10 8 The Financial Life Cycle Venture Capital Financing and expected returns on Investments The SEC its roles and responsibilities Initial Public Offerings Investment Banks roles and responsibilities and Due Diligence Obligations The SEC as Regulator Primary Role Goals instill confidence in markets 1 Protect investors primarily 2 Information disclosure investors make decisions 3 Operational and pricing efficiency of security markets operating correctly 4 Fair and orderly markets SEC oversees issuers primary company investment firms goldman sachs investors you markets NYSE NASDAQ Procedural Elements of the SEC 1 Rules and Regulations 2 Enforcement action when someone breaks the rules 3 Provide for Full and Fair disclosure of information for issuers a Quarterly and annual filing requirements primarily b 10K report suggest go to SEC investor relations side download 10k of company The Financing Life Cycle 1 Owner s capital intial capital investment own money 2 Bank Financing loans and lines of credits for tangible assets 3 Venture Capital Private Equity equity investments by investors in private companies angels 4 Security Offerings markets 5 Mergers Acquistions Initial Public Offering IPO initial public sale of common stock to investors Seasoned Secondary Offerings subsequent sales of common stock to investors negative return at announcement showing that companies need fundings Crowd Funding collective efforts of individuals who network to pool money to support business limitations on amounts raised allows individuals to become angel investors and usually on the internet mostly social conscious JOBS Act Jump Out Business Start Ups 2002 allows companies to raise onlien with restrictions longer time larger of investors before the company must registers with SEC Venture Capital high risk capital earned 50 returns over time bring together entrepreneurs ideas private investors people investment bankers deal exits with an IPO VC 50 return Angel 70 returns bonds 5 stocks 10 small stocks 15 Venture Capital Financing Seed Startup Funding Angel Earliest stage of business investment based on a business plan First Round Funding A Round Higher expected return higher risk Funding to accommodate growth company finishes R D funding in form of convertible bond Intermediate Second Round Funding B Round Maturing ompany with a future leveraged buyout merger acquisition IPO option Later Stage Funding C Round Mature company needing funds for expansion or new product development profitable or breakeven Offer an ownership position to induce the loan or a note to convert from debt to equity Equity Loan 1 Mezzanine Funding Company s progress makes positioning for an IPO viable Venture funds used to support IPO The Role of Securities Markets Primary Securities Market source of capital cheaper to raise capital supported by secondary market Secondary securities Market liquidity for primary market price determination a good secondary market lowers the cost of raising capital The Primary Securities Market Initial sale of common stock to public Underpricing Average first day return 15 on purpose so everyone feels good The Winner s Curse the average investor does not get First Day Return goes to biggest investors The Long term 3 yr adjusted performance of IPO is negative The Roles of Investment Banks Primary Securities Market Advising goldman sachs when to go into the market Origination Securities Act of 1933 study of company register with SEC Due Dilligence Registration Statement Prospectus S 1 Restration Statement company product services financial condition use of risk Syndicate Formation Underwriting what they will sell stablize price and Prie Stabilizations forms Red Herring can t buy preliminary prospectus view Tombstones roadshows and marketing advertising by investment bankers Green Shoe underwriter option to sell 15 more shares Negotiated Offerings underwritings best effort and standby offerings most are negotiated 10 10 The Capital Markets The role of the Designated market maker NYSE DMM Stock Markets computation of stock indices exchanges and ECNs Bid Ask Spreads what dealer would you buy from and sell to Market Orders vs Limit Orders SEC Securities Act of 1933 and Securities and Exchange Act of 1934 The Role of Capital Markets Capitalism markets allocate capital economic freedom Role of Government Regulator Investor The importance of Market Efficiency Stock Price Reflect Stock Values Operating Efficiency Price Efficiency 2 Creating Shareholder value attract capital Well Functioning Financial Markets Factors Promoting Well Functioning Markets Secure Property Rights easy enforced contracts transparent statements accountable borrowers and investors players bear consequences of own decisions Financial Functions Mobilize savings allocate resources transfer risk as market lets you know everything liquidty and validation Consequences Better projects people are willing to provide capital if you are good more innovation accountable managers Results Stronger economic growth and greater consumer satisfaction J Primary Markets vs Secondary Markets Primary Markets Newly issued securities sold to ivnestors marketed through an investment bank Debt is issued by corporations government and agencies IPO s newly issued preferred and additional common stock issued only by companies ISSUER RECEIVES FUNDS Secondary Markets Markets of trading of previously issued securities Funds flow from buyer to seller of security ISSUER DOES NOT RECEIVE FUNDS Organized Exchanges vs OTC Markets Organized Exchanges Actual physical place for trading securities NYSE and American Stock Exchange aution markets Buyers and sellers interact through open platform and a specialist is responsible for the trading No Physical Locations tradings over phones and internets NASDAQ market administered by NASD Most Over the Counter Markets bonds are OTC OTC Market Systems Broker Dealer System Ameritrade Competitive Market Maker System market makers security dealer NASDAQ System mostly tech stocks automated quotation system provides dealer bid and ask quotes Securities Traded 7 000 traded tech is biggest Dealers vs Brokers Dealer Markets Individuals or Firms facilitate trades between buyers and sellers earn spread between bid and ask Securities dealers who make markets willing to buy and sell 7 8000 different stocks Brokered Markets trade only 20 Brokes serve as agents to bring buyers and sellers together earn a commission fee for trades Types of Orders