those securities to the public. Methods of Distribution (arrangement with the initial buyer)There are several methods of distribution that can be used: Negotiated purchaseo If there is an IPO, meaning there is no history of price, the firm has options to trick the public into buying the securities. A common way of doing this is to underprice the stock at the beginning of the day, letting demand rise for the stock, and raise the price towards the end of the day.  Competitive bido Regulated by the government. This restricts the use of using just any investment banker to underwrite the securities. o If an investment banker wants to underwrite a security, they must submit a bid and the investment banker with the best bid will get the opportunity.  Commission/Best Efforts Privileged Subscriptions or Rights offeringo Offered to existing shareholders; gives them a chance to buy stock at a special price.o Shareholders who have this opportunity can sell their Right Offering, if they wish. Direct Sale to PublicCost of issuing securities:Total cost = Direct cost + Indirect Cost Direct cost is mostly made up of the underwriter spread, which is the selling price to the public minus what the corporation raising the funds gets.  Other direct costs include printing, legal, acct, taxes, etc. Indirect costs include management time to prepare the offering, cost of under pricing,


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