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Chapter 20

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Wilfrid Laurier University
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BU393 Chapter 20 – Issuing Equity Securities to the Public Week 6 The Public Issue -A firm issuing securities must satisfy a number of requirements set out by provincial regulations and statutes and enforced by provincial securities commissions -Regulation of the securities market in Canada is carried out by provincial commissions and through provincial securities acts -The Securities Act sets forth the provincial regulation for all new securities issues involving the province of Ontario and the Toronto Stock Exchange -All companies listed on the Toronto Stock Exchange come under the jurisdiction of the Ontario Securities Commission The Basic Procedure for a New Issue 1. Management’s first step in issuing any securities to the public is to obtain approval from the board of directors. The firm must also engage an underwriter. 2. The firm must prepare and distribute copies of a preliminary prospectus to the OSC and to potential investors. The preliminary prospectus contains some of the financial information that will be contained in the final prospectus; it does not contain the price at which the security will be offered. 3. Once the revised, final prospectus meets with the OSC’s approval, a price is determined and a full-fledged selling effort gets underway The POP System -Prompt Offering Prospectus -The eight provinces with securities commissions all have compatible legislation allowing certain securities issuers prompt access to capital markets without the necessity of preparing a full preliminary and final prospectus prior to a distribution -Accessible only by large companies, lets issuers file annual and interim financial statements regardless of whether they issue securities in a given year The Cash Offer -Underwriters perform the following services: 1. Formulating the method used to issue the securities 2. Pricing the new securities 3. Selling the net securities -Syndicate/banking group – a corporate loan made by a group of banks and other institutional investors A syndicated bank loan may be publicly traded -Spread/discount – if a bond is selling below its face value -Regular underwriting – the purchase of securities from the issuing company by an investment banker for resale to the public -Firm-commitment underwriting – an underwriting in which an investment banking firm commits to buy the entire issue and assumes all financial responsibility for any unsold shares -Best-efforts underwriting – an offering in which an underwriter agrees to distribute as much of the offering as possible and to return any unsold shares to the issuer -Bought deal – one underwriter buys securities from an issuing firm and sells them directly to a small number of investors -While the issue is being sold to the public, the underwriting group agrees not to sell securities for less than the offering price until the syndicate dissolves -Investment banks are the heart of new security issues -The issuing firm faces a potential loss if the offering price is set too high or too low -Underpricing is a fairly common occurrence and it clearly helps new shareholders earn a higher return on the shares they buy -Public firms are subject to stricter disclosure and other potentially costly regulatory requirements -Determining the correct offering price is the most difficult thing the lead investment bank must BU393 Chapter 20 – Issuing Equity Securities to the Public Week 6 do for an initial public offering -Much of the apparent underpricing is concentrated in smaller issues -When the price of a new issue is too low, the issue is often oversubscribed – investors will not be able to buy all of the shares they want The Announcement of New Equity and the Value of the Firm 1. Managerial information – if managers have superior informat
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