Financing, or underwriting as it is sometimes called, is the process by which a company or government raises capital either publicly or privately.
For corporations, this can be accomplished by an initial public offering, or IPO. The process may vary depending upon whether the security is equity, or corporate or government debt.
An IPO is created when a company requires financing that simply cannot be arranged privately.
The IPO demands a great deal of skill by the underwriter, since the company seeking financing is relying on the expertise and advice of the investment dealer in providing funding. How the issue is handled can affect the financial well-being of the company for years to come.
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The investment dealer must be competent, imaginative, thorough and diligent in the preparation of the official financing documents as well as in the marketing of the issue. For example, the underwriters advise the company on matters such as the price and size of the offering, based on their experience and on information gathered during a marketing period before the final prospectus is issued.
Securities acts regulate the way securities may be sold, and also require that whenever a new issue of securities is to be offered to the public, a prospectus must be prepared in accordance with the requirements of the particular provincial act. It must also be accepted for filing by the provincial securities commission.
The basic principle is that “full, true and plain disclosure of all material facts relating to the securities offered” must be made in the prospectus.
In no way does the prospectus imply that any government body has approved the issue as a suitable or an attractive investment. The prospectus is designed only to enable the prospective investor to make an intelligent decision.
It’s important that the investor request a copy of the preliminary prospectus for an IPO from his investment adviser, and read it carefully before making any investment decisions.
During a distribution, an investor has the right to withdraw from the agreement to buy the securities within two business days after getting or being considered to have received the prospectus.
The total number of initial public offerings on the Toronto Stock Exchange increased in 2002, mainly because of a rise in income trust activity.
IPOs in Canada hit a $5.8 billion record in 2002, according to a survey by accounting firm PricewaterhouseCoopers, 86 percent of which were income trusts.
Of the 69 IPOs completed last year, only nine, including the TSX itself, were traditional equity deals involving common stock. The deal raised nearly $400 million through an IPO in November, making it the first publicly traded stock
exchange in North America.
The income trust boom helped CIBC seize the title as Canada’s top equity underwriter, according to figures compiled by Financial Post Datagroup.
CIBC dominated underwriting for the year’s hottest sector, raising nearly $3 billion for income trusts, almost $1 billion more than runner-up Scotia Capital Inc. CIBC did it by spearheading the movement into the business trust sector.
Until recently, most income trusts were based on energy or real estate assets. CIBC persuaded investors to invest in businesses as diverse as sardines, bleach and nail manufacturers.
When IPOs become available, your investment adviser should be able to discuss the investment suitability for your portfolio.
Ian Morrison is an investment adviser with Wood Gundy Private Client Investments in Calgary and is licensed to sell insurance products. His views do not necessarily reflect those of CIBC World Markets Inc. or The Western Producer. Morrison can be reached at 800-332-1407 or by e-mail at ian.
morrison@cibc.ca.
