Section 7.1: The Primary Market

  • 🏦 What is the Primary Market?

    • The primary market is where corporations sell new stocks and bonds to the public to raise money.

    • Think of it as the “maternity ward” of finance — it’s where securities are born.

    • The issuer is selling new securities to raise capital.

⚖️ Securities Act of 1933:

  • This law governs the primary market and:

    • Requires full and fair disclosure to investors.

    • Requires that new issues (unless exempt) be registered with the SEC before sale.

    • Requires all investors in a corporate issue to receive a prospectus.

    • Prospectus:
      A detailed disclosure document that includes all material information an investor needs to make an informed investment decision.

💰 Why Securities Are Sold:

  • Corporations issue securities to:

    • Fund expansion, mergers, or acquisitions.

    • Reduce debt.

  • Governments issue securities to:

    • Fund major projects.

    • Pay for ongoing expenses.

    • Refinance or replace higher-interest debt.

👥 Primary Market Participants (“Persons”)

  • In securities law, a person can be either:

    • A natural person (a human being), or

    • A legal entity (like a corporation, government, or municipality).

Key participants:

  • Issuers:

    • The entity selling the securities (corporations, municipalities, or the federal government).

  • Underwriters (Investment Bankers):

    • Broker-dealers who work with issuers to structure and sell new issues to the public.

    • May form a syndicate (temporary group of underwriters) to raise capital.

  • Investors:

    • Those purchasing new issues with the intent to hold them.

    • Divided into Institutional, Retail, and Accredited investors.

  • Municipal Advisors:

    • Broker-dealers who advise municipalities on issuing municipal bonds or other securities.

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👤 Types of Investors

  • Institutional Investors:

    • Entities that pool money to buy securities or assets.

    • Examples: banks, insurance companies, pension funds, hedge funds, mutual funds, investment advisers.

    • Qualified Institutional Buyers (QIBs): Institutions that own and invest at least $100 million in securities.

    Retail Investors:

    • Individuals investing their own money.

    • Receive more communication and disclosure because they are often less experienced.

    Accredited Investors:
    Defined under Regulation D of the Securities Act of 1940, includes:

    • Insiders of the issuer (officers, board members, major shareholders).

    • Individuals with income ≥ $200,000 ($300,000 jointly) for the past two years and expected in the current year.

    • Individuals with net worth ≥ $1 million (excluding primary residence).

    • Holders of certain financial licenses (Series 7, 65, or 82).
      ➡️ Must meet at least one of these criteria.

📈 Types of Offerings

  • Initial Public Offering (IPO):

    • The first time an issuer sells a security to the public.

    • These securities have never been traded before.

  • Additional Public Offering (APO):

    • The issuer sells more shares of a security that’s already been sold publicly in the past.

    • Raises additional capital by selling new shares.

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✺ Review questions ✺

  • a) Securities Exchange Act of 1934
    b) Securities Act of 1933
    c) Investment Company Act of 1940
    d) FINRA Rule 2111
    ✅ Answer: b) Securities Act of 1933

  • Prospectus

  • a) Corporation
    b) Municipality
    c) Individual investor
    d) Federal Government
    ✅ Answer: c) Individual investor

  • $100 million in securities

    • IPO = First time a company sells securities to the public.

    • APO = Company sells additional shares that have already been issued before.