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Chapter 12 Financing and listing securities - Coggle Diagram
Chapter 12 Financing and listing securities
Government and corporate finance
finance: raise capital to finance their operation ; Government financing is accomplished through an auction process, and occasionally through a fiscal agency. Public financing is by public companies that trade on exchanges and OTC market.
Investment dealer finance department
government finance
specialize in selling debt instruments
advise the issuing government concerns:
“The size (or dollar value), coupon (interest rate offered), and currency of denomination of the issue
• The timing of the issue
• Whether the issue should be domestic or foreign
• What effect the issue may have on the market
• Whether the issue should be a new maturity, or whether a previous issue should be reopened”
corporate finance
balancing the needs of corporate client seeking funds with investing who provide funds
balance the debt and equity
consider factors regarding a new issue:
“Types of securities
• Timing to market
• Private or public offering
• Proportion directed to institutional and retail investors
• Pricing
• Coupon rate or valuation multiple (such as price-to-earnings ratio)
• Underwriting fee (charged to the corporation)”
Canadian government issues
issues new fix-coupon bonds through
competitive tender system
by way of an auction
only institutions recognized as government securities distributors are permitted to enter bids to the Bank of Canada
institutions: “include the Schedule I and Schedule II banks, investment dealers, and foreign dealers active in the distribution of government securities. ”
primary dealer: distributor that maintains a certain threshold of activity
non-competitive tender : bid accepted by the bank of Canada, and bonds are awarded at the auction average yield
2, 5 and 10 years; semi-annual auctions for 30 year; denominations are $1000, $5000, $100,000 and 1 million
Provincial and municipal issues
Provincial
direct bonds and guaranteed bonds are sold at a negotiated price through a fiscal agent
direct bonds are issued in the government's name (Province of Manitoba bonds) ;
guaranteed bonds are issued in the name of a crown corporation, with repayment guaranteed by the provincial government
syndicate: underwrite issues, offer advice and manage the process of issuing securities
municipal bond and debenture
placed in institutional portfolios and pension accounts
these issues require in-depth knowledge of tax-generating potential (must understand industrial base and demographic info)
Corporate financing
usually occurs through negotiated offering
corporate management negotiate with dealer determine the type, price, interest , or valuation multiple , and any special features and protective provision (ensure the success of the new issue)
equity financing (selling share)
common share, preferred shares, and special shares( special status in terms of dividends, distribution of assets in liquidation etc. )
share capital
authorized shares: maximum number of shares (common or preferred) that a corporation may issue under its charter
Issued shares: portion of authorized shares that have been sold by corporation, and held by shareholders ; these shares owned by shareholders are called outstanding shares
outstanding shares determine its market capitalization
public float: outstanding shares that are freely available for public trading ( : held by directors, officers, by institutions with controlling interest ); :red_cross:held by insiders or by mutual funds are held over a long term and tie up; :red_cross:Public float excludes shares owned in large blocks by institutions.
smaller float indicates more volatile
raise capital by selling share (equity financing ) or by issuing debt or fixed-income securities (debt financing)
debt financing and other alternatives
need for a large amount of new capital
2 main types: mortgages and debentures
many other financing options: “bank loans, money market 货币市场，borrowing, commercial paper, bankers’ acceptances, leasing, government grants, and export financing assistance.”
The corporate financing process
due diligence report
“The study includes the corporation’s position within the industry, financial record, financial structure, and future prospects. As well, all risk factors associated with the industry and the company are closely observed.”
The dealer's advisory relationship with corporations
broker of record: official advisor of the company, and has the right of first refusal on new financings planned by the corporation
Advice on the security to be issued : book 12.9 about the pros and cons of issuing securities
Advice on protective provisions
the dealer may provide advice on protective clauses of bonds called protective provisions, trust deed restrictions or covenants(a pledge in bond debenture e.g. promise not to issue any more debt).
trust deed: legal documents about agreement between issuer and holders , such as coupon rate, interest payment etc.
mortgage: deed of trust and mortgage
debenture: trust indenture
make an issue more attractive to investors (when in a weak financial condition )
The method of offering
private placement
entire issue is sold to one or several large institutional investors
detailed disclosure, pubic notice are waived; formal prospectus is not prepared , which reduces the cost of distribution for issuing company
Public offerings
best efforts underwriting : dealer act as agent to sell the securities; if do not sell, return to the issuer; face the risk of not raising capital
firm commitment underwriting : “The underwriter commits to buy a specified number of securities at a set price, which it then resells to the public. ”
“the underwriter pays the full proceeds to the issuer, regardless of whether it has been able to resell the securities to the public. The underwriter assumes the risk of selling the security.”
a primary offering (IPO: initial pubic offering) : require expertise in terms of pricing and marketing of the issue; affect the financial well-being
treasury shares: purchase some of its outstanding shares currently trading in the market; (do not have voting rights, dividend) ; sell to the market later ,when voting rights restored)
firm commitment agreement involves different groups
financing group: lead underwriter (managing underwriter/ syndicate manager) the issuer sells bonds to financing group
financing group recommend type, size , timing, covenants and protective clauses etc
banking group: additional dealers with liability for their participation
various group allotted responsibility
• The selling group consists of other dealers who are not members of the banking group.
• Casual dealers are non-members of the banking or selling group. They may include broker dealers, foreign dealers, or banks.
• Special group orders may occur under various circumstances. For example, the issuer may demand special consideration for a dealer or its banker, or for its parent’s banker, if it is a subsidiary of a foreign parent.
• A portion may be allotted for sale to the exempt list. This list usually includes only large professional buyers, mostly financial institutions, that are exempt from prospectus requirements.”
Bringing securities to the market
When a prospectus is required
all provincial securities require a prospectus ; ( a contract between the investor and the corporation; it is designed to provide disclosure regarding material facts about the security)
applies to 3 types of trades in securities
“Trades by or on behalf of an issuer (e.g., a new issue from treasury)
• Except in Quebec, trades from a control position, unless the trade is made under a prospectus exemption
• Trades in securities previously acquired by way of a prospectus exemption, unless the subsequent trade is made under a further prospectus exemption”
new issues
IPO must first be filed with the regulators
new issue may not an IPO, it may be an additional raising of capital from a reporting issuer (an already public company) and it's less detailed
Preliminary prospectus
“Most provinces require the filing of both a preliminary prospectus (also called a red herring prospectus) and a final prospectus.”
“The preliminary prospectus must have on its front cover, in red ink, a statement to the effect that the prospectus has been filed, is not in final form, and is subject to completion or amendment.”
securities cannot be sold until a receipt of the final prospectus has been obtained
may exclude information :“price paid to the underwriter and the price at which the securities will be offered to investors. The auditor’s report may also be excluded from the preliminary prospectus.”
information circular
also called
greensheet:
“Highlights for the firm’s sales representatives the salient features of a new issue, both pro and con in order to successfully solicit interest to the general public. Dealers prepare this information circular for in-house use only.”
passport system
“All jurisdictions of the Canadian Securities Administrators, except Ontario, adopted Multilateral Instrument (MI) 11-102 Passport System”
“gives issuers streamlined access to the capital markets in multiple jurisdictions. ”
“Even though Ontario did not adopt MI 11-102, the province is still considered a principal regulator under the instrument.”
Permitted activities during the waiting period
waiting period: between the issuance of a receipt for a preliminary prospectus and receipt for a final prospectus is called the waiting period
:check:“During this period, the underwriters may solicit expressions of interest 征求意向书from potential purchasers of the security. A copy of the preliminary prospectus must be provided to anyone who expresses interest, whether solicited or unsolicited.
:red_cross: prohibited: “Activities that are considered to be encouraging a trade are prohibited (e.g., the execution of an agreement to purchase the security in question)”
:check:“the price (if determined) and the name and address of the dealer member or registrant from whom the security may be purchased.”
Final prospectus
“provide the required full, true, and plain disclosure of all material facts relating to the securities to be distributed”
(“Any information that can significantly affect the market price or value of the securities is considered a material fact. )”
“he final prospectus must be accompanied by the written consent of experts” (appraisers, auditors, and lawyers)
blue sky: approval of the final prospectus is granted, the issues if blue sky
a copy of the final prospectus must be mailed/delivered to all purchasers no later than midnight on the second business day after entering into an agreement of purchase and sale
Details of an offering
cover page disclosure
“value of the offering, how stakeholders will be paid, and whether the prospectus is preliminary or final.”
summary
information relating to the issuer
information relating to the securities
“ type of product, use of proceeds, distribution method and eligibility of investment, as well as a description of the securities.”
information relating to the officers and shareholders
“Disclosure of specified information with respect to executive compensation and indebtedness of directors and senior officers to the issuer or its subsidiaries
• Information regarding any bankruptcies, cease-trade orders, or securities regulatory violations
• Details of any outstanding options, rights, or warrants to purchase securities of the issuer, of shares held in escrow
• Details of any prior sales of the securities being offered.”
“Officers and shareholders information includes names and addresses of directors and officers with five-year histories of principal occupations and shares owned.”
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information relating to the parties involved
2 certificates
a certificate signed by CEO , CFO, two board directors and any promoters
a certificate signed by the underwriters and made to the best of their knowledge and belief
market out clauses 上市条款
“permits the underwriter to cancel an offering without penalty under certain conditions”
“The underwriter must fully disclose whether any or all market out clauses might result in the cancelling or cessation of an offering.”
“A reference to the conditional aspects of the underwriting is required on the cover page of the prospectus, along with a cross reference to the location of further details under the Plan for Distribution in the prospectus.
The short form prospectus system
“This system allows reporting issuers to issue a short-form prospectus that contains only information not previously disclosed to regulators.
The short form prospectus contains by reference the material filed by the corporation in the Annual Information Form.”
“A short form prospectus omits information that can be found in the issuer’s annual information form (AIF) and other continuous disclosure documents”
issuer use the short form prospectus under the following conditions
“It is a reporting issuer in at least one Canadian jurisdiction (and relies on the Passport System, if it files in other jurisdictions).
• It has filed current annual financial statements and a current AIF in at least one Canadian jurisdiction in which it is a reporting issuer.
• It is not an issuer whose operations are ceased or whose principal asset is cash, cash equivalents, or exchange listing.
• It has equity securities listed and posted for trading or quoted on a short form eligible exchange.”
“It electronically files using the System for Electronic Document Analysis and Retrieval (SEDAR).”
Companies already listed on a Canadian stock exchange may use a less detailed Short Form Prospectus if it meets all the reporting and filing conditions. The short form prospectus focuses on matters relating primarily to the securities being distributed, such as price, distribution spread, use of proceeds, and the securities’ attributes.
After-market stabilization
“the dealer is required to support the offer price of the stock once it begins trading in the secondary market (also called the after-market). ”
three types of after-market stabilization activities
Greenshoe option (over allotment option) 超额分配
“allows the dealer to issue 15% more shares than originally planned.”
“If demand is low, and the price of the stock drops, the dealer buys back the additional shares to cancel them”
penalty bid
“The lead underwriter penalizes other dealers if their customers flip shares in weak issues.”
flipping means selling the shares during , or shortly after the discussion period
“Penalties may include paying back commissions to the underwriter or reducing the number of shares that the investment advisor can receive in future IPOs.”
stabilizing bid
“The dealer posts a bid to purchase shares at a price not exceeding the offer price if the distribution of shares is not complete.”
Securities distributions through the exchange
the exchange reviews the prospectus and approves or disapproves
“This prospectus exemption can be used by issuers who meet the following requirements:”
“The securities are listed securities or units of securities and warrants.
• The issuer has filed with the TSX Venture Exchange an exchange offering document, which incorporates by reference the AIF, the most recent financial statements, and material change reports. (This document must be delivered to purchasers.)
• The number of securities offered does not exceed the number previously outstanding.
• The gross proceeds do not exceed $2 million.
• No more than 20% of the offering goes to one purchaser.”
Other methods of distributing securities to the public
as Junior company distribution
these types of company have no record of earnings and few assets that would qualify as collateral for conventional credit sources
the fund these companies need is known as risk capital
as options of treasury shares and escrowed shares
a junior company can grant the underwriter specified treasury share options; To entice an underwriter to act as a principal in a
bought deal
rather than as an agent for a best efforts offering,
bought deal: A new issue of stocks or bonds bought from the issuer by an investment dealer for resale to its clients, usually by way of a private placement or short form prospectus
“This technique involves the use of escrowed shares that serve as payment for properties, goods, or services.”
“
Escrowed shares
are shares held by an independent trustee in trust for its owner. The escrowed shares
cannot be sold or transferred, unless special approval is given
: such as a stock exchange or securities administrator.”
through a capital pool company (CPC) program
“he CPC program is a vehicle for emerging businesses to obtain financing earlier in their development than might otherwise be possible with a regular IPO.”
“A CPC can conduct an IPO and list the shares on the TSX Venture Exchange. The CPC’s goal is to buy an existing business or assets, called significant assets, through a qualifying transaction (QT).”
CPC program has two-stage process
First: “a CPC prospectus is filed and cleared, the IPO is completed, and the CPC’s common shares are listed on the TSX Venture Exchange. Under this program, the issuer must raise between $200,000 and $4,750,000 from the IPO.”
Second stage
1.“Within 24 months, the CPC identifies an appropriate business and issues a news release to announce the agreement to acquire the business.
The CPC prepares a filing statement or information circular providing prospectus-level information on the business to be acquired.
The TSX Venture Exchange reviews the disclosure document and evaluates the business to see that it meets initial listing requirements.
Shareholder approval is typically not required to close a QT.
The NEX board
a separate board of the TSX Venture Exchange that provides a trading forum for companies that have fallen below the TSX venture exchange's listing standards
provide a trading forum for the following types of issuers
issuers that have been listed on the TSX venture exchange but no longer meet the TSX maintenance requirements (inactive issuer)
CPCs that fail to complete a Qualifying Transaction (QT)
Crowdfunding
the process of raising start-up capital by soliciting contributions from the public at large, usually aided by online or internet-based system
“the participating regulators have adopted harmonized registration and prospectus exemptions that allow start-ups and early stage companies to use crowdfunding to raise capital.”
The listing process
advantages
prestige and goodwill
established and visible market value
excellent market visibility
more information available
simplified valuation for tax purposes
disadvantages
additional controls on management
need to keep market participants informed
market indifference
additional disclosure
additional costs to the company
Withdrawing trading privileges
temporary interruption of trading
delayed opening: if a heavy influx of buy or sell orders for a particular securities materialize
the delay give exchange traders time to organize the orders and to align buys with sells
Halt in trading
temporary halt in trading allow the reporting and communication of significant news such as pending merger or a substantial change in dividends or earnings
suspension in trading
the financial condition not meet the exchange's requirement; company fails to comply with the terms of its listing ; if the company rectify the problem, the trading resumes
during suspension, members are usually allowed to execute orders for the suspended security in the unlisted market
A suspension of trading is usually ordered when the company does not meet the Exchange requirement with respect to financial condition or reporting.
cancelling a listing
a permanent cancellation of listing privileges
for the following reasons
“The delisted security no longer exists because it was called for redemption (in the case of a preferred share) or was substituted for another security as a result of a merger.
• The company is without assets or has gone bankrupt.
• The public distribution of the security has dwindled to an unacceptably low level.
• The company has failed to comply with the terms of its listing agreement.”