Drew Field
Direct Public Offerings



The meanings in this glossary are from our perspective as direct public offering advisors.  Words in italics are ones that have their own definition in the glossary, in their alphabetical order.  Some of the terms are also linked to our related commentaries section on this website.  Nothing in this Glossary, or other material on this website, is to be considered legal advice or anything other than a brief summary of a personal understanding or view.

Absolute return  This is one of the buzzwords for an approach to return on investment, or ROI.  Its guru is David Swensen, author of Pioneering Portfolio Management and manager of the Yale University endowment fund, which averaged a 17% annual return in the 1995-2005 period.  Yale had less than 20% of its assets in U.S. shares and bonds.  It had invested in private equity funds, hedge funds, land and other nontraditional assets.  Other money managers have copied the absolute return approach.  However, according to another guru, Warren Buffet:  "What the wise man does in the beginning, the fool does in the end."

Acceleration  Securities cannot be sold unless a registration statement has become effective with the SEC, or a specific exemption applies.  The law says that the effective date occurs automatically 20 days after it is filed, unless an SEC stop order or refusal order is in effect.  The way it really works is that each filing includes a delaying amendment so that it cannot become effective automatically.  Once the SEC staff reviewer says  that there will be no more comments, the lawyers file a request for acceleration of the effective date to a selected day and time.

Accelerator  When a venture capital firm invests in an early stage business, its exit plan is generally to get a very large cash return in as short a period as possible.  An "accelerator" is the person or consulting firm responsible for speeding up growth so that the business can have a liquidity event, such as attracting an underwritten public offering or an acquisition by a big company.  This may not fit the goals of the entrepreneur.  In direct offerings, investors come from the communities of people who share those goals.  They provide patient money.

Accredited investors  Federal and state securities laws have exemptions from registration for securities sales to persons wealthy enough to be accredited investors.  For individuals, the basic minimum is a $1 million net worth or $200,000 annual income.  Federal safe harbor rules will allow sales without registration to no more than 35 persons who are not accredited investors. 

Aftermarket  The trading market that develops for shares after the public offering is over.  We believe that any direct public offering client needs to put in place a method for investors to convert their securities back into cash.  Conventional aftermarkets are all “interdealer” systems, where an investor must open an account with a securities firm and place an order to buy or sell shares.   For listed shares, a specialist on the stock exchange will match orders received from forwarding securities firms.  Orders are matched in the over-the-counter market by a securities firm acting as a market maker.  The quality of the aftermarket is measured by its ability to absorb bid price or asked price orders without major disruptions in the price.  That ability is a function of the market’s liquidity, which depends upon its float--the number of shares owned by the public, rather than by company insiders--and the extent to which the public is active in trading the shares, rather than holding them for the long term.  For small direct offerings, there may be an order matching service, which brings together people who wish to sell with those who wish to buy.

Agents  An individual performing services for an issuer or broker-dealer in the offer and sale of securities.  The SEC and state securities regulators require registration or licensing of agents, unless they are within the definition of a specific exemption.  In a direct public offering, the issuer's employees will often all be within an SEC exemption.  They will also be within exemptions, or simplified licensing procedures, provided by most state securities regulators.

Agreement among underwriters  In the last few weeks before the effective date of an underwritten public offering, the managing underwriter will be putting together an underwriting syndicate of other securities firms.  When the underwriting agreement is signed, the firms who have joined will sign an agreement among underwriters, assigning them an allotment of shares they are technically required to buy from the company as an underwriter.  These agreements don't exist until the syndicate members have gathered enough indications of interest to sell at least all of the offering, at a price the issuer will accept, and the lawyers are confident that the SEC effective date is within a few hours. 

AIM (formerly the Alternative Investment Market)  The London Stock Exchange's trading market for small business.  Of the 1,600 issuers listed on AIM, 90% have a market capitalization of less than $200 million.  Nearly 300 are based outside England, over 50 in the United States.  Instead of regulatory review before an IPO, there is a review by a division of the securities firm that will sell the shares.  These nearly 100 "nominated advisors," or "nomads," are monitored by the Exchange staff.  If a nomad resigns, trading in its shares is suspended.  

All hands meetings  Part of the ritual for an underwritten public offering.  These gatherings include an initial planning meeting (the “kickoff meeting”) and sessions for reviewing drafts of the registration statement.  They include two or more representatives each from the issuer, the issuer’s general counsel and its securities lawyers, the managing underwriter, the law firm representing the underwriters, and the auditors.  The kickoff meeting may have people from the financial printer, transfer agent, and registrar.  The meetings go on for at least a full day, often for two or three days and into the night.  The kickoff meeting is often consumed with a power struggle among representatives of the investment bankers, the issuer and their respective counsel to settle who will be the “quarterback” for the preparation process. 

All-or-none offering  Each public offering will have a total number of shares to be sold.  Sometimes, in a best efforts underwriting, a condition of the offering will be that all shares offered must be sold or the offering is cancelled and none of the shares will be sold.  This makes the "best efforts" really the same as a firm commitment underwriting, where there is only a letter of intent to sell the offering until the underwriter has indications of interest for at least the entire amount.

Allotment  In an underwritten public offering, each securities firm in the underwriting syndicate is allocated an allotment of shares to sell.  As a practical matter there is very little relationship between the allotment and actual sales.  Technically, the agreement among underwriters could force each member of the underwriting syndicate to take its allotment.

Alpha  "is a code word for the ability to consistently beat the market."  [Scott Patterson, The Quants, Crown Business, 2010]  It is ascribed to certain individuals and groups, as a way to quantify and put a market value on the ability.  Raj Patel, The Value of Nothing: How to Reshape Market Society and Redefine Democracy, Picador, 2009, pages 92-108]

Analyst effect  How decisions by a company's management are affected by the actions of Wall Street securities analysts.  Many money managers for institutional investors will not buy securities unless they are rated by analysts.  Most brokers recommend trades to their customers based on reports of their securities firm's analyst.  With financialization, those analysts are almost always focused entirely on predicting short-term changes in the market price of the securities.  As a result, an issuer's board of directors and officers will often make business decisions under the influence of how they believe securities analysts will react.  This effect can be compounded if the issuer's management has significant stock options valued by the current market value

Angel investors  Also known as informal investors, these are people who invest money in the business at its start-up, or early, “seed capital” stage, before other sources of capital would be available.  They are usually relatives or friends of the entrepreneur, or individuals with the wealth and experience to take significant risks for possible long-term rewards.  Angel investors and entrepreneurs often get together through acquaintances or finders.  According to Kelly Spors in the October 30, 2007 Wall Street Journal, "a growing number of these groups are aligning themselves with a mission and funding all sorts of businesses that support the cause."  The transaction is usually negotiated as a private placement.  Angel investors are the largest source of external equity capital for small businesses in the United States, with about $25 billion a year invested by over 250,000 individuals in nearly 50,000 ventures.  Information about angel investing is maintained by the Center for Venture Research at the University of New Hampshire, wsbe.unh.edu/cvr, and the Angel Capital Association, www.angelcapitalassociation.org.

Annual report  Financial statements and a management’s discussion and analysis of the issuer’s operations and condition.  Reporting companies, those with registered shares under the federal Securities Exchange Act of 1934, or issuers which have registered a public offering under the Securities Act of 1933, must file an annual report with the SEC, following Form 10-K or, for a small business, Form 10-KSB.  Most states require corporations to send annual reports to their shareowners.  These usually require audited financial statements, but their form and content is left to management’s preference.

Arbitrage  Strictly speaking, arbitrage is the simultaneous buying and selling of the same thing in different markets without risk, in order to make a profit from the difference in price quotations between the markets.  Recent practice has included “risk arbitrage,” where the buying and selling are not simultaneous and there is some risk that the price difference will turn unprofitable.  (A example has been buying shares in the stock market, expecting a takeover offer at a higher price.)  When an underwritten public offering is expected for a company that already has shares in the trading market, the arbitrageurs will sometimes sell the shares short, that is, place sell orders for shares they do not yet own (naked short selling).  This drives the market price down.  As the effective date approaches, the lower market price causes the underwriters to negotiate for a reduced offering price.  The arbitrageurs then buy shares in the underwriting to cover their short sales.  Where there is no existing market, these short sales may occur in a when-as-and-if-issued-market.  In a direct public offering, the offering price will have been set before any public filing or announcement.  As a result, the effect of selling pressure in the trading market would be to cause a postponement of the offering.  The issuer can also remove the incentive for arbitrage by setting a maximum on the number of shares anyone may purchase in the offering, so an arbitrageur could not buy enough to cover the short sales.

Articles of incorporation  This document is filed, generally with a state agency, to create a corporation.  It is called a charter in some states and has been used for businesses for over 600 years.  Until the 1800s, the states imposed conditions, such as the kind of business that could be operated by the corporation or how long it could exist.  Today, a corporation can conduct any legal business, for a perpetual term.  Court decisions have made corporations "persons," entitled to constitutional protection.  

Asked price  Shares traded in the over-the-counter market will have prices quoted by their market makers, either on  one of  the NASDAQ markets or in the Pink Sheets.  The quotations are for the bid price (what the market maker will pay to buy at least 100 shares), or the asked price (what it will take to sell at least 100 shares).  For listed shares, bid and asked quotations are channeled through a specialist, a dealer who does business at a post on the stock exchange trading floor. 

At-the-market offerings  An alternative to an underwritten public offering, in which all the securities are sold by an underwriting syndicate of securities brokers at a negotiated price.  An at-the-market offering is an agreement with one broker to act as a placement agent for selling newly issued shares into the company's existing trading market.  The company can control the price and timing of sales, usually over a period of several months.  [David Pentlow Katten  and Muchin Rosenman, "At-The-Market" Offerings: A Closer Look," Insights: Corporate & Securities Law Advisor, 2010, Volume 24, page. 11]

Audited  Financial statements are audited when the auditors have completed a review of the records for a business, including confirmations from banks and selected creditors, vendors, customers and others.  Their review must conform to "generally accepted auditing standards" of the public accounting profession.   The audit generally results in an opinion letter that the financial statements "fairly present" the financial condition and experience of the business and have been prepared in accordance with generally accepted accounting principles, applied on a consistent basis (a "clean opinion").  The opinion may contain "except for" or "subject to" language (a "qualified opinion").  The auditors may even say they are unable to express an opinion (a "disclaimer").   Most public offerings of securities require audited financials, with a clean opinion, under SEC forms or state blue sky rules. 

Auditors  A firm of certified public accountants, independent of the company, that reviews the company’s financial statements for the purpose of issuing an opinion on their fairness.  There are the Big Four firms that audit companies that account for 99% of U.S. market capitalization, because underwriters and money managers insist upon those firms.  In direct offerings, a regional or local firm that does audits may provide better service at lower costs.  Securities regulators and individual investors in DPOs have shown no preference for a Big Four firm.

Backdooring  In some underwritten initial public offerings, speculators will commit to buy shares at the offering price, then immediately sell the same shares back through another broker.  If it is a hot new issue, the price will have jumped up in the aftermarket, so the speculator makes a fast profit as a flipper of the shares.  If the market reception has been cool, the speculator’s shares will likely be sold “through the back door” to the underwriting syndicate, which has committed to buy shares at the offering price, for stabilization of the aftermarket price.

Backing away  Whenmarket maker refuses to honor its asked price or bid price on an over-the-counter share.  This is in violation of FINRA and SEC rules.

Bad boys  Past offenders under securities fraud laws.  When the SEC has authorized exemptions from full registration statements, such as Regulation A and SCOR, it prevents their use by a corporation affiliated with persons who have, within the previous five years, been convicted of securities fraud or who are subject to any enforcement order by a securities regulator.  States have similar rules.  Filings under the securities laws may require disclosure of bad boy affiliations.

Bedbug letter  A major part of any public offering of securities is compliance with federal and state securities laws.  Usually, this requires filing a registration statement with the SEC and receiving a letter of comment (deficiency letter).  When the regulatory reviewers consider the company or its registration statement to have problems that cannot be fixed by recommended changes, they suggest that the registration statement be withdrawn.  This bad news is called a bedbug letter.

Behavioral targeting  A form of microtargeting that presents advertisements and messages to individuals based on their Internet use.  Internet service providers implant cookies on web browers to gather information about sites visited.  They mix that with age, gender, residence, etc. data.  When the user goes to a site on a particular subject, a related online ad can be delivered.

Best efforts underwriting  When a securities firm agrees to use its “best efforts” to sell shares as an agent for the issuer.  It is not technically an underwriting since that term means buying all the shares offered and reselling them to investors (a firm commitment underwriting).  Most best efforts agency agreements will have a minimum as well as a maximum number of shares that must be sold within the offering period.  If the minimum is not met, the offering is cancelled and all money collected from investors is returned.  Some best efforts are all-or-none offerings.  That is really how a firm commitment underwriting works, since the underwriter is not legally bound to buy the shares until it has collected indications of interest for the entire offering.  The term "best efforts" is defined by the Uniform Commercial Code as a "more rigorous standard than 'good faith.'"  Without objective measurements (such as the number of brokers assigned to sell and the amount of their time they will devote to the offering) "best efforts" doesn't create any enforceable standard.

Beta  A measure of a company’s share price volatility--how wide the ups and downs of its trading price will be, compared to the market generally.  Stock market averages, like the Standard & Poor’s 500, will be assigned the number 1.00 to reflect how much it would move on news about earnings, dividends, new products, etc.  Shares of a very stable, mature company might move even less on that news, with a beta of, for instance, 0.74.  On the other hand, an emerging growth company, especially in a competitive new technology or market, could have a beta of 2.00 or more.

Bid price  The price at which the bidder will buy a specified number of shares (see asked price).

Big Four  The largest international independent public accounting and consulting firms.  They are auditors for most large corporations with publicly traded shares.  Recent consolidations have reduced the “Big Eight” to these four:  Deloitte Touche Tohmatsu, Ernst & Young, KMPG and PricewaterhouseCoopers.

Blank check offerings  Public offerings where the prospectus explains the general intended use of the offering proceeds but gives management the discretion to choose how much will be spent for any one purpose.  Blank check offerings are often made by a specified purpose acquisition company, when the intended use of the proceeds is to acquire another business in a specified industry.  According to the December 24, 2007 Wall Street Journal, there were 66 SEC-registered blank check offerings in 2007, raising $12 billion, or 23% of the total number of U.S. IPOs and 18% of the total amount raised by IPOs. The SEC and state securities regulators  require additional disclosure and restrictions on blank check offerings.  These include returning the proceeds to investors if an acquisition is not made by a target date (usually 18 months to two years) and requiring an 80% approval by shareowners of the acquisition.

Blind pool offerings  Public offerings made without any specific business described for use of the offering proceeds.  In addition to the limits on blank check offerings, some state securities regulators will prohibit blind pool public offerings.  However, there have been recent large blind pool offerings, registered with the SEC but exempt from state registration as covered securities.

Blue sky laws  Nearly every state has its own state securities regulator with whom a filing must be made for any public offering of securities to its residents.  The governing laws were enacted to stop offerings that had no more substance behind them than “the blue sky.”  There are great differences among the states in their blue sky requirements--both in the standards they impose and the detail work necessary to qualify an offering.  Many are so-called merit states, where the regulatory staff actually judges the quality of the company and the terms of its share offering.  The standard for most merit states is that the proposed investment be fair, just and equitable to the local citizens.  Only limited coordination exists among the states (through NASAA) and with the SEC, so that companies will have to consider blue sky costs and delays when designing their marketing program.  The blue sky laws private for exempt transactions, as well as licensing and exemptions for securities broker-dealers and agents.

Board of directors  The governing body of a corporation which sets policy and appoints major officers.  Directors are elected by the shareowners.

Bonds  Debt securities for borrowings due to be repaid a year or more  after they are issued.  They are generally marketable securities and many are listed on stock exchanges.  Corporate bonds are often subject to an indenture.  There is no standardization among bonds; investors need to study the bond terms, as well as the credit and prospects of the corporate issuer.  Bonds of large corporations are usually rated securities.  There have been occasional direct public offerings of corporate bonds, and even state and municipal bonds, but nearly all of them are sold in underwritten public offerings or private placements by broker-dealers, mostly to money managers.  However, the United States Treasury has a huge established direct public offering system for its debt securities, called Treasury Direct.

Book value  The amount of a corporation’s shareowners’ equity, as shown on its financial statements.  Also called net worth.  Literally, the difference between the amount of the corporation's assets and its liabilities, according to its own accounting records.  In many businesses, accounting methods and fluctuations in market value make the book value of academic interest only.

Bottom line  This has become slang for "the net result." It initially referred to the last item on a statement of operations prepared for a business, usually titled "net income" or "net profit."  However, these statements measure financial results only, in accordance with rules of the public accounting profession and the SEC.  Some people argue for a "multiple bottom line," which would show results of the business operations on the public, the environment, employees or other stakeholders.  Others respond that the long-term financial interests of the business and its shareowners will necessarily include those factors, in contrast to the very short-term interests demanded by financialization of the stock market.  Proponents of the single bottom line argue that asking management to serve other interests will lead to conflicts of interest and distraction from the primary purpose of the business.

Bought deal  When an investment banker or other financial intermediary has arranged for the purchase of an issue of securities, before offering to buy them from the issuer.  This has become a frequent way for large corporations to sell securities, particularly debt.  They can use a shelf offering, so that the issue is legally ready for immediate public offering, and then wait to be approached with a bought deal. 

Bracket underwriters  Securities firms with the ability to be managing underwriters are arranged by tacit understanding into brackets.  This explains the pyramid of alphabetical listings in the tombstone ad announcing a public offering.  The rankings are based upon the number and stature of their corporate clients, their ability to originate new financial products, their coverage of institutional investor customers, and the number of their registered representatives.  From four to seven firms at any one time seem to be at the top--the “bulge” or “special” bracket.  Next is the “major” bracket, composed of most other large Wall Street firms.  There was, into the 1970s, a large “submajor” bracket of medium-sized Wall Street brokerages dealing primarily with individuals; these are now gone.  A “mezzanine” bracket remains, consisting of Wall Street specialty houses and a few active underwriters in other cities.  In the bottom bracket are the “regionals,” that is, firms with offices only in one section of the country (with a small presence in New York).

Breaking the syndicate  During a period after the effective date, underwriters can conduct stabilization activities.  These usually involve placing buy orders at the offering price and accepting any offers to sell back shares purchased in the underwriting.  The agreement among underwriters provides the authority for these transactions and spreads their cost among underwriting syndicate members.  That authority terminates 30 days after the effective date unless the managing underwriter decides to shorten or extend it, usually by breaking the syndicate before the 30 days is over and letting the shares seek their market price in the aftermarket.

Broker  Defined in the securities laws as a person in the business of buying and selling securities for the accounts of others.  In everyday usage, “broker” or “stockbroker” refers to an individual who talks with investors about their investments and causes their buy or sell orders to be executed.  This may be a registered representative of a securities firm, an independent broker-dealer, or a financial planner.

Broker-assisted  Direct public offerings can be successful without using any commissioned sales people.  However, the size of the offering, its timing, or other factors may suggest using licensed brokers to sell part of the offering.  They can be allocated a portion of the shares to sell on a best efforts basis to their own customers or by cold calling to prospects they generate.  Or, the issuer can deliver the names and telephone numbers of people who have requested a prospectus to selected brokers and pay a negotiated commission rate for their conversion into sales.

Broker-dealer  Individuals who have passed an examination and have met other standards can be licensed as a broker-dealer principal.  This gives them and their corporate employer the right to engage in the business of buying and selling securities, both for the accounts of others (a broker) and for their own account (a dealer).  They usually hire registered representatives to build a book of customers for the broker-dealer firm.

Brokerage firm  The business organization which operates under a broker-dealer license, more often and accurately called a securities firm.  Before the 1960s they were nearly all partnerships.  Now they operate primarily as corporations, either publicly owned or as the subsidiary of a large insurance company or conglomerate.

Bullet-dodging  The amount of profit on stock options given to management of a corporation depends upon the increase in market value of the corporation's shares between when the option was granted and when it can be exercised and the shares sold.  "Bullet-dodging" is the practice of granting options shortly after the corporation has publicly released bad news, which has temporarily driven its stock price down.  It is the mirror image of spring-loading.   

Business  An entity that sells products or services to fulfill human needs or desires.  The most frequent forms are a proprietorship (ownership by one individual), partnership and corporation.  Businesses are generally operated for profit, with revenues expected to be greater than expenses, although some are cooperatives or nonprofit entities.  

Business Development Company  A corporation described under the Investment Company Act of 1940 that invests more than 70% of its assets in private and over-the-counter public companies.  Like a mutual fund, it does not pay corporate taxes on income it distributes to shareowners.

Buybacks  Public corporations repurchased $437 billion of their own shares in 2006, up from $300 billion in 2005 and $131 billion in 2003, according to estimates by Standard & Poor's.  The announcement for a buyback will often say that this is the best use of available corporate cash, because the shares are undervalued by the market.  It also reduces the number of shares issued, increasing the earnings per share calculation for comparison to past years; it offsets the increase in shares from exercise of management stock options; it can increase the share price by reducing the amount that would be offered for sale and it can signal to short-term investors that management will act to maintain or increase the share price, putting a "floor" on their risk of loss.  Buybacks have recently far exceeded dividends as a way to pay cash out to shareowners.  In many cases, the amount a corporation has paid for buybacks has about equaled the amount received by its officers and directors who sold shares as they were received in exercise of stock options

Buyouts  When a corporation or investment group buys all of a public corporation's shares (or at least a controlling interest).  Often referred to as a takeover, especially when it comes as a surprise to management of the business acquired.  The $3.2 trillion record of buyouts in 2000 was attributed to the high (26.4) price-earnings ratio of the Standard & Poor's 500 companies who did most of the acquiring.  Over 70% of the buyouts were made by issuing the acquirer's shares in exchange for the shares of the business being acquired.   A new record will be set in 2006, with 60% being paid for in cash.  This was made possible by low interest rates on the acquirer's borrowings and the lower price-earnings ratios for acquired companies.  Buyouts, like buybacks, reduce the number of shares held by public investors and increase the number held by financial intermediaries, with the goals of financialization.  According to the Federal Reserve Board, the dollar decrease in outstanding shares from buyouts and buybacks was more than the increase from new shares issued  in ten of the last 12 years.  In 2006, the net decrease was over $500 billion.

Bylaws  These rules are adopted by a corporation's board of directors.  They are subject to the corporation's articles of incorporation and deal with the selection and duties of officers and directors, meetings of shareowners and other procedural matters.

Caller ID service  Using a telephone company central office switch and an inexpensive computer system, a customer’s file can be automatically displayed on a monitor as the customer is calling in (or as an outbound call is being placed).  Where available for direct public offerings to an issuer's customers and other communities, this service can improve conversions, particularly from inbound telemarketing.  The monitor can display the caller’s name, address, dates of the response and fulfillment, caller’s priority for the marketing program, and all demographic information accumulated. 

Capital  Also known as capitalization.  The amount of long-term money available to a business.  The total of shareowner investment, earnings retained in the business, and borrowings which will not come due for more than a year.  By the mechanics of double entry bookkeeping, capital is equal to assets minus short-term debt (due within a year).  Equity capital or equity is that part of the company’s capital that comes from shareowner investment and retained earnings.  It is more often called net worth or shareowner’s equity.

Capital formation  The process of adding to a company’s capital.  It usually refers to issuing equity or debt securities.  The largest source of capital, retained earnings, is often all that large public corporations need to continue their growth.  Earlier stage businesses need to market their securities, either by direct offerings or through securities firms.

CEO  The chief executive officer of a corporation, usually also its president or chairman of the board, or both.  While the CEO is selected by the board of directors, the corporate governance process of many large corporations may allow the CEO to decide who becomes and stays on the board.  With money managers as large shareowners, and most shares held in street name, a CEO may have near dictatorial powers, so long as the goals of financialization are served. 

Certain transactions  When money or property has passed between the company and one of its insiders, it may require explanation in the prospectus.  The name, certain transactions, comes from the instructions accompanying the SEC forms for registering a public offering.  For example, when an entrepreneur hopes to take a company public, it is wise to avoid any of the situations that would need description in the certain transactions section.  They may make it difficult to qualify the offering under the blue sky laws of a merit state.  Descriptions of certain transactions tend to be lengthy and complicated, causing prospects to reject the offering based on their “smell test.”

Charter  Another name for articles of incorporation, or for the document that is filed to create a limited liability company.

Cheap shares  When insiders have invested in the company within three years before the public offering, the amount they paid will be compared with the offering price to the public.  A big difference raises the cheap shares issue, which must be dealt with satisfactorily for the public offering to be cleared through SEC and state blue sky laws.  A NASAA Statement of Policy defines “cheap stock” (shares) and provides for their escrow, or lock up as a condition to qualify the public offering in some states.  While in escrow or lock up, the shares cannot be traded.  Release of the shares is typically conditioned upon meeting a three-year earnings test (see promotional shares).

CIK  The SEC assigns a Central Index Key number to a business or individual filing disclosure documents with the SEC's EDGAR system.  The Edgar retrieval page on www.sec.gov allows access either by the filer's name or its CIK number.

Closing  In an underwriting, the closing is generally a week after the effective date of the underwriting.  That will be when the company delivers share certificates and the underwriters pay for the shares they have sold, less their commissions and expenses.  In a direct public offering, the offering closes when all the securities offered have been sold or a closing date has been reached and no more orders are accepted. 

Cold calling  When a broker or agent makes telephone solicitations to strangers, usually from a list of prospects.  Securities laws require a prospectus to be delivered before shares can be sold, so cold calling can only be for gathering indications of interest in the shares.

Cold comfort  Sometimes called “negative comfort.”  A representation made by someone independent of the issuer, to the effect that although they have not checked everything, what they did review revealed nothing wrong.  The issuer’s auditors are required to give the underwriters a “cold comfort letter” just before the underwriting agreement is signed.  It lists several pages of “special procedures” the auditors have performed.  The letter explains that this was not an audit and gives the cold comfort that “nothing came to our attention that caused us to believe that” there are any misleading errors or omissions in the material reviewed.  Getting this letter is part of the underwriters’ due diligence defense against claims by any investors who lose money on their investment.

Collateralized debt obligations (CDOs)  A security that includes an obligation to pay interest and repay principal, with that obligation secured by a pledge of specific financial assets, such as real estate mortgage loans, credit card debt or even royalties to be received from music licenses.  They are often rated securities and can be extremely complex, involving major fees to financial intermediaries, lawyers, trustees and consultants.  The CMO is usually divided into tranches and marketed to investors with different risk/reward analyses.

Common shares  Also known as common stock.  These are the basic units of ownership in a corporation.  Their voting rights elect the board of directors, which sets policy and hires and fires management.  When a corporation is sold or liquidated, whatever is left, after paying off creditors and any senior securities, belongs to the owners of common shares.  Some corporations have more than one class of common shares, usually as a way to keep voting control in the founders’ family.

Community  A group of people who share a common interest.  Direct offerings market shareownership to the communities served by the business.  These will include its customers, suppliers, employees, neighbors and people who have a strong interest in the primary purpose of the business.  A community may also be defined by the means used to communicate with them.  For instance, many "online communities" have grown around websites and blogs.  The great success of microcredit lending has been attributed to the requirement that the entrepreneur borrowers have a community of peers, with responsibilities among them for meeting lending terms.  Businesses who use direct offerings increase the bond with members of their communities, who then act as ambassadors of good will in promoting the business, addressing any political issues affecting the business and making suggestions to management.  Good advice on  how a business may create and maintain communities,  is available at http://blog.guykawasaki.com/2006/02/the_art_of_crea.html.

Community-owned businesses  Most businesses with publicly-traded shares have turned over the sale of their securities to securities firms.  As a result, they are owned by customers of securities firms.  With increasing financialization of investments, these owners may have no interest in the business, its markets, products, services, local economy or management -- their only interest is in an expected short-term increase in the security's price.  Through direct public offerings, a business can market its shares in direct communication with its communities.  The initial microcredit model, Grameen Bank, founded by Nobel laureate Muhammad Yunus, required a borrower to be in a community of about five other borrowers, with responsibilities to each other.  After the start-up or seed capital stage, the next level for growing businesses is to expand its community of owners to customers, neighbors, vendors, employees and others who believe in what the business is doing.  

Confirmation  Shares are sold in an underwriting when brokers telephone their customers and prospects.  Since this takes place a week or so before the effective date, there is no final prospectus available.  Securities laws require delivery of a prospectus before a “sale.”  To get around this, when an investor says "yes," it is called an indication of interest or “circling a number of shares.”  Then, on the effective date, the prospectus is mailed to the investor along with a confirmation showing the company’s name, number of shares, and amount due in payment.  The investor either pays on the settlement date or reneges on the sale.

Conflict of interest  Officers, directors and partners are stewards of investors' capital and owe a fiduciary duty to the business and all its owners.  Sometimes, they are presented with a choice between serving the owners' interests or serving their own selfish interest.  Many legal rules and internal documents are intended to identify and resolve conflicts of interest. 

Control person  Securities laws place potential liability for investor losses onto persons who “control” the company.  They include executive officers, directors, and the owners of more than five percent of the company’s shares.  Control persons are insiders subject to special rules about trading in the company’s shares and passing on information about the company that would be important to a decision about buying or selling its shares.

Conversion  A direct public offering follows the steps of direct marketing:  (1) the proposition (offer to provide a prospectus), (2) the prospects’ response in requesting the prospectus, (3) fulfillment through delivery of the prospectus, and then (4) conversion of the prospects into shareowners.

Convertible bonds  Bonds that can be converted into shares of common stock, or other securities, generally at a price higher than the market value at the time the bonds are sold.  Companies will issue convertible bonds because they give investors the extra incentive of a profit from any increase in the share price.  In exchange, the company may be able to set a lower interest rate than straight bonds would need.  The company also avoids having to raise capital by selling shares at a price it believes is too low at the time.

Cornerstone investors  Persons who "commit to buying and holding a large stake at a set share price as a show of confidence intended to draw in other investors.  In exchange, they sometimes get a better price on the stock."  [Sharon Terlep, "U.S. Frets Over Foreign Investors in GM," The Wall Street Journal, September 3, 2010, page B3] We've called them "lead investors" in DPOs.

Corporate cleanup  When a company is owned entirely by an entrepreneur, it may be used to minimize taxes and meet other personal needs.  Its structure may reflect negotiations with angel investors or venture capitalists.  There may be a certain casualness about corporate proceedings.  When presented to the public, the SEC and state securities regulators, the business should be simple, tidy, and as independent as practicable.  This transformation is called corporate cleanup and includes contributions by the securities lawyer, securities marketing advisor and management.

Corporate governance  Corporations are much like the parliamentary form of government, with each share similar to one registered voter.  Shareowners elect directorsThe board of directors makes policy, appoints officers, and monitors their performance.  The rights and responsibilities of shareowners, directors, and officers are determined by laws of the state from which the corporation has its charter.

Corporation  An entity formed to conduct a business.  A corporation is created in the United States by filing articles of incorporation, or a charter, with a state official.  It is then a "resident" of that state, governed by the state's laws and is entitled to many of the same rights and privileges as an individual.  It is subject to federal and state income tax, with some exceptions.  Current laws allow a corporation to conduct unlimited lawful activities and to exist in perpetuity. 

Covered securities  Securities exempted from state registration by a 1996 amendment to Section 18 of the Securities Act of 1933.  This amendment allows public offerings of covered securities to be made without any registration or other regulatory review of the offering  by state securities regulators.   The definitions of a covered security include a security listed, or authorized for listing, on the New York or American Stock Exchanges, the Nasdaq National Market System or any national securities exchange that the SEC rules to have "substantially similar" standards.   The SEC's Rule 146 added securities listed on the Chicago Board of Options Exchange, on Tier 1 of the NYSE Arca Exchange, Tier 1 of the Philadelphia Stock Exchange and options listed on the International Stock Exchange.  Nasdaq petitioned the SEC in late 2006 to add its Nasdaq Capital Market as a covered security.   A covered security also includes one issued in a transaction exempt from SEC registration under its private placement Rule 506.

CUSIP number  All certificates for publicly traded shares require an identification known as a CUSIP number.  They are issued by the CUSIP Bureau in the New York office of Standard & Poor’s Corporation.

Customer information file (CIF)  Nearly every business maintains some sort of information about its customers.  With such computer peripherals as bar code scanning, information can be gathered about buying patterns.  Through access to data banks (available from list brokers, credit card companies, credit bureaus, and government registrations), database enhancement can add extensive statistics and demographics about customers.  Because of their preexisting relationship, customers are usually prospects for a company’s shares in a direct public offering.

D&O policy  An insurance policy purchased by a corporation to pay liabilities and costs resulting from claims made against its directors and officers. This coverage is expensive and has many complex conditions, such as who selects the lawyer for a defendant.  When claims are made, the insurance company often denies coverage.

Dark Pools  An electronic trading network which matches sellers and buyers in secret.  One of the problems with stock exchanges is that so many people can watch the trading activity.  Knowing who is buying or selling which stock can bring out speculative buying and cause the price to move in anticipation of more activity.  By May 2008, there were 42 dark pools, handling 17% of stock trades.  But some traders are using computer algorithms to detect patterns in the dark pools, defeating their purpose.

Database enhancement  Adding externally compiled information to the company’s customer information file.  There are suppliers who compile and sell statistics and demographics on nearly every adult American.  Their data can be added for each name in the customer information file.

Database management  Information management is a major part of any direct public offering.  Information must be gathered, checked, and communicated in order for people to make an investment decision.  In addition, information about the people to whom the shares will be offered must also be acquired and used.  Database management includes names, addresses, telephone numbers, and other useful facts about selected individuals and markets.  Some of this data may be purchased, some developed from responses to advertising, and some built from the company’s own records as well as the knowledge of its employees and advisors.  Database management handles the arranging of that data into categories reflecting the probabilities of investment in certain amounts.  It enables the sorting and displaying of data in the most useful form for selecting media, preparing messages, doing telemarketing, and tracking results.

Dealer  Securities laws define a dealer as one who buys and sells securities for the dealer’s own account.  This contrasts with a broker who buys and sells as the agent for others.  In the 1930s, Congress had almost decreed that each securities firm could be either a broker or a dealer, but not both.  The reason was to separate giving advice to customers from also being an investor.  Instead, the standard license in the business is a “registered broker-dealer.”  Underwriters are dealers, since they technically buy the shares from the issuer and resell them to investors.

Deficiency letter  Often called a “letter of comment.”  After receiving a registration statement for a public offering, the SEC or a state securities regulator will generate a list of comments from the staff assigned to its review.  There are usually separate ones for the text and for the financial statements.  The process generally involves comparing the filing with the agency's rules and recent registrations the agency has cleared for similar businesses.  Since the law does not call upon the SEC to pass upon the adequacy of a registration statement, the comments are only “suggestions.”  Failure to make changes or otherwise explain each suggestion may mean that the registration statement never becomes effective and the offering is cancelled.  Sometimes the staff will send a bedbug letter, telling the company that its registration statement is considered so deficient that it cannot be fixed with an amendment.

Delaying amendment  When a registration statement is on file with the SEC, it would automatically reach an effective date and be usable to sell securities.  To prevent this, securities lawyers routinely include a delaying amendment in the filing.  They then request acceleration of the effective date to a selected time.

Demographics  The use of population statistics to classify prospects by particular characteristics.  Customer information files often have little information beyond name, address, and telephone number.  When lists are purchased, they are often subscribers to particular magazines, purchasers from designated catalogs, or contributors to selected fund-raisers.  At its most basic level, demographics is the selection of target markets by the ZIP code of their residence, which is some indication of household wealth.  Much more demographic information can be added to these files and lists through database enhancement.  Census data now encourages “geodemographics,” the correlation of location with the propensity to invest.  So much information is available from credit bureaus and customer information files, that the science has moved on to “psychographics,” where a mix of data bits will suggest spending patterns and other characteristics useful in planning and executing a marketing program.

Deregister  Companies registered under the Securities Exchange Act of 1934 can deregister if they are not traded on an exchange and have fewer that 300 shareowners.  It is often called "going dark," because a deregistered company no longer files publicly-available information with the SEC as a reporting company.

Derivatives  These securities are derived from some other existing security.  For instance, options are rights to buy or sell a security, as in the case of stock options

Dilution  Whenever new shares are issued, there is some financial effect upon the company’s existing shareowners, as well as the new investors.  This is usually measured by the increase or decrease in the amount of shareowners’ equity, or book value per share.   Dilution may also refer to the expected earnings or cash flow to come from the use of money received in the offering of new shares.  If a share issuance is dilutive to new shareowners, it will be “antidilutive” to existing shareowners, by increasing their per share amounts.  It is antidilutive to all shareowners when a corporation has a buyback, reducing the number of shares outstanding.

Direct Community Finance  Where loans or investments are made directly between the provider of capital and the steward of capital, both of whom are part of the same community.  Finance without a financial intermediary.

Direct limited offering (DLO)  The direct offering process may be used for direct public offerings, often to many thousands of the issuer's customers and its other communities.  The same basic process can also be used for direct limited offerings, to far fewer people who must each invest a significantly larger minimum amount.  The DLO may qualify as an exempt transaction under SEC rules and with many state securities regulators.

Direct mail  One of the media used in direct marketing.  A marketing proposition is sent by mail to a list of prospects who may communicate their response by mail, telephone, facsimile, or other media.

Direct marketing  When the provider of a product or service markets it directly to the ultimate customer, referred to as disintermediation in the financial services industry.  In the language of direct marketing, the process for a direct public offering involves:
                           The proposition:  “We’ll give you a prospectus.”
                           The response:  “OK, I’d like to see it.”
                           The fulfillment:  “Here is the prospectus.”
                           The conversion:  “This is my order for shares.”
Direct marketing has developed several generations beyond the first solicitations by mail to everyone in selected neighborhoods.  Now it incorporates demographics, database management, list brokers, fulfillment houses and telemarketing specialists.  Media used still includes direct mail, but the proposition may also come through emails, websites, telephone, radio or television.  Fulfillment may be effected by email, password to a website or print, all including the prospectus and selling materials.  The conversion could be handled by the same media.  Recent direct public offerings have allowed all four steps to occur in one computer session, including completion of a share purchase order and payment through credit card or electronic transfer of funds.

Direct offering  Securities are sold by their issuer to investors through direct marketing.  There are no financial intermediaries.  The relationship is directly between the entrepreneur and the communities created as the business is developed.

Direct public offering (DPO)  A direct offering made to large communities, usually requiring a registration statement to be filed with the SEC and filings made under state Blue Sky laws.  This contrasts with an underwritten public offering sold by registered representatives who work for securities firms in an underwriting syndicate.   The United States Treasury is a leader in direct public offerings of its bonds, notes and bills.  Other sections of this website describe direct public offerings by businesses.

Direct stock purchase plan  Corporations may allow purchases of their shares directly, without use of a broker.  This has grown from dividend reinvestment plans to allowing shareowners to buy more than the amount of their dividends.  Then some corporations began offering direct purchase to people who didn't already own their shares.  There will often be minimum and maximum amounts for a purchase.  Pricing is usually at the trading market, or a slight discount.  There is the risk that shares purchased at a discount will be immediately resold into the market, causing downward pressure on the price.

Directed sales  In an underwritten public offering, a money manager for institutional investors will often ask the managing underwriter to take an order for shares and give credit for the sale to a particular securities firm.  The designated firm will then be paid the 60 percent selling concession portion of the underwriting spread.  This is a way for money managers to pay securities firms for research or other services provided “free” under so-called soft dollar deals.

Directors  Representatives elected by the shareowners to the board of directors to make policy and appoint officers.  They are stewards of the corporate assets and operations, on behalf of the shareowners and, some people argue, other stakeholders.  The directors of many large public corporations are effectively selected by its CEO, because of the election process, shares held in street name and the voting practice of money managersCorporate governance rules require certain decisions to endorsed by independent directors.  A business which uses direct offerings to raise capital will have more active shareowners, who hold directors accountable to their stewardship.

Disintermediation  When money is transferred directly between the user and the provider without passing through a financial intermediaryPart of the general trend toward “cutting out the middleman.”  An example has been the commercial paper market, where large corporations lend and borrow among themselves, rather than through bank deposits and bank loans.  A direct public offering is a form of disintermediation because there is no underwriter.

Dividend reinvestment plan  Shareowners may elect to have dividends on their shares used to buy more shares.  Corporations with dividend reinvestment plans may expand them into direct stock purchase plans.

Dividends  Payments of amounts per share by a corporation to its shareowners.  Dividends represent a proportion of the corporation’s earnings (except for liquidating dividends and other unusual cases).  They are usually paid in cash, but may be paid in newly issued additional shares.  Sometimes, the shares of a subsidiary or other corporate assets are distributed to shareowners as a dividend.

Dog and pony show  The road show arranged by underwriters for money managers who are prospects for an underwritten public offeringOfficers of the issuer and securities analyst employees of the underwriters will provide information orally that would be unlawful gun-jumping if furnished in writing.  The meetings are generally closed to individual investors, although the SEC has moved toward requiring open access to road shows made available on the Internet.  Since electronic availability is treated the same as printing, the electronic road shows become limited to what is already in the preliminary prospectus.

Dow Jones average  This usually refers to the Dow Jones Industrial Average, which is a group of 30 large public corporations used as an index for performance of the general stock market.  There is also a Dow Jones Transportation Average and a Dow Jones Utilities Average.

DPO  The acronym for a direct public offering.  It was first used by the Simon & Schuster editors when preparing our first book, Take Your Company Public.  It is often used to contrast the direct public offering process from an underwritten IPO, which offers securities through securities firms as financial intermediaries.

Due diligence  Securities laws allow disappointed investors to recover their losses in court from persons related to the company or involved in a public offering of its shares.  One of the ways to avoid that liability is known as the due diligence defense.  It requires that the defendant make a reasonable investigation into the truth and completeness of the registration statement.

Distort and Short  A stock market manipulation tactic of selling short a corporation’s shares and then spreading false rumors about the corporation.  When the share price is driven down, the perpetrators cover their short sales with purchases at the lower price.  This is the other side of the pump and dump scheme. 

Dutch auction  Where investors bid on shares in public offering, with the final price being set at the highest price that would result in all of the shares offered being sold.  The principal practitioner in the U.S. securities markets is W.R. Hambrecht & Co. (www.openipo.com).  The process requires an investor to have an account with a participating securities broker-dealer.  Google's initial public offering is the major Dutch Auction example so far.

EDGAR  The SEC’s Electronic Data Gathering, Analysis and Retrieval system for a reporting company to file documents by computer media.  It is to be replaced in 2009 by IDEA.

Effective date  This is the precise moment when the registration statement “becomes effective” with the SEC and state agencies.  Only then can the prospectus be used in offering shares to the public.  In an underwriting, timing of the effective date will have been requested by the lawyers to come at the point when the sales efforts are concluded by the underwriters’ brokers.  If those efforts have been successful and the company agrees to the underwriters’ final price, the underwriting agreement will be signed a few hours before the effective date.  Then, confirmations of the sale are sent to investors with a copy of the prospectus.  In a direct public offering, the sales program really begins on the effective date. 

Emerging growth company  A business that is just coming out of its start-up phase and entering the growth company category.  In most periods, candidates for an initial public offering are emerging growth companies.  Since 2000, there have been more IPOs for previously public corporations that were acquired in going private transactions and are again going public, reflecting the financialization of the stock market.

Emerging growth stock  A popular term to describe shares of companies large enough to have a trading market, but still in the early stages of an expected period of growth.  They usually have price/earnings ratios higher than market averages because investors are paying for the discounted present value of expected future earnings and cash flow.  These expectations often change as events unfold, causing the stock price to fluctuate more than market averages (see Beta).

Employee Stock Ownership Plan (See "ESOP" below)  The late Louis O. Kelso co-authored books on broadening access to capital ownership.  As a lawyer, he used an obscure part of the Internal Revenue Code to create a trust for a corporate client, with its employees as the beneficiaries.  The trust borrowed money from a bank to buy all the client's shares from its founders.  The client corporation pledged all its assets to secure the loan and agreed to pay dividends sufficient to service the debt.  With the help of then-Senator Russell Long, tax benefits were increased, including for the lending banks.  However, employees have not realized significant benefits from the technique, since they don't receive dividends, cannot sell their shares and have no voting rights. Most benefits have gone to the former owners who sold their shares, the banks who made the loans and the intermediaries, consultants and lawyers who handled the transactions.

Endorsement  A marketing message that uses someone outside the company to express approval of the product or service being sold.  A “testimonial” is usually a favorable quotation from an individual who is either famous or someone with whom the prospects are expected to identify.  Other endorsements are more subtle.  Advertising in a particular media may connote the media's endorsement, especially if other advertisers are well known.  A powerful endorsement for a direct public offering can come from a sponsor, especially one making a standby commitment--a promise to buy any shares not purchased by prospects.

Entrepreneur  The founder of a business, who has the most at risk, getting the business started and shepherding it through its early stages.  The entrepreneur usually has a primary purpose for the business, beyond earning a living or getting rich.  Holding onto the original objective can become increasingly difficult as the business needs more capitalFinancial intermediaries rarely share the entrepreneur's long-term vision.  A direct offering can raise capital from individuals within the communities who understand where the entrepreneur is headed and share the same objectives.

Equity  In finance and accounting, this term means the owner’s investment in the business.  For a corporation, it is used interchangeably with shareowners’ equity or net worth.  It includes amounts the owners have invested, plus or minus the earnings or losses that have been accumulated from operating the business.

Equity Carveout  Also called a "partial IPO," this is an IPO of shares in a large corporation's subsidiary.  In a study of 271 equity carveouts between 1988 and 2006, the size of the offering was approximately $336 million, three times the conventional IPOs during those years. The percentage ownership of the subsidiaries kept by the parents ranged between 2% to 64%.  [Professor Thomas Thompson, Lamar University, "Partial Price Adjustments and Equity Carve-Outs," Financial Review, 2010, Volume 45, page 743]

ERISA  The Employee Retirement Income Security Act of 1974.  It cast into stone the “herd instinct” of money managers who invest for pension funds by redefining the common-law “prudent investor” rule.  Congress changed the fiduciary duty from investing other people’s money as a prudent manager would invest its own, to investing the same way as other institutional investors.  This standard gets tested every quarter when money managers file public reports.  One effect has been to turn the stock market into a short-term performance race.  This financialization has discouraged many individual investors from buying or holding sharesDirect public offerings can operate outside the securities markets dominated by ERISA investors.

ESOPs  (See "Employee Stock Ownership Plans," above)  These are trusts set up to own a company’s shares for the benefit of its employees.  The legal structure was a creation of the Internal Revenue Code seventy years ago and Congress has added several tax incentives for companies to form ESOPs.  They have also been used to put large blocks of publicly traded shares into the hands of a trustee who will protect management from a takeover.  In most cases employees cannot vote, sell, or receive dividends on the shares.  Their interest in the trust is cashed out when they leave the company.  Most ESOPs have been created with bank borrowings which must be repaid out of the company’s cash flow.

Exchange  As defined in section 3 of the Securities Exchange Act of 1934, an exchange includes a "market place or facilities for bringing together purchasers and sellers of securities."  However, section 6 of that act sets standards for a "registered national securities exchange."  In 2006, the Nasdaq was registered.  Others include the New York, American and the remaining regional exchanges

Exchange Traded Funds (ETFs)  Shares in these closed-end mutual funds trade on a stock exchange.  This involves another layer of financial intermediary, the fund and its management company, which pays commissions to brokers who sell the ETF's shares to investors.  The first ETFs were marketed as a way to invest in an index, while paying low management fees and having maximum liquidity.  In 2006, nearly 150 new ETFs were introduced, about a third trading on the American Stock Exchange and the rest on the New York Stock Exchange.  New "sector-specific" exchange traded funds are currently marketed as a way to invest in a group of businesses in the same category.  A new ETF will show past theoretical performance, based upon the investment criteria it proposes to use.  This would allow a manager to pick a sector with attractive past performance and create a fund to acquire similar investments.  As quoted from Morningstar Inc. analyst Sonya Morris in the December 28, 2006 Wall Street Journal, "Performance-chasing is a hazardous game and ultimately a loser's game."  According to that article, the SEC is considering ways to speed up the regulatory review for ETFs and even more new ones are expected in 2007.

Exempt securities  Federal and state securities laws read as if they applied to all offers and sales of all securities.  They then define certain kinds as being exempt securities, to which the registration, disclosure, and some antifraud provisions of the laws do not apply.  These include securities of certain types of organizations like banks and government agencies.

Exempt transactions  Securities laws apply to every purchase and sale of securities, unless a specific exemption applies.  Most stock market transactions are exempt, as are private placements.  The SEC and the courts keep the interpretation of exempt transactions rather narrow.  It can be dangerous for an issuer to sell shares without a no-action letter or an opinion of counsel that the proposed transaction is within SEC safe harbor rules or other defined limits.

Exit plan  Venture capital firms, private equity funds and other professional investors will have an exit plan for when they can convert their investment in a business back into cash.  There are often alternative plans, including a sale of the entire business for cash, merger of the business into a corporation with publicly traded shares (which can then be sold in the secondary market) or other liquidity eventFinancialization has resulted in shortened times between investment and exit, as well as forcing the business to change its primary purpose to one which can bring a liquidity event more quickly.

Fair, just and equitable  State blue sky laws often require their state securities regulator to pass upon the quality of the proposed offering of shares to residents.  These are the merit states and a frequent standard is that the terms of the proposed offering, the investment itself, and the method of sale are all fair, just and equitable to the local residents.  Where the offering is limited to prospects meeting certain standards (usually wealth and income), the agency may also pass upon the suitability of the investment for that class of investors.

Fair price provision  Language in the corporation’s charter requiring that all shareowners receive the same price in any takeover of a controlling interest in the shares.  This prevents the “two-tier” offer, where the first group of shares tendered in acceptance of the offer receives one price, while the remaining shares get a lower price in a later offer.  The fair price provision may not be a particularly effective shark repellant, but it does protect shareowners who hold their shares in street name or are otherwise slow in responding to a takeover offer.

Faith-based business  A business that has been formed and is operated in furtherance of the religious commitments of its entrepreneurs, shareowners and management

FASB (pronounced “fazby”)  The Financial Accounting Standards Board--an attempt to bring uniformity and understanding to generally accepted accounting principles (GAAP).

Fat-tailed models  Before the Panic of 2008, investors and financial advisors had made asset allocation and other investment decisions based upon a risk analysis model following the traditional "bell curve."  The center of the curve is the most frequent result and the tails at either end are remote.  The standard model, for instance, assumed that a 2008-2009 price decline in stocks would happen only once in 111 years.  The simultaneous market collapse of stocks, real estate and other assets was modeled as nearly impossible.  Fat-tailed models have since been developed to increase the probability for the extremes at the tails of the bell curve.  Wall Street uses these models to promote purchasing derivatives to hedge against the model's increased risks.

Filing date  The day on which a registration statement for a public offering is filed with the SEC (or a filing is made to qualify under state blue sky laws).  It marks the end of the prefiling period and the beginning of the waiting period.

Fiduciary duty  Caretakers of other people's money are under a legal duty to treat that money the way "prudent" people would treat their own money.  That "standard of care" applies to directors and officers, or managing partners, who are stewards of investors' capital.  The standard of care for fiduciary investors was changed by ERISA.

Fiduciary investors  People who make decisions on investing other people's money.  These include money managers and many investment advisors, where they have discretionary authority and owe a fiduciary duty to the ultimate owners of the money for which they are responsible.  They are supposed to avoid any conflicts of interest, such as benefiting personally from selecting a particular investment or financial intermediary

Financial Industry Regulatory Authority (FINRA)  A self regulatory organization created by the SEC in July 2007 and operating under SEC oversight.  FINRA is responsible for regulating all securities firms that do business with the public, including professional training, testing and licensing of registered persons, arbitration and mediation.  It is also responsible, by contract, for regulating The Nasdaq Stock Market, Inc., the American Stock Exchange LLC, and the International Securities Exchange, LLC.  FINRA is the consolidation of the former NASD and the regulatory subsidiary of the New York Stock Exchange.

Financial intermediary  Someone in between the stewards of capital and the providers of that capital.  A middleman through which money flows from its source to the business which wants to use that money.  For instance, banks get money from depositors and lend it to businesses;  securities firms channel money from investors to corporations by selling the corporations' securities; mutual funds, hedge funds and private equity funds sell their own securities to raise capital to invest in other businesses, securities or commodities.  The function of intermediaries is to attract and match providers and stewards.  Beyond that, they may provide a transformation of risk, denomination and maturity.  Disintermediation occurs when the money flows directly from the source to the steward, as in a direct public offering

Financial planner  An advisor to individuals in their financial affairs.  Financial planners will review their clients’ income, expenses, assets, debts, tax status, and future needs.  Then they may recommend a budget and the purchase of financial products, like insurance or investments.  There is little special government licensing or regulation of financial planners.  Most of them are licensed to sell insurance or securities and earn their living from commissions on sales.  Some are “fee-only” financial planners who accept no commissions and are compensated solely by an agreed fee or percentage of their client’s assets or investment income.   Sometimes this includes incentive arrangements for investment results above performance standards.  Fee-only financial planners who have a large practice become subject to the federal Investment Advisers Act of 1940 and similar state laws.  They are then usually called investment advisors or money managers.

Financial printers  Printing businesses that specialize in printing documents used in corporate or government finance, such as prospectuses, annual reports, and takeover offers.  What distinguishes them from commercial printers is the intensive level of service--speed, accuracy, and responsiveness to nearly every whim of the company’s securities lawyers.  There is, of course, an extra price for this service.  Word processing, especially computer telecommunications and desktop publishing, make it possible for cooperative lawyers, auditors, and other advisors to perform everything but large-scale print runs, eliminating the need for a financial printer.  As a consequence of these changes and the general slowdown in corporate finance transactions, there are only three national survivors:  Bowne, Donnelley and Merrill.

Financialization  An approach to investment exclusively as a way to maximize short-term gains in market value.  Its practitioners include hedge funds, private equity firms, stock traders and executives with stock options.  They place no weight upon how a business affects its customers, employees, or the world.  They may not even be concerned with the business plan or management quality.  The focus is entirely on expected movement in the market price within a brief time.  Financialization has expanded from trading in existing public companies and IPOs to startups and venture capital.  As someone said about Silicon Valley, "things changed when they went from selling products and services to selling stocks."   

Finder  A person who introduces a business to a source of financing--an investor or another financial intermediary, like a bank or securities firm.  Finders typically get paid a fee upon closing of the financing.

Firm commitment underwriting  A public offering of securities by an underwriting syndicate, where the underwriting agreement contains a firm commitment by the underwriters to buy all of the shares.  In practice, the underwriting agreement is not signed until indications of interest have been gathered by brokers for sales of more than all the shares.  Large, older securities firms will usually participate only in firm commitment underwritings and not in best efforts underwritings.  All securities must be sold to persons selected by the participating securities firms and, in hot new issues, those selected have an immediate, often very large, trading profit.

First refusal rights  Some IPO underwriters will require that they be given the right to be the company’s investment banker and receive a fee on future corporate finance transactions.  They will have no obligation, but will have the first refusal rights to any proposed arrangement with a securities firm.

Flipper  There is potential for a “heads-I-win, tails-you-lose” game in underwritten initial public offerings.  Members of the underwriting syndicate will have signed an agreement among underwriters, which binds them to buy back shares at the offering price for stabilization of the aftermarket, for a period as long as 60 days after the effective date of the underwriting.  A flipper will buy the shares in the offering, then sell them back within the next few hours or days.  On a hot new issue, the flipper realizes a quick profit by selling to someone who did not get shares in the underwriting and is willing to pay more for them in the aftermarket.  If the price does not go up, the flipper can resell shares back to the underwriting syndicate (often by backdooring through another broker).  The only cost to the flipper is the brokerage fee on the resale, since the underwriters have fixed a floor price. 

Float  This has two very different meanings.  As a noun, the float is the number of a company’s shares that are owned by the public, rather than owned by the company’s officers, directors, and other insiders.  A minimum float is required by a stock exchange for listed shares and by NASDAQ for its price quotation system.  As a verb, to float shares means to sell a new issue through an underwriting.  The British refer to an underwritten public offering as a “flotation.”

Focus group  A market research tool.  A dozen or so individuals, who are thought to be representative of the target markets for a direct public offering, are invited to meet as a group for two or three hours.  Payment is made to them or a designated charity.  Trained facilitators ask questions and monitor a discussion of the investment proposition and marketing methods.  Company officers and advisors watch through a one-way mirror, and the session is usually recorded by audio or videotape.

Follow-up marketing  The last step in direct marketing is conversion of the prospect into an investor.  This often means initiating follow-up marketing steps, to overcome inertia and indecisiveness.

Founders’ shares  Before businesses go public, their shares are often owned by the entrepreneur and other private placement investors.  The question will be raised of dilution and promotional shares.  Depending upon the difference between the price paid for founders’ shares and the offering price to the public, special disclosure in the prospectus may be required under SEC rules.  If the private placement was made within three years before the proposed public offering, the blue sky laws in merit states may require an escrow of the cheap shares, or even prohibit the sale to their residents as unfair.

Free-riding  When shares of a hot new issue are purchased by securities firms for their own account (or for their employees and their immediate families), rather than for distribution to the public.  FINRA rules prohibit free-riding, but they do not prevent favored customers from getting all the shares available in the underwriting or upon exercise of the Green shoe option.

Free writing period  The time between the effective date and the conclusion of the public offeringShares may be offered only by a final prospectus, which is available only after the effective date of the SEC registration.  Any other communication, in writing or on radio or video, may be considered a prospectus in violation of the securities laws.  But, during the free writing period, other selling materials may be used if accompanied or preceded by the final prospectus.  When preparing a time and responsibility schedule, the fulfillment (delivery of the prospectus to prospects) should come immediately after the effective date.  It can then be accompanied with other selling materials and followed with additional marketing tools.

Frontrunning  The practice of some broker-dealers in placing an order in the trading market for shares for themselves, before they place an order for a customer.  They allegedly do this when they expect the customer’s order to cause a change in the price, so that they can then sell their own shares at the resulting higher price (or buy shares at the lower price to cover selling short.)

Fulfillment  In direct marketing terms this occurs when a prospectus is sent in fulfillment of a prospect’s response to the company’s proposition--that it would furnish a free prospectus.

Fully diluted  Per share earnings or other amounts in a company’s financial statements after giving effect to the potential issuance of additional shares.  This occurs when a company has issued warrants or options to purchase shares in the future, often as incentives to employees or investors, or as compensation to an investment banker or other financial intermediary.

GAAP (pronounced “gap”)  An acronym for generally accepted accounting principles, which must be observed in financial statements in order to get a clean opinion from the company’s auditors--a necessity in virtually every public offering.  Conforming to GAAP may be painful for an entrepreneur if the company’s bookkeeping has principally served to save on taxes.  The European Union and other countries have adopted the International Financial Reporting Standards and, in 2007, the SEC permitted foreign countries to use those standards in U.S. filings, instead of GAAP (so that U.S. companies could continue filing in Europe with GAAP.)

Glass-Steagall  The Banking Act of 1933, which separated commercial banks from investment bankers and prohibited commercial banks or their affiliates from underwriting securities.  Because an underwriting is technically an investment in securities and a resale, the underwriter must have capital to cover a prescribed ratio to the amount of the underwriting.  Taking banks out of the business severely limited the number of investment bankers which had sufficient capital to do underwritings.  The Federal Reserve Board of Governors had been gradually relaxing the Glass-Steagall restrictions, and Congress repealed it in its 1999 Gramm-Leach-Bliley Act. 

Going dark  When a company deregisters its securities under the Securities Exchange Act of 1934.  This may be done to avoid the costs of being a reporting company.  A result is that the shares can no longer be listed on any stock exchange or the OTCBB.  They can still be quoted for over-the-counter transactions on the Pink Sheets, but the price has, on average, declined as a result of this change in the market.  Shareowners often sue management for this loss in the market value of their shares.

Going private  When a company with publicly traded shares takes steps to withdraw from the public market.  It may deregister as a reporting company, so that a broker can no longer execute orders to buy or sell on a stock exchange or the OTCBB.  It more often results from management or others offering to purchase shares from the public, usually at a premium to the current market value.

Going public  When a company owned by no more than a few shareowners comes to have publicly traded shares.  The usual method is through an initial public offering.

Going public by the back door  When a business comes to have publicly traded shares without an initial public offering.  This can happen through a series of acquisitions of businesses, paying the former owners in new shares of the acquiring corporation.  It may result from a string of private placements with a gradual widening of shareownership until a trading market develops.  A third way for a business to go public by the back door is for promoters to organize or acquire a shell corporation which already has publicly traded shares, or does a blind pool offering.  Then the shell acquires the operating business, often through a reverse merger.

Golden parachute  An employment contract, requiring a significant amount of severance pay for an officer or director in the event of a hostile takeover of the company.  Golden parachutes are often justified as assuring the shareowners that officers and directors will not block an otherwise favorable acquisition in order to save their jobs.

Green Shoe  In a firm commitment underwriting, the underwriting syndicate agrees to buy a fixed number of shares from the issuer.  The selling efforts will have been concluded before the underwriting agreement is signed, by registered representatives gathering telephone indications of interest from their customers and prospects.  Some of these buyers will renege by refusing to accept and pay for the shares.  Other buyers will be flippers who force the underwriting syndicate to buy back shares as part of their aftermarket price stabilization.  To protect against this, underwriting syndicates take orders for considerably more shares than are included in the underwriting (similar to the overbooking of airline reservations in anticipation of cancellations and “no-shows”).  But if more shares have to be delivered to buyers than are included in the underwriting agreement, the underwriters could be required to cover the shortage through buying shares in the aftermarket.  This would likely drive the trading price up, causing losses to the underwriting syndicate.  In an underwriting for the Green Shoe Manufacturing Company, underwriters first negotiated an option to cover these overallotments by buying more shares from the issuer (or its major shareowners) within 30 days after the effective date.  The first Green Shoe options were for up to ten percent of the shares underwritten.  The maximum is now commonly fifteen percent and the most frequent use of the Green Shoe is to reward the underwriters’ favored clients by getting them hot new issues at the original offering price.  (FINRA rules against free-riding prevent underwriters from themselves investing in hot new issues.)

Growth company  This term is an attempt to classify businesses that are not yet “mature,” but are beyond the “start-up” phase.  Mature companies are in markets that are not expected to get much larger (like some public utilities), or have products that nearly everyone owns and will only replace when worn out (for example, refrigerators).  They usually have a low risk of failure and a low potential for major growth.  Start-ups are very high risk, and, if they succeed, can produce rapid growth in size and share value.

Gun-jumping  Rules of the SEC and state blue sky laws limit the written advertising and publicity that can appear before the effective date and the delivery of a prospectus to each of the offering’s prospects.  If these rules are violated through gun-jumping, the offering may have to be postponed for a “cooling-off period,” or even cancelled.  In the words of the SEC, gun-jumping is publicity or other communications that “may in fact contribute to conditioning the public mind or arousing public interest in the issuer or in the securities of an issuer in a manner which raises a serious question whether the publicity is not in fact part of the selling effort.”  SEC Rule 135 permits a very limited prefiling public announcement of a proposed offering.  In its Release No. 33-8591, effective December 1, 2005, the SEC summarized a new rule as "communications by issuers more than 30 days before filing a registration statement are not prohibited offers so long as they do not reference a securities offering that is or will be the subject of a registration statement."  An underwritten public offering is sold by securities broker-dealers through meetings and telephone calls that take place in the last few days before the effective date, so gun-jumping issues, as with Google, Salesforce and Webvan, have resulted from statements made in media interviews by the issuer's executives, or from accidental delivery of written material to prospects.  In a direct public offering, the relationship with prospective investors needs to have already been built through interaction with customers and other communities.  Otherwise, communications could likely be seen as in anticipation of the offering and "gun-jumping."

Hard money loans  Most loans are made in reliance upon the borrower's projected ability to pay interest and return principal on time.  This may be based upon projections of income and expenses, as well as the perceived character of the borrower or social capital.  By contrast, hard money lenders rely on their ability to get paid by selling assets the borrower has pledged to secure the loan.  Interest rates and fees on hard money loans are usually higher than conventional loans.  Borrowers often take hard money loans with the intention of refinancing them at a lower cost.

Hedge funds  Partnerships or limited liability companies owned exclusively by accredited investors and engaged in trading securities and commodities.  Initially, minimum investments were more than a million dollars, but the entry levels have come way down over the last ten years.  Sales to accredited investors are usually exempt from federal or state registration.  Until 2005, hedge fund managers were exempt from SEC scrutiny and the SEC's attempt to require registration was reversed by the courts.  The "hedge" term comes from their freedom to engage in selling short, a practice not permitted to mutual funds.  They set up another level of financial intermediaries between the individual investors providing capital and the businesses who are stewards of that capital.  Financialization dominates hedge fund investing, with short-term profits the only policy behind decisions.  By 2008, there were over 8,000 hedge funds operating, with 87% of the money from investors in funds managing a billion or more dollars.  A study by University of Chicago, Steven Kaplan and Joshua Rauh (reported by Greg IP in the October 12, 2007 Wall Street Journal) showed that the top 25 hedge fund managers earned more in 2004 that the chief executives of all the S&P 500 corporations. 

Hot new issue  An underwritten initial public offering that trades in the immediate aftermarket at a price higher than the offering price.  According to FINRA rules, member firms and their employees may not trade in hot new issues.  The many hot new issues in 1999-2000, and the favoring of certain securities firm customers, led to litigation and regulatory changes.  

IDEA  Interactive Data Electronic Applications, adopted in August 2008 by the SEC, will replace EDGAR as the electronic data base for filings by a reporting companyIDEA filings are to be available by late 2009 and are based on extensible business reporting language, or XBRL.

Incubators  Start-up businesses are typically financed on a shoestring.  They need cheap rental space and they need lots of experienced advice for “free.”  Incubators are usually sponsored by universities or community development organizations.  They provide space for several beginning businesses, pool support services, and provide consultation, all at a cost that is usually below market value.  Several incubators are also tied in with groups of informal investors, from whom tenants may be able to raise capital.

Indenture  The contract among a company, investors, and a trustee, governing the issuance of corporate bonds.  These are generally very long and must be filed with the SEC under the Trust Indenture Act of 1939.

Independent Contractor Broker Dealer  Every securities registered representative must be associated with a registered securities broker-dealer.  That generally means being an employee.  But there are broker-dealers who sign registered representatives as independent contractors, for those who want more independence, want to keep a higher percentage of their commissions and are willing to give up the big firm name and research.  The largest is LPL Financial of Boston, formed by the 1989 merger of Linsco Financial Group (started in 1968) and Private Ledger Financial Services (started in 1973).  It is 60% owned by two private equity partners, Hellman & Friedman, LLC, and Texas Pacific Group. By mid-2009, over 12,000 registered representatives were contracted with LPL as their broker-dealer.  One of the promises on the LPL website is “there are no proprietary products.  Ever.” 

Independent directors  Members of a board of directors who meet standards of independence from the corporation, its officers and major shareowners.  In the context of particular corporate transactions, a director is independent or "disinterested" if there is no "conflict of interest," that is, no material financial interest in the subject of the transaction.  Federal and state securities rules define independence by legal relationships and measurable economic interests.  However, courts have examined "bonds of friendship" and other more subtle influences.  In one case, two professors were determined not to be independent, because of the large contributions to their university by the corporation's CEO. 

Index  A group of securities used to measure the performance of individual securities, including their beta and relative price earnings ratio.  The most frequently-used indices are the Standard & Poor's 500 and the Dow Jones Industrials.  There are mutual funds that own shares in the same proportions as the index.  These index funds have usually generated better returns to investors than funds with money managers who select investments.

Indications of interest  A way to communicate the willingness to buy or sell securities at a price on any terms, without creating a legally binding obligation to do so.  This occurs when brokers write orders for shares in an initial public offering.  No sale of shares can occur until the effective date and delivery of a final prospectus to the customer.  In practice, the prospectus in an underwritten IPO is first sent to the customer when it accompanies the confirmation of sale.  The customer then has to pay for the shares at the offering price, or to renege and cancel the order.

Individual investors  People who are investing their own money directly.  Included are IRAs and trusts for family members.  Not included are people who channel their money through mutual funds, pension plans, or other institutional investors.

Influentials  People who influence the decisions of others.  Members of communities to whom acquaintances turn for advice or a role model because of their position, reputation, or personality.  A direct public offering program will try to reach these people first.

Infomercial  also known as “infocommercial.”  A commercial message presented like a feature story.  Most advertisements are short and in a rather standardized format, whether the media is print or electronic.  An infomercial is longer and packaged to resemble news, editorial copy, or programming.  There will be some distinguishable mark, like the word “advertisement” in print or a voice-over in television:  “This special announcement is brought to you by . . . ”

Informal investors  Also known as angel investors.  There is a period between the start-up of most businesses and their initial public offering when capital is needed for the business to become established and profitable.  These businesses will probably not be attractive to venture capital firms, most of which have become institutionalized and unwilling to take risks on little companies with unknown entrepreneurs.  As a result, various networks of informal investors have developed all over the country.  They are often coordinated by incubators, accounting firms, or management consultants.  Information about early stage capital is available from the Center for Venture Research, Whittemore School of Business and Economics, University of New Hampshire, www.wsbe.unh.edu.

Initial public offering (IPO)  For a corporation, the initial public offering is like a coming-of-age rite.  It signals that a company has joined the ranks of successful businesses.  As a matter of practical finance, the first-time sale of shares to the public opens the door to large amounts of capital with no interest expense, no repayment, and no restrictive covenants on management.  For the founders and early investors, it places a market value on their investment and provides the liquidity for some cash return.  In the past nearly every IPO was a firm commitment underwriting through an underwriting syndicate.  Today the developments in direct marketing make possible the direct public offering (DPO).

Inside information  Some investment theorists say that all information about publicly traded shares is readily available to all investors, with the result that the share price always reflects the effect of this information.  The conclusion is that no one would be able to profit more than anyone else by picking individual stocks.  However, some investors, brokers or advisors  claim to have access to inside information, that is, facts or rumors which are not public information but have been leaked by employees, directors and others with a fiduciary duty to the issuer

Insider  A person in a position to control the corporation or to have access to nonpublic information which, if publicly known, would likely affect the price of the shares.  The legal definition varies with the particular legal duty involved.  Insider trading is periodically the subject of prosecution and publicity.

Institutional investors  Pools of capital under the control of money managers.  The largest institutional investors are pension funds, insurance companies, mutual funds, and endowments for schools and religious bodies.  Nearly half the shares of America’s largest corporations are owned by institutional investors.  Because they buy and sell investments much more frequently than individual investors, over 70 percent of the trading in corporate shares is done for institutional investors.  After years of poor performance, money managers of many institutional investors have been replaced by index managers who invest in the same shares and proportions as the Standard & Poor’s 500 or other market index.  In recent years, most underwritten IPOs have been sold to institutional investors and individual speculators.

Interactive marketing  This occurs when the company and the prospects can communicate back and forth immediately, without the delay of going from a proposition in one type of media (newspaper or TV) to a response in another (telephone or mail) and on to a fulfillment and conversion.  The oldest interactive marketing (as well as the most costly and time-consuming) is calling upon prospects in person or by telephone.  Electronic means of interactive marketing allow all four steps in a direct offering to take place in one session.

Interdealer market    All the markets for buying and selling existing securities (the secondary market) are available only for transactions made through registered securities broker-dealers.  Securities which are not listed for trading on an exchange are traded in the over-the-counter market.  Interested broker-dealers quote bid prices, at which they will purchase at least 100 shares, and asked prices, at which they will sell at least 100 shares.  These bid and ask prices are made available to the broker-dealers, and through public media, through NASDAQ and the Pink Sheets

Internal memoranda  A brief writing, video, or audio tape used to tell registered representatives about a public offering and give them selling points for their telemarketing.  It is unlawful to show internal memoranda to prospects.

International Financial Reporting Standards  A set of accounting standards, developed by the International Accounting Standards Committee and adopted by the European Union.  They are said to be more "principles based" than GAAP, which contains more detailed rules for recording transactions and presenting financial statements.  The SEC now permits foreign issuers to use the IFRS in place of GAAP.

Intrastate exemption  Registration of a public offering with the SEC is not required if the shares are offered and sold only to residents of the same state in which the company is incorporated, has its headquarters, does nearly all of its business and will spend the offering proceeds.  Each element of the statutory exemption must be met and issuers may rely on an SEC safe harbor rule.  Most securities lawyers are nervous about recommending use of this exemption since the SEC or the courts may challenge it.  If only one offeree or investor is not a resident, or if a buyer resells to a nonresident within the next nine months, the exemption is lost.

Investment advisor  Technically, a person or firm registered under the federal Investment Advisers Act of 1940 or similar state law.  (The preferred modern spelling has become “advisor,” rather than “adviser.”)  Under ERISA, investment advisors are really money managers, having been delegated the absolute decision-making authority to buy and sell investments, within some general guidelines.  Financial planners may be registered investment advisors.  Many are not because they operate on too small a scale to require registration.

Investment banker  This is not a defined term under the securities laws, like broker, dealer, or investment advisor.  It most often refers to the corporate finance department of a securities firm which handles public offerings and private placements of securities, as well as mergers, acquisitions, and other corporate finance transactions.  Many securities firms call themselves investment bankers even when the only services they provide are as a broker for trading securities in the secondary market.

Investment company  These are generally mutual funds regulated under the federal Investment Company Act of 1940.  They are institutional investors run by money managers.  Some of them have a specific investment objective that includes the purchase of emerging growth stock, often through an initial public offering.

Investment letter  Legal documents used in a private placement of securities to avoid violating the laws requiring registration of a public offering.  They state that the buyer is purchasing for investment purposes only and not with a view to the redistribution of the securities.  The letter usually has the effect of a contract and may require that the securities be held for a particular period of time, that an opinion of counsel be obtained before any sale, or that the securities can only be transferred to a certain class of investors.  Shares subject to an investment letter are known as lettered stock.

IPO  This acronym for an initial public offering is usually associated with an issuer's first underwritten public offering.  Some people have used the term as a contrast with a DPO, or direct public offering, where there is no underwriter or other financial intermediary.

Issuer  The business or governmental entity which issues securities.  A corporation will be the issuer of shares as fractional ownership interests.  Corporations may also be the issuers of debt securities and options or warrants.  For each share or other security, there is an issuer and an investor.

Issuer-directed shares  In an underwritten initial public offering, every share must be sold through the underwriters.  The entrepreneur and the issuer's management can request that shares be sold by the underwriting syndicate to persons who have some special relationship to the issuer, such as members of the board of directors.  Some underwriters will not permit the practice and FINRA rules allow only 10 percent of the shares to be issuer-directed.  An underwriting spread must be paid on all shares, including any which are issuer-directed.

Junk bonds  Long-term corporate debt securities are generally issued as bonds.  Before the 1970s, nearly all bonds sold in public offerings were rated as to their investment quality by Moody’s or Standard & Poor’s.  When the term junk bonds was coined, it referred to bonds of “fallen angels,” corporations which had qualified for a rating when the bonds were issued, but had lost their rating when the business fell on hard times.  The term carried over to the use of new issues of high-yield, unrated bonds for growth companies and acquisitions.  One reason for the use of new junk bonds was the deduction from corporate income taxes allowed for interest payments on bonds, but not for dividends on shares.  Another was the preference of institutional investors for liquidity.  The trading market for shares of growth companies was often too thin to allow sales of large amounts without depressing the price.  Junk bonds might be no more marketable, but they substituted an obligation to repay the investment in a few years and a high cash return until repayment.  Since most institutional investors are tax-exempt, all of the interest received counted toward the return on investment.  Junk bonds allowed money managers to show better short-term results than their peers, who invested in stocks or rated bonds.  During the 1980s, junk bonds often met the capital needs for emerging growth companies that have traditionally used equity to finance rapid growth.

Know-your-customer rule  Securities firms and brokers are subject to certain standards of conduct under securities laws, self-regulatory organization rules, and court decisions.  One such standard is that they should know about their customers’ financial condition and needs before recommending a transaction.  The broker can then determine the suitability of the proposed transaction for the customer.

Lead underwriter  When there are multiple managing underwriters, one of them takes the lead and “runs the books” for the underwriting syndicate.  The lead underwriter’s name will appear on the left side of the first line in the listing of underwriting syndicate members for the tombstone ad.

Legal opinion  For an initial public offering, securities laws require an opinion of the company’s lawyers for the benefit of investors in the shares.  These are in standardized form and provide the lawyers’ opinion that the shares have been legally issued.  In an underwritten public offering, the underwriting agreement will require a very extensive opinion from the issuer's lawyers.

Letter of intent  When an issuer and a managing underwriter reach an understanding about doing an initial public offering, they sign a letter of intent.  It describes the proposed offering price, number of shares, and effective date.  An underwriting spread will be included, as well as an amount of underwriters’ warrants.  However, nothing in the letter of intent is legally binding, except a usual provision for the issuer to pay the underwriters' expenses if the issuer calls off the deal.

Letter stock  Shares acquired in a private placement where the investor has signed an investment letter.  Because of the restrictions created on transfer of ownership, letter stock can be sold only to certain persons.  As a result, the sales price will often be at a discount of 20 percent to 50 percent of a trading market price.

Leverage  The ratio of borrowed money to equity capital in a business reflects its leverage.  The concept is that a base of equity money can be enhanced in its power by adding debt capital.  The amount of leverage considered prudent varies significantly by industry.  Financial institutions, like banks, may be considered very sound if they have $12 of debt for every $1 of equity.  Manufacturing businesses often have only $1 of debt for every $2 of equity. 

Leveraged buyout  Purchase of all or most of a company's publicly traded shares by another company, using borrowed money for all or most of the price paid.  The purchase may be made in a management buyout, a going private transaction, acquisition by a private equity firm or a hostile takeover by a competitor or other company.

Limited liability company (LLC)  This form of legal entity has been adopted for use in most of the United States.  It is intended to provide the same legal protection to investors, and the freedom to management, as the corporation form, while allowing the income tax advantages of the partnership form.  Ownership interests can be sold in public offerings.

Liquidity  How quickly an asset can be converted into freely available cash.  For a business, it is the proportion of its assets consisting of money in the bank, accounts receivable, salable inventory, and the like.  For an investor, it means how long it would take to sell and collect cash without a resulting drop in market value.

List broker  Lists of prospects are used for direct mail, email and telemarketing.  They may come from magazine subscription or credit card records.  Some are compiled from census data, others from credit reporting agencies or government registration files.  A good list broker will help develop a profile of the company’s prospects, then suggest lists that will merge and purge to most closely match that profile.

List maintenance  Issuers will develop their own lists of prospects for direct public offerings from customer information files, purchased lists, and other sources of information about their communities.  Once these lists have been through a merge and purge program, they need to be kept current and secure through list maintenance procedures.  Like database enhancement, list maintenance is part of a company’s database management.

Listed shares  Shares admitted for trading on a stock exchange.  One securities firm will be appointed by the exchange to be the specialist in a company’s shares and will process all bid and asked offers.  (As the exchanges gradually automate, most orders will be matched electronically.)

Liquidity event  An occurrence in the life of a business which will allow some or all of the investors to receive cash.  A sale of the entire business, for cash or publicly traded shares, is often the preferred liquidity event for investors motivated by financialization.  An initial public offering is a liquidity event that can provide cash to the business for growth, while also allowing investors to sell securities, either as a secondary offering or into the trading market that follows an IPO.  

Lock up  The managing underwriter in an underwritten initial public offering will insist that major owners of shares of the issuer cannot sell their shares until at least six months (or other agreed period) after the IPO, unless the managing underwriter agrees to an earlier release.  This absence of available shares affects the supply/demand ratio during the lock up period, keeping the price higher than it might otherwise be.  The SEC has its own Rule 144 about how much insiders can sell.  State securities regulators may impose a lock up as a condition of registration.

Management  The individuals who run a business.  In a corporation, it will be its board of directors and the officers they select.  In a partnership it will be one or more managing partners, while other titles will be used in limited liability companies and trusts.  Management are stewards for the business and its shareowners.  It is also the responsibility of management to meet the legal requirements of the business and deal with its employees and other stakeholders.

Management buyout  Purchase of a controlling amount of a company's publicly traded shares by the company's management, often with participation by private equity firms or other investors.  The purchase is often a leveraged buyout, secured by the company's own assets.  The lender funds the purchase price when the transaction closes and the new owners take control.  Participating members of management generally receive ownership shares, stock options, employment contracts and other inducements to go from serving the public shareowners to serving just themselves and their buyout group.

Management’s Discussion and analysis (MD&A)  In a public offering the securities laws generally require this section in the prospectusAnnual reports will also have an MD&A.  It requires management to comment on changes in financial condition and results of operation for comparative recent periods, as well as such issues as liquidity, and the effect of laws for environmental protection and other external factors.

Managing underwriter  The securities firm that originates the proposed public offering and is responsible for both client relations and putting together the underwriting syndicate.  As compensation, the managing underwriter receives 20 percent of the underwriting spread, as well as what it earns by participating in the underwriting syndicate and having its brokers sell securities.  There are often multiple managing underwriters, in which case one will be the lead underwriter and “run the books” for the syndicate.

Market capitalization  The number of shares an issuer has outstanding, multiplied by its market value per share.

Market maker  A securities firm which quotes bid and asked prices for particular shares in the over-the-counter market.  A market maker must generally be willing to buy at least 100 shares at its quoted bid price and sell at least 100 shares at its quoted asked price.

Market out  also known as “catastrophe out.”  Conditions in an underwriting agreement giving the underwriters the right not to go through with an underwritten public offering.  They are generally limited to such events as a suspension of the securities trading markets, a general banking moratorium, or a “material change in general economic, political, or financial condition.”  As a practical matter, the underwriting agreement is not signed until hours before the effective date and orders for more than all the shares have been taken.  As a result, the market out conditions only apply to events during the few days from the effective date to the closing.

Market research  This is the work done to determine whether a direct public offering is feasible, to select the best markets, and to suggest the most effective message and media.  It is akin to “alpha testing” a new product before the test marketing or “beta testing” stage.  Tools of market research include studying the case histories of other companies, demographics, interviews, questionnaires, and focus groups.

Market segmentation  This is an effort to make marketing more cost-effective.  In mass marketing, a message is delivered through a medium that includes far more people than those who are likely prospects for the product or service being offered.  Most print and electronic media are priced on the basis of the number of people they reach without regard to their demographic or other characteristics.  Screening for available factors that resemble the communities for a business (including microtargeting) will often suggest media which are directed to the logical prospects.

Market timing  Shares of each corporation have their individual price trends depending upon investors’ estimates of the corporation’s future profitability and growth.  Their prices are also likely to fluctuate with the overall market for corporate shares, or the market for their industry.  Market timing is the effort to buy when the market is at a low point of a cycle and sell when it is at its high point.  Money managers who practice market timing have generally had a worse record than those who use a random selection method.

Market value  The price at which a seller and a buyer will meet to complete a transaction, when neither of them is under any compulsion to buy or sell.  Where securities are actively traded in a secondary market, this will be the price of the most recent trade.  For securities that don't trade frequently, market value may be the average of the current bid price and asked price.  Where there is no trading market, market value will be the result of negotiations between a buyer and seller.  With structured finance, "way less than half" of all securities trade with readily available market value information, according to Goldman Sachs analyst Daniel Harris, quoted in the October 12, 2007 Wall Street Journal article, "U.S. Investors Face Age of Murky Pricing."

Media  The means by which a message is delivered.  Email to communities the business has developed and an offering website have become the most effective direct public offering media.  Others include direct mail, radio, newspapers, magazines, and "open house" gatherings.  Records kept in DPOs show that the most effective media is word-of-mouth.

Merge and purge  A database management tool.  Computer programs will combine two or more lists of prospects, reorder them and eliminate duplications. 

Merit state  A state with blue sky laws requiring that an offering of securities must meet a quality standard, such as fair, just and equitable.

Mezzanine financing  A loan, often coupled with the right to buy shares.  The name comes because it is in between the first level of bank borrowing and a second round of debt or equity.

Microcap companies  Publicly traded companies with the lowest amount of market capitalization (price per share times number of shares issued).  An SEC advisory committee defines microcap as the companies making up 1% of the total market capitalization of all public companies.  In 2005, that would have been companies with a market capitalization of up to $128 million.  Microcap companies made up over half of all the companies on established trading markets.

Microlending (Microcredit or Microfinance)  Loans of very small amounts (generally well under $1,000), made to help people start businesses.  The initial model is the Grameen Bank in Bangladesh, where borrowers had to be part of a group which provided support and shared responsibilities and where owners of the bank included its borrowers.  The Grameen Bank and its founder, Muhammad Yunus, received the 2006 Nobel Peace Prize.  The very low loan loss rate has encouraged many more programs.  Most of these have moved away from the participation by borrowers toward the administration by the charitable or for-profit intermediary.  As the estimated number of microloan borrowers has reached 100 million, there are numerous associations, academic studies and other resources about microcredit.  Useful websites include www.cgap.org and www.microfinancegateway.org/section/journals.  A recent entry by an EBay company, MicroPlace (www.microplace.com) looks like the website is one of our Direct Public Offerings or a peer-to-peer lending site, allowing individuals to read a prospectus and invest small amounts.  However, the investment flows through three intermediaries--a securities broker-dealer, a securities issuer and a microlender. 

Microtargeting  This direct marketing process gathers data about individuals from multiple sources, primarily through the Internet.  Marketers then use mathematic formulas to weight the categories of data and to create categories of people who are likely to act similarly on the proposition they are selling.  Microtargeting has been used extensively in political election campaigns to predict how people with similar profiles will vote.  Firms that specialize in microtargeting include TargetPoint Consulting, Alexandria, Virginia and Copernicus Analytics, Washington, D.C.  A related process is behavioral targeting

Minimum/maximum offering  In a best efforts underwriting or a direct public offering, there may be a minimum and a maximum number of shares offered for sale.  If orders are received for less than the minimum during the offering period, then the offering is cancelled and any money received is returned (funds are usually required to be deposited in escrow).  If offers are received for more than the maximum, then shares may be prorated among investors, or treated as "first-come, first-served."

Mission  The primary purpose for a business, often expressed in a "mission statement." 

Money manager  An investment manager who has discretionary authority to make decisions about when and how much to buy, sell, and even borrow, generally without any consultation with its client.  Some manage money for their employers, including mutual funds, hedge funds, private equity funds, pension funds, insurance companies and charitable endowments.  Others are independent contractors to institutions and individuals.  Most money managers will say that their fiduciary duty to clients means that their only consideration can be to maximize preservation of capital and return on investment.

Mutual Funds  These financial intermediaries sell shares and invest the proceeds in a portfolio of individual company stocks, bonds and other investments.  They are regulated by the SEC under the Investment Company Act of 1940 and also register in the states.  Most of the nearly 9,000 funds are open-ended, that is, they will redeem shares on request, at the "net asset value."  The other funds are closed-end and trade on the exchanges.  Recently, more of these exchange traded funds have been formed and sold.  Mutual funds can provide diversification among investments, the ability to invest small amounts periodically through self-directed or employer pension plans.  Regulations prevent management compensation based on results.  Mutual funds are criticized as providing investors lower returns than market averages, paying high fees to their management companies, in-and-out trading practices, generating taxable income and paying large transaction fees to broker-dealers who furnish soft dollar benefits to their management companies.

Naked Access  Securities broker-dealers may allow customers to trade on exchanges, in so-called sponsored trading.  Some broker-dealers require trades to go through their own computer system before going to an exchange.  The broker-dealer is then able to screen for trades that might violate rules of the firm, exchange or regulators.  Naked access is when the broker-dealer does not screen and the customer can use the broker-dealer's access codes to place orders directly on exchange computers.  Naked access trades can be completed as quickly as 250 millionths of a second, compared to 750 microseconds for sponsored trading.   

Naked short selling  This is one of the greed traps that haunt underwritten public offerings.  It endangers offerings by businesses that already have some limited trading in their shares.  Selling a stock short means selling shares that the seller does not yet own.  Properly done, a seller “borrows” an equal number of shares from an owner, paying a fee for the privilege.  These borrowed shares are then transferred to the buyer.  The seller can buy shares later in the market to deliver back to the lender, making a profit or loss on the intervening price changes.  “Naked short selling” is selling without owning or borrowing shares.  For very short times, the seller can buy shares for delivery, within the three days that are required.  But enforcement of the delivery requirement has been very lax over the years.  The SEC’s Regulation SHO requires a broker-dealer to borrow, or enter into a contract to borrow the shares before executing a short sale of the shares.  However, the regulation says that the broker-dealer need only have “reasonable grounds” to believe that the shares can be borrowed.  When short sellers picked several Wall Street firms to sell short, the SEC eliminated the “reasonable grounds” alternative for short selling shares of the 19 major investment bankers.   A client of ours had made several acquisitions, resulting in a few hundred shareowners and an over-the-counter trading market.  It had a “letter of intent” for a public offering, at an expected price. Some unscrupulous brokers starting selling shares, without delivering them within the required time.  This went on for several weeks, with the price pushed down by constant selling.  Efforts to get the NASD or SEC to stop it got nowhere. The purpose of the game was to force the company to do an underwriting at the artificially depressed price.  The naked short sellers would buy in the offering and finally deliver the shares they had sold.  Instead, management called off the proposed offering.

NAqcess  The small order handling system proposed by the NASDAQ in 1995 and never adopted.  It was to replace its Small Order Execution System ("SOES") for relatively small transactions in over-the-counter shares.  The Securities Industry Association ("SIA") told the SEC that the SOES "lends itself to abuses by professionals posing as individual investors" but they nevertheless "strongly urge the SEC to defer consideration of the NAqcess proposal until it has had an opportunity to analyze the potential impact of these sweeping regulatory changes."  After expressing concern about specific protections for its broker-dealer members, the SIA said that "possible ramifications of the proposal in these areas and others too numerous to list have not been studied adequately.  Prudence, therefore, dictates a cautious, measured approach."  The SEC approved a modified rule in 1997.  

Narrowcasting  In contrast to broadcasting, this is use of media that primarily reaches only certain target markets.  It most often refers to the use of cable TV.  Through market segmentation, a proposition can be communicated through a cable channel that market research shows is watched by a significant number of the likely prospects for a direct public offering.

NASAA  North American Securities Administrators Association, the association of state securities regulators in the United States, Canadian Provinces and some other North American jurisdictions.  NASAA prepares Policy Statements, Uniform Forms and other tools for some uniformity of administration among all the independent agencies.

NASD (National Association of Securities Dealers)  All securities firms included in underwriting syndicates, as well as those selling securities as broker-dealers, belong to the NASD.  All of its regulatory functions were transferred by the SEC in July 2007 to the Financial Industry Regulatory Authority (FINRA), which is a self-regulatory organization.  The SEC recognizes regulation by the NASD as a substitute for what the government would otherwise have to police.  Tests for registered representatives, broker-dealer principals, and other securities professionals are administered by FINRA. 

Nasdaq  This over-the-counter market for shares was started by the NASD in 1971 as the National Association of Securities Dealers’ Automated Quotation System.  It was first an electronic system for displaying bid and asked prices and trading history for its member securities firms.  They would then actually make trades by telephone.  It has become more automated and the SEC has registered Nasdaq as a national securities exchange.  In 2006, Nasdaq reclassified its listings into three market tier designations:  Global Select Market (new), Global Market (formerly National Market System) and Capital Market (formerly SmallCap Market.)

Nasdaq Capital Market  Before 2006, this was called the Nasdaq Small Cap Market.  Nasdaq said the name change was made "to reflect the core purpose of this market which is capital raising."  Nasdaq then petitioned the SEC to have securities listed on the Nasdaq Capital Market be covered securities, exempt from regulatory review by state securities regulators.  After requiring changes in listing standards to be made, the SEC deemed securities listed on the Nasdaq Capital Market to be covered securities, by Rule 146(b)(1)(v).  NASAA filed a letter that it would not oppose the Nasdaq petition.

Net operating loss carryover  When a corporation has operated at a loss in past tax years, it can carry over the loss and deduct it from its income in future years, to save on taxes.  There are many restrictions on use of the carryover, including how they might be used after a reverse merger into another corporation. 

Net worth  The shareowners’ equity in a corporation.  Through double entry bookkeeping, it equals assets less liabilities.  It results primarily from money invested by shareowners and the earnings (or losses) not paid out in dividends.

New issue  Any security being sold by the business issuing it.  A primary market transaction rather than a sale by an investor-owner into the secondary market.

Niche marketing  Directing a marketing program at a particular group of prospects who fit defined characteristics and are seen as neglected by competitors.  A niche is selected and described through market segmentation.  It is a step beyond selecting target markets, because the search is for prospects that are in an overlooked niche.

No-action letter  This is a letter from the staff of the SEC saying that it will not recommend enforcement action.  A no-action letter is issued in response to a request by lawyers for the company, prepared because they are uncertain whether some proposed steps are in violation of the securities laws.  The no-action letter is limited to the facts presented in the letter request.  However, the SEC releases most no-action letters for publication and lawyers often use them to support their own opinion to clients.  As a matter of published policy, the SEC will not issue no-action letters on certain types of questions.

North American Securities Administrators Association (NASAA)  State agencies administering blue sky laws belong to NASAA, where efforts are made to coordinate enforcement against fraud and to achieve some uniformity in the rules governing the sale of securities.

Offering circular  The information or disclosure document by which an offer of securities is made to prospects It is the same type of document as a prospectus--the different name results from the term used in the applicable securities laws.  For instance, a security registered under the federal Securities Act of 1933 would be offered by a prospectus, while one filed under the Regulation A exemption from that Act would use an offering circular.

Offering expenses  Costs incurred by the issuer for the purpose of the public offering.  For an underwritten public offering, more than half the total offering expenses will be the underwriting spread, which may be subject to a maximum under FINRA rules.  Other offering expenses include legal and accounting fees. The SEC requires disclosure of the underwriting spread and total offering expenses in the prospectus, with an itemization in the nonprospectus portion of the registration statement.  Internal costs, such as an allocation of compensation and overhead for employees’ time, are generally not shown in the filings under the securities laws.   Some blue sky laws in merit states set maximums on offering expenses, such as 15 percent of the total proceeds of the offering.  Offering expenses are generally accounted for as deductions from the proceeds of the offering, rather than as deductions from revenues as current operating expenses.

Offering price  The price at which securities are offered for sale in a public offering.  Because it is offered to the public, it is not practical to negotiate the price with prospects.  In an underwritten public offering, the offering price is fixed by the underwriting agreement between the company and the managing underwriter, typically after indications of interest have been taken for all the shares (at an estimated price or range.) In a direct public offering, the price will have been set by the company’s board of directors before the offering begins.

Officers  A corporation's managers, appointed by its board of directors to act on its behalf.  The authority and duties of each officer are generally described in the corporation's bylaws.  State laws for incorporation usually require at least a president and a secretary.  Most bylaws will also provide for chairman of the board, treasurer, vice presidents and assistant vice presidents.  Some titles, like Chief Executive Officer, Chief Financial Officer and Chief Operating Officer are considered more descriptive and may be used in addition to the formal titles from the bylaws.

Officers and directors’ questionnaire  As part of the issuers', underwriters’ and lawyers’ due diligence, a lengthy list of questions is required to be answered in writing by the issuer’s officers and directors.

Options  Contracts granting one party the right to buy or sell securities from or to the other party, at an agreed price and within an agreed time.  In an underwritten public offering, the issuer may issue overallotment options and may also issue underwriters’ warrants  as part of the compensation to the underwriting syndicate.  Corporations issue stock options to employees (often under tax rules for Incentive Stock Options). 

Order matching service  A system (1) to keep records of people who wish to sell and people who wish to buy, with the number of shares and desired price, (2) to match a buyer and seller, (3) to collect the share certificate from the seller and the payment from the buyer, (4) to send the certificate in to the transfer agent for reissue in the name of the buyer and (5) to send payment of the net proceeds to the seller. When the service is handled by a securities firm, both the seller and the buyer are required to open accounts with the securities firm and the firm deducts its commission from the payment.  An issuer may operate an information service for persons wishing to buy or sell its shares, where they can post number of shares, desired price and how to communicate with them. The buyer and the seller reach an agreement between them. The company's stock transfer agent then handles the exchange of certificates and money, deducting a fee for its service. The company cannot be involved in the process at all, except for making the information available on its website and by fax or telephone.

OTCBB  The Over-the-Counter Bulletin Board is an electronic information system started by NASDAQ, currently owned by the NASD and available only to about 230 securities firms who are market makers in over-the-counter shares.  Issuers of all securities quoted on the OTCBB are subject to periodic filing requirements with the SEC or other regulatory authority.  An issuer must be sponsored for quotation by a member securities firm.  About 3,300 issuers have their securities quoted on the OTCBB, including bid prices, asked prices, recent transactions and indications of interest.

Overallotment  In an underwriting syndicate, the managing underwriter allots shares to be sold among the participating securities firms.  The total number will initially be considerably more than shown in the prospectus, as the underwriters create a short position (selling more shares than they have agreed to purchase from the company).  The reason for selling short is to cover indications of interest which become reneges after the confirmations are sent out to investors, as well as shares repurchased by the underwriters from flippers under a stabilization bid.  If the amount of overallotment were to exceed the amount of reneges and stabilization bid repurchases, the underwriting syndicate would be forced to buy shares in the aftermarket in order to deliver shares sold in the underwriting.  This could cause a short loss.  That risk gave rise to the Green Shoe option which allows the underwriters to buy more shares at the offering price “to cover overallotments.”

Over-the-counter market  The conventional aftermarket for buying and selling securities which are not listed for trading on a stock exchange.  Nearly all bonds are traded in the over-the-counter market.  There are an estimated 47,000 different issues of shares traded over-the-counter in the United States, according to the NASD.  Of these, approximately 3,300 meet standards for quotation on NASDAQ and another 3,300 are quoted on the OTCBBNearly 5,000 are in the Pink Sheets.  Trades by securities firms in the remaining issues are to be reported to the NASD but bid and ask quotes are not available.  This is sometimes called the “grey market.”  Unless there are several securities firms very actively trading a company's shares, a substantial risk of price and information manipulation is available in the over-the-counter market.  This can bring great price volatility in the trading market.  If no securities firm is actively issuing reports on an issue, there won’t be buyers available when shares are quoted for sale, causing a price reduction as a step to generate buyer interest.  Either of these consequences can make shareowners unhappy and future public offerings difficult.

Over-voting  Each share gets one vote in most corporations, in the election of directors and other decisions submitted to shareowners.  "Over-voting" is when more votes are cast than the number of shares issued.  The major cause is the practice of lending shares to persons who are selling short.  Most shares are held in street name through brokerage firms, which earn fees by lending shares held for their customers.  ($8 billion a year, as reported in the January 26, 2007 Wall Street Journal, which also described "empty voting," where shares are borrowed to control votes at shareowner meetings.)  Published articles on over-voting have reported voting rights being distributed for three times the actual number of shares.  

Par value  When shares are issued, they may be assigned a par value.  This number no longer has any practical meaning, except that it must be less than the offering price.  Many corporations now issue “no par” shares, assigning them instead a “stated value” for accounting purposes.

Partial public offering  Selling shares in part of a business by having a subsidiary corporation go public.  This is currently being done with subsidiaries operating in foreign countries, so that the shares can be marketed to residents there and traded on local stock exchanges.  It could be especially appropriate for a direct public offering, where part of a business can be matched to target markets in another country.

Patient money  Investment capital from people who expect to wait years before they receive a return by way of dividends or a sale of their investment.  This is very much in contrast to the financialization of  investment.  Direct offerings generally bring patient money to the business, while venture capital and underwritten public offerings carry expectations of a quick turnover.

Peer-to-peer lending  (P2P lending)  A term used to describe individuals lending money directly to other individuals, often entrepreneurs.  This is a form of disintermediation of banks, where individuals make deposits and others apply for loans.  It is a  form of direct microlending.  Two online businesses, (www.zopa.com and www.prosper.com) match lenders and borrowers and supply billing, collection and administrative services.  Information is available at www.p2plendingnews.com.  An administrative services provider is at www.circlelending.com, whose founder, Asheesh Advani, wrote the book, Investors in Your Backyard.  The online matching programs divide investments among multiple loans and an entrepreneur receives funds from multiple lenders.  The new practices do not seem to have yet been challenged for compliance with federal and state laws requiring registration of securities and licensing of brokers.  One nonprofit matchmaker, Kiva (www.kiva.org), has had great success at attracting noninterest-bearing loans from individuals to entrepreneurs in developing countries.  It is microlending through direct public offerings on the Internet.  

Penny stocks  Low-price shares, trading at anywhere from a fraction of $.01 up to $5.  A very small price movement can represent a large percentage change, fueling the “get-rich-quick” fantasy.  Penny stocks are the specialty of some securities firms, many of which have defrauded investors by manipulating the market and misrepresenting the facts.

Pink Sheets  Publisher of listings by broker-dealers of bid and asked prices for corporate shares for interdealer trading in the over-the-counter market.  The name comes from the non-glare color of their original form, published by the National Quotation Bureau Inc. from 1913 until new ownership changed the name to Pink Sheets LLC in 1987 and Pink OTC Markets Inc. in 2008.  (Quotations for unlisted corporate debt are in the Yellow Sheets.)  The website is viewable by the public but trading is only available to securities broker-dealers who have subscribed to the service.  Description and history is at www.pinksheets.com, including a news release about the 2006 introduction of a tiered system for companies meeting standards of public disclosure.  It is the exclusive source for trading quotes in nearly 5,000 issuers.  Beginning in 2007, issuers who qualify, and who pay a $5,000 listing fee and $950 a month, may be quoted on www.otcqx.com.  The remaining issuers are quoted on the Pink Sheets, in one of six tiers, based on the "level, quality and timeliness of a company's disclosure."  The symbol for companies in the bottom three levels will be accompanied by either a "yield," "skull and crossbones" or "stop" icon.  The Pink Sheets plans to copy the AIM program of the London Stock Exchange, where an issuer would be reviewed by a securities firm acting as a "designated adviser for disclosure," or "DAD."

PIPE  A private investment in a public equity security.  When a company with publicly traded shares makes a private placement of newly issued shares.  The investors sign confidentiality agreements that they will not disclose the information they were provided to make their investment decision.  They may also agree to a lock up of their shares for a few months.  The price will reflect a discount from the current trading market.  The company saves the cost and time required for a public offering.  The PIPE may be combined with a public offering, in a wall crossing.

Plutocracy  A government controlled by a wealthy class, in contrast to a democracy, controlled by all of the people through their elected representatives.     

Poison pill  A shark repellant device to discourage a hostile takeover of a controlling number of the company’s shares.  A poison pill is a right to buy securities of the corporation at a bargain price, with the right being triggered by a hostile takeover.  It is intended to make the takeover too costly to be profitable.

Portfolio pumping  This is a window dressing practice used by some mutual fund management companies to improve the reported performance of the funds they manage and also known as "marking the close."  In the last few minutes before the close of trading on the last day of the fund's reporting period, the managers purchase additional shares in companies which are already major holdings in the fund's portfolio.  The effect of these buys is to raise the price at which the shares close that day.  This artificially high reported closing market price is then used to value all of the shares of those companies in the fund's portfolio.

Positioning  A marketing strategy.  It considers the frame of reference in the prospects’ mind, then conveys an image to fit a particular mental position.  The classic positioning is in contrast to a dominant competitor’s product, such as, “the Uncola,”  “We’re No. 2,” “IBM compatible.”  In a direct public offering, it may be necessary to position corporate shares in reference to other investments (savings, real estate) or other ways to spend discretionary funds (automobiles, gambling).  Then the particular company’s distinguishing facts can be positioned within the prospects’ understanding of the market, product, management, and competition.  Positioning often comes after initial market research and market segmentation, but before planning the marketing program.

Posteffective period or quiet period  The period after the effective date and before the public offering is considered to be over.  During this time, any material changes in the information contained in the prospectus need to be disclosed, usually by stickering the prospectus.

Preferred shares  A separate class of corporate shares having some preferential feature over common shares.  Preferences often include a right to receive a percentage rate of dividends, to be repaid first if the corporation liquidates, or to elect a majority of the board of directors if performance standards are not met.  Preferred shares may be voting or nonvoting and may or may not participate in dividends on common shares.

Prefiling conference  A meeting with staff members of the SEC or state securities regulator, held before the filing of a registration statement for the proposed public offering.  There may be a question as to whether the offering would meet the standards required by the laws, or whether some variation from usual practice may be used.  Resolving these issues in a prefiling conference can prevent later delay or the receipt of a bedbug letter in response to a filing. 

Prefiling period  The time between a decision to make a public offering and the initial filing for registration under the securities laws.  Care must be taken not to do something inadvertently that could be considered gun-jumping during the prefiling period.

Preliminary prospectus  This is the prospectus included in the registration statement filed with the SEC but before the effective date.  It may be used in marketing the securities, within SEC rules.

Price/book ratio  The market value of a business divided by its book value, either in total or on a per share basis.  This ratio is usually not very useful information, except for banks or for a business which invests in marketable securities, which are frequently “marked to market” on its accounting records.

Price/cash flow ratio  The market value of a business divided by the annual cash flow generated by the business.  This is used by sophisticated analysts and investors, with varying interpretations and methodologies.  “Cash flow” is the excess of cash received by a business during an accounting period over the amount of cash paid out.  It will differ from net earnings because nearly every company with publicly traded shares uses the accrual method of accounting, rather than the cash method.  Some who use this ratio apply it to “free cash flow,” meaning cash not required for debt retirement or asset replacement.  Since there is no generally accepted definition or usage, comparisons can be misleading.

Price/earnings ratio  The market value of a business divided by its annual earnings, either on an historical or projected basis.  This information is readily available in published tables of publicly traded shares and has become the most common means of comparing one corporation’s share price with another’s, as well as comparing stages in the stock market for market timing.

Price/revenue ratio  The market price of a business divided by its annual revenues, either on an historical or projected basis.  Sometimes, earnings may be thought of as unreliable for comparison, because they are so affected by the stage of a corporation’s growth, by management policy and by accounting methods.  Some investors prefer using total revenue for comparison.

Primary dealers  The Federal Reserve Bank of New York maintains a network of 18 banks and broker-dealers with whom it negotiates sales of Treasury securities.  These primary dealers then resell the securities to other financial intermediaries and large investors. 

Primary market  The sale of a new issue of its securities by an issuer, in contrast to the sale of outstanding securities by their owner in the secondary market.

Primary purpose (or principal purpose)  The human need or desire that a business is intended to meet.  States used to require the statement of primary purpose to be in a corporate charter Financialization means the primary purpose of a business is to cause a significant short-term increase in the market value of shares in the business.

Private equity funds  Partnerships or limited liability companies owned by institutions and wealthy individuals which make large Private Investments in Public Equity Securities ("PIPES").  They also may purchase entire public companies from which they pay themselves fees and dividends, funded by new borrowings made by the purchased company.  Then they sell the company, in whole or pieces, or sell their shares in an underwritten "IPO."  In 2005, private equity fund sponsors began offering shares of new funds to the public, using foreign stock exchanges to avoid SEC oversight.  The effect is to add another layer of financial intermediaries between the individuals providing capital and business managers who are stewards of that capital.  That intermediate level of fund managers makes decisions based on financialization.  Their compensation is based on percentages of the trading profits on purchasing and reselling.  Alan Murray said, in his January 31, 2007 Wall Street Journal column:  "That is the ultimate irony behind the new financial alchemy.  Pension funds are paying hefty fees to private-equity firms -- which generally charge 2% of funds under management, plus 20% of the profit -- to make investments that the pension funds used to make by themselves."

Private Investment in Public Equity Securities (PIPES)  Purchases by hedge funds, private equity funds and other professional investors in the private placement of equity securities of corporations which have publicly traded shares.   Over $27 billion of PIPES were placed in 2006.  The investor expects the issuer will register a secondary offering of the shares, so they can be sold into the trading market for the shares.  The incentive to the investor is that the shares are purchased at a substantial discount to their current market value.  The incentive to the issuer is that the financing can be quickly arranged and funded, without the time and expense of a public offering.  The SEC has generally given lesser review of registrations for secondary offerings than for primary offerings.  However, some of the PIPES have involved many times the number of shares that the issuer had outstanding at the time and the SEC has been less tolerant of secondary offerings that involve more than 33% of the public float, treating them as if they were primary offerings. 

Private placement  In the language of the Securities Act of 1933, a sale of securities exempt from SEC registration as “not involving a public offering.”  Most private placements rely on the SEC's Regulation D, Rule 506, a safe harbor from SEC registration.  Congress also exempted that path from state securities laws.  Any amount can be sold under Rule 506, so long as their are no more than 35 investors who are not accredited investors.  An investment banker or other agent may be involved for a fee.   

Privatization  When a government-owned business is transferred to nongovernment owners or operators.  This can happen by contracting out a service formerly provided by government employees, or by a negotiated sale of an operation.  Privatizations through initial public offerings are occurring in nearly every part of the world, except North America.  England, France and other countries have used consumer marketing campaigns to motivate the broadest individual purchase of shares.

Proceeds  The amount received by the issuer from a public offering of securities (after the underwriting spread in an underwritten public offering).  Net proceeds is the amount after payment of all other offering expenses.  Securities laws require that the prospectus have a “Use of Proceeds” section explaining what the issuer is going to do with the money received from investors.

Projections  Estimates of the future operations and conditions for a business.  Projections have been permitted and encouraged for many years, but almost never used in prospectuses for underwritten public offerings of shares.  This has been because the regulatory review of the assumptions  and qualifications so complicated the process and presentation that results were not worth it.  Projections are generally used in private placements of shares.

Promoter  The founder or organizer of a corporate business.  Securities law administrators often require the identity and background of promoters to be described in the prospectus.

Promotional shares  Shares issued in return for services or ideas, usually when a business is first incorporated.  Securities regulators look for full disclosure about promotional shares in the prospectus.  Shares issued to founders or promoters at a nominal price, within three years before filing the registration statement, will often be considered cheap stock, and it may be necessary for those shares to be kept in escrow or under a lock up  for a period after the public offering.

Proposition  In direct marketing parlance, this is the first stage--the offer to prospects of something they can request through a response.  In a direct offering, the proposition will be to send a prospectus.

Prospects  Potential investors in the issuer’s securities.  In an underwritten public offering, they will be customers of registered representatives and those on lists used for cold calling.  In a direct public offering, prospects may be people known to the issuer’s employees and directors, names obtained through market research and list brokers.  They may also be self-selected through their response to a proposition made in the media.

Prospectus  The disclosure document by which a public offering of securities is made (sometimes known as an offering circular).  The prospectus will be the major part of any filing with the SEC and with any state securities regulators under the blue sky laws.  Its contents are prescribed by rules, forms, and instructions.  In underwritten public offerings, a prospect does not see the prospectus until after placing an order to buy shares.  It has often been said that only three kinds of people ever read the prospectus:  the lawyers and accountants who prepare it, the SEC and state securities regulators who review it, and the securities litigation attorneys hired to recover money lost from buying the securities.  As a result of this view of the prospectus as a “liability document,” it is generally very long and very difficult to read, despite SEC "Plain English" requirements.  In a direct public offering, the prospectus is the fulfillment of the prospect’s response to the company’s proposition.  It is the principal selling tool, intended to be read before a decision is made to buy.  To be effective, it must be readable and interesting. 

Public Company Accounting Oversight Board (PCAOB)  A non-profit corporation created by Sarbanes-Oxley to oversee the auditors of public corporations.  Its website is www.pcaobus.org.

Public corporation  A corporation with publicly traded shares, usually referring to a reporting company.

Public offering  When securities are offered for sale to the public rather than in a negotiated private placement or in an offering to a limited number of prospects.  The basic rule of the Securities Act of 1933 is that no public offering may be made (unless an exemption applies) until delivery of a prospectus--and then only after the effective date of the registration statement, which includes the prospectus.  There is a gray area into which companies may inadvertently stumble, where private becomes public in violation of the securities laws.  This may be uncovered during the corporate cleanup, due diligence, or regulatory review, and can require a recission offer.

Public relations  Communications to the public in media that are not directly paid for, as opposed to advertising.  It includes being mentioned in articles written by journalists, on radio, TV news or feature programs, and other more subtle ways of having “independent” third parties convey facts or images which originated with the business.  It can be done in ways that are entirely legal and ethical.  While the cost may be much lower than purchasing media usage, the business probably has little control over the content of the message and the market to which it is distributed.  The use of public relations in a public offering is made particularly sensitive by the risk of gun-jumping, that is, influencing prospects before they have received a copy of the prospectus.

Public shell corporation  A corporation with publicly traded shares but with no operating business.  Some public shells are corporations which are no longer operating a business.  They may have net operating loss carryovers which could benefit a corporation acquiring them through a reverse merger.   Some promoters form public shell corporations, cause them to have a trading market and then get paid for having an operating business use them for going public through the back door.  The larger scale of this practice involves going public with a specified purpose acquisition company.

Publicly traded shares  Shares that are available in the secondary market through a securities firm.  Trading may occur through listing on a stock exchange or price quotation in the over-the-counter market.  When few trades occur, shares are considered to be “thinly traded.”  Where it is necessary for a broker to make calls in order to find a match for a prospective buyer or seller, there is a “work out market,” or a “market by appointment.”  There are numerical standards for publicly traded shares set by the stock exchanges, NASDAQ, and the Securities Exchange Act of 1934.  They include having a minimum number of shareowners and a required float.

Pump and Dump  A stock market manipulation tactic of buying a corporation’s shares and then spreading information (true or false) about the corporation.  When the share price is driven up, the perpetrators sell the shares.  Distort and short is the short selling variation on this scheme.

Qualify  This has two different meanings in public offerings.  To qualify shares under a state’s blue sky laws means to meet the requirements for a public offering to that state’s residents.  To qualify the prospects for a share offering means to determine that they have the interest and the suitability to invest in the shares.

Quiet period  A period of up to 90 days after the effective date of an IPO during which a prospectus may have to be delivered to buyers in the secondary market.  Special care is necessary for any other written communications, especially if they are not preceded or accompanied by a prospectus.  The term "quiet period" has been used to include the period before the effective date, when communications can be considered gun-jumping.  However, that's also the period in which the underwriting syndicate is conducting road shows for the institutional investors who purchase nearly all of the shares in an underwritten public offering.  This contrast is described in an August 2, 2004 Business Week article by Marcia Vickers titled "There's No 'Quiet Period' for Bigwigs:  Before an IPO, institutions get road shows--while small investors get shut out."

Rated securities/Rating Agencies  Debt securities issued by governments and large corporations are often rated as to their quality by such rating agencies as Standard and Poor's, Moody's and Fitch.  The rating agencies apply tests to rate the likelihood that the issuer will make timely payments of interest and pay the principal at maturity.  Each agency has a set of symbols for its ratings, such as "AAA," "AA," "A," "BBB," etc. Some institutional investors will only buy rated debt securities and some of them will only buy "investment grade," which may mean BBB and above.  Unrated securities are referred to as "junk bonds" or "high-yield bonds."  Rating agencies are paid by the issuer of the securities.

Recirculation  Providing another prospectus to persons who received an earlier version.  This may be required for people who were provided a red herring.  It may become necessary as a result of stickering the prospectus or having to print an amended prospectus.

Recission offer  An offer to existing shareowners to exchange their shares for return of the price they paid.  A recission offer is usually made only because the shares are considered to have been originally sold in violation of the securities laws.  Most often this is discovered by the securities lawyers during the corporate cleanup or due diligence.  A typical case is a series of share sales to small groups of investors without following the filing and prospectus deliver requirements for a public offering.

Red herring  A preliminary prospectus that has been filed with the SEC but is used before its effective date.  The name comes from the legend required to be printed on the cover (until recently, in red ink) to the effect that it is not a final prospectus.  Shares cannot be offered by the red herring and anyone receiving the red herring must later be given a final prospectus.

Regional exchange  One of the five stock exchanges in the United States, other than the New York and the American.  They include the Boston, Cincinnati, Chicago, Pacific (now NYSE Arca) and Philadelphia.

Register  The process required by the SEC and many state securities regulators before an issuer may offer and sell securities.  An issuer is not required to register exempt securities or exempt transactions.

Registered representative  An individual licensed to act as agent for a broker-dealer in buying and selling securities for the account of others.  Also known by such terms as “brokers,” “stockbrokers,” “account executives,” “investment representatives,” “financial planners,” “financial consultants,” and "wealth management consultants."  At most securities firms, the registered representatives keep from 35 percent to 75 percent of the commissions generated on their transactions.  Discount brokers may pay their registered representatives a salary to process orders from customers without giving advice or participating in the investment decision.

Registered shares  Corporate shares covered by a registration statement filed with the SEC.  When shares are registered for a public offering under the Securities Act of 1933, it is only for the purposes of that offering.  When a corporation’s shares meet the standards for being considered as publicly traded, they must be registered under the Securities Exchange Act of 1934.

Registrar  The keeper of the records showing the ownership of securitiesIt is now a combined function with the transfer agent, which records transfer of securities from one owner to another.  An issuer may act as its own registrar and transfer agent or may contract the service to a bank corporate trust department, or a data services company.

Registration statement  A filing required by the SEC  for a public offering under the Securities Act of 1933 or for publicly traded shares under the Securities Exchange Act of 1934.  A registration statement is also required by a state securities regulator for public offerings from or to residents of its state.

Regulation A  An exemption made by the SEC from filing a registration statement under the Securities Act of 1933.  It applies to offerings below a certain dollar amount, which has changed over the years and is currently $5 million within a 12-month period.  It still requires much of the same filing material and process as a registration statement.  Unlike filing a registration statement, a Regulation A filing does not make the issuer a reporting company.

Regulatory review  Review of the registration statement by the staff of the SEC and state securities regulators.  This process can be processed as a "cursory review," where a filing is cleared if it seems to comply with the formal requirements, or as a "full review," where every word and number seems to be scrutinized and comments made on all sorts of real and esoteric issues.  The comment and response period can last from a few days to over a year, into a "regulatory runaround" that may seem personal or politically motivated.  However:  "Never attribute to malice what can be explained by ineptitude."  (Stephen Frey, in his novel Silent Partner)   Any ineptitude is not necessarily that of the regulator.

Reneges  Cancellations by investors who have placed orders in an underwritten public offering.  They will have expressed their indication of interest to a registered representative for a member of the underwriting syndicate or selling group before the effective date.  They will then receive a confirmation with the prospectus.  The investor must promptly pay for the shares.  Those who do not are reneges and the shares allotted to them come back to the underwriting syndicate.

Replicators  These hedge fund clones are mutual funds or exchange traded funds, intended to track indices of hedge fund returns.  The popularity of hedge funds caused Wall Street to come up with products for sale to middle class investors who didn't meet income and wealth requirements for hedge funds. 

Reporting company  A business required to file reports on the SEC's EDGAR system.  These are required for companies with publicly traded shares, companies with more than 500 shareowners and more than $10 million in assets, and companies that have registered offerings with the SEC.

Repos  Abbreviation for "repurchase agreements," a structure for financial intermediaries to borrow money for short terms.  The borrower transfers a pool of loans or securities it owns to the lender and agrees to repurchase them in a few days at a price that includes a factor for interest.  In September 2008, lenders stopped participating, because they were uncertain whether the assets could be sold  if the borrower failed to repurchase them.  This led to the bankruptcy of Lehman Brothers.

Response  The object of a direct marketing proposition is to get a response, which occurs when the prospects request the prospectus.

Restricted shares  Outstanding shares for which the resale by the shareowner is limited, either because of who owns them (such as an insider), or because of the way they were acquired (such as in a private placement).  The restriction may be imposed by the securities laws or by an agreement.  When shares are used as incentive compensation to employees, they are often subject to a restriction that they can only be sold back to the company until a certain date or event.

Results/cost ratio  Dividing the cost of a direct marketing program into the sales or other dollar measurement of results.  This is often done with test marketing, the use of selected media, or lists of prospects.

Retained earnings  This is the accumulation of past years' net profits of a business, which have not been paid out as dividends to shareowners.

Return on investment (ROI)  The amount earned on an amount invested, often expressed as a percentage.  With financialization, ROI is only in terms of the financial return, without any consideration of the benefit or harm done by the business in which an investment is made, or any primary purpose the business may have, except increase in share value.  With a  community-owned business, shareowners usually have additional objectives, such as supporting the availability of helpful products and services.

Reverse merger When an acquiring corporation is merged into the corporation it acquired, rather than the other way around.  A reverse merger is used because the acquired corporation has some quality that the new owners want, such as a well-known name, a tax loss carryover or business license.  Some operating companies do a reverse merger into a corporation with publicly-traded shares, as a way of going public through the back door, without having to put audited financials and other information into a prospectus and filing a registration statement with the SEC.  (The March 5, 2007 Business Week reported that some 150 Chinese companies have used reverse mergers since 2005, usually followed by private placements of shares with hedge funds.)  A specified purpose acquisition company may be formed for the purpose of going public and then acquiring an operating corporation through a reverse merger.  

Rights offering  An offering of securities made only to persons who are already owners of the business' securities.  The name comes from the day when it was common for a corporation’s charter to give current holders the "preemptive" right to acquire new issues.  That provision is rare today, but many corporations find they can raise all the capital they need by asking their existing shareowners if they would like to buy more.

Risk factors  A section near the front of a prospectus, calling attention to the most significant risks of loss from an investment in the securities being offered.  Usually required in IPOs.

Risk/reward analysis  The basic process that every investor goes through before deciding to buy or sell a security.  Some investors make an intuitive analysis, while others have extremely complex formulas for assigning weights to each factor and projecting multiple scenarios.

Road show  Also known as the dog and pony show.  In the last week or so before the effective date of an underwritten public offering, there is usually a road show.  Top officers of the issuer, investment bankers, their securities analysts and perhaps lawyers and auditors, travel to meetings with money managers and representatives of the underwriting syndicate.  These are usually conducted over the days’ three meals, with smaller sessions for major prospects.  Preparation for road shows is often very elaborate, with speech training, mock session rehearsals, video, and slide presentations.  Shares can legally be offered only by the prospectus; however, that document is not yet available in required final form at the time of the road show.  While the road show cannot lawfully provide any information that is not available to the entire public, it is typically the only marketing effort in which the issuer participates.

Safe harbor rules  The SEC has issued interpretations for some of its governing statues and regulations, giving numerical and other objective standards.  If the facts of a particular situation fall within those standards, then the rules provide a “safe harbor” and the company does not need to get a no-action letter or other assurance that it will not violate the securities laws.  There are, for instance, safe harbor rules for private placements, for the intrastate exemption and for the use of financial forecasts in a prospectus.

Sarbanes-Oxley (Sox or Sarbox)  The names of the co-sponsors of the Public Company Accounting Reform and Investor Protection Act of 2002, the response by the U.S. Congress to Enron and other corporate financial scandals.  It created the Public Company Accounting Oversight Board and assigned new corporate governance legal duties to officers and directors of reporting companies

SCOR (the Small Corporate Offering Registration)  Also known as ULOR, the Uniform Limited Offering Registration.  It is a procedure used by state securities regulators for public offerings of securities in amounts of up to $1 million every 12 months.  An issuer must use the Form U-7 adopted by NASAA

SEC  The United States Securities and Exchange Commission, which administers the federal securities laws.

Secondary market  The trading market for securities that have been previously issued by a corporation.  (The original issuance would have been an offering in the primary market).

Secondary offering  An offering, generally through an underwriting, of securities already issued and owned by a selling shareowner.  This occurs when the number of shares to be sold is considered too large for the trading market to absorb without harmful effects on the market price.  It may also be used for restricted securities that need to be registered before they can be sold into the public market.   A secondary offering is often included with a primary offering made at the same time by the company.  When there is a secondary offering included in the initial public offering, some investors believe it shows a lack of faith and an effort by the selling shareowners to bail out.  The term secondary offering is frequently misused to apply when a company makes its second or other successive public offering.

Securities  There has been considerable litigation over what are securities, especially in the areas of real estate transactions, borrowings, and joint ventures.  The general distinction from other forms of ownership or loans is that securities are interests which depend to some extent upon someone managing money or other assets. Corporate bonds and shares are clearly within the definitions of securities.  Other investments which courts or agencies have decided were securities include orange trees and pay telephones.

Securities Act of 1933  Amended from time to time, this law is the federal structure governing public offerings of securities, the primary market.  It is administered by the SEC.

Securities analysts Individuals whose job it is to analyze the securities of an issuer and rate their merit as an investment.  "Buy side" analysts work  for money managers, while "sell side" analysts work for securities firms.  There is a history of conflict of interest abuses, particularly with sell side analysts whose employers are brokers and underwriters.  Before a securities firm will become an underwriter for an initial public offering, the firm's analyst must be willing to issue ratings in the aftermarket.  This promised analyst coverage is a big factor for issuers in choosing a managing underwriter, especially when the issuer's management expects to sell shares they own into the secondary market, after the lock up, or to sell the shares they receive on exercise of stock options.

Securities Exchange Act of 1934  (There is no “and” in the title, as there is in the “Securities and Exchange Commission.”)  Amended from time to time, this law is the federal structure governing the trading of securities, the secondary market.  It defines and governs stock exchanges, securities firms, and other participants in the securities markets.  It also requires registration of issuers with securities listed on an exchange and issuers which have more than 500 security holders and more than $1 million (increased to $10 million by SEC regulations) in assets.  Registered issuers, as well is issuers which have had an effective registration statement under the Securities Act of 1933, must become reporting companies, filing financial and other reports on the SEC's Edgar system.

Securities firm  A business which acts as a broker, dealer, or investment banker.

Securities fraud  Transactions in securities are subject to the same laws concerning fraud as other types of commerce.  In addition, the securities laws make certain specific actions subject to criminal prosecution, to “cease and desist” enforcement by the SEC or state securities regulators, and to actions for damages by persons claiming loss.  These are referred to as securities fraud.

Securitization  The practice of turning any flow of money into a security that can be sold to investors.  Structured finance builds and sells new legal structures.  Hedge funds and private equity funds sell their securities to investors and use the money as intermediaries to buy other securities.  Part of the financialization of investments, securitization has vastly increased commissions, legal fees and other transaction payments.  The mind-numbing complexity of the structured investment vehicles forces out any do-it-yourself approach to investing.

Seed capital  Also called "start-up capital," this is the money needed to begin an operating business.  Most seed capital comes from the entrepreneur's own savings and from borrowings from friends, relatives, credit cards and second mortgage lenders.  A few new businesses can attract angel investors or venture capital.  We have consistently discouraged attempts to use direct public offerings for seed capital, although most inquiries we receive begin with a variation on "I've got this great idea, if I only had some money."  We direct them to the Screen Test for a Direct Public Offering

Selected dealer agreement  Large public offerings often require a broader telemarketing network than all the registered representatives employed by members of the underwriting syndicate.  Other securities firms will be invited to sell a specific number of shares in return for the selling concession portion of the underwriting spread.  They sign a selected dealer agreement, which becomes effective when the underwriting agreement is signed.  Securities firms providing soft dollar services to money managers may also be compensated by directed sales under a selected dealer agreement.

Selective Disclosure  A process of providing inside information about an investment to a limited audience, before it is publicly available.  A broker-dealer firm may release a securities analyst's report on a company by first trading on its own behalf, then notifying its larger money manager customers, followed by telling its brokers and finally issuing a public news story.  In IPOs, the underwriter arranges private meetings and a road show for favored customers, where information is provided orally that is beyond what can be found in the prospectus for the offering.

Self-regulatory organization (SRO)  A trade group recognized by the SEC as capable of enforcing rules about fairness of the securities markets.  Principal SROs are the stock exchanges and FINRA.  According to the Wall Street Journal, December 31, 2004, "One of the biggest problems in the system is that the self-regulatory organizations tend to target chiefly the little guy, sparing the big, deep-pocketed members that wield clout at the marketplaces."

Selling Away  Anyone acting as an agent for the seller or buyer of a security must be licensed as a broker-dealer or registered representative.  Every registered representative must work exclusively under an employment or independent contractor agreement with a licensed broker-dealer.  It is a very serious offense for a registered representative to act as agent directly for an issuer.  This "selling away" can result in loss of the registered representative's license with the FINRA and other disciplinary action.  To use a broker-assisted component in a direct public offering, it is necessary for the issuer to have an agreement with the broker-dealer for the participating registered representatives.

Selling concession  The portion of the underwriting spread paid to the securities firm employing the registered representative who actually sells shares in an underwritten public offering.  The selling concession is typically 60 percent of the underwriting spread.

Selling group  The securities firms who sell shares in an underwritten public offering, but not as members of the underwriting syndicate.  They sign a selected dealer agreement and receive a selling concession for shares they sell.

Selling materials  Any written, filmed, recorded, or broadcast materials used in selling securities other than the prospectus.  Except for a very limited announcement of the proposed public offering, no selling materials may be communicated to prospects until after the effective date, and then only if they are preceded or accompanied by a final prospectus.  During this free writing period, the fulfillment package will include selling materials along with the prospectus.  Additional selling materials will be used in the follow-up efforts for conversion.

Selling shareowners  In a secondary offering, the persons selling their securities in the issuer.

Selling short  Selling shares which the seller does not own.  The seller generally borrows shares from another owner, for a fee, to meet the delivery requirement on the settlement date.  The purpose of selling short is to eventually replace the borrowed shares by buying later, at a lower price.  If the seller owns the shares, but still chooses not to deliver them, it is called “selling short against the box,” a practice used for income tax purposes.  Naked short selling is someone selling shares they don't own, or haven't borrowed.

Settlement date  Current SEC rules set three days after a security is bought and sold in the secondary market as the settlement date, when the buyer must make payment and the seller must deliver a stock certificate or other evidence of ownership. The settlement date is one day for government securities and options.  For sales by an issuer of new securities in the primary market, the settlement date is set by the underwriting agreement or, in a direct public offering, by the issuer.

Shareowners  Persons owning shares in a corporation Also known as shareholders or stockholders.

Shareowners’ equity  The dollar amount of the shareowners’ interest in the corporation, as shown on its accounting records.  Also known as net worth or book value, it is equal to the amount of the corporations' assets minus the amount of its liabilities.  It is generally composed of the amount paid to the corporation when its shares were sold in the primary market, plus or minus its retained earnings or net accumulated losses.  This financial accounting entry usually has little relationship to the market capitalization of an issuer.

Shares  Fractional ownership interests in a corporation.  Shares are also called stock.  There are common shares and preferred shares.  They generally have the right to vote for the election of directors and on certain policy issues.  Shares receive whatever dividends the board of directors decides should be paid, up to the amount of the corporation's current income and retained earnings.  If the corporation is sold or liquidated, shareowners receive liquidating dividends equal to whatever is left over after payment to all creditors.

Shark repellants  Legal devices used to prevent a takeover of a controlling number of a company’s shares.  They are intended to make the acquisition too costly for the outsider, thereby protecting the insiders.

Shelf offering  A public offering of securities which have been through the effective date of a registration statement and then held “on the shelf” until the company decides to offer them.  This allows management to indulge in market timing, trying to sell securities when the terms are most favorable to the company.  It also encourages bought deals, where underwriters come to the company after they have already arranged for the buy side of a transaction.

Shell corporation  A corporation with no operating business.  This can happen when the business has been sold or discontinued without dissolving the corporate form.  It may also be a corporation formed to reserve a corporate name or just to be ready for a proposed business to begin.  A public shell corporation may result from a blind pool offering or a blank check offering.  Placing an operating business into the shell corporation, by a reverse merger, is a way of going public by the back door.

Short loss  Money lost by the underwriting syndicate as a result of selling more shares in the underwriting than it agreed to buy from the issuer (including shares purchased under the Green Shoe option).  Twenty percent of the underwriting spread is intended to help defray any short loss (see flipper, overallotment, and reneges).

Short swing profits  Once a company has securities registered under the Securities Exchange Act of 1934, officers, directors, and owners of more than 10 percent of the shares must file reports on Edgar.  They must also pay over to the company all “short swing profits” resulting from any matching of sales and purchases of shares within any six-month  period.  This rule has nothing to do with intent and is often triggered accidentally.

SIVs  Structured Investment Vehicles are securities designed to make a profit on the difference between short-term and long-term interest rates.  Many SIVs are also known as asset-backed commercial paper.  The assets backing the 90-day or shorter notes are often pools of mortgages.  The 2007 panic in subprime mortgages hit many of the bank-sponsored SIVs.

Small business  Definitions vary with the purpose for which they are used.  The SEC allows simpler filings for companies with equity securities having a market value of up to $25 million and annual revenues of not more than $25 million.  The US Small Business Administration has size standards by industry, such as up to 500 employees for most manufacturing businesses and $6.5 million in annual receipts for most service businesses.

Small cap stocks  The shares of companies with a market capitalization in the range of $100 million up to $1 billion, depending on the line drawn by a money manager.  An SEC small business advisory committee defined small cap stocks as the next largest 5% of all stocks traded in public markets, after the smallest 1% of microcap stocks.  The market capitalization range by the committee’s standards in 2005 was from $128 to $787 million.  They made up about 26% of all stocks traded in public markets.

Social capital  Most capital is defined in monetary terms.  But, in lending or investing, there are often important resources and characteristics other than assets and projected cash flow.  These include personal relationships between the providers of capital and the stewards of capital, character judgments and community membership.   Social capital is particularly important in microlending, Peer-to-Peer lending and direct public offerings.

Socially responsible business  This term is used for a business that is motivated beyond financialization.  Sometimes it means a business that tries not to harm the environment, is fair and considerate to its employees and has a primary purpose that doesn't hurt people.  Another definition goes beyond this avoidance of negative consequences and would mean a business that also has a primary purpose of improving the world and the lives upon it.  There are socially responsible mutual funds, which limit their investments to shares of businesses that fit the fund manager's particular definition. 

Soft dollar deals  Arrangements where goods or services are provided to investors, usually money managers, in return for an understanding that the provider will be compensated in commissions from securities transactions.  For instance, a securities firm may provide research services to a money manager.  When that money manager buys shares in an underwritten public offering, it may instruct the managing underwriter to treat it as a directed sale so that the selling concession is paid to the provider of soft dollar services.  Before Mayday 1975, when fixed commission rates were deregulated in the trading market, money managers used soft dollar deals to get volume discounts for their trades.  Now, commissions in the secondary market have all been negotiated down by money managers to a fraction of their fixed level, leaving no room for discounts.  The underwriting spreads on bonds have been similarly negotiated down by the large corporate borrowers, especially with the tools of shelf offerings and bought deals.   As a result, about the only vestige of pre-Mayday commission rates is in underwritten public offerings of shares, particularly IPOs, where the underwriting spread has actually increased from about 6 percent to 8 percent.  Money managers are the major buyers of underwritten initial public offerings and use them extensively to make payments on soft dollar deals.  Benn Steil, of the Council on Foreign Relations, in the June 19, 2006 Wall Street Journal, said that 95% of institutional brokers received soft dollars.  The SEC has repeatedly studied and issued rules on soft dollars, but the practice survives.

Specified Purpose Acquisition Company  (SPACs)  A newly formed corporation that does an initial public offering before it begins conducting any business.  Its IPO is called a blank check offering, because investors are leaving management to select, buy and control a business, within a specified industry but otherwise not identified.  (If an acquisition candidate were known by management at the time of the offering, it would have to be described and its audited financials included in the prospectus, just as if shares in the candidate were being offered.)  Management has up to three years to close an acquisition, which must be approved by a vote of at least 70% of the SPAC shareowners.  Dissenters can get their cash back.  The acquisition is usually made by issuing more shares of the acquirer, in a reverse merger.  For the business being acquired, this is a way of going public by the back door.  From 2003 through 2006, 74 SPACs have raised $5.61 billion, according to the Reverse Merger Report.

Specialist  The securities firm assigned to make the market for a company’s shares on a stock exchange.  A specialist continuously announces bid and asked prices and generally owns an inventory of the shares.  All trades in listed shares, by brokers or dealers who are members of the stock exchange, are required to go through the specialist (with increasing exceptions).  The specialist is a dealer, buying and selling shares for the dealers’ own account.  This serves to maintain an inventory, allowing trades when there are no corresponding bid and asked prices being offered.  It also allows the specialist to accumulate positions in the shares for an expected profit on future moves in the market.

Sponsor  A person, group, or business standing behind an offering of shares.  Investors can reasonably conclude that the sponsor has performed due diligence and has an economic stake in the issuer.  In underwritten public offerings, the managing underwriter is usually thought of as a sponsor (and is referred to by that term in England).  In a direct public offering there may be a large corporate strategic partner or venture capitalist who purchased shares of the issuer in an earlier private placement and whose name conveys endorsement or sponsorship.  Arrangements can be made for a recognized name to be a sponsor through a standby commitment, by agreeing to buy all shares not purchased by prospects in the offering.

Sponsored Access  Only registered securities broker-dealers can trade on securities exchanges.  Recently, some broker-dealers have allowed their market participant identification computer codes to be used by their hedge fund or other trader customers place orders directly with the exchanges.  

Spring loading  When corporations issue options to employees just before positive news is announced.  The price at which the options can be exercised to buy shares (the "strike price") is expected to be lower than the price after the announcement.  Some corporations have gone further, back-dating options to a time just before a rise in the price of the shares.  Options are granted by a corporation's directors, or a committee they appoint, and these practices have been criticized as directors favoring management at the expense of the shareowners who elected them.  Many corporations grant options to directors, increasing the conflict of interest.

Stabilization bid  A bid for shares made shortly after the underwritten public offering by a member of the underwriting syndicate.  There is a specific exemption for this under the antimanipulation provisions of the securities laws.  The purpose of the bid is to keep the market price from falling below the offering price until the underwriting syndicate has disposed of all the shares it committed to buy in the underwriting agreement.

Stakeholders  This term has been used to describe the groups who are affected by a business.  In addition to shareowners, it usually means employees and the geographic community in which the business is located.  Persons using the term are usually responding to the consequences of financialization.  Some socially responsible businesses will publicly state that they look out for the interests of stakeholders, in addition to their shareowners, and consider business performance by a "multiple bottom line."  Others say that the long-term interests of shareowners are best served when the business considers social and environmental purposes and that this is included in the single bottom line results over the life of the business.

Standard & Poor's 500  A group of the largest public corporations which are tracked as an index of movements in the stock market.

Standby commitment  An agreement to purchase any shares left over after completion of a public offering.  This is commonly done in a rights offering, where a standby underwriter agrees to purchase all shares not subscribed for by the existing shareowners.  Initially, the function of an underwriter in a public offering was to issue a standby commitment, to insure that all the money would be raised.  It was akin to a performance bond.  Today, there is only a letter of intent between the underwriter and the issuer proposing to go public.  The risk that the public offering will not occur, or that the offering price will decline substantially, is borne entirely by the issuer.  It is not until hours before the effective date, after all the selling efforts have been completed, that the underwriters will sign an underwriting agreement to buy the shares at an agreed price.

State securities regulator  Each of the United States has laws, regulations and a staff for regulating the offer and sale of securities to its residents.  The regulators have some cooperative practices, through NASAA, but each state has its own regulatory structure.  Because of recent amendments to the Securities Act of 1933, nearly all underwritten public offerings, as well as private placements by investment bankers, are exempt from registration under state laws.  By contrast, nearly all direct public offerings must be registered with state securities regulators, unless they involve exempt securities or exempt transactions under the state laws.

Statement of operations  The presentation of financial results of a business for a year or other time period.  This is the title currently required by the accounting profession.  It is also known as the "income statement,"  "profit and loss statement" or "P&L."  For a reporting company, it is accompanied by a balance sheet, statement of changes in shareholders' equity and statement of cash flows.  There are generally many pages of notes to the financial statements, explaining accounting procedures used, providing more detailed information about some of the items in the statements and calling attention to contingencies that might affect some of the items.  Nearly all financial statements for public corporations will be audited.

Statutory underwriter  Someone who has become an underwriter within the meaning of the securities laws, even if that was not the intended status.  The statutory definition of underwriter has sometimes been interpreted very broadly, especially where securities fraud has been alleged.  Persons who purchased shares from the issuer or an insider and then resold them, may find they are a statutory underwriter.  So may persons who provide services in a public offering.  Since liability can arise solely out of the status of underwriter, often without regard to intent, it is an important area for preventive law services.

Stewards  The management of a business, its officers and directors, owe a fiduciary duty to shareowners, to take care of the business and its assets as they would their own property.  They need to avoid any conflict of interest.  When financial intermediaries and money managers are layered between the business and its owners, management may lose sight of this relationship.  This becomes more so with financialization.  In direct offerings, the business is owned by members of the business' communities and management is likely to be held accountable to serving the interests of shareowners.

Stewardship  When entrepreneurs sell securities, they are entrusted with other peoples’ money, to use as described in the prospectus.  This requires a separation of the business from their personal affairs.  For a faith-based or socially responsible business, stewardship can also refer to a duty by management to a spiritual power, to fellow humans, to other stakeholders, to future generations and to nonhuman species.

Stickering the prospectus  Attaching a paper to the cover or other page of a prospectus as a means of providing additional information.  This is often required when material events occur after the effective date, but before the offering is concluded.  It is an alternative to printing a new prospectus with amendments.  Sometimes, the SEC will require recirculation of the revision to everyone who received the original prospectus.  In rare circumstances, a recission offer may be required.

Stock  Another name for corporate shares.

Stock exchange  An exchange which acts principally as a trading market for shares.  Many of the exchanges which still include stock in their name actually do much more trading in options and other derivatives.  In the United States, NYSE Euronext owns the  New York Stock Exchange and American Stock Exchange.  Nasdaq OMX Group Inc. owns the Nasdaq Stock Market, Boston Stock Exchange and Philadelphia Stock Exchange.  The Chicago Stock Exchange is still owned by its member broker-dealers. BATS Trading Inc. was approved by the SEC to operate as an exchange in 2008.  (BATS is an acronym for Better Alternative Trading System.)

Stock market  The trading market for shares including the stock exchanges and the over-the-counter market (quoted on the Nasdaq Capital Market, the OTCBB, or in the Pink Sheets).  The stock market for listed shares is made by the assigned specialist for the stock exchange.  For shares traded over-the-counter, one or more securities firms act as market makers.  Beyond the stock exchanges and the over-the-counter markets, there are the so-called “third market” and “fourth market.”  The “third market” is made by securities firms who trade listed shares among themselves without going through a stock exchange.  They use "electronic communications networks" (ECNs) Two of those ECNs, (BATS, formerly Better Alternative Trading System and Direct Edge) each trade over 100 million shares a day.  This disintermediation of the specialist is carried one step further in the “fourth market,” where money managers trade among themselves without even going through a securities firm as broker or dealer.

Stock options  These are rights to buy or sell shares of a particular issuer  at a "strike price" by a set date.  Their most frequent current use is for grants to employees, mostly top management.  They have been abused, for instance by backdating to take advantage of market price movements.  Congress was lobbied to keep option grants from being accounted for as compensation expense.  Many believe that stock options create a conflict of interest between management and shareowners, because decisions are made to time stock market price movements, rather than for the long-term best interest of the business.  Quite separate from employee stock options are options created for trading on exchanges.  People who believe that a particular security will have a short-term price increase or decrease may purchase the right to buy shares (a "call option") or the right to sell shares (a "put option").  They either receive the price difference as a profit or they lose the amount paid for the option.  The trading markets for options now have huge volumes.  They are a "zero sum game," meaning that the aggregate losses and gains of all participants even out.  This is unlike the stock market, where there has been an overall long-term increase in value. 

Strategic partner  A business which has bought shares in the issuer through a private placement, for the dual purpose of making an investment return and helping its own business.  Large corporations often become strategic partners of businesses still in their development stage.  This can provide the partner with access to new technology that complements the large corporation’s products.  It may give them access to a market they have not otherwise developed.  In addition to investing capital, the strategic partner may also provide support services to the smaller business.  Some entrepreneurs try to avoid having a strategic partner, feeling that they lose some independence in future policy decisions.

Street name  When certificates for securities owned by an investor are issued and held in the name of a nominee.  Securities firms often own all or part of a nominee corporation, which is used exclusively as the street name in which securities are held for its customers.  The reason is to make shares more quickly available for transfer in the event they are sold.  Sometimes, a street name is used to conceal the identity of the real owner from corporate management or others.  Corporations which have large percentages of their shares in street name often have no way to effectively communicate with their shareowners.  It leads to over-voting and other corporate governance difficulties.

Structured finance  The use of alternative legal arrangements instead of traditional stocks and bonds.  It has become a major tool in the financialization of the investment world and the increasing amount of capital that is diverted into fees for intermediaries, lawyers, rating agencies and other transaction costs.  In the 1970s, "pass-through certificates" were used to package and sell fractional ownership in a pool of mortgages.  That led to "collateralized mortgage obligations," which divided the pool into tranches of different risk/reward analyses.  Next came "collateralized debt obligations" that applied the pattern to automobile loans, credit card balances. music royalties and other obligations for future payments.  Now, there are books, college courses and consulting firms offering structured finance advice, along with the brokers and lawyers.

Suitability  A test for whether someone really should be investing in a particular security.  For brokers, checking suitability goes along with the know-your-customer rule.  Several blue sky laws require that certain investments be offered only to persons meeting a set of suitability standards, usually related to wealth and income.  Determining suitability is part of what it means to qualify a prospect.

Supermajority  When a vote requires more than a majority of the shares owned by the shareowners.  Provisions of the corporate charter may, in some states, provide that a merger or a recall of the directors, for instance, must be approved by  80 percent of the shares.  The purpose is usually to create a shark repellant in order to prevent a takeover.

Synthetic CDOs  These are derivatives designed by investment bankers to sell to money managers.  The "CDO" part of the name stands for collaterallized debt obligations, pools of bonds or loans issued by multiple borrowers, with tranches of different risk levels and returns.  Synthetic CDOs are ownership interests in pools of insurance contracts against defaults on 100 or more corporate bonds. The pool collects premiums from bondholders seeking default protection.  There were about  $6 trillion synthetic CDOs outstanding in June 2008.

Takeover  The transfer of a controlling interest in a corporation, usually by a purchase of more than half its outstanding shares.  Although there can be a friendly takeover, the term usually refers to a hostile takeover.  The best protection against a takeover is having a broad base of individual shareownership and a share price in the trading market that does not represent a bargain when compared to the issuer’s “real value.”  Shark repellants are used as defenses against takeovers, but they are generally perceived as being for the benefit of management rather than for shareowners.

Tangible book value  The book value (also known as shareowners’ equity and net worth)  after adjustment by subtracting the recorded amount for such intangibles as good will.  It is intended to represent the “hard assets” of the company less its liabilities.

Target markets  Prospects for buying the issuer’s shares organized into groups with similar characteristics, such as place of residence, occupation, or other demographics.  The target markets are defined through market segmentationMicrotargeting and behavioral targeting are newer methods of identifying target markets.

Telemarketing  Using the telephone as a means of marketing.  Telemarketing and road shows have been virtually the only media employed in underwritten public offerings, where securities firms have their registered representatives telephone prospects to announce the offering, make a sales presentation, and take an order--preferably all in one call.  In a direct public offering, telemarketing is one component of the marketing program.  It may be responsive (limited to answering incoming responses from prospects to the proposition) or active (initiating follow-up calls to prospects, after the fulfillment for their conversion into a sale).  Careful procedures must be prepared and supervised to avoid violation of the securities laws, especially if the telemarketing staff are not registered representatives under the supervision of a registered broker-dealer.

Tender offer An offer to a company's shareowners, to buy all the shares they choose to "tender" in acceptance of the offer, within the named price, timing and other conditions.  The SEC has extensive rules about conducting tender offers for a reporting company.  The tender offer may be made as part of an issuer's buyback plan to repurchase its own shares, as a management buyout to have the issuer go private or as an acquisition by private equity funds.  Tender offers are often funded by borrowings, to be secured by assets of the business acquired, in a leveraged buyout.

Test marketing  A limited offering of shares to a target market, using particular media or copy or graphic presentation.  The purpose is to refine the marketing program as quickly and cost-effectively as possible.  Before it can begin, a test marketing needs to comply with all the applicable securities laws for an offering.

Test the waters  The term used for communicating with prospects before an issuer decides to do a securities offering.  Its purpose is to learn whether enough prospects say they would be interested in purchasing, and how much they might invest, to make it worthwhile to spend the time, money and foregone alternatives to do the proposed offering.  Unlike a test marketing, no sales can result.  This preliminary step is specifically permitted by the SEC's Regulation A offerings and by several state securities regulators.

Time and responsibility schedule  A listing of all the steps to be accomplished in preparing and completing a public offering, together with the time by which the step is to be accomplished and the name of the person responsible for seeing that it is done.

Tombstone ad  A formal announcement of a proposed or completed public offering.  In an underwritten public offering, the tombstone ad typically appears only after the sale is completed.  It advertises the names of the underwriting syndicate and shows that the managing underwriter has originated and completed a deal.  The name "tombstone ad" comes from the appearance of the typical sparse copy and the layered format.  In a direct public offering, a tombstone ad can be used to announce an   offering to be made.  After the effective date, a tombstone ad can be used as the proposition stage of a direct public offering, promising to deliver a copy of the prospectus to the reader.  It may contain a  coupon, website, email and postal address and a telephone and facsimile number for the response.  In a broker-assisted offering, the tombstone ad may suggest calling any of the participating securities firms or financial planners.

Total return  The return on investment from dividends or interest received and from the difference between the price paid and the price received on resale (capital gain or loss).  Wall Street, and others motivated only by financialization, focus on gain or loss, especially from short-term trading.  However, over half of the total return on the Standard & Poor's 500 stock index for more than the last 20 years has been from dividends. 

Trading market  Where publicly traded shares are bought and sold.  The secondary market, which is made either by a specialist for shares listed on a stock exchange or by market makers for over-the-counter shares.

Tranche  From the French word for "slice," a tranche is one series or class of a security.  Used mostly in bonds or collateralized debt obligations, the tranches may be based upon different maturity dates, different levels of risk or different markets (such as foreign and domestic).

Transfer agent  The keeper of detailed information showing transfers of the record ownership of securities.  This function is generally combined with the registrar and may be performed by the issuer or an independent contractor.

ULOR (the Uniform Limited Offering Registration)  Also known as SCOR.  Available under some state blue sky laws for public offerings of not more than $1 million, which are also exempt from SEC registration.

Unbundling  Separating services that were formerly sold as a package.  In securities firms, this has meant having businesses that only act as a broker, and not as a dealer or investment banker.  Many financial planners sell only financial advice, unbundled from any other services.

Underwriter  A securities firm that sells securities in an underwritten public offering and then purchases those securities from the issuer.  The name came from the former practice, where the underwriter became legally obligated to buy the securities at a fixed price, well in advance of selling them to the public.  In insurance terms, it underwrote the risk that the securities would not be sold to the public at a price higher than the underwriter agreed to pay the issuer.  The role has evolved so that the underwriter and the issuer have only a letter of intent for the proposed offering.  Within a few days of the anticipated effective date of the registration for the offering, the underwriting syndicate will commence marketing and take indications of interest from investors.  If these indications of interest are for a total of at least the amount of the proposed offering, and at a proposed offering price that the issuer will accept, the underwriter and issuer sign the underwriting agreement and the securities firms involved will sign the agreement among underwriters.  Within a few hours, confirmations are sent to investors and trading begins in the secondary market .

Underwriters’ warrants  Also known as underwriters' options.  They are rights to buy shares of the issuer in the future at prices based upon the offering price in an underwritten public offering.  They represent additional compensation to the underwriters beyond the underwriting spread.  Their terms are usually for five years, with the option price starting at 100 percent of the offering price and increasing by 10 percent each year.  These terms are limited by blue sky laws and FINRA, which also permit the warrants to cover no more than 10 percent of the number of shares in the underwriting.

Underwriting  The process of doing an underwritten public offering.

Underwriting agreement  The legal document which commits the underwriters to buy securities in an underwritten public offering.  Typically signed just hours before the effective date--after indications of interest for more than the entire offering have been obtained--it fixes the offering price and the underwriting spread, usually within a range stated in the letter of intent.  It has many pages of warranties by the issuer, contents of letters required from the issuer's auditors and lawyers and other protections for the underwriters.

Underwriting spread  The commission paid to the underwriters in an underwritten public offeringFor IPOs of shares, it is usually from six to eight percent of the total offering amount.  Debt offerings have much lower percentages.  It is called “the spread” because it equals the difference between the offering price and the proceeds of the offering paid to the issuer before offering expenses.  An underwriting spread is paid entirely at closing and is generally divided in these proportions:  A 60 percent selling concession to the securities firm employing the registered representative who sold the securities; a 20 percent “management fee” to the managing underwriter; and 20 percent for the “syndicate account,” which pays the underwriters’ expenses and applies toward any short loss.

Underwriting syndicate  The group of securities firms which have signed an agreement among underwriters for each of them to sell a specified amount of an underwritten public offering and to bear a proportion of the underwriters’ risks and expenses.  Most of the selling is done through telemarketing by employees of syndicate members and through road shows.

Underwritten initial public offering  A company’s first public offering of its shares, which it has chosen to do through an underwriting.

Underwritten public offering  An offering of securities to the public, using a securities firm as an underwriter.  The securities are sold by registered representatives of the underwriters to prospects they have selected.  Selling occurs through telemarketing and road shows.  If sufficient orders are collected for the securities, an underwriting agreement is signed.  About a week later there is a closing, where the underwriters pay the issuer the offering price for the shares less their underwriting spread and expenses.

Values-driven business  A term used in contrast to a business driven by financialization.  However, like "socially responsible business," the values that are seen as driving a business depend upon the view of the person using the term. 

Venture capital  Money invested in a business in its early stages, when the risk of loss is generally greater and there is usually no trading market into which securities can be sold.  There are stages of venture capital investment, from start-up or seed capital to second-round or sprout capital, to mezzanine financing, and on to succeeding rounds.  A venture capitalist--the investor--needs an exit plan for the investment, usually either a public offering or a sale of the entire business.  Venture capitalists may be friends and relatives of the entrepreneur, venture capital firms, individual angel investors (informal investors), or other corporations as strategic partners.  By the 1990's venture capital firms were attracting huge amounts of funding from university endowments, public pension funds and other institutional investors, based upon comparing their historical ROI of about 20% a year to the lower returns then available from the stock market and other traditional investments.  These much larger pools of capital have led to financialization of venture capital, affecting the types of investments that venture capital firms make and the exit plan or liquidity event for the investment.

Waiting period  The time between the filing of a registration statement with the SEC (or application to qualify shares under blue sky laws) and the effective date of that filing.  Because there is no final prospectus available during the waiting period, no sales of shares can be made.  Care must be taken to avoid gun-jumping, although the rules are somewhat different from the prefiling period

Wall Crossings  A public corporation does a private placement of securities with institutional investors, known as a PIPE, followed quickly by a public offering of the same securities at the same price.  The institutions commit to keeping confidential the information they get, thus "crossing the wall" into being an insider.  They cannot trade in the securities until the public offering is completed.  A Wall Crossing is often used when the offering corporation plans an acquisition or other confidential use of the funds raised.

Wall Street  The street in lower Manhattan which is headquarters to the New York Stock Exchange and other financial services.  "Wall Street" and "the street" have come to include investment bankers, money managers and their professional support organizations, whether or not they are physically located near Wall Street.  As a result of the increased financialization of the investment process, Wall Street has grown rapidly and incomes of its participants have increased even more.  As reported by Greg Ip in the Wall Street Journal, a study of 2004 incomes by Steven Kaplan and Joshua Rauh, of the University of Chicago, showed that Americans earning in the top half of one percent included twice as many from Wall Street firms as from all nonfinancial companies.  As reported in the January 23, 2008 Wall Street Journal, the Center for Responsive Politics compiled the source of contributions by industry to presidential candidates through September 30, 2007, with Wall Street the largest, at $50.4 million, followed by lawyers and lobbyists at $34.8 million.  Together, they accounted for 40% of all contributions of over $200 each. 

When-as-and-if-issued market (WAII market)  When a public offering of securities is expected, a trading market will sometimes develop in advance.  In periods when there have been many hot new issues, speculators have bought and sold shares with payment and delivery to be made when, as, and if the shares are actually issued.  This is a form of risk arbitrage, where the participants are predicting the offering price and the subsequent price in the trading market.

Whisper earnings  Trading for short-term profits, the financialization of investing, is often based on getting information before it is available to the public.  Most issuers with publicly traded shares continue to issue earnings projections, even after regulations and lawsuits.  Securities firms also issue their estimates of earnings to be reported by the issuers they cover.  Then there are the informal "whisper earnings" projections, which are supposedly more recent and more accurate.  They are often attributed to secret sources within the issuer.  Brokers may use this inside information to stimulate trades by their clients.

Wikinvest  Modeled on the online encyclopedia Wikipedia, this website allows anyone to contribute and edit information about publicly traded shares.  The idea is that a large group will usually arrive at a better result than a single securities analyst.

Window dressing  Actions taken by mutual fund managers to improve the reported performance of the funds they manage.  Portfolio pumping is an example of window dressing.

Wire house  A large securities firm with multiple offices serving retail (individual investor) customers.  The name is from the days when orders for trading securities were transmitted to New York headquarters by a proprietary telegraph or telephone wire.