 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at selling securities to the public, the basic procedure. This topic is covered in introduction to finance, as well as the CPABEC section. Now, in the next session, we would look at alternative procedure, but we're gonna look at the basic procedures first. Always, if you haven't connected with me on LinkedIn, please do so. YouTube is what house all my lectures, 1,500 plus accounting, auditing finance and tax lectures. This is a sample of all the courses that I cover within my channel. Now, if you'd like additional resources, please go to my website, farhadlectures.com, where you can have access to notes, PowerPoint slides, quizzes, 2000 plus CPA questions if you're studying for your CPA exam. StudyPal.co is an artificial intelligence driven study platform that matches you with a CPA, CFA, or any exam you are studying for. They have users in 85 countries and 2,800 cities. So let's talk about how to issue public, how to issue securities to the public. First thing you wanna know is about the Securities Act of 1933 and the Securities Exchange Act of 1934. So there are many rules and regulation that govern the process of selling securities, but those two act that are administered by the SEC are the most important. And the first thing you wanna differentiate between the 1933 and the 1934. The 1933 is the original federal regulation for all new interstate securities. This is called the primary issuance. Primary means this act govern when a company, so here what we have here is a company, selling stocks to the public. So it govern this process. A company selling stock to the public, the public is given back money to the company to operate. This is the 1933. The 1934 is the basis for regulating securities already outstanding. Now remember, we have the company that sold stocks to the public. Now the public has the stocks. Now the public is gonna exchange the stocks with other public. Okay, then the public will exchange stock with other public with a third party. So the company now is not involved. So the 1934 regulate that what we called secondary market. So this is, I meant to say primary market. This is the primary market, the 1933, and the 1934 is the secondary market. So the SEC administer both acts. The SEC, the Securities and Exchange Commission admission both acts, it's a federal agency. Now, what are the steps in issuing stocks to the public? We're gonna summarize them into five steps, going through them, step one, five, step two of five, step three of five. So the first thing is, management will need to obtain the board of approval if they want to sell stock to the public. And in most cases, the number of shares authorized must increase. If that's the case, that would require the shareholders vote. Because if you want to issue more stocks, my existing stocks value might go down because you're diluting my stocks. So you may require a vote of the shareholders. Okay, that's a step one. You need to have an agreement within the company itself, agreeing that they want to sell, they want to sell stocks to the public. Now, step two in this process is to file and prepare and file what's called the registration statement and file it with the SEC. Now, we need to talk about this registration statement. It's contained in some cases, 50 pages or more of financial information, including financial history, detail of existing business, proposed financing and plan for the future. So simply put, let's think of it this way. If you're selling stocks to the public, if you are selling part of your company to the public, the company wants to know everything that needs to know about your business, such as financial information. How are you planning to finance yourself? What's your plan for the future product you are selling? They want to know as much as possible about the company. And this is called the registration statement, very important, and the financial statements will need to be audited, okay? The registration statements is required for all public interstate issue of securities with two exceptions. Now, there are two exceptions to this. One is if you are raising money to borrow money that mature within nine months. So if you are selling, not selling, if you are selling bonds, yes, if you are borrowing money for nine months, you don't need this registration statement because it's for a short period of time and also you're borrowing money. Also, if you are issuing less than 5 million in stocks, this is called the second exception. This is called the small issue exemption. Basically, 5 million, the SEC does not consider it a lot. What they do in this situation, they simplify the procedure because it's considered a small issue once, okay? Under the basic small issue exemption, issues of 5 million or less are governed by something called regulation A. So you need to know what regulation A, it's only a brief offering statement. So it's not as long as the registration statement. And hopefully this makes sense. And if you are raising money more than 5 million, you would need more requirement. If it's less than 5 million, it's regulation A will do. That's basically what we are seeing here. This is step two. Step three, what's gonna happen is you submitted your registration statement. The SEC is going to examine the registration statement during a waiting period. Now, during that time, during the time when the SEC is reviewing the statement, you can distribute copies of the preliminary prospectus. Now, what is a prospectus? A prospectus contain much of the information of the registration statement and it's giving a potential to potential investors by the firm. So here what you can do, now you can mail this prospectus to potential investors as the SEC is reviewing your work. The preliminary prospectus is also called the red hearing in part because bold red letters are printed on the cover saying this is a prospectus. It means the SEC did not approve it yet. It's under review, okay? So when does the registration statement becomes effective? Usually 20 days after it's filing, unless the SEC sends a letter of comment and suggestions. So if they don't send a letter of comment on any suggestions, basically it's simply put it's approved, okay? Now, if they do send, then you have to wait another 20 days, start again. So every time they need more information, you have to wait another 20 days. Now, it's important to know that the SEC does not consider the economic merit of the proposed sale. So if the SEC said yes, we approve the sale, it doesn't mean it's a good company. All what they're looking for, if they're making sure that you follow the rules and regulation and specifically accounting and disclosure rules, that's what they're concerned. Just because they approve it, it means it's a good investment because most of the time they approve all investments, sorry, they approve all prospectus. It doesn't mean it's a good investment, okay? And the SEC does not check into the accuracy or truthfulness of the information. Well, that's the job of the auditor. They assume that the auditor did their job as well as the internal auditor of the company, the internal procedures, okay? Also the registration statement does not usually contain the price of the new issue. So you don't say how much you're gonna sell the stock by. Usually a price amendment is filed or at the near of the end of the waiting period and the registration becomes effective. So the price is set up all the way at the end, okay? Now, the company cannot sell securities during the registration period. This is step four. However, they can make oral offers. So they can make oral offers, but they cannot actually sell. Then on the effective date, once the date is effective and the price is determined, a full pledge selling effort gets underway. Now you can sell your stocks and you can bring the money to the company. You know, the money will come to the company. So a final prospectus, which doesn't have direct hearing, must accompany the delivery of securities or confirmation of sale, whichever comes first. So here we go. Now, basically what we went through is initial public offering IPO. Assuming it's a new company or if it's an existing company, just we're selling securities to the public. Now, one term we need to be familiar with is tombstone. It's basically an advertisement is used by underwriters which we'll talk about the underwriters in a moment during and after the waiting period. So during the waiting period, they could use what's called a tombstone. And I do have a copy of it on the next slide. It contained the name of the issuer who's issuing the stocks. It provides some information about the issue and it lists the investment bankers or the underwriter involved in the issue. Who are the underwriter? The investment banks on the tombstone which are the underwriters are divided into groups called brackets based on their participation in the issue because the company use someone else, use underwriters, investment bankers to help them sell the stocks, okay? And the names of banks are listed alphabetically within each bracket. Now the bracket are viewed as a kind of back in order. In general, the higher the bracket, the greater is the underwriter prestige. And in recent years, there was no more tombstone because now advertisement you don't need to advertise anything in newspaper. And this is a sample of tombstone World Wrestling Federation entertainment. And the reason this is an interesting one because look at those two prestigious investment firm, Bear Stern and Merrill Lynch. I happen to work for Merrill Lynch. And if you know anything about these two investment firms, they're gone, they're wiped out. I mean, well, Bear Stern is wiped out totally but Bank of America was bought, I'm sorry, Merrill Lynch was bought by Bank of America right here which is part of the banks bought Merrill Lynch which was also part of this offering of the World Wrestling Federation. They're trying to sell 11.5 million shares to the public. So the point is times do change and they do change very fast, okay? Another term we need to be familiar with, it's crowdfunding and crowdfunding came along after the Jobs Act of 2012 that was signed into law. And basically it allow companies to raise money through crowdfunding, it's basically through the internet. So if you want to raise money for your company, as long as you have money, anyone can participate as long as you have money. Which is the practice of raising small amount of capital from a large number of people typically via the internet. So if you have a business idea and you want to raise money, you can do it through crowdfunding, okay? It was first used to underwrite US store of British drug brand, Maryland, but the Jobs Act allow companies to sell equity by crowdfunding. So you could sell equity by crowdfunding. Specifically it allow company to show up to 1 million, okay? Within 12 months in crowdfunding and investors are permitted to invest up to 100,000. So it's not like you can invest as much as possible and the company can not raise as much money as possible within 12 months. So there are some rules, remember, the SEC is trying to protect the public, so they're gonna allow a little bit of leeway but not too much, okay? Now bear in mind, the SEC still sets rules and regulation for these new exchanges, okay? Although it's crowdfunding, it's not through the traditional procedures but they are still in control. Now the next topic we would look at alternative issue methods. So let's think of it, think what we went through is the traditional method. We're gonna look at alternative issue method, alternative issue method. Now if you have any questions, please email me. I suggest if you want more lectures about finance to visit my website and if you want to look at additional resources, that's also a good idea. Once again, I have many, many courses covered and on my website I have a lot of resources that you have access to. I strongly suggest you subscribe, study hard and good luck.