INTRODUCTION TO

CORPORATE FINANCE
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‡ Learning Objectives
‡ Important Terms
‡ Conflicts between Issuers and Investors
‡ Securities Legislation in Canada
‡ IPOs and Investment Banking
‡ Post
Post--IPO Regulation and Seasoned Offerings
‡ Summary and Conclusions
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ou should understand the following:

‡ That the core problem in raising capital is information

asymmetry, which, in extreme cases, can to lead to
fraudulent activities
‡ The importance of securities laws and regulations in
financial markets
‡ The basic steps included in the initial public offering
(IPO) process
‡ What is included in a prospectus and why it is critical
for IPOs
‡ Why continuous disclosure requirements are important
for investors, and how they affect secondary offerings.

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‡ Agency theory ‡ Greenshoe

‡ Asymmetric information ‡ Initial public offering (IPO)
‡ Banking (or dealer) Investment Dealers
syndicate Association
‡ Bearer bonds ‡ Lead investment dealer
‡ Best efforts offering ‡ Limit orders
‡ Bought deal ‡ Lock
Lock--up period
‡ Continuous disclosure ‡ Long
Long--form prospectus
‡ Distribution period ‡ Market or disaster ´outµ
‡ Due diligence clause
‡ Exempt market ‡ Market orders
‡ Fair disclosure ‡ Offering memorandum
‡ Firm commitment offering ‡ Overallotment

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‡ Ponzi scheme
‡ Standby or rights
‡ Preliminary prospectus offering
‡ Private equity ‡ Underpricing
‡ Prospectus ‡ Underwrite
‡ Reporting issuers ‡ Venture capital
‡ Securities and ‡ Waiting period
Exchange Commission
(SEC)
‡ Selling group
‡ Short
Short--form prospectus
‡ Spinning
‡ Spread

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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.
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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






  
 
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In addition to issuers and investors there are other
participants in the financial markets including:
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Given the diversity of parties, interests, goals, skills and

access to information, the financial marketplace is an
attractive target for scam artists who seek to try to take
advantage of others.

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‡ 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.

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‡ William E. Lyons attempting to sell US $220

million in fraudulently issued zero coupon
bonds to Bear Stearns, Merrill Lynch, Goldman
Sachs Group and Chase Manhattan
‡ Common use of bearer bonds in Europe
‡ Ponzi schemes

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‡ Broker
Broker--dealers (securities dealers) dealing in
penny stocks known as ´bucket shopsµ
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‡ The case of Norbourg Asset Management Inc.
where founder Lacroix was accused of stealing
$84 million of investors money from the firm he
controlled.

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‡ If investors are not convinced that the markets are
reasonably fair, they will not invest.

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‡ 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:
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A security includes ´ any document, investment

or writing commonly known as a securityµ

‡ In determining whether a security exists, the

following are factors that are considered:
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‡ Given that the markets for stocks are concentrated in

Ontario (TSX, TSX Venture Exchange) the OSC has
considerable responsibility and influence over securities
regulation in Canada.

‡ The OSC is involved in five major areas in which

securities are transferred or traded:
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‡ IPO ² Initial Public Offering

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‡ Going public requires the firm to incur significant
changes and costs including:
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‡ The motivation for going public include:
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V. Best efforts offering

2. Firm commitment offering
3. Bought deal
4. Standby or rights offering

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‡ Underpricing of an IPO occurs when the price of the IPO

is less than its market value
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‡ There is evidence of systemic underpricing in most
OECD countries (see Table V -V on the following slide)
‡ Reasons for underpricing and the various degrees of
underpricing in different capital markets include:
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‡ Following the IPO a quiet period is required before the

investment dealer·s research analysts can initiate
coverage on the company.
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‡ Misleading research reports were identified in the U.S.
during the internet bubble and analysts from major U.S.
underwriters were charged for providing such reports.
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‡ Following the IPO investors do not receive the

prospectus when investing in securities
‡ Public companies are expected to become
reporting issuers and provide continuous
disclosure including:
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‡ All required information for public issuers in
Canada is available at SEDAR.com
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‡ Reporting issuers in Canada can take advantage of the

annual information form and short-
short-form prospectus (a
system known as the Prompt Offering Prospectus (POP)
system) in order to speed their access to capital
markets.
‡ The short
short--form prospectus system has given rise to the
use of the ¶bought deal· in Canada.
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‡ The underwriting market in Canada has become
extremely competitive as information requirements have
been decreased through the POP system.

(See Table V -2 on the following slide for recent Canadian underwriting trends.)

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In this chapter you have learned:

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ohn Wiley & Sons Canada, Ltd Ltd.. All rights
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