Wednesday, August 3, 2011

Selling New Securities - SEC Rules

Shelf Registration — SEC Rule 415

If, after the IPO, a company wants to issue and sell more new securities, it would have to go through the same basic procedure as the IPO, but with some differences. First, the price of the new securities would be determined by the current market price of the securities that are already being bought and sold in the secondary market. Secondly, the new prospectus would not have to be as detailed, because the public company must publish financial reports continually, and file those reports with the SEC.


In the 1980's, the SEC adopted Rule 415, which allowed public companies to register new securities, but then shelve the public offering for up to 2 years. Thus, the company can make a public offering when the company needs the money, or market conditions are favorable, with a minimum of expense and effort.

 
SEC Rule 144 — Private Placement Market

Companies that are too small or risky for an IPO can get financing through private placements, which is also cheaper and faster than a public offering. SEC Rule 144

A private placement is the selling of unregistered securities, either stocks or bonds, to qualified institutional investors—investment companies, pension funds, and insurance companies, especially life insurance companies. The cost of a private placement is much less than a public offering, because the securities do not have to be registered with the SEC, the issuer does not have to comply with U.S. generally accepted accounting principles, and because there are usually only a few institutional investors involved, marketing costs are much less.

The SEC enacted Regulation D in 1982 which defines a qualified institutional investor as one who can understand, or can employ those who understand, the return and the risk of securities, and can bear the risks.

However, the purchaser of a private placement must sign a letter of intent, called an investment letter, which states that the securities are being bought for investment and not for resale. Thus, these securities are often called letter securities, or in the case of bonds, letter bonds. If the letter securities are stocks, then they may be called letter stocks, or 144 stocks.

lthough the issuer does not have to give a prospectus to buyers in a private placement, it still must furnish information that the SEC deems material in the form of a private placement memorandum to potential investors. Unlike a prospectus, though, the SEC does not review the memorandum. Because there are usually few investors in any given private placement, the investors can negotiate the characteristics of the issue, giving them more flexibility than they would have in a public offering.

Letter securities cannot be resold for 2 years (1 year if more onerous conditions are met), and when they are, it must be a regular brokerage transaction.

Most private placement bonds are not investment grade, and because they were privately placed, they can’t be resold to the public unless they are first registered with the SEC. Thus, they generally pay a higher interest rate compared to other securities of comparable terms.

An investment banker can tailor private placements for their institutional customers.
governs private placement transactions.

SEC Rule 144A — Increasing Liquidity and Foreign Investment, and Domestic Issuance of Foreign Securities

Previously, investors who bought private-placement securities could not resell them for 2 years. This cost issuers more because they had to pay a higher yield to compensate investors for the illiquidity of their purchase. In April, 1990, the SEC enacted Rule 144A, which allowed institutional investors to trade the investments among themselves at any time, and without having to register the securities. This not only lowered the cost of raising funds by the issuer, but it also increased foreign investment, which increased the supply of money, and thereby reduced its cost een more. Rule 144A offerings are underwritten by investment bankers.

Rule 144A also enhanced the domestic issuance of securities for foreign issuers, primarily because it eliminated the need to register the securities, thereby saving time and expense.

No comments:

Post a Comment