Capital Markets Advisors - Securities Glossary

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The following terms are defined in the Capital Markets Advisors Glossary of Securities Terms:

Acceleration Request
Account
Accredited Investor
Agreement Among Underwriters (AAU)
Allocation
Bracketing (Syndicate) List
Circle
Directed Order
Distribution
Due Diligence
EDGAR
Effective
Filing
Follow-on Offering
Formula Pricing
Free-Riding
Green Shoe (The Shoe)
Gross Spread
Group Sale
Indication of Interest
Initial Public Offering (IPO)
Institutional Pot/Institutional Pot Orders
Jump Ball Pot

League Tables
Manager Bill and Deliver Order
Management Fee
Managing Underwriter
Mezzanine Bracket
Naked Short
One-on-One Meeting (One-on-One)
Participation
Passive Market Making
Penalty Bid
Praecipium
Preliminary Prospectus
Prospectus
Re-allowance
Red Herring
Registration Statement
Retention
Secondary Offering/Distribution
Selected Dealer
Selling Concession
Selling Group
Stabilization
Syndicate

Termination
Tombstone
UA
Underwriting Account
With-Holding

Acceleration Request
Formal request by a registrant/issuer to the SEC to speed up ("accelerate") the automatic declaration of "effectiveness" of its registration statement, which would occur 20 days after filing in the normal course of business.
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Account
Commonly used abbreviation for Underwriting Account.
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Accredited Investor
Defined in Rule 501(a) of Regulation D under the 33 Act, as ammended, to identify eight separate categories of individuals and artificial entities who, by virtue of their close relationship with an issuer, their wealth or other salient factors, have been accorded special treatment by the SEC. Such treatment includes exclusion from the "counting" of permissible purchasers in a Regulation D offering and, where an offering is limited solely to accredited investors, removes the necessity for complying with the mandated narrative disclosure requirements otherwise applicable to such offerings. Accredited investors include natural persons who are executive officers or director of the issuer, any general partner (or executive officer or director or general partner of the general partner) of the issuer, millionaires, and persons whose annual income exceeds $200,000 ($300,000 for individuals and ther spouses) in each of the most recent two years and who have a reasonable expectation of reaching that same level in the current year; entities include banks, savings and loan associations, registered broker-dealers, insurance companies, corporations, trusts, partnerships or organizations described under Section 501(c)(3) of the Internal Revenue Code, in each case, not formed solely for the purpose of making the investment and with total assets in excess of $5,000,000; and certain pension and profit sharing trusts with more than $5,000,000 in assets. Private placement and high risk investments may be sold only to accredited investors.
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Agreement Among Underwriters (AAU)
Document that empowers lead manager to act on behalf of other underwriters in a public offering.
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Allocation
Amount of securities that a firm or individual salesperson has been given ("allocated" to sell, or the amount of securities an end investor receives from a salesperson. Also, the process of allotting (also referred to as "circling") securities.
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Bracketing (Syndicate) List
List of participants in a new issue compiled by the lead manager. Each bracket contains the names of underwriters grouped by equal commitments. The placement of underwriters into brackets is based on historical tradition, general firm size and capital position, past distribution performance, issuer/seller request, and syndicate manager discretion. Types of bracket lists include preliminary draft(s), invitation list and final underwriting.
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Circle
Verbal commitment by the managing underwriter or syndicate manager to allocate a certain number of an underwritten transaction|s securities to a firm or to a salesperson(s) within a firm. This term prohibits others from claiming these securities. A circle becomes an order after the registration statement has been declared effective, the offering has been released for sale and the account "circled" acknowledges receipt of the offering terms and confirms its intention to purchase.
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Directed Order
Institutions may request protection for a large order of an underwritten issue through the syndicate manager, directly from a "pot" of securities (Institutional Pot) set aside for this purpose. Through the manager, the institution may designate ("direct") the sales credits attached to these securities to certain underwriters or selected dealers. Such securities are confirmed and delivered by the lead manager, with sales credits paid out as part of final underwriter settlement. See Manager Bill and Deliver Order.
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Distribution
Crucial to several key provisions of, but not specifically defined in, the 33 Act. Process by which securities find their way from private hands (the issuer or its stockholders) into public hands. Frequently, a distribution may take the form of a public offering, but it may also refer to a series of one or more private sales (and resales) that ultimately come to rest in the hands of the investing public. Also, indicating the act of sending something to an investor, e.g., cash dividend, additional shares, etc.
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Due Diligence
Pursuant to preparation for a transaction, the formal procedure whereby an investment bank(s) and its (their) counsel perform all necessary inspection and examination of a company's operations, books and records in offer to satisfy it (themselves) as to the accuracy and legitimacy of the company's statements and representations with regard to past history, current operations and future prospects. Investment banks acting in an underwriting or advisory capacity are of necessity exposed to potential claims that may be made against them under certain provisions of the 33 Act, 34 Act or 40 Act should the transaction go awry. Their standard defense is demonstration of performance of due diligence.
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EDGAR
(SEC|s) Electronic Data Gathering and Retrieval (System).
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Effective
Declaration by the SEC that its review of a registration statement is complete. After the SEC declares a registration statement effective, the lead manager may release the securities for sale, commence the offering, and confirm indications of interest into orders.
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Filing
Actual filing of a registration statement by an issuer with the Securities and Exchange Commission. From 1933 until 1996, a physical event but now electronic via EDGAR.
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Follow-on Offering
Underwritten new issue of shares that already have an existing public market.
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Formula Pricing
Used on follow-on or secondary offerings only. Such an issue is typically priced according to a pre-determined "formula" -on the closing bid (for a Nasdaq listed issue) or at the last sale (for an exchange listed issue) and re-offered to the public concurrent with pricing. A precursor to 430-A offerings.
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Free-Riding
Either the prohibited practice whereby an investor buys and sells a new issue security so rapidly as to avoid actually putting up any money, or the prohibited practice of an NASD member firm selling securities to preferred individuals while unfilled orders from the public still exist. See also With-Holding.
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Green Shoe (The Shoe)
Another term for the over-allotment option granted to underwriters in the underwriting agreement. It was first used in an offering for the Green Shoe Company in 1963.
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Gross Spread
In an underwritten transaction, the difference between the price paid to an issuer by the underwriter(s) and the reoffering price that purchasers must pay. The gross spread is th pre-expense fee earned by underwriters and has traditionally been broken down into a management fee (approximately 20 percent), an underwriting fee (20 to 30 percent) and a selling concession (50 to 60 percent), but there are no hard and fast rules covering this breakdown.
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Group Sale
Originally used to describe a procedure whereby institutional purchases from the pot carry no designation for credit to specific underwriters. Purchase is made out of the "institutional pot," and each underwriter receives sales credits based on the percentage its underwriting commitment bears to the entire offering. In current practice, an offering subject to group sale usually means that the lead manager will not allocate any free retention shares to underwriters. Rather, the lead manager, possibly co-managers, and perhaps a select number of firms who are "friends of the company," will place all shares on behalf of the entire syndicate. The lead manager then compensates each underwriter not allocated shares with a dollar amount equal to the sales credits that would have been earned on a normal free retention (e.g., 10 percent of its underwriting commitment).
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Indication of Interest
Dealer|s or investor|s non-binding interest in purchasing securities that are in registration. Indications of interest are not firm commitments to buy a security and should be solicited only with information obtained from a preliminary prospectus. Each prospective purchaser must receive a preliminary prospectus. Indications of interest are meant to be an accurate reflection of investor interest in an offering, and the sum total of such indications of interest is the pre-price book in a deal.
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Initial Public Offering (IPO)
Company|s first offering of stock to the public which may be all primary (new), all secondary (already issued and outstanding), or a combination of primary and secondary.
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Institutional Pot/Institutional Pot Orders
Managing underwriters often establish a "pot" which will "protect" stock for institutional clients. Institutions are theoretically able to designate the sales credits attached to portions of their total order to any member(s) of the underwriting account or other selected dealers. In practice, the lead manager normally obtains the lion|s share. Designated(or directed) orders are typically treated as "Manager Bill and Deliver" (MBDs) with all of the order processing and settling handled directly between the institutional investors and the bookrunning manager.
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Jump Ball Pot
With regard to institutional pot sales credits, this arrangement theoretically puts all co-managers and underwriters on equal footing in competing for orders. In reality, the book running manager almost always has a distinct edge, and issuers sometimes elect to limit or "cap" the lead manager|s portion of sales credits.
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League Tables
Quarterly and annual tables published by third-party statistical services to rank investment banking activity by a variety of measures, e.g., total dollar volume, number of deals lead-managed or co-managed, etc. Used by firms in their pitch books to indicate investment banking prowess.
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Manager Bill and Deliver Order
(aka manager B&D or MBD) Occurs when an institution purchases securities directly from an underwriter(s) (away from the institutional pot) and later requests that the lead manager withhold the securities from such underwriter(s) and deliver them directly to the purchasing institution—in effect, a bookkeeping device.
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Management Fee
Portion of the gross spread in an underwriting that goes only to the lead manager and any co-manager(s). Currently it is approximately 20 percent in a negotiated transaction and five percent in a competitive transaction, although no hard and fast rules exist. Its actual amount is not disclosed to the public nor is the split of this fee between managers (if there is more than one) disclosed - a split that may be even or uneven.
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Managing Underwriter
Lead investment banking firm of a syndicate formed for the purchase and distribution of a new issue of securities. The Agreement Among Underwriters authorizes the managing underwriter, or syndicate manager, broad and sweeping powers to act as leader for the group in structuring, marketing, pricing, purchasing, distributing and trading the issue in the immediate aftermarket. The firm "running the books".
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Mezzanine Bracket
Underwriting bracket whose participation commitment is less that the major firms but greater than any regional firms. See Bracketing (Syndicate) List.
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Naked Short
Oversold syndicate short position that exceeds the amount that may be purchased (covered) from the issuer/seller as part of any over-allotment option.
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One-on-One Meeting (One-on-One)
As relates to pre-price marketing of a new issue via a roadshow, a meeting between an institutional investor and senior officials of the issuer(most commonly the CEO and CFO), accompanied by a representative of the lead manager and usually held on the premises of the potential investor.
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Participation
Level of activity or commitment when a firm acts as an underwriter or a selected dealer but not as a lead or co-manager.
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Passive Market Making
Technique permitting an underwriter(s) to continue to make a secondary market in the underwritten security until the deal has been priced.
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Penalty Bid
Technique to discourage flippers from operating in the immediate after market of an underwritten offering. The lead manager may place a penalty bid on its stabilizing or short-covering of an IPO and enforce the penalty by charging back the sales credits attached to the repurchased shares to the underwriting member or selling group participant who originally distributed such stock. DTC facilitates this process by disclosing the seller|s identity to the lead manager through DTC|s electronic tracking process.
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Praecipium
Originally developed and widely used in eurobond offerings. So-called "super" management fee usually taken only by a global coordinator(s) in a multi-tranche, global offering. The carve out of a piece (normally 25 to 50 basis points - but no hard and fast rule exists) of the traditional management fee and payable only to the global coordinator(s) e.g., a three percent gross spread produces a management fee of 60 basis points - the praecipium might range from 25 to 50 of this 60.
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Preliminary Prospectus
Also known as a red herring and used to solicit pre-price interest in an underwritten offering. Gives preliminary information about the financial status of the registrant company, background of management, risk(s) of the offering, use of proceeds, etc. A preliminary prospectus is distinguishable from the final prospectus by the SEC-mandated red ink disclaimer strip printed on the left hand side of the cover page of the document indicating that the information contained therein is subject to completion or amendment; that a registration statement has been filed, but the SEC has not yet declared it effective; and that individual state securities laws govern distribution of the document.
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Prospectus
Specific portion of a registration statement filed with the SEC in a registered public offering, including the bulk of mandated narrative and financial disclosures. The prospectus is the portion of the registration statement distributed to the public. More generically, the term refers to any written offering document used in any offering (public or private). The issuing company, its legal counsel, the underwriter(s) and its (their) legal counsel all work together to prepare this document. It describes the company and the offering terms. A preliminary prospectus (red herring), issued prior to SEC effectiveness, contains sections which describe the use of proceeds; financial data; investment policies; description of company; description of offering and plan of distribution. The final prospectus, issued after effectiveness, also includes a list of underwriters, the price paid to the company, the gross spread or underwriter|s compensation and other non-money terms, as well as any material change(s) which may have taken place between original filing and effectiveness.
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Re-allowance
Largest discount from the offering price at which trading between dealers may take place in a new issue security prior to the termination of its price and trading restrictions.
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Red Herring
See Preliminary Prospectus.
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Registration Statement
Formal name given to the document filed with the SEC containing mandatory disclosure of a company|s business and financial prospects in order to effect registration of securities under the 33 Act or state securities law. Registration statements filed with the SEC are made on different forms depending on the SEC rules applicable to the issuer, type of transaction in which the securities will be issued and other factors. These SEC forms are designated with the letter "S" followed by a hyphen and the number of the form. Part I of the document is the prospectus distributed to the public. Part II, containing additional and more detailed information such ad the company|s certificate of incorporation, its bylaws, the underwriting agreement, etc., is not widely distributed (circulated) but is available upon order from the SEC.
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Retention
Amount of an underwriter's statutory underwriting commitment which the lead manager allows the underwriter to keep for the underwriter's own sales effort. Initial retention is usually a fixed percentage of the underwriter's total underwriting commitment, while final retention includes any give-ups, additional takedown(s) and directed orders. See Directed Order.
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Secondary Offering/Distribution
Public sale of a large block of already issued and outstanding securities held by investors, usually corporations, institutions or other affiliated persons, with the proceeds from such offering going to the selling shareholder(s) rather than the issuer. Such a sale is handled in the over-the-counter market, usually underwritten and executed at a fixed price with the seller(s) obtaining permission from the applicable SRO. A term often but erroneously used to denote a follow-on public offering of primary shares for an already listed company.
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Selected Dealer
Non-underwriter distributor of a new issue, earning only the sales credit portion of the gross spread and only on the securities it actually distributes. See Selling Group.
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Selling Concession
The discount, or difference between the price at which underwriter and selected dealer participants make purchases from the lead manager, and the public offering price at which such participants make sales to the public.
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Selling Group
Composed of two groups: (1) an underwriter participates in selling group to the extent that its net take down exceeds its underwriting commitment; and (2) a non-underwriter participates in selling group when it takes down underwritten securities for re-sale to an investor(s). See Selected Dealer.
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Stabilization
The placement by the lead manager of orders to buy, or in NASDAQ of a syndicate bid, for the purpose of preventing the fall in price of the offered security during the offering period. This is a from of temporary manipulation permitted by Regulation M.
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Syndicate
Ad hoc group of underwriters(dealers) who band together to underwrite (purchase from the issuer/seller), almost always at a fixed price less an underwriting discount(gross spread), and to distribute a new issue of securities or a block (usually large) of already issued and outstanding securities at a stated fixed price to investors.
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Termination
Removal of formal price and trading restrictions of a new issue, indicating that the securities are free to trade in the open (secondary) market. The lead manager issues formal notice of this event, most often after the determination that the issue is "all sold." If there is a penalty bid in effect, it may remain so.
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Tombstone
Advertisement announcing an underwritten offering, or other investment banking transaction, that may include, but is not limited to, the name of the issuing company, amount and description of securities, offering price, trading symbol, location of secondary trading and name(s) of underwriter(s). So-called because of its formal, stilted appearance.
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UA
Underwriting Agreement.
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Underwriting Account
Entire list of dealers committed to purchase an issue.
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With-Holding
The prohibited practice wherein a syndicate member withholds a portion of newly issued securities from the public in anticipation of selling them at a price higher than the initial public offering price.
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