PRIMARY AND SECONDARY MARKET

Primary Market: Markets dealing with financial claims that are newly issued.
Secondary Market: Markets exchanging financial claims previously issued.
Investment Bankers: Participants in the market place that work with issuers to distribute newly
issued securities
Underwriting: The function of buying securities from the issuer
Underwriter: The investment banking firm who buys the securities from the issuer and accepts
the risk of selling the securities to investors at a lower price
Firm Commitment: The underwriting arrangement where the investment banking firm agrees to
buys the securities from the issuer at a set price
Best efforts: In contrast to a firm commitment, the investment banking firm agrees only to use
its expertise to sell the securities -- it does not buy the entire issue from the issuer
Gross Spread, or underwriter discount: The fee earned from underwriting a security is the
difference between the price paid to the issuer and the price at which the investment bank
reoffers the security to the public
What are two important factors that affect the size of the gross spread?
(1) Type of security, and
(2) Size of the offering
What are the three 3 major types of offering?
1. Initial public offering (IPO),
2. Secondary common stock offering, and
3. Bond offering
Initial Public offering (IPO): A common stock offering issued by companies that had not
previously issued common stock to the public.
Secondary common stock offering: an offering of common stock that had been issued in the
past by the corporation. The range for the gross spread as a percentage of the amount raised is
between 3 & 6%.
Why is the gross spread higher for secondary common stock?
Because of the risk associated with pricing and then selling an IPO to investors

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Syndicate: Due to so much risk of capital loss, investment banking firm forms a syndicate to
underwrite the issue, and the gross spread is then divided among the lead underwriters and the
other firm in the underwriting syndicate.
Selling Group: Increases the potential investor base. The lead underwriter will put together this
group, which includes the underwriting syndicate plus other firms that are not in the syndicate.
Members of the selling group can buy the security at a concession price, less than the re-offering
price.
Registration statement
The Securities Act of 1933 governs the issuance of securities and requires that this be filed with
the SEC by the issuer of the security
Prospectus: Part 1 of the registration statement. It is typically distributed to the public as an
offering of the securities.
Due Diligence: Due to heavy penalties from the Gov't or potential for being sued, the
underwriter must conduct a reasonable investigation of the information reported to them by the
issuer.
What is a "letter of comments" or "deficiency letter"?
If the SEC Division of Corporate Finance staff finds a problem with the registration statement,
they will send this explaining the problem it has encountered. The issuer must remedy any
problem.
The SEC declaration of a registration statement as "effective" means what?
The SEC Division of Corporate Finance staff is satisfied the registration statement
Waiting Period or cooling-off period: The time interval between the initial filing of the
registration statement and the time the registration statement becomes effective
Red Herring: If the prospectus is not "effective," its cover page states this in red ink
Shelf Registration Rule
Rule 415: If the SEC permits certain issuers to file a single registration document indicated that
they intend to see a certain amount of certain class of securities at one or more times within the
next two years, then these securities are seen as sitting on a "shelf" and can be taken off that shelf
and sold to the public without obtaining additional SEC approval.

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1. A deal underwritten not using the traditional syndicate process. It is an auction process for
both stocks and bonds and a rights offering for underwriting common stock
Competitive bidding underwriting
The auction form which is mandated for certain securities of regulated public utilities and many
municipal debt obligations
Dutch Auction: a single-price auction, where all bidders would buy the amount allocated to
them at a single bid %.
Multiple-price Auction: Another way for each bidder to pay whatever each one bid
Preemptive Rights Offering: grants existing shareholders the right to buy some proportion of
the new shares issued at a price BELOW market value.
Subscription price: The price at which the new shares can be purchased
Standby Underwriting Arrangement: A corporation that uses the services of an investment
banker for the distribution of common stock that it is not subscribed to.
Standby fee
Using the standby underwriting arrangement calls for the underwriting to buy the unsubscribed
shares.
Value of a right expression
Value of a right = Price before rights offering - Price after rights overing
or
Value of a right = Share price rights on - Share Price ex rights
Dilution effect of the rights issue: the difference between the price before the rights offering
and after the rights offering expressed as a percentage of the original price
Value of a right expression, alternate: (Price after rights offering - subscription price) / number
of rights required to buy a share
or
Dilution effect = (Discount %) / (1+ Ration of old to new shares)
Private Placement: Securities may be placed with a limited number of institutional investors
such as insurance companies, investment companies and pension funds.
SEC Regulation D: Set forth the guidelines that determine if an issue is qualified for exemption
from registration
What are the three exemptions from federal registration of a security?

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(1) Intrastate offering exemption (securities only sold with a state), (2) small offering exemptions
(Regulation A), and (3) transactions by an issuer not involving any public offering.

Rule 144A
SEC rule. Rule eliminate the two-year holding period by permitting large institutions to trade
securities acquired in a private placement among themselves without having to register these
securities with the SEC

Why 144A? What two reasons?

(1) It will attract new large institutional investors into the market that were unwilling previously
to buy private placements because of the requirement to hold the securities for two years.

(2) Foreign entities were unwilling to raise funds in the US prior to establishment of Rule 144A
because they had to register their securities and furnish the necessary disclosure set forth by U.S.
Securities laws.

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