Initial Public Offering
All firms must have a source of funds to acquire assets and retire outstanding debt. One possible source for these funds includes savers who are not currently using all of their income to buy goods and services. The transfer of these funds may occur indirectly through a financial intermediary or directly through the purchase of securities issued by firms. The investment bankers act as a middleman between the firm and investors who underwrites the securities and guarantee the issuing firm a specified amount of money. The SEC also enforces the federal securities laws that govern the trading of corporate stocks and bonds in the secondary markets. The intent of SIPC is ...view middle of the document...
38." When the underwriting involves multiple brokerage firms, they come together to form a syndicate. A syndicate relieves the originating house from selling all of the securities. Instead, the syndicate comes together to portion out a specific number of securities to each firm. Syndicates come with the additional advantage of reaching more buyers that increase the likelihood that all of the issued securities sell (Mayo, 2012).
Pricing a New Issue
Most sales of new securities are underwriting, the pricing of securities is crucial. If the initial offer price is too high; the syndicate will be unable to sell the securities leaving the investment bankers to have only two choices. (1)Maintain the offer price and to hold the securities in inventory until they sale. (2)Allow the market find a lower price level that will induce investors to purchase the securities. The underwriters purchase the securities and hold them in inventory, and they either must tie up their funds, which could be earning a return elsewhere or must borrow funds to pay for the securities. The underwriters may choose to let the price of the securities fall, and the inventory of unsold securities can then sell at a lower price. They also cause the customers who bought the securities at the initial offer price to lose. The underwriters certainly do not want to inflict losses on the customer, so the investment bankers try not to overprice a new issue of securities (Mayo, 2012 pg. 39)
Risks in the Public Offering
Crossing state borders is not unusual for securities, so the primary regulation is at the federal level. These laws have been developed to protect the investor but in no way guarantee the investor will make money. They were first developed in the 1930’s as a result of the chaos in the market crash of 1929. “The 1933 act covers new issues of securities, and the 1934 act is devoted to trading in existing securities,” (Mayo, 2012 pg. 43). Since the acts would require administrative oversight, the Securities and Exchange Commission (SEC) was established.
Full-disclosure laws indicate that a firm that is publicly traded must keep the public informed on facts regarding the firm. In addition to filing reports during the year regarding material changes to the firm, the firm must file an annual report (the 10-K report) with the SEC. This information in the annual report to investors and is supplied free of charge. If the firm does not disclose such information...