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Before the IPO begins in earnest, the issuer must draft a prospectus. The prospectus is a detailed overview of the company’s finances, history, operations, products, risk factors, industry environment, etc. The SEC actively polices the content of each IPO prospectus, and law firms are usually involved in the drafting process.
Under the Securities Act, until an IPO is registered with the SEC, no public offering of any kind may be made by the issuer or its underwriters. Any offering during this «quiet period» is called «gun jumping». After filing, the issuer and underwriters may advertise the IPO through a simple «tombstone» advertisement, listing the name of the company, the amount of stock being offered, the names of the underwriters, and other basic information. Private placement discussions and limited press releases are also permitted. Any written offers to sell stock must be accompanied by a copy of the prospectus as submitted to the SEC, which is usually stamped with a warning of its non-final status in red letters and therefore called a «red herring».
Once the SEC approves the prospectus, the price of the shares is finalized and the IPO enters a «free riding» period in which shares may be offered for sale in a number of ways, such as telephone calls, «road shows» and institutional visits.
The issuer is liable for any misstatement or omission in the prospectus; its directors and underwriters may also be liable if they fail to undertake a «reasonable investigation». Underwriters may defend against liability by completing a due diligence investigation of the issuer, usually involving outside lawyers and accountants.
Legal Requirements in the European Union
The EU does not have a central regulatory mechanism for IPOs, but has made several steps toward unifying European laws relating to IPOs, most notably the Prospectus Directive of 2003. In Europe, underwriters generally face joint and several liability for the underwriting of all the offered securities. This differs from the U.S. rule, where each underwriter is separately liable for their allotted portion of the offering.
Historically, IPOs both globally and in the U.S. have been underpriced. The effect of underpricing an IPO is to generate additional interest in the securities. This leads to massive gains for investors who enter the IPO early. However, underpricing an IPO results in «money left on the table». Investment banks take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company.
Investment banks assist public and private corporations in raising funds in the capital markets, as well as in providing strategic advisory services for M&As and other types of financial transactions. They also act as intermediaries in trading for clients. Investment banks differ from commercial banks, which take deposits and make commercial and retail loans. In recent years, however, the difference between them has blurred, especially as commercial banks are now offering more investment banking services. In the U.S., the Glass-Steagall Act, created in the wake of the Stock Market Crash of 1929, prohibited banks from simultaneously accepting deposits and underwriting securities; it was repealed by the Gramm-Leach-Bliley Act in 1998. Investment banks may also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds.
There appears to be considerable confusion today about what does and does not constitute an «investment bank» and «investment banker». In the strictest definition, investment banking is the raising of funds, both in debt and equity, and the name of the division handling this in an investment bank is often called the «Investment Banking Division» (IBD). However, only a few small boutique firms solely provide this, with almost all investment banks heavily involved in providing additional financial services for clients such as the trading of fixed income, foreign exchange, commodity and equity securities. It is therefore acceptable to refer to both the «Investment Banking Division» and other ‘front office’ divisions such as «Fixed Income» as «investment banking».
More commonly used today to characterize what was traditionally termed «investment banking» is «sell side». This is trading securities for cash or securities (i.e., facilitating transactions, market making), or promoting securities (i.e. underwriting, research, etc.). The «buy side» constitutes the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell side in order to maximize their return.
Role of Modern Investment Banks
The original purpose of an investment bank was to raise capital and advise on M&As and other corporate financial strategies. As banking firms have diversified, investment banks have come to fill a variety of roles:
– Underwriting and distributing new security issues
– Offering brokerage services to public & institutional investors
– Providing financial advice to corporate clients, e.g. on securities issues and M&As
– Providing financial security research to investors and corporate customers
– Market making in particular securities.
Investment banks have also moved into forex markets, private banking, asset management and bridge financing.
A key role of investment banks is to help companies raise capital in the capital markets by arranging the issuance of new securities. There are two ways to do this: through a public offering or through a private placement.
The Main Activities and Units
Large, global investment banks typically have several business units, including Investment Banking, concerned with advising public and private corporations; Research, concerned with producing reports on valuations of financial products; and Sales and Trading, concerned with buying and selling products.
An investment bank is split into the so-called Front Office, Middle Office and Back Office, with Front Office widely deemed as having the highest-caliber employees in terms of intellectual and/or interpersonal capital, and Back Office the least
Front Office.
Investment Banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on M&As and Corporate Finance. Investment bankers prepare idea pitches that they bring to meetings with their clients, with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction.
Financial Markets is split into four key divisions: Sales, Trading, Research and Structuring.
– Sales and Trading is often the most profitable area of an investment bank, responsible for the majority of revenue of most investment banks. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients’ orders to the appropriate trading desks, which can price and execute trades, or structure new products.
– Research is the division which reviews companies and writes reports about their prospects, often with «buy» or «sell» ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank.
– Structuring has been a recent division as Derivatives have come into play, with highly technical employees working on creating complex structured products, which typically offer greater margins and returns than underlying securities.
Middle Office.
Risk Management involves analyzing the risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent ‘bad’ trades having a detrimental effect to a desk overall.
Back Office.
Operations involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers.
Technology – Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for IT support.
Recent Evolution of the Business
Investment Banking is one of the most global industries, and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout Investment Banking history, many have theorized that all investment banking products and services would be commoditized. However, new products with higher margins are constantly invented by bankers in hopes of winning over clients and developing trading know-how in new markets. Since these cannot be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins. For example, trading bonds and equities for customers is now a commodity business, but structuring and trading derivatives is highly profitable. Each contract has to be uniquely structured to match the client’s need, may involve complex pay-off and risk profiles, and is not listed on any market.
Possible Conflicts of Interest
Potential conflicts of interest may arise between different parts of a bank, creating the potential for financial movements that could be deemed as market manipulation. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the U.S.) require that banks impose a Chinese Wall which prohibits communication between Investment Banking and Research and Equities.
Some of the conflicts of interest involved in investment banking are:
Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many researchers allegedly traded positive stock ratings directly for investment banking business. Companies would also threaten to divert investment banking business to competitors unless their stock was rated favorably. Increased pressure from regulators and a series of lawsuits and prosecutions curbed this business to a large extent following the 2001 stock market tumble.
Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities that did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.
Since investment banks engage heavily in trading for their own account, there is always the temptation or possibility that they might engage in front running.
Source: Wikepidia
1. underwriting (UW) n – андеррайтинг (покупка ценных бумаг у эмитента для перепродажи или собственных инвестиций); страхование; гарантирование размещения займа
underwriter n – андеррайтер, гарант
underwrite v – гарантировать, страховать
2. syndicate n – синдикат (консорциум)
syndicate v – синдицировать, образовывать синдикат
3. lead manager – лид-менеджер (ведущий менеджер: банк, являющийся главным организатором и гарантом займа)
4. blue sky law – «законы голубого неба» (законы ряда штатов, предназначенные для защиты от мошенничества при эмиссии и торговле ценными бумагами)
5. pre-emption n – покупка прежде других; преимущественное право на покупку
pre-empt v – покупать раньше других; приобретать преимущественное право; осуществлять преимущественное право
pre-emptive a – преимущественное право
6. prospectus n – проспект эмиссии
7. quiet period – «тихий» период (период до и некоторое время после регистрации эмиссии, когда запрещено заниматься ее рекламой)
8. gun jumping – нарываться (торговля ценными бумагами на основе еще не обнародованной информации; незаконное принятие брокером приказов на покупку новых, еще не зарегистрированных ценных бумаг)
9. tombstone n – «надгробный памятник» (краткое объявление в финансовой прессе о займе, выпуске новых акций, поглощении и т. п.)
10. red herring – предварительный вариант проспекта эмиссии до регистрации в Комиссии по ценным бумагам и биржам США
11. road show – презентация компании или эмиссии ценных бумаг, которая устраивается компанией и ее инвестиционными советниками в основных финансовых центрах
12. misstatement n – неверное, ложное утверждение
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