1.2.3 Underwriting and Issuance of Securities

Introduction

In the Canadian securities industry, investment dealers play a crucial role as financial intermediaries, particularly regarding the underwriting and issuance of securities. Understanding this process is essential for students preparing for the Canadian Securities Course (CSC®) certification. This section will provide an overview of the underwriting process, the concept of syndication, and the significance of Initial Public Offerings (IPOs).

The Underwriting Process

Underwriting is a critical component in the issuance of new securities. Investment dealers evaluate and assume the risk associated with distributing new securities to the public or private investors. The underwriting process involves several key steps:

Key Steps in Underwriting

1. Due Diligence: This initial phase involves thorough research and analysis by the underwriters to verify the financial health, business model, and potential risks of the issuer. The aim is to provide investors with a comprehensive and accurate understanding of the security offering.

2. Pricing: Investment dealers, in collaboration with the issuing company, determine the offering price for the securities. Pricing involves market analysis, assessment of investor demand, and consideration of similar offerings.

3. SEC Approval: For public issues, approval from securities regulators (e.g., the Securities and Exchange Commission in the US, or the Canadian Securities Administrators for Canadian companies) is required before securities can be offered to the public.

4. Marketing and Distribution: After regulatory approval, the securities are marketed to potential investors. This phase often includes roadshows and presentations to generate interest and inform investors about the offering.

5. Selling Group: The investment dealer may form a selling group or syndicate to help distribute the securities. This spreads the risk and increases the reach of the offering.

Mermaid Diagram: Underwriting Process

    graph TD;
	    A[Start: Due Diligence] --> B[Pricing];
	    B --> C[SEC Approval];
	    C --> D[Marketing and Distribution];
	    D --> E[Selling Group Formation];
	    E --> F[Successful Issuance];

Syndication

Syndication involves a group of investment dealers working together to underwrite and distribute a significant security issue. The primary dealer, or lead underwriter, organizes the syndicate:

• Role of Syndicate Members: Each syndicate member undertakes to sell a proportionate share of the securities. This collaboration minimizes the risk per underwriter and expands the distribution network for the issue.
• Managing the Allocation: The lead underwriter manages the allocation of securities to syndicate members, deciding the share that each member will distribute.

Initial Public Offerings (IPOs)

Initial Public Offerings are a pivotal stage in a company’s growth, marking the transition from a private entity to a publicly traded company. The process and significance of IPOs include:

• Capital Raising: IPOs enable companies to raise substantial capital by selling shares to the public, providing funds for expansion, debt repayment, or other business activities.
• Market Visibility: Going public increases the company’s visibility and credibility in the market, potentially leading to better terms with lenders or partners and attracting top talent.
• Process: The IPO process involves due diligence, filing a registration statement with regulatory bodies, deciding on a price range with underwriters, and launching a roadshow to attract institutional and private investors.

Mermaid Diagram: IPO Process

    graph TD;
	    A[Start: Prep for IPO] --> B[Choose Underwriters];
	    B --> C[File Registration Statement];
	    C --> D[Regulatory Approval];
	    D --> E[Price Setting with Underwriters];
	    E --> F[Launch Roadshow];
	    F --> G[IPO Day: Begin Trading];

Glossary

• Underwriting: The process by which investment dealers assess and assume the risk of distributing new securities.
• Syndication: The collaboration of multiple investment dealers to share the risk and distribution of securities.
• Initial Public Offering (IPO): The first sale of a company’s shares to the public, converting it from a private to a public entity.

Additional Resources

• Canadian Securities Administrators (CSA)
• Investment Industry Regulatory Organization of Canada (IIROC)

Summary

Investment dealers are at the heart of the underwriting and issuance of securities in the Canadian market. By conducting due diligence and pricing, facilitating syndication, and managing IPOs, they enable the capital-raising activities essential for corporate growth. Mastery of these concepts is vital for anyone entering the securities industry.

Understanding these intricate steps and processes will not only prepare you for the CSC® certification exam but also enhance your comprehension and capability within the broader financial services environment.