Английский язык. Практический курс для решения бизнес-задач

Источник: журнал «Экономика России: ХХI век» № 15 (отрывок);

авторы: Владимир Меркушев, менеджер компании Ernst&Young,

Екатерина Решетникова, старший консультант компании Ernst&Young

Lesson 31 How IPOs are Organized

Read and translate the text and learn terms from the Essential Vocabulary.

IPO Procedure

Initial Public Offerings generally involve one or more investment banks as «underwriters». The issuer enters a contract with the underwriters to sell its shares to the public. The underwriters then approach investors with offers to sell these shares.

A large IPO is usually underwritten by a «syndicate» of investment banks led by one or two major investment banks (lead manager). The underwriters keep a commission based on a percentage of the value of the shares they sell. Multinational IPOs may have as many as three syndicates to deal with differing legal requirements in the home country, the U.S. and other countries. Because of the wide array of legal requirements, IPOs typically involve one or more law firms.

Legal Requirements in the United States

The U.S. has the strictest legal regime in the world governing IPOs. Moreover, federal securities law applies not only to IPOs within the U.S., but to any IPO in the world that targets or is likely to target a large number of U.S. investors.

The IPO process is governed by the Securities Act of 1933 and the regulations of SEC; each stock exchange has separate rules that listing companies must follow. Smaller IPOs may also be significantly affected by state blue sky laws; these laws are usually pre-empted by federal law when the stock is to be listed on a major exchange or NASDAQ, but apply fully to certain medium-scale offerings on a local level.

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.

Pricing

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

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.

Definitions

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