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
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
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
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
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
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
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
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
and Muchin Rosenman,
"At-The-Market" Offerings: A
Insights: Corporate & Securities Law Advisor,
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
are the Big Four firms that audit companies that account for
99% of U.S. market capitalization, because underwriters and
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 When a market 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
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
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
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
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
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 directors.
The 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.
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.
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
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
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 managers. Corporate 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
Disintermediation When money is transferred directly between the user and the provider without passing through a financial intermediary. Part 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
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 offering.
Officers 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
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
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 capital.
Financial 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,"
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 shares. Direct 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
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 event.
Financialization has resulted in shortened times between investment and
exit, as well as forcing the business to change its primary
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.
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
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 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.
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 offering. Shares 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
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.
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
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.
Electronic Applications, adopted in August 2008 by the SEC,
will replace EDGAR as the electronic data base for filings by a
reporting company. IDEA 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.
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,
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
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
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
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
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
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 prospectus. Annual 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
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
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
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.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
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
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
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
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
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
underwriters’ warrants as part of the compensation
to the underwriting syndicate. Corporations issue stock
options to employees (often under tax rules for Incentive Stock
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 OTCBB. Nearly 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,
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
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
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
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
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
Public Company Accounting Oversight Board (PCAOB)
A non-profit corporation created by
Sarbanes-Oxley to oversee the auditors of
public corporations. Its website is
Public corporation A corporation
with publicly traded shares, usually referring to a reporting
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 securities. It 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
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
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
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
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.
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.
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
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
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
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
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
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
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
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
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.
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
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
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 segmentation.
Microtargeting 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
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 offering. For
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
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
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.