Note 2a: The placement / offering of Securities

1. Primary equity market issues to the public

1.1. Introduction:
Most companies in Europe are small, compared with the US or UK. In Spain, the
average company has less than five employees; Only 90 companies have revenues in
excess of 1 billion euros and less than 200 have sales worth more than 500 million
euros. More than 40% of Spanish workers are hired by companies with fewer than 10
employees. In France, the share is 29%, in Germany 19%, and in the United States
only 11%. Therefore this chapter is really more relevant for US markets, but it is
adapted to include the European and Spanish situation as much as possible.

The Spanish Law proclaims a general principle of freedom of issuance without prior
authorization, except in certain exceptional cases. Likewise, the placement system that
each issuer wishes to use is declared free, with no requirement other than that of being
defined and made public at all of its points before proceeding with the issuance of the
issue. Although the issue of securities does not require authorization, the Minister of
Economy or the CNMV in a delegated manner, may require prior authorization to:

• Issuance of securities whose principal or interests are based on inflation.

• Issues that pay interest in terms of more than one year.

• Issues in currency other than the euro.

• Issues made in the domestic market by non-residents

Anyway, companies that want to issue securities in the market should:

• Communication to the CNMV of the issuance project.

• Register in the CNMV of the Issuance Agreement and the characteristics of the
securities and the rights and obligations of their holders.

• Record of an audit of accounts made by an auditor registered in the Official Register

of Account Auditors.

• Presentation of the Issue Prospectus in the CNMV. The prospectus will inform
investors of the main characteristics of the company, the rights and obligations of
these. In addition, it will reproduce the conclusions of the audit of accounts and the
procedure for the placement of the securities.

• Duration of the minimum terms established by regulation between the time of the prior
notification of the issuance or registration of the prospectus and the execution of the
same.

There is a fee charged by the Governing Societies for the admission of negotiable
securities. This can be divided into two concepts:

1. By study, examination and processing of the admission file: 1.160 euros.

2. For admission rights: The amount that results from applying the following ranges:
From 0 to 230 million euros per 1 thousand. From 230 million the 0.1 per thousand.

1.2 The offer of titles.

The offer of securities is done through three types of operations:

1. Public offers of sale of shares of new companies (IPO).

2. Public offers of subscription of companies already listed in the market (SEO).

3. Capital increases by subscription (rights offering) or for the exchange of own shares
for other companies (merger).

The purpose of a Initial Public Offering (IPO) is the placement among many investors
of a number of shares. The placement may be new shares or shares already in
existence, for example shares offered by insiders. Generally, new shares are issued
when there is a company that wants to enter the market for the first time and chooses
the Initial Public Offer as a system that guarantees both the minimum number of
shareholders and the required diffusion. The case of the shares already quoted is the
case of large public companies that are immersed in a privatization process.

The requirements for a Public Offering are the same as the requirements for issuing
shares. However, there are nuances that differentiate one from the other. In the Public
Offering, the markets to which the issuance of shares is directed must be indicated in
the prospectus, as well as the entities involved in the placement and underwriting, in
addition to the apportionment procedure, if this exists. The bidder of a Public Offer
assumes the maximum responsibility over the issuance prospectus.

Public Offerings can be addressed to different investors. In this case, different sections
will exist within the emission: The international section; the institutional section; the
general section and the section of workers. The international tranche is aimed at
foreign investors and non-resident institutions. The institutional section is directed to
large corporations, pension funds, investment funds, etc. The general section is also
known as the retail section and is aimed at small investors. When there is a large
demand for shares by investors, there is apportionment in the allocation. Finally, there
is the section of workers, which is the smallest of all and allows the workers of the
issuing company to acquire shares of this with different conditions from the rest of the
investors. The two most important participating entities in a Public Offer are the
directing entity and the placing entities.

The managing entity (lead bookrunner) is in charge of preparing and directing the offer
by express mandate of the offeror. It can be a directing entity or several directing
entities (co-leader). In addition, it collaborates in the determination of the values that
will be presented and the establishment of the amount of the offer, as well as the price
that will be requested per share. Specific, together with the company, the sections of
the emission and establishes the calendar of this. The managing entity is responsible
for the preparation of the prospectus and for probing the market to determine if there
are interested investors. Lastly, this entity is the interlocutor with the CNMV for the
matters that concern the Public Offering. On it lies the function of forming the banking
union.

In a bought (firm) deal, the underwriter purchases a company's entire IPO issue and
resells it to the investing public. In this case, the underwriter bears the entire risk of
selling the stock issue, and it would be in best interest to sell the entire new
issue because any unsold shares then continue to be held by the underwriter.
In a best effort (guarantee) deal, the underwriter does not necessarily purchase any of
the IPO issue, and only makes a guarantee to the company issuing the stock that it will
use its "best efforts" to sell the issue to the investing public at the best price possible. It
is the issuing company that is stuck with any unsold shares.

When the market responds positively and there is an over-demand, a company can
issue more shares than planned (green-shoe option). Also, the allocation of the number
of titles per person is usually apportioned. One of the most important data is the
determination of the offer price. In order to estimate this price, the evolution prospects
of the share, the value of the company and the market situation must be taken into
account. You can set several prices depending on the type of investor. Thus, there will
be a price for institutional investors, another for the international tranche, another for
the workers and another for the retailers. But the prices will be very close! The
following figure shows a scheme of how a Initial Public Offer is resolved, both from its
retail point of view and from the institutional point of view.

Fig. 1 IPO process

Stage 1: The consortium of investment banks is formed.

Stage 2: Institutional Pre-Marketing. In this phase, the treasury table of the Securities
Company that is in charge of the Public Offer calls the clients and studies the demand
that the operation may have. The price range is chosen (e.g. 10-20 euros).

Stage 3: BookBuilding. The operations book is filled with requests. When completing
the book of operations, the price of the institutional sector is determined according to
the requests received.

Stage 4: The final price is set (e.g. 15 euros)

After the award there is a stabilization period that usually lasts for a month in which the
investment bank responsible for the placement observes the evolution of the placed
shares. They can buy or sell shares to keep the price stable.

IPO legal aspects in Spain:

➢ The issuers must have capital of 1.2 million;

➢ Must have profits in past 2 years;
➢ Must have more than 100 shareholders each holding less than 25%
1.3 Why quote publically on the stock market?
Why would a company want to go public? This question has four answers, and all of
them, individually or as a whole, are valid reasons to make the jump to the stock
market.

The first answer is because of the image offered by publicly traded companies. To
quote companies must meet certain requirements whose compliance offers an image
of solvency and strength. In addition, the moment a company goes on the market it
acquires an image of professionalism. The listed company leaves behind the family
and enters into the financing of the market. All this is very appreciated by investors,
analysts and also by customers and suppliers.

The second reason why trading on the stock exchange is the improvement in liquidity
obtained by shareholders. The stock market is one of the most liquid financial markets,
understanding by liquidity the speed in transforming securities into money without a
considerable loss of value. In this way, the founders of the company that for the first
time goes public, can sell part of their shares transforming into money the continued
effort of several years. It is a solution to one of the great problems in the life of
companies: the generational change by which the founder leaves the company to his
family. This change is usually more traumatic the more generations go by. One solution
is the professionalization of the company and its IPO.

The third reason to quote on the stock exchange is the capture of financial resources.
Companies grow and that growth must be financed. As internal resources are limited
and often can not cope with the investments required for that growth, companies must
resort to external financing. The company, either because of the economic environment
where it is, or because it has already exhausted the resources of the debt, can then go
to the stock markets in search of that financing.

The fourth reason is that companies that are on the stock exchange have an objective
valuation of their shares. It is known, at all times, how much the company's own
resources are worth. In the markets a great number of expectations converge on the
future of the company. All these investors can agree on an exchange price of the
shares. But that price reflects the expectations of investors, their analysis, their studies
... all a complex process up to the price of quotation. That price is the reference for
investors and shareholders when making decisions.

1.4 The decision to issue

Before the Board of Directors decides to submit to the Shareholders' Meeting the
proposal to increase the capital with the issuance of new shares, it has to analyze the
following issues:

Investment projects. The company must have a portfolio of future investment projects
with the same expected return as obtained with past projects.

When the management team makes the decision to go to the stock market, it must
analyze its strategy. Ask yourself if you are clear about what the company knows how
to do and how it differs. The stock market investor does not want multiple or
complicated strategies; Simplicity in strategy is valued. That's why the equity story, the
future success of the company, or, put another way, the potential and future of the
company, should be exposed in a simple way.

You have to have a growth plan based on the strategy of the company. It must be
possible to demonstrate that growth is feasible and that earnings per share can
continue to rise. Going out with a cheap price is not enough; the market, to trust the
new shares, wants to see if the company has the capacity to continue growing.

Degree of leverage. The company must study what is the optimal ratio between debt
and equity, depending on the sector and the particular characteristics of the company.
This analysis should focus on calculating which financial instruments are cheaper for
the company. It is interesting to note that companies that go public have a reduction in
the cost of bank debt and a diversification of their lenders. Banks like quoted ones,
because they suppose that they have a higher discipline than companies that are not in
the market.

The degree of reception. We must study what will be the demand for the shares that
will be traded in the market, as it will influence the choice of the best time to go public.
This task should be done by a prestigious financial advisor who will help set an
attractive price for investors, otherwise they will be suspicious of the issue and will not
go to it. The financial services company contracted to advise on the issuance of shares
must discuss with the issuing company which is the best window for the exit of
securities to the market. This period of time will depend, not only on when the company
is ready, but when the investors are ready. For example, it is not a good idea to make
the exit in the same period that an IPO of a company better known than ours is taking
place. The bulk of the buyers are the institutional investors, that is, the funds and they
make a professional analysis about the company that is going to go public. This
analysis focuses on four points:

1. Perception of what is bought is cheap, not a bargain, that does not exist in the
markets. The valuation of the action on the day of its departure, should give the feeling
that it is cheap in relation to what may come to be in the future.

2. Perception of growth. The company will grow; for this you must show a credible
growth story

3. Certain dividend policy. In addition, the CNMV requires to inform if the company has
such a policy.

4. Liquidity. The institutional investor does not want to get stuck, he wants to be able to
leave the value whenever he wants; he does not like that capital is concentrated in a
few hands. In other words, it values a large free float that allows a capital rotation. The
free float depends on the size of the company. So size will be a key factor

The price of the offering is very important. The market must see that the company has
a consistency that will allow it to continue growing in the future. The advisory bank will
recommend to the company a starting price, because like the company, it looks for the
success of the placement. The adviser's commission is the most expensive of the
output, it can reach 10% of the entire operation. The fixed costs are paid by the
company, but the variables are the shareholders that sell their shares.

The process: It is a good practice to develop a plan and a calendar in which there
appear objectives to be met and the procedure to be followed in order to go out to
negotiate. In any financial transaction involving investors, there is an unwritten
obligation, consisting of performing a Due Dilligence of the company. This document is
a detailed study of the company intended to anticipate future problems. In this way all
possible problems are addressed and action will be taken quickly when the conditions
are not favorable. The prestigious consultant uses many resources and time in
performing the Due Dilligence, since its image and prestige are played in it. In addition,
the CNMV is very demanding and the brochure is very exhaustive and it is easy to
make mistakes or forget data. If there is a lack, it is better to tell it in the Supplement to
the brochure, because if it is not done and it is discovered, a large fine has to be paid.
Everything must appear in the brochure.

The information: It is very important to have been audited for several years by a
prestigious Auditor. The potential institutional investors are more relaxed if the
responsibility of the accounts rests in one of the large auditors, because it gives the
company a certain degree of professionalism. The company must change, and part of
that change must focus on the system that the company has to offer information. It is
the task of the business bank to verify that the company has a good reporting system
that allows the information to be prepared at the appropriate time. But, as an addition,
this should not have errors, because, as we said before, your amendment is time
consuming. You can think that the company needs to increase the accounting
department to develop all the necessary information. It is not true, the most important
thing is to automate the process of preparing the information.

The company must take into account that now, the market will require more detailed
reports: a greater degree of disaggregation of income and expenses than was
customary. The volume of information generated will grow, because the company must
not only give information to analysts, but also to the media and researchers. It is very
interesting to be, before the IPO, in the statistics of the sector in order to be known by
future investors; The company must be a reference. You have to think that the
objective of the investors is to compare the company's data to get an idea of its
characteristics.

The team: Although there is no quantification of how much time the company must
devote to preparing for its negotiation, experience shows that companies that have
requested trading on their stock have used at least one year to prepare. During this
period, they have hired consultants who have helped them present the information and
convince the board of directors about the advantages of going public. The company
must start acting as if it was already listed on the stock exchange. That is why you
have to go to present the intentions of departure one year before the date in which you
want to leave. Training is fundamental in this process of transition towards an offer of
degrees. All company executives should be familiar with the IPO process and the
consequences that it has. Another alternative is to hire training sessions on IPOs. They
have to work very closely with external consultants hired for this purpose.

The management must be done from the board of directors, because investors do not
like a master, a single owner, they want independent advisors. A company is more
prepared if it has very diverse shareholders. If for any reason, the shareholder has
more concentration, you should have a very dispersed council.

When top executives know the process, this knowledge should be transferred to the
rest of the organization. It must transform the processes, systems, financial,
accounting, fiscal, operational and information technology controls in the terms of a
publicly traded company. This transformation must alter as little as possible the day to
day of the company, so it is essential to maintain the balance between current
operations and the process of change.

Investors do not want a one man show. They want a team, the more independent from
the shareholders, the better. They want independent professionals, even if they have
some heritage. The company must establish committees for decision making. You
have to let the investor know that the know-how stays in the company, even if the
address changes.

In the end, a culture must be created. This culture teaches to be transparent, to give all
the data to the market, to the analysts, to the funds to the authorities. The company will
come out in the press, analysts will make positive or negative reports with the data
delivered

For all this, executives must learn to manage confidentiality, as it affects value.

1.4.1 Example of a rights issue

A rights issue is a common way of issuing shares, which are normally priced at a
discount to the current market price.

The theoretical price of subscription rights (also called the Theoretical ex-rights price) is
calculated using the following equation:

Theoretical value of the Subscription Rights = Market price - Theoretical price after the issue

Being:

Theoretical price after the issue = (NAA x PC + NAN x PE)/ (NAA + NAN)

Where: NAA is the number of shares that the company had before the expansion
PC is the current stock price of the shares
NAN is the number of shares issued in the expansion
PE is the offer price in the expansion
 Example of rights issue
The company Isadora SA shows the following book value balance sheet (in euros)

2,800,000 Non-current assets Capital 800,000

Retained earnings 200,000
Total equity 1,000,000

200,000 Current assets Loan 2,000,000

3,000,000 3,000,000
It has 100,000 shares with a market value of 20 euros each. The company wants to make a
capital increase of 1 x 5 with a premium of 20% to the book value. An investor without shares
wishes to have 15% of the capital at the end of the expansion, so now he must buy the rights
from an investor. What theoretical amount of money will he need to do this?
Solution
If it has 100,000 shares and it is going to issue one new share for each five old ones, then the
company will issue 20,000 shares. Total after there will be 120,000 shares.

Each shares’ book value is 1.000.000 / 100.000 = 10 euros. The issuing price will be 10 + 20%
premium = 12 euros. According to this, the theoretical price of the shares after the issue will be

(100,000 x 20 + 20,000 x 12) / 120,000 = 18.67 euros.

Each subscription right has a value of 18.67 - 12 = 6.67 euros

If an investor wants to own 15% of the company, he will need 0.15 x 120,000 = 18,000 shares. He
does not have any shares yet, so he will need 18,000 rights.

For those rights, he will pay: 18,000 rights x 6.67 euros/right = 119,997 euros

With the rights he can get shares but must pay: 18,000 shares x 12 euros/share = 216,000 euros

In total: 119,700 + 216,000 = 335,997 euros.

Or the investor can wait to buy the shares in the market directly, after the issue. The price he will
1.5.
pay for Corporate
each Governance:
share will then be 335,997 / 18,000 = 18.67

ThatThe
means that it makes
company no difference
must change if the investor buys
the administration the and
system shares before
move thean
from expansion is
administration
based
taking placeon
or aafterwards
Board of in
Directors formed, at least, by three members. However, the
the market.
recommendation of the Unified Code of Good Government (CUGB) is a minimum of
five and a maximum of fifteen. Therefore, the bylaws must be modified in agreement of
the General Meeting. Then the public deed must be consigned and registered in the
Mercantile Registry.

The number of directors is determined by the General Meeting and the appointment is
also the responsibility of the General Meeting. The CUGB recommends that the
majority be external and that a third be independent. The only one

The listed companies have the obligation to prepare a Regulation of the Board of
Directors to guarantee the best management of the company. This regulation must
contain the set of internal rules, organization and functioning of the Board of Directors.

Once prepared and approved by the Board of Directors, the General Meeting will be
informed of the aforementioned document. Approved in a meeting, the CNMV will be
notified by sending a copy of the Regulations and will be registered in the Mercantile
Registry and published on the websites of the CNMV and the company.

The listed companies must prepare a Regulation of the Board whose purpose is to
develop the basic rules for convening, preparing and holding the Shareholders'
Meeting of the Company, with the aim of guaranteeing equal treatment. This
Regulation will be prepared by the Board of Directors and must be approved by the
General Meeting.

The listed companies must prepare an Annual Corporate Governance Report and
disseminate it as a relevant event within a maximum period of four months from the
end of the fiscal year, detailing the degree of compliance with the recommendations of
the CUGB.

The listed companies must prepare an Annual Report on the Remuneration of

Directors with clear and understandable information about the company's remuneration
policy approved by the Board for the current year. Said compensation must have a
fixed part and a variable part, except for the external ones, since the CUGB does not
recommend that their compensation be variable so that they are not conditioned to the
evolution of the benefits.

Size. The probability of an IPO is positively related to the valuation of companies in the
same sector in the stock market: the more optimistic the market is in relation to the
value of companies in the sector, the more likely IPOs will exist. In some markets it has
been found that the main factor that determines the probability of a company deciding
to go public is the relationship between the market value and the book value of
companies in the same sector that are listed on the market. (Pagano, et al., 1998) This
is because the need for investment in sectors with growth opportunities or where the
owners of the companies take the opportunity to place the shares in the market when
they observe that there is an overvaluation of their companies, without having great
potential for it. It is a case of informational asymmetry (markets are not strong form
efficient, and investors know less than managers!).

However, other authors conclude that the most relevant factor for the valuation of the
shares that go public is the relationship between the value of the company and sales.

Anyway, most of the professionals consulted and some authors note that one of the
most important variables when going public is the size…..since the fixed costs of the
offering, coming in part from the advertising in a public offer, are high, and only the size
is capable of diluting them.

2. Admission to Listing of Fixed Income Securities (mainly

long-term Bonds and short-term bills or commercial paper)
The primary market bond offerings usually end up in the hands of institutional
investors. The primary market is like an IPO in shares, that is, a bond issuance is
issued by a company and when it places them in the market it is usually the market
makers who usually buy these bonds. Market makers can be investment banks that
deal directly with the company. The placement can be done in just 20 minutes, so, in
general, it is difficult for the retail customer to access the primary market. And, it is a
less known market for the retail investor than the stock market and even the derivatives
market.

Buying corporate debt is complicated in both the primary and secondary markets. It is
not like buying shares, it is not even like buying Treasury Bills, where there is already a
set up machinery that facilitates the purchase of bonds or treasury securities by the
private investor. For the private investor it is not advisable to buy in the secondary
market of corporate fixed income because the costs are usually very high, and the level
of liquidity is not the same as in the equity market. If you want to buy corporate debt it
is a mistake to go to the secondary market because there you are assuming a really
high risk since you will have to concentrate everything on one issue. It is in the primary
market where we know that we can get the bonds at an attractive price, while in the
secondary market, it depends on the investor's strategy, to see if the bond has gone
down in price, whether it is interesting or not, it depends on whether the investor wants
to keep it or if he wants to resell it later.

2.1 Prerequisites
The securities subject to admission will be previously covered by an issuance or offer
prospectus verified by the CNMV, together with the corresponding supporting
documents. In this informative brochure must be collected the intention of the issuer to
apply for admission to the Market, and the date set for it. The informative brochure
must be sent by the managing entity or by the issuer to the Market Rector. The
admission procedure will be subject to the supervision of the CNMV.

The securities issued by the Autonomous Communities and by the International

Organizations of which Spain is a member will be understood to be admitted to trading
by virtue of the mere request of the issuer. The securities issued by those entities to
which the legal provisions in effect at the date of admission grant them a similar
treatment will also be admitted by virtue of mere request.

2.2 Admission Classes

Admission may be carried out through two different procedures:

A.- Definitive admission

B.- Admission in two phases

For the issuances of company promissory notes and similar securities there will only be
definitive admission.

A) Definitive admission:

The issuing company must provide, by means of a notary, the deed of the issue and
the constitution of the union of bondholders, registered in the Mercantile Registry. Once
the issue is over, you must submit, by means of a notary, the minutes of the closing of
the same. In addition, you must show the breakdown of the subscribers' values,
ordered both by their nature and by their geographical distribution.

The issuing company must certify the compensation and settlement system that it will
use. Finally, it will present a facsimile of the security and the sign of the signatures.
B) Admission in two phases:

For the purposes of admission in two phases, the requirements will be the following:

Admission requirements in the first phase: In accordance with the provisions of article
25 of the Regulation, it is a necessary requirement to submit for processing the
admission of a first phase emission that complies with the commitment acquired by the
issuer, with respect to the term of admission to listing, in the issuance information
brochure.

Admission in the first phase will require the presentation of the same documents as in
the final admission

Requirements for admission in the second phase: Notarial testimony of the closing act
of the issue registered in the Mercantile Registry. Certification of the clearing and
settlement system for putting the securities into circulation and that, for the purpose of
deposit, the individualized ownership in the clearing system at the time of the final
issue of the securities is duly documented.

C) Procedure

The procedure, which is common to any type of admission, will be as follows:

a. If met by the issuer the requirements demanded in each case, the file will be subject
to examination by the technical bodies of the Market.

b. Once the complete documentation has been examined, the Market Management
Body, if it finds that it is in agreement, will submit to the CNMV the proposal for
admission to trading of the corresponding securities.

c. Once the favorable supervision of the CNMV has been obtained, the Market
Management Body will proceed to the pertinent admission.

The requirements and procedures for admission of the mortgage bonds and bonds or
obligations not subject to issuance deed or to the registration thereof in the Mercantile
Registry are the same as those described above. However, the following caveat will be
taken into account:

The deed and constitution of the bondholders union and the closing act of the issue will
be replaced, in the case of securities not subject to issuance deed, by the issuer's
certification of the placement result. This certification must collect the number of
subscribers of the issue.