Merger, Acquisition & Transaction Consultants

King & Associates, P.C.

 

 

DEFINITIONS

 

(C) Copyright 2006-08

Here follows a detailed glossary of commonly used securities terms.

 

 

Acceleration - Securities cannot be sold unless a registration statement has become effective with the SEC, or a specific exemption applies. That effective date occurs automatically 20 days after it is filed, unless an SEC stop order or refusal order is in effect. In reality, however, each filing includes a 'delaying amendment' so that it cannot become effective automatically. Then the lawyers file a request for acceleration of the effective date to a selected day and time.

 

Aftermarket - The trading market that develops for shares after the public offering is over. Orders to buy or sell shares are matched in the over-the-counter (OTC) market by a securities firm acting as a market maker. For NYSE or American Stock Exchange shares, a specialist on the stock exchange will match orders. The quality of the aftermarket is measured by its ability to absorb bid price or asked price orders without major disruptions in the price. That ability is a function of the market's liquidity - the number of shares owned by the public, rather than by company insiders (called the float), and the extent to which the public is active in trading the shares, rather than holding them for the long term.

 

Affiliate - normally defined as an individual or corporation in a position to exert direct influence on the actions of a corporation. Among such persons are owners of 10% or more of the voting shares, directors, and senior elected officers and any persons or entities in a position to exert influence through them - such as members of their immediate family and other close associates.

 

All-or-none Offering - Each public offering will have a total number of shares that must be sold. Sometimes, in a direct public offering or a best efforts underwriting, a condition of the offering will be that all shares offered must be sold or the offering is cancelled and none of the shares will be sold; this is an all-or-none offering.

 

 

American Depositary Receipts (ADR) - A negotiable receipt representing a specific number of equity shares in a foreign corporation. ADRs trade in American dollars in the American securities market like domestic equities.

 

American Depositary Shares (ADS) - A trading unit for the issuer in the U.S. which may represent more or less than one underlying share of the issuer. ADSs are issued in New York in registered form, eligible for trading and clearing in the U.S. markets, and may be made eligible for clearing outside the U.S. in Euroclear and CEDEL.

 

Angel Investors - Also known as informal, wealthy investors, these are people who invest money in the business at its start-up or "seed capital" stage, before other sources of capital are available. They are usually relatives or friends of the entrepreneur, or individuals with the wealth and experience to take significant risks for above-average long-term rewards.

 

Annual Report - Financial statements and management's discussion and analysis of the company's operations and condition. For companies with registered shares under the Securities Exchange Act of 1934, an annual report must be filed with the SEC, following a Form 10-K format. Most states require corporations to send annual reports to their shareowners. These usually require audited financial statements, but their form and content is left to management's preference.

 

Asked Price - Shares traded in the OTC market will have prices quoted by their market makers, either on NASDAQ, on the OTCBB or in the Pink Sheets. The quotations are for the bid price (what the market maker will pay to buy at least 100 shares) and the asked price (what it will accept to sell at least 100 shares).

 

Bad Boys - Past offenders under securities fraud laws. When the SEC authorizes exemptions from full registration statements, such as Regulation A and SCOR, it prevents their use by a corporation affiliated with persons who have, within the previous five years, been convicted of securities fraud or who are subject to any enforcement order by a securities regulator. Filing under the securities laws requires disclosure of bad boy affiliations.

 

Best Efforts Underwriting - A type of underwriting, in which a securities firm agrees to use its "best efforts" to sell shares as an agent for the company. There is no minimum number of shares that the underwriter must sell.

 

Bid Price - The price at which the bidder will buy a specified number of shares (see asked price).

 

Big Four - The largest international independent public accounting and consulting firms.

 

Blind Pool - Public offerings also known as "blank check." These offerings are made without any specific business plan or purpose described for use of the offering proceeds. Normally, the business purpose of the company is to effectuate a merger or acquisition with an as-yet-to-be-specified company.

 

Blue Sky Laws - State securities laws.

 

Board of Directors - The governing body of a corporation, which sets policy and appoints major officers. Directors are elected by the shareholders.

 

Bonds - Debt securities generally for borrowings due to be repaid several years after they are issued. Bonds are legal instruments to evidence borrowed money.

 

Book Value - The amount of a corporation's shareholders' equity. Also called net worth. Literally, the company's assets minus liabilities.

 

Broker - Defined in the securities laws as a person in the business of buying and selling securities for the accounts of others. This may be a registered representative of a securities firm, an independent broker-dealer, or a financial planner.

 

Broker-Assisted - Direct public offerings can be successful without using any commissioned sales people. However, the size of the offering, it's timing, or other factors may suggest using licensed brokers to sell part of the offering. They can be allocated a portion of the shares to sell on a best efforts basis to their own customers or by cold calling the prospects they generate. Or, the company can deliver the names and telephone numbers of people who have requested a prospectus to selected brokers and pay a negotiated commission rate for the conversion into sales.

 

Bulletin Board Stock - Over-the-counter shares, for which bid price and asked price information is available on-line through the OTC Bulletin Board (OTCBB), operated by the NASD.

 

Capitalization - The debt and equity structure of a company.

 

Certain Transactions - When money or property has passed between the company and one of its insiders, it may require explanation in the prospectus. The name "certain transactions" comes from the instructions accompanying the SEC forms for registering a public offering. For example, when an entrepreneur hopes to take a company public, it is wise to avoid any of the situations that would need description in the certain transactions section. They may make it difficult to qualify the offering under the blue sky laws of a merit state. Descriptions of certain transactions tend to be lengthy and complicated, causing prospects to reject the offering based on their "smell test."

 

Cheap Stock - When insiders have invested in the company within three years before the public offering, the amount they paid will be compared with the offering price to the public. A big difference raises the cheap shares issue, which must be dealt with satisfactorily for the public offering to be cleared through SEC and state blue sky laws. A NASAA Statement of Policy defines "cheap stock" and provides for their escrow as a condition to qualify the public offering in some states. While in escrow the shares cannot be traded. Release from escrow is typically conditioned upon meeting a three-year earnings-per-share test equal to 5 percent of the public offering price, a three-month period of trading at 175 percent of the offering price, or six to nine years after the offering.

 

Closing - In an underwriting, the company delivers share certificates, and the underwriters pay for the shares they have sold, less their commissions and expenses. The closing date is generally a week after the effective date of the underwriting. In a direct public offering, there will be a date when the offering closes and no more orders are accepted. An allocation is then made when more shares have been ordered than were offered, and certificates are mailed to the new shareholders.

 

Closing Meeting - Final meeting to effect the exchange of the offered securities for the proceeds of the offering.

 

Comfort Letter - A letter provided by the company's independent accountants, at the underwriters' request as part of their due diligence that details the performance of specified procedures and findings and contains certain representations.

 

Common Shares - Also known as common stock, these are the basic units of ownership in a corporation. Their voting rights elect the board of directors, which sets policy and hires and fires management. When a corporation is sold or liquidated, whatever is left after paying off creditors and any senior securities belongs to the owners of common shares.

 

Control Person - Control persons are insiders subject to special rules about trading in the company's shares and passing on information about the company that would be important to a decision about buying or selling its shares. They include executive officers, directors, and the owners of more than ten percent (10%) of the company's shares. Securities laws place potential liability for investor losses onto persons who "control" the company.

 

Conversion - A direct public offering follows the steps of direct marketing: (1) the proposition (offer to provide a prospectus), (2) the prospects' response in requesting the prospectus, (3) fulfillment through delivery of the prospectus, and then (4) conversion of the prospects into shareholders.

 

CUSIP Number - All certificates for publicly traded shares require an identification known as a CUSIP number. They are issued by the New York office of Standard & Poor's Corporation.

 

Deficiency Letter - Often called a "letter of comment." When a registration statement has been filed with the SEC or a state securities administrator, the regulator will usually generate a list of comments from the staff assigned to the letter's review. There are usually separate comments for the text and the financial statements. The process generally involves comparing the filing with the most recent ones the agency has cleared for similar businesses. Since the law does not call upon the SEC to pass upon the adequacy of a registration statement, the comments are only "suggestions." Failure to make changes or otherwise explain each matter may mean that the registration statement never becomes effective and the offering is cancelled. Sometimes the staff will send a bedbug letter, telling the company that its registration statement is considered so deficient that it cannot be fixed with an amendment.

 

Delaying Amendment - When a registration statement is on file with the SEC, it would automatically reach an effective date and be usable to sell securities. To prevent this, securities lawyers and consultants routinely include a delaying amendment in the filing. They then request acceleration of the effective date to a selected time.

 

Depositary Receipts (DR) - Permit investors to acquire and trade in foreign securities, while at the same time giving the issuing companies access to the major international markets.

 

Dilution - The effect on a purchasers' common equity interest caused by disparity between the public offering price and net tangible book value per share immediately preceding the offering.

 

Direct Public Offering or "DPO" - An offering, in which a company sells securities to investors through direct marketing. This contrasts with an underwritten public offering sold by registered representatives who work for securities firms in an underwriting syndicate.

 

Due Diligence - The responsibility of underwriters and others, who prepare or sign the registration statement, to conduct a reasonable investigation to provide a basis for their belief that the registration statement does not contain misstatements or omissions of material facts at its effective date.

 

Effective Date - The date on which the registration statement becomes effective and the public offering begins.

 

EDGAR - The SEC's Electronic Data Gathering, Analysis, and Retrieval system for companies to file registration statements and periodic reports by computer media.

 

Equity - In finance and accounting this term means the owner's investment in the business. It is used interchangeably with shareholder's equity or net worth. It includes amounts the owners have invested, plus or minus the earnings or losses that have been accumulated from operating the business.

 

Escrow Account - An account in which the offering proceeds are kept prior to closing of an offering.

 

European Depositary Receipts (EDR) - Usually listed on a European exchange, represented by a single global certificate, and deposited with a common depository on behalf of Euroclear and CEDEL. Ownership in the EDR is shown on, and transfers thereof are effected through, records maintained by Euroclear and CEDEL. EDRs are not issued in the U.S. and therefore are not subject to regulation by the SEC.

 

Exempt Transactions - Registration provisions of securities laws apply to every purchase and sale of securities, unless a specific exemption applies. Most stock market transactions are exempt, as are private placements. The SEC and the courts keep the interpretation of exempt transactions rather narrow. It can be dangerous to sell shares without a no-action letter or an opinion of counsel that the proposed transaction is within SEC safe harbor rules or other defined limits.

 

Filing Date - The day on which a registration statement for a public offering is filed with the SEC (or a filing is made to qualify under state blue sky laws). It marks the end of the pre-filing period and the beginning of the waiting period.

 

Finder - A person who introduces a company to a source of financing - an investor or another financial intermediary, like a bank or securities firm. Finders typically get paid a fee upon closing of the financing.