Underwriting/New Financing Transaction, Types of Offerings and Registration of Securities
Underwriting/New Financing Transaction
The underwriting process
A financing mandate begins with an engagement letter and proceeds through due diligence, drafting of the registration statement, roadshow, pricing, allocation, and settlement. Candidates must understand the underwriting agreement, the syndicate structure, and the economics of the gross spread. In a firm-commitment underwriting, the underwriter buys the securities and bears market risk; in a best-efforts deal, the underwriter acts as agent and does not guarantee proceeds.
Syndicate economics and mechanics
The gross spread typically has three components: the manager’s fee, the underwriting fee, and the selling concession. A reallowance is the portion of the concession paid to non-syndicate dealers. The over-allotment option, or greenshoe, is usually 15% of the base deal and lets the syndicate stabilize the aftermarket. A lock-up restricts insiders from selling for a set period, commonly 180 days. Stabilizing bids and penalty bids are regulated and must be disclosed.
Worked example
A $300 million IPO carries a 6.5% gross spread. Total underwriting compensation is $19.5 million. If the 15% greenshoe is exercised in full, the syndicate sells an additional $45 million and earns an extra $2.925 million at the same spread. Rule of thumb: gross spread is not underwriter profit-selling concessions and expenses are paid out of it.
Traps in questions
Do not confuse the gross spread with the offering discount or with the underwriter’s net profit. Best efforts does not assure the issuer of proceeds. The greenshoe is an option, not a guarantee, and the syndicate short position is covered by exercise or open-market purchases. Review FINRA Rules 5110, 5121, 5130, and 5131 for compensation, conflicts, spinning, and quid pro quo issues.
Types of Offerings and Registration of Securities
Registration pathways
Securities Act Section 5 requires registration before a public offering unless an exemption applies. Candidates must distinguish an IPO from a follow-on offering, a primary offering (issuer sells new shares) from a secondary offering (selling shareholders sell existing shares), and a shelf registration under Rule 415 from a traditional S-1. A well-known seasoned issuer can use an automatic shelf and file free writing prospectuses more freely.
Private and exempt offerings
Regulation D Rule 506(b) permits sales to an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors, without general solicitation. Rule 506(c) allows general solicitation if all purchasers are accredited and the issuer takes reasonable verification steps. Rule 144A resales go to qualified institutional buyers. Regulation S covers offshore offers. Rule 144 governs resale of restricted and control securities, with holding periods and, for affiliates, volume limits and Form 144 filing.
Worked example
An affiliate of a reporting issuer wants to sell restricted stock under Rule 144. The affiliate must satisfy the six-month holding period, the current public information requirement, the volume limitation (greater of 1% of outstanding shares or the four-week average trading volume), and the manner-of-sale and Form 144 filing requirements. A non-affiliate of a reporting issuer generally must hold six months but faces no volume limit.
Traps in questions
Do not assume 506(c) allows non-accredited investors-it does not. General solicitation is prohibited under 506(b). Gun-jumping and quiet-period violations can trigger rescission rights. Remember that Rule 144A is a resale exemption for QIBs, not an issuer registration method.