Capital Market -- The market for relatively • Investment Banker -- A financial

long-term (greater than one year original institution that underwrites (purchases
maturity) financial instruments. at a fixed price on a fixed date) new
Primary Market -- A market where new securities for resale.
securities are bought and sold for the  Investment banker receives an
first time (a “new issues” market). underwriting spread when acting as a
Secondary Market -- A market for existing middleman in bringing together
(used) securities rather than new issues providers and consumers of
investment capital.
Public Issue -- Sale of bonds or stock
to the general public  Underwriting spread -- the difference
between the price the investment
 Securities are sold to hundreds, and bankers pay for the security and the
often thousands, of investors under a price at which the security is resold to
formal contract overseen by federal the public.
and state regulatory authorities.
• Investment bankers have expertise,
 When a company issues securities to contacts, and the sales organization
the general public, it is usually uses to efficiently market securities to
the services of an investment banker. investors.
  Three primary means companies use • Underwriting Syndicate -- A
to offer securities to the general temporary combination of investment
public: banking firms formed to sell a new
Traditional (firm commitment) security issue
underwriting A. Competitive-bid
Best efforts offering  The issuing company specifies the date
that sealed bids will be received.
Shelf registration  Competing syndicates submit bids.
• Underwriting -- Bearing the risk of  The syndicate with the highest bid wins
not being able to sell a security at the security issue.
the established price by virtue of B. Negotiated Offering
purchasing the security for resale to  The issuing company selects an
the public; also known as firm investment banking firm and works
commitment underwriting. directly with the firm to determine
the essential features of the issue.
 Together they discuss and negotiate a
price for the security and the timing
of the issue
• Best Efforts Offering -- A security • Privileged Subscription -- The
offering in which the investment sale of new securities in which
bankers agree to use only their existing shareholders are given a
best efforts to sell the issuer’s preference in purchasing these
securities. The investment securities up to the proportion of
bankers do not commit to common shares that they already
purchase any unsold securities. own; also known as a rights
• Shelf Registration -- A procedure offering
whereby a company is permitted to • Preemptive Right -- The privilege
register securities it plans to sell of shareholders to maintain their
over the next two years; also called proportional company ownership
SEC Rule 415. These securities by purchasing a proportionate
can then be sold piecemeal share of any new issue of common
whenever the company chooses. stock, or securities convertible into
common stock.
• Right -- A short-term option to buy • A shareholder who owns 77
a certain number (or fraction) of shares and just received 77 rights
securities from the issuing would like to purchase 8 new
corporation; also called a shares. It takes 10 rights for each
subscription right. new share. What action should
• Options available to the holder the shareholder take?
of rights: • The shareholder can then purchase 7
Exercise the rights and subscribe shares (use 70 rights) and still retain
for additional shares the 7 remaining rights. Thus, the
shareholder needs to purchase an
Sell the rights (they are
additional 3 rights
transferable)
Do nothing and let the rights expire
• Standby Arrangement -- A • Securities Exchange Act of 1934 --
measure taken to ensure the Regulates the secondary market for
complete success of a rights long-term securities -- the securities
offering in which an investment exchanges and the over-the-counter
banker or group of investment market
bankers agrees to “stand by” to • Registration Statement -- The
underwrite any unsubscribed disclosure document filed with the
(unsold) portion of the issue. SEC in order to register a new
• Securities Act of 1933 -- securities issue.
Generally requires that public • Red Herring -- The preliminary
offerings be registered with the prospectus. It includes a legend in
federal government before they red ink on the cover stating that the
may be sold; also known as Truth registration statement has not yet
in Securities Act become effective.
• Tombstone Advertisement -- An • Private (or Direct) Placement --
announcement placed in The sale of an entire issue of
newspapers and magazines giving unregistered securities (usually
just the most basic details of a bonds) directly to one purchaser or
security offering. a group of purchasers (usually
• Sarbanes-Oxley Act of 2002 financial intermediaries).
(SOX) – Addresses, among other • Initial Public Offering (IPO) -- A
issues, corporate governance, company’s first offering of common
auditing and accounting, executive stock to the general public
compensation, and enhanced and
timely disclosure of corporate
information
• Blue Sky Laws -- State laws
regulating the offering and sale of
securities