Explore key terms and concepts related to financing and listing securities, including underwriting, IPOs, and regulatory requirements in the Canadian financial market.
In Chapter 12, we delve into the intricate world of financing and listing securities, a critical component of the financial markets. This glossary serves as a comprehensive guide to the key terms and concepts that are essential for understanding the processes and mechanisms involved in bringing securities to market. Whether you’re preparing for the CSC® exam or enhancing your knowledge of the Canadian financial landscape, this glossary will provide clarity and insight into the complex terminology used in this field.
After-market stabilization refers to the techniques employed by underwriters to support the price of a newly issued security in the secondary market. This is crucial in maintaining investor confidence and ensuring a smooth transition from the primary to the secondary market. Underwriters may engage in buying back shares or exercising the Greenshoe option to stabilize prices. For example, if a new stock is trading below its IPO price, underwriters might purchase shares to prevent further decline.
The auction process is a method of issuing securities where bids are submitted, and securities are allocated based on the highest bids. This process is often used in government bond auctions. In Canada, the Bank of Canada conducts regular auctions for Government of Canada bonds, where primary dealers submit competitive bids, and securities are awarded to the highest bidders.
In a best efforts underwriting agreement, underwriters commit to selling as much of the offering as possible without guaranteeing the entire issue. This contrasts with firm commitment underwriting, where underwriters purchase the entire issue and resell it to the public. Best efforts underwriting is often used for smaller or riskier offerings where the demand is uncertain.
The broker of record is the financial professional responsible for handling a client’s transactions and records. This individual acts as the primary point of contact for the client and ensures that all transactions are executed in accordance with the client’s instructions and regulatory requirements.
A Capital Pool Company (CPC) is a unique Canadian vehicle created to raise funds through an Initial Public Offering (IPO) to acquire a business or significant assets. This program, exclusive to the TSX Venture Exchange, allows emerging companies to access public capital markets without the need for an established business. The CPC raises funds with the intention of completing a qualifying transaction within a specified timeframe.
A convertible bond is a type of bond that can be converted into a predetermined number of the issuing company’s shares. This feature provides investors with the potential for capital appreciation if the company’s stock performs well. Convertible bonds offer the security of fixed income with the upside potential of equity.
Continuous disclosure refers to the ongoing reporting requirements for public companies to inform investors of material developments. In Canada, these requirements are enforced by securities regulators to ensure transparency and protect investors. Companies must regularly update their financial statements, management discussion and analysis (MD&A), and other relevant information.
A creditor is an entity to which money is owed, typically through loans or bonds. Creditors have a legal claim to the debtor’s assets in the event of default. Understanding the rights and obligations of creditors is essential for assessing the risk associated with debt securities.
Dealers and banks are financial institutions involved in underwriting and distributing securities. They play a crucial role in the capital markets by facilitating the issuance and trading of securities. In Canada, major banks like RBC and TD are key players in the underwriting process, providing expertise and distribution networks.
Delisting is the removal of a security from a stock exchange, ending its public trading. This can occur voluntarily, if a company chooses to go private, or involuntarily, if it fails to meet the exchange’s listing requirements. Delisting can have significant implications for shareholders, as it reduces liquidity and market visibility.
A fiscal agency is an organization authorized to manage government funds and securities issuance. In Canada, the Bank of Canada acts as the fiscal agent for the federal government, overseeing the issuance of government bonds and treasury bills.
The Greenshoe option is an over-allotment option that allows underwriters to sell additional shares to stabilize the offering. This option provides flexibility to meet excess demand and stabilize the stock price post-IPO. The term “Greenshoe” originates from the Green Shoe Manufacturing Company, the first to use this option.
An Initial Public Offering (IPO) is the first sale of a company’s shares to the public. This process allows companies to raise capital from a broad base of investors and gain access to public markets. The IPO process involves extensive regulatory compliance, including the preparation of a prospectus and meeting listing requirements.
The issuing company is the entity that creates and sells securities to raise capital. This company is responsible for complying with regulatory requirements and providing investors with accurate and timely information about the offering.
Market capitalization is the total market value of a company’s outstanding shares. It is calculated by multiplying the current share price by the total number of outstanding shares. Market capitalization is a key indicator of a company’s size and market value.
A market out clause is a provision allowing underwriters to cancel an offering under certain conditions, such as adverse market events or significant changes in the issuer’s business. This clause protects underwriters from unforeseen risks that could impact the success of the offering.
A non-competitive tender is a bid submitted to purchase securities at the average yield without specifying a rate. This type of bid is commonly used in government bond auctions, allowing smaller investors to participate without competing on price.
The offering price is the price at which securities are sold to the public. This price is determined by the underwriters and the issuing company based on market conditions, investor demand, and the company’s financial performance.
The over-allotment option, also known as the Greenshoe option, allows additional shares to be sold if demand is high. This option provides underwriters with the flexibility to meet excess demand and stabilize the stock price post-IPO.
Primary dealers are financial institutions authorized to deal directly with the government in issuing securities. In Canada, primary dealers play a key role in the distribution of government bonds and treasury bills, ensuring efficient market functioning.
A prospectus is a formal document that provides detailed information about a security offering to potential investors. It includes information about the issuer, the terms of the offering, and the risks involved. In Canada, the prospectus must be filed with securities regulators and made available to the public.
The public float is the portion of a company’s shares that are available for trading by the public. It excludes shares held by insiders, such as company executives and major shareholders. The size of the public float affects the liquidity and volatility of a company’s stock.
A red herring prospectus is an initial prospectus filed before the final details of the offering are determined. It provides preliminary information about the offering and is used to gauge investor interest. The term “red herring” refers to the disclaimer printed in red on the cover page, indicating that the document is not final.
Regulatory requirements are the legal obligations that issuers must comply with when offering securities. These requirements are designed to protect investors and ensure market integrity. In Canada, securities regulators enforce these requirements through continuous disclosure obligations and prospectus filings.
A secondary offering is the sale of existing shares by shareholders rather than the issuer. This type of offering does not raise new capital for the company but allows existing shareholders to monetize their holdings. Secondary offerings can impact the stock price by increasing the supply of shares available for trading.
A short form prospectus is a simplified prospectus used by qualified issuers to expedite the offering process. This document provides essential information about the offering and is subject to less stringent regulatory requirements than a full prospectus. In Canada, the short form prospectus system is designed to facilitate timely access to capital markets for seasoned issuers.
A syndicate is a group of investment dealers and banks that underwrite and distribute a large securities issue. By pooling resources and expertise, syndicates can manage large and complex offerings, ensuring broad distribution and market support.
A trust indenture is a legal document outlining the terms of a bond issue and the obligations of the issuer. It includes details about the interest rate, maturity date, and covenants designed to protect bondholders. The trust indenture is administered by a trustee, who acts on behalf of the bondholders.
The underwriting fee is the compensation received by underwriters for managing and distributing the securities offering. This fee is typically a percentage of the total offering amount and is shared among the syndicate members based on their participation.
Yield to maturity (YTM) is the total return anticipated on a bond if held until it matures. It considers the bond’s current market price, coupon interest payments, and time to maturity. YTM is a key measure of a bond’s attractiveness to investors, providing a standardized way to compare different bonds.
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