!1!10/8!–!The!Financial!Life!Cycle!Venture!Capital!Financing!and!expected!returns!on!Investments!The!SEC,!its!roles!and!responsibilities!Initial!Public!Offering s!Investmen t!Ba nk sIroles!and!responsibilities!and!Due!Diligenc e!Obligation s!!The$SEC$as$Regulator$Primary!Role/Goals!–!instill!con fid en c e!in !markets!1. Protect!investors!–!primarily!2. Information !disclo sure !–!investo rs !m a k e !de cis io n s!3. Operational!and!pricing!efficiency!of!security!markets!–!operating!correctly!4. Fair!and!orderly!markets!!SEC!oversees!–!!issuers(primary!comp any ),!in v e st ment!firms!(go ld man!sa c h s ),!investor s ( you),!m arke ts(NY SE ,!NASD A Q) !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!com pa ny!!!!$The$Financing$Life$Cycle$1!!!!!Owner’s!capital!(intial!capital!investment,!own!money)!!2èBank!Financing(loans!and!lines!of!credits!for!tangible!assets)!!3èVenture!Capital/Private!Equity!(equity!investments!by!investors!in!private!companies,!“angels”)!4èSecurity!Offerings!(markets)!5!èMergers&Acquistions!!Initial!Public!Offering !(IPO )!–!initial!pu b l ic!sa le !o f!co m mon!stoc k !to !inv e st or s!Seasoned(Secondary)!Offerings!–!subsequen t!sales!of!comm on!stock !to!investors!–!negative!return!at!announcement!(showing!that!companies!need!fundings)!!Crowd!Funding!–!collective!efforts!of!individuals!who!network!to!pool!money!to!support!business,!limitations!on!amounts!raised,!allows!individuals!to!become!angel!investors,!and!usually!on!the!internet,!m ostly!so cial!con sciou s!JOBS!Ac t!–!Jump !O ut !Business!StartIUps!2002,!allows!companie s !to !r a is e !o nlien!w ith!restrict io ns,!longe r !time/larger!# !of!investo rs!be fore!the !com p an y!m u st!registers !with!S EC .!!!Venture$Capital$$high!risk!capital,!earned!50 %!returns!over!t ime!bring!together!entrepreneurs(ideas)+private!investors(people)+investment!bankers(deal),!exits!w i th !a n!IPO!VC!I50%!return,!Angel!–!70%!returns!(bonds!5%,!stocks!10%,!small!stocks!15%)!Venture$Capital$Financing$• Seed/Startup!Funding!(Angel)!Earliest!stage!of!business,!investment!based!on!a !business!plan!• First!Round!Funding!(A!Round)!Higher!expected!return,!higher!risk!Funding!to!accommodate!growth,!company!finishes!R&D,!fund i n g !in !form!of!c o n v e r t ib l e !b o nd!• Intermed iate/ Se con d!R ou nd !Fu nd ing !(B!Ro un d )!Maturing!ompany!with!a!future!leveraged!buyout,!merger/acquisition/IPO!option!• Later!Stage!Funding!(C!Round)!Mature!company!needing!funds!for!expansion!or!new!product!development,!profitable!or!breakeven!• Equity!Loan!Offer!an!ownership!position!to!induce!the!loan!or!a!note!to!convert!from!debt!to!equity!!2!• Mezzanine!Funding!Company’s!progress!makes!positioning!for!an!IPO!viable.!Venture!funds!used!to!support!IPO!!The$Role$of$Securities$Markets$Primary!Securities!Market!–!source!of!capital!(cheaper!to!raise!capital)!–!supported!by!seconda ry!m arket!Secondary!securities!Market!–!liquidity!fo r!p rimary!ma rk et,!p rice !de ter m in at ion !“a!good!secondary!m arket!low ers!the!cost!of!raising!capital”!!!The$Primary$Securities$Market$Initial!sale!of!comm o n!sto ck!to !pub lic !Underpricing!I!Average!first!day!return!15%!I!on!purpose!so!everyone!feels!good!The!Winner’s!Curse!–!the!average!investor!do es!no t!get!First!D ay !Retu rn(go es!to!bigge st!investors )!The!LongIterm!(3!yr)!adjusted!pe rform a nce !of!IPO !is!nega tive!!!The$Roles$of$Investment$Banks$Primary!Securities!Market!!Advising!(goldman!sachs)!when!to!go!into!the!market!Origination!(Securities!Act!of!1933)!–!study!of!com pan y,!register!with!SEC!! Due!Dilligence,!Registration!Statement,!Prospectus!! SI1!Restration!Statement!–!compa ny,!product/services,!financial!condition,!use!of!$,!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!m arke ting!adve rtising!by!investm en t!banke rs!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,!DM M )!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$Capitalism!–!markets!allocate!capital!(economic!freedom)!Role!of!Government!–!Regulator/Investor!The!importance!of!Market!Efficiency!–!Stock!Price!Reflect!Stock!Values!! Operating!Efficiency/Price!Efficiency!!3!Creating!Shareholder!value!–!attract!capital!!WellBFunctioning$Financial$Mark et s$Factors!Promoting!WellIFunctioning!Markets!!Secure!Property!Rights,!easy!e n forced!c ontracts,!transpare nt!s ta tem e nts,!a c c o u ntable!b orrowe r s !a n d !i nvestors,!players!bear!consequences!of!own!decisions!Financial!Functions!Mobilize!savings,!allocate!resources,!transfer!risk!as!market!lets!you!know!everythin g,!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$Primary!Markets!• Newly!issued!securities!sold!to!ivnestors,!marketed!through!an!investment!bank!• Debt!is!issued!by!corporations,!government!and!agencies!• IPO’s,!newly!issu ed !pre ferre d!an d!a dd itiona l!com mon!stock!issued !on ly!by !com p an ies! !• ISSUER!R EC E IVE S !FUN D S!Secondary!Markets!• Markets!of!trading!of!previously!issued!securities!• Funds!flow!from!buyer!to!seller!of!security!• ISSUER!D O ES !NO T !RE C EIV E !FU ND S!$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!!Over!the!Counter!Markets!•