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Capital Formation • Financial Advertising

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Financial Investment Glossary

Financial Investment Glossary of Investment Banking Terms

ACCREDITED INVESTOR: A person or institution deemed capable of understanding and able to afford the financial risks associated with purchasing securities. Individuals need a net worth exceeding $1 million or income over $200,000 annually in the past two years and a reasonable expectation of the same income level in the current year.

AFFINITY GROUPS: People who already possess some connection to the developing company, such as customers or suppliers.

AFTERMARKET: The stock market activity in which traders buy and sell shares in a public company after it has gone public.

ANGEL INVESTOR: Friends, family, or wealthy individuals who invest their money usually in start-up or early-stage companies. According to the SBA, angel investors were the largest source of external equity capital for small businesses in the U.S. at about $30+ billion a year.

BROKER (STOCKBROKER-REGISTERED REPRESENTATIVE): An individual who has registered with the SEC, the exchanges, the NASD, and appropriate states, and who has passed certain tests and requirements allowing her or him to be involved in the business of buying and selling securities.

BROKER-DEALER: An individual or, more commonly, a group of individuals who have met certain standards and are licensed to buy and sell securities for others (broker) for their own accounts (dealer).

BULLETIN BOARD STOCK (BBS): An over-the-counter (OTC) stock for which bid and ask prices can be obtained from the OTC Bulletin Board operated by the NASD.

COMMON STOCK (SHARES): Units representing ownership of a corporation. If the company is liquidated, the claims of its creditors and owners of bonds or preferred stock take precedence over the common stockholders; common stock usually has more potential for appreciation.

CORPORATE CLEANUP: When a company is owned by an entrepreneur, it may be used to minimize taxes. Its structure may reflect negotiations with angel investors or venture capitalists. There can be a certain casualness about corporate proceedings. When presented to the public and the securities regulators, the business should be simple, tidy, and as independent as practicable. This transformation is called corporate cleanup and calls for some balance among the securities lawyer, marketing advisor, and management.

DIRECT PUBLIC OFFERINGS: Offerings of new securities by a company made directly to the general public without the services of an underwriter or investment bank. (Available on the internet since 1995.)

DUE DILIGENCE: The process of gathering and confirming information about a company and its business, management, and financial affairs.

EFFECTIVE DATE: The date on which a company's registration statement becomes effective with the regulatory agencies (SEC and state agencies), allowing it to begin selling its securities.

EMERGING GROWTH COMPANY: The definition of growth company is a business beyond the start-up phase but not yet mature. The term emerging growth company is used to describe a business that is just coming out of a start-up and entering the growth company category. Most candidates for an initial public offering are emerging growth companies.

EMERGING GROWTH STOCK: A popular term to describe shares of companies large enough to have a trading market, but still in the early stages of an expected period of growth.EXCHANGE: The stock exchange on which an issue is listed (NYSE, AMEX, or regional exchanges).

EXEMPT (SECURITIES): Securities, usually common stock, that are exempt from federal and state full registration laws.

GOING PUBLIC: The process wherein a privately held company sells shares to the general public via an initial public offering (IPO).

INITIAL PUBLIC OFFERING (IPO): A private company's first public sale of a specific class of security, usually common stock whether by an underwriter or a direct public offering (DPO).

INSTITUTIONAL INVESTORS: Typically refers to pension funds, insurance companies, mutual funds, and endowments with large amounts of money managed by professional investors. The majority of the stock of large companies is held by institutional investors, large pools of capital controlled by money managers.

INVESTMENT BANK (BANKER): A financial firm or individual, sometimes also a stock broker-dealer, who acts as an intermediary and whose principal functions are to identify companies that need financing and then provide them with advice on the corporate financing functions and methods to obtain financing.

ISSUER: An entity, usually a corporation, that has the ability to issue and distribute securities. For each share, there is an issuer and an investor.

LETTER (RESTRICTED) STOCK: Stock that is purchased in a private offering and has certain restrictions on its sale or transfer.

MARKET MAKER: A broker-dealer that quotes firm bid and ask prices in a given security and stands ready to buy or sell a stock at publicly quoted prices in the over-the-counter market in a minimum amount of 100 shares.

MEMORANDUM: A document similar to a prospectus, sometimes also referred to as an offering circular, which is the official document by which private placements are offered and sold. (PPM refers to Private Placement Memorandum.)

NASD (NATIONAL ASSOCIATION OF SECURITIES DEALERS): A self-regulating organization composed of broker/dealers which the SEC recognizes as a substitute for government regulation. Testing of individual brokers and operating requirements for broker/dealers are administered by the NASD.

NEW ISSUE: The stock of a company that is now going, or has just gone, public.

NICHE MARKET: A marketing program directed at a particular group of prospects who fit defined characteristics and are seen as neglected by competitors. A niche is selected and described through market segmentation. It is a step beyond selecting target markets, because the search is for prospects that are in an overlooked niche.

OFFERING CIRCULAR: A disclosure and information document used to furnish information about a company and its stock offering to prospective investors; commonly used for exempt offerings and patterned after a prospectus.

OTC: Abbreviation for over-the-counter and is associated with OTC companies, their stocks, and the OTC market, where a market maker quotes bid and ask prices at which he or she will buy and sell shares of stock.

OTC BULLETIN BOARD: An electronic information system operated by the NASD that furnishes bid and ask prices of smaller capitalized OTC-traded stocks.

PRIVATE PLACEMENT: A nonpublic offering of securities exempt from full SEC registration requirements that is usually made directly by the issuing company but may also be made by an underwriter.

PROCEEDS: The net amount of monies received by a company from a public offering; "use of proceeds" describes how a company intends to use the money.

PROSPECTUS: The official offering document that is part of the registration statement filed with the SEC in conjunction with a public offering of fully registered securities.

REGULATIONS A AND D, AND SCOR: SEC Exemptions from filing a full registration statement under the Securities Act of 1933.

RESTRICTED SHARES: Shares of stock usually obtained in a private placement or owned by an insider where their resale has certain restrictions.

SCOR (SMALL CORPORATE OFFERING REGISTRATION): An SEC-exempt offering for the sale of securities up to the amount of $1 million that must be qualified under state blue-sky laws (Also known as ULOR.)

SEC: The U.S. Securities and Exchange Commission, which is charged with the administration and enforcement of federal securities laws.

SECONDARY OFFERING: A term generally applied to an offering made after an initial public offering.

SECONDARY MARKET: The trading market (aftermarket) for stocks after they have undergone an initial public offering.

SECURITIES: Broadly includes common or preferred stocks and bonds, but can also include other types of financing instruments such as debentures, warrants, and convertible offerings.

SECURITIES ACT OF 1933: The federal law, including amendments, pertaining to the offering of securities administered by the SEC.

SECURITIES EXCHANGE ACT OF 1934: The federal law, including amendments, pertaining to the trading of securities, stock exchanges, firms, and brokers administered by the SEC.

SHAREHOLDERS: Individuals or entities who own the securities (shares/stocks) of a company.

STOCK MARKET: The trading market for publicly held securities that includes the OTC, NASDAQ, the NYSE, the AMEX, and regional and foreign exchanges.

TELEMARKETING: Using the telephone as a means of marketing. This has been virtually the only medium employed in underwritten public offerings, where securities firms have their registered representatives telephone prospects to announce the offering, make a sales presentation, and take an order-preferably all in one call. In a direct public offering, telemarketing is one component of the marketing program. It may be passive (limited to answering incoming responses from prospects to the proposition) or active (initiating follow-up calls to prospects, after the fulfillment for their conversion into a sale.

UNDERWRITER: A stock brokerage (securities) firm that sells the stock for a new public company.

VENTURE CAPITAL: The money invested to start and develop a company. Traditional venture capital firms that fund emerging growth companies are commonly funded themselves by institutional investors (pension funds, insurance companies, and investment trusts). On a broader basis, venture capital comes from founding company entrepreneurs, friends and family, angels, accredited investors, and other companies that may be strategic partners.


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