Investment Banking and Securities Law - Finance - Lecture Slides, Slides of Finance

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Investment Banking and Securities Law

Lecture Agenda

1. Conflicts – Issuers & Investors

2. Securities Legislation

3. IPOs and Investment Banking

4. Post IPO Regulation

Conflicts Legislation IPOs^ Post IPOs

Participants in Securities Markets

Investment Banking and Securities

Law

Issuers and Investors in Securities

Issuers of Securities

• Corporations must issue securities to raise capital in order to invest in plant/equipment, working capital, research and development in order to produce products and services that meet needs in a competitive market environment.
• Corporations must design securities that meet the investing needs of investors.

Investors in Securities

• Investors has surplus cash at the moment, but hope to transform that cash into larger sums in the future by investing in appropriate securities
• Some investors have long investment time horizons and have the capacity to accept risk (for example a large pension fund)
• Other investors have short investment time horizons, require a liquid investment and do not have the capacity to accept risk

Information Asymmetry

Investment Banking and Securities

Law

Conflicts Between Issuers and Investors The Basic Problem of Asymmetric Information

• Information asymmetry occurs when one

party to a transaction has information that

the other party doesn’t.

• Superior information creates a situation

where one party can use that information

for their own benefit at the expense of the

other.

Conflicts Between Issuers and Investors

Some Canadian Examples of Fraudulent Activities

• Broker-dealers (securities dealers) dealing

in penny stocks known as “bucket shops”

• Issuing shares in highly speculative mining and

real estate companies

• Use of ‘ wash sales’ and high pressure sales

tactics

• The case of Norbourg Asset Management

Inc. where founder Lacroix was accused of

stealing $84 million of investors money

from the firm he controlled.

Implications of Financial Fraud for

Financial Markets

• If investors are not convinced that the markets are reasonably

fair, they will not invest.

• Societies where individuals do not respect the rule of law, or where law breakers are not found and punished, find that financial markets cannot develop
• In these cases, legitimate businesses operating those countries lack access to capital, cannot invest, cannot create jobs and cannot compete in international markets for their products and services.
• In the end, the standard of living in countries with no respect for the rule of law is extremely low, and they are often plunged into political turmoil.
• In such places, people bury their funds or hide them under their pillow cases…and everyone loses!

Primer on Securities Legislation in Canada

Basic Responsibilities

• Provinces are responsible under the Canadian Constitution for

securities regulation.

• Many argue that a national regulator would improve the

efficiency of Canadian financial markets by harmonizing laws

and their enforcement.

• Provincial regulators (like the Ontario Securities Commission)

meet regularly to coordinate efforts through the CSA (Canadian

Securities Administrators)

• The CSA among other things:
  • Issues National Policy statements that provide recommendations for Provincial regulators to follow
  • Maintain SEDAR.com (System for Electronic Data Access and Retrieval) which is a website that maintains all information for publicly-traded companies in Canada.

Primer on Securities Legislation in Canada

What is a Security?

A security includes “ any document,

investment or writing commonly known

as a security”

• In determining whether a security

exists, the following are factors that are

considered:

• Whether the promoter raises money and

leads the investor to expect a profit

• Whether the investor has any control on

how the money is spent

Securities Offerings

Investment Banking and Securities

Law

Security Offerings

The Prospectus Versus Offering Memorandum

Prospectus

• A disclosure document in support of public offering of securities
• Must provide “full, true and plain disclosure of all material information pertaining to the security being issued”
• Consists of two parts:
  • Long-form prospectus – contains information about the corporate issuer, directors, financial performance, operations, etc.
  • Short-term prospectus – contains information pertaining to the particular securities that are being offered including price, type of security, intended use of the proceeds, etc.

Offering Memorandum

• A disclosure document in support of an offering of securities in the exempt market
• Has the same objectives of disclosure as a prospectus, however, offers significantly less information because of the nature of exempt /sophisticated investors

IPOs and Investment Banking

• IPO – Initial Public Offering

– Primary offering of securities to the public (

a first-time distribution by the issuer)

– Difficult to ‘value’ or price because there is

no prior history of trading in the securities

by unrelated parties in arms length trading

– Must be accompanied by a prospectus.

IPOs and Investment Banking

Motivation for IPOs

• Going public requires the firm to incur significant changes and

costs including:

• Costs of meeting market listing requirements including the costs associated with information disclosure requirements expected of public companies
• Underwriting and distribution costs associated with the public offering including prospectus and underwriters spread and potentially underpricing costs associated with the IPO
• Listing fees
• The motivation for going public include:
• Access to capital
• Greater public visibility (perhaps increasing the market demand for the firm’s products and services)
• Ability for venture capital firm and/or entrepreneur to ‘harvest’ their investment
• Ability to reward managers through options that will now have a market value