lecture4 - Page 1 of 2 Week 4 Initial Public Offerings...

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Initial Public Offerings, Investment Banking, Venture Capital, and Laws of the Securities Industry Introduction | Investment Bankers | Initial Public Offerings (IPOs) | Leveraged Buyouts (LBOs) | Debt Refunding Operations One of the topics of this week's assignment covers the issuing of securities and the role of investment bankers (banking) in such issuing of securities. The Securities and Exchange Commission (SEC) was created in 1933 to regulate the interstate issue of securities. All firms that intend to issue securities (bonds, preferred stock, common stock) and sell them interstate must first register the issue with the SEC - they must file a registration statement with the SEC. Once approved, the firm can then sell the registered securities in the (primary) market. Each potential buyer is provided a Prospectus (mini registration statement). The Prospectus provides the potential investor with the information needed to make a prudent decision as to whether or not they should buy the security. Most firms use an investment banker (IB) or a syndicate of IBs to sell their securities in the (primary) market. If an IB is used, the firm can have it done in one of two ways. The new issue can be underwritten by the IB – in this situation, the IB buys the securities from the issuing firm and immediately resells the issue to the investing public. Here, the IB assumes the risk once it has purchased the issue. At this point, the firm receives the proceeds from the sale and has no risk. The IB, acting as a principal (for itself), rather than as an agent for the firm, runs the risk of selling the issue to the public at a price that gives him or her the anticipated profit. The other method involves the IB (or syndicate) acting as an agent
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lecture4 - Page 1 of 2 Week 4 Initial Public Offerings...

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