Capital Markets Outline

 
Spindler_CapMarkets_Spring_2015
 
1/21/2015
Overview/PowerPoint slides
 
·         Shadow bank: non-bank institutions that don't take deposits.
o    Short-term liabilities and long-term assets
o    Got in trouble in 2008
·         Biggest bank failure was Washington Mutual (2008).
·         Mutual fund: Company like Vanguard that takes money from people saving for retirement, and mutual fund company buys stocks (pool of money used to buy other things).
o    Investment pool.
o    Under securities law, called investment companies and are heavily regulated.
o    Money-market mutual fund.
·         Broker/dealer requirements
o    Madoff was broker dealer, invested for the clients through mutual fund.
·         Ponzi scheme- taking new investment money to pay old investors as their ROI.
·         Market making activities
o    Securitization and derivatives
 
Unit 1 (Facebook Pre-IPO):
·         Securities offerings (every security offerings/sales is one of these 3 things):
o    Registered
o    Exempt
o    Illegal
·         1933 Act (Securities Act of 1933):
·         Why trade securities? Economics of liquidity
o    Creating liquidity in stock allows creation of public offering in your stock but that is not only way.
·         How to provide liquidity short of a registered offering (IPO)?
·         Evidence on welfare effects of these formal markets?
o    No evidence but that's because hard to study effects (sample size of 1- the whole market).
·         Three areas of regulation for securities transaction:
o    Issuance/Sale:
·         Issuer, like Facebook, selling shares to someone outside of FB (offer/sale).
·         Sophistication of the parties comes into play; Gordon Gekko playing with shares compared to uneducated people like farmers.
§   Information asymmetry- one party knows more than another one does.
·         Causes market to break down due to adverse selection. 
·         Heavily regulated (gekko to farmer transaction; but not so much farmer to farmer)
·         Primary sale
o    Trading middleman (broker/dealer)
·         Gekko trader to another Gekko trader with Morgan Stanley handling transaction.
§  Morgan stanley/similar middleman there to help supervise that no one lying etc. and makes transaction anonymous so no communication of info between ultimate buyer and seller.
·         Anonymizes transaction.
·         Would prefer that the middleman be neutral on the stock they are trading.
·         Firewalls exist to block the middleman employees working for that client stock and other ones that are supervising transactions in order to not have conflict of interest.
·          Middleman broker/dealer makes money from fees and from market making (covering spread).
§  Less need for regulation than first example, not as concerned with information asymmetry as long as neither has insider trading info.
§  Secondary sale (not directly from company, being traded among investors)
§  Can have price discovery problems, don't know what stock is worth and relying on money manager to know value AND thus need for regulation and basic rules for regulation are: need to be loyal to client and can't lie,  fiduciary role in putting interests of clients in front of their own (investment advisors for people; if between Gekkos does not really matter).
o    Investment pools and advice
·         General rule for providing investment advice (investors giving money to Zoom LLC that then buys FB stock for them), required to disclose how much intermediary paid for the stock.
·         This category is kind of a subset of 1 and 2 (issuance/sale & trading middlemen).
·         Intermediary between primary/secondary sale.
 
1/26/2015
 
1933 Act
 
·         No trade theorem- when you realize one party wants to trade with you, they know something you don't and thus should not trade so never trade.
·         Three types of offerings:
o    Registered: IPO or Seasoned offering (public offering) and filings with SEC, after this you are public company and have quarterly and annual filings with SEC.
o    Exempt:
·         4(2) private placement
§  Rule 506: Accredited investors
·         Safe harbor of 4(2)
·         This is what hedge funds use, and selling to rich people (people making over 300k, and have over one million net worth).
§  Reg S: Offshore exemption
§  Rule 144A:
·         Safe harbor of 4(2).
·         Resale of qualified institutional buyers rule, for very liquid markets.
·         Insurance and banks
·         If starting company and selling stock to angel investors; sale of security?
§  Probably
·         If you run company as partnership and take on money investor (you and partners do), is that a sale of securities
§  Yes, anything can be a security (anytime you are raising money in any sort of company, can be considered to a security probably). Can be partnership, unincorporated entity.
o    If not exempt or registered, then illegal:
·         If do it intentional, can go to jail.
·         If unintentional, buyer of securities has right of rescission against you and unwind the sale and this is at their option; if things go well, they don't have to do so but if it goes bad they give back to you for price they paid for.
§  This is if you made illegal offering.
·          How was FB able to sell stock to employees, founders and venture capitalists without having to file registration statement?
o    Private placement, exempt category:
o    4(a)(2)- Section 5 of Act don't apply to transactions by an issuer not involving any public offering- aka they are all private offerings.
·         Employees, founders etc are all private sales.
·         Can't go put in an ad in wall street journal seeking investors (this is for registered offer of securities going through SEC, but it is not exempt deal).
·         What makes something private?
§  If the offer is limited to people who are sophisticated and informed, that counts as a non-public offering of securities.
§  Qualify for 4(a)(2) by offering only to sophisticated and informed; and these are employees and informed venture capital. Can make them informed