Corporations:

• File Articles of Incorporation
  • Also referred to as a Certificate of Incorporation or Corporate Charter
• Solicit individuals to serve as members of the Board of Directors
  • Board member responsibilities include:
    • Overseeing the management team
    • Corporate governance 
    • Declaring dividends

How Corporations Raise Money:

• Corporation
  • Debt Financing
    • Bonds
      • Bondholders (senior to equities)
  • Equity Financing
    • Stocks
      • Stockholders
        • Preferred (senior)
        • Common (junior)

Issuing Stock:

• The Corporate Charter determines the number of shares that are authorized and can be issued
• Initial Public Offering:
  • Authorized: 1B
    • How many shares the company can offer/sell 
  • Issued: 10M
    • The amount they actually have out there (employees, shareholders)
  • Outstanding: 10M
    • The same as your issued if no share buybacks

Shares Repurchased by Corporation:

• If a corporation chooses to repurchase some of its outstanding shares, they become Treasury stock
• After Share Repurchase:
  • Authorized: 1B
  • Issued: 10M
  • Treasury: Assume we purchase 2M shares back 
  • Outstanding:  Now we have 8M shares outstanding
• Treasury stock does not receive dividends and has no voting rights
• Market Cap = Shares Outstanding * Share Price
• EPS can be increased by repurchasing shares (since it’s in denominator and shares outstanding decreases)

Common Stock Ownership Rights:

• Inspection of Books
• Evidence of Ownership
• Transfer of Ownership
• Participation in Corporate Earnings
  • Entitled to dividends if declared (not guaranteed)
• Voting power, including the:
  • Election of board members
  • Authorization of additional shares and stock splits (but NOT vote for dividends)

Two Voting Methods:

• Statutory
  • Beneficial for large shareholders
  • One vote, per share, per issue
• Cumulative
  • Beneficial for small shareholders
  • Allows shareholders to multiply the number of shares owned by the number of voting issues

Restricted Stock:

• When securities are purchased through a private placement, they are referred to as restricted securities
• Stop-transfer instructions are issued and a legend on the certificates indicates that the securities are unregistered
• Investment Letter of Lock-up Agreement
  • Purchasers must sign the letter to acknowledge that the shares cannot be resold within a defined period 

Rule 144:

• Permits the sale of restricted and control stock
• Restricted Stock:
  • Unregistered stock that is acquired through a private placement or as compensation for senior executives of an issuer
    • Mandatory six month holding period
• Control (Affiliated) Stock:
  • Registered stock that is part of an issuer’s public float and purchased in the open market by officers, directors, or greater than 10% shareholders of the issuer
    • No minimum required holding period 

The CEO has restricted stock. They’ve held it for 3 months. How many can they sell?

• None, because it’s only been 3 months. Need to hold for A MINIMUM of 6 months.
• If he owned these shares on his own, it would be control and he’d be able to sell it

When intending to sell, the SEC must be notified:

• Form 144 filed at the time the sell order is places
• Securities may be sold over 90 days through unsolicited broker’s trades or to a dealer that is acting as principal
• If any shares from this filing remain unsold and the investor wants to sell them, an updated Form 144 must be filed 

Maximum sale allowed is the greatest of:

• 1% of the outstanding shares or the average weekly trading volume over the last four weeks

Filing Form 144 is NOT required if selling no more than 5,000 shares and $50,000 of securities 

American Depositary Receipts (ADRs)

• Characteristics
  • Priced in US dollars
  • Pay dividends in US dollars
  • Sponsored
    • Issued in cooperation with the foreign company
    • May trade on US exchanges (NASDAQ or NYSE)
  • Unsponsored
    • Issued without involvement of the foreign company
    • Generally trade in OTC market (OTCBB or OTC Pink Markets)

Vocabulary:

• Blue Chip
  • Stock of strong, well-established, dividend paying companies
• Growth
  • Stock of companies with sales and earnings that are expanding faster than the economy; pay little (if any) dividends
• Income
  • Stock  of companies that pay higher than average dividends in relation to market price (banks, insurance)
• Defensive
  • Stock of companies that are resistant to recession (utilities, tobacco)
• Cyclical
  • Stock of companies whose value fluctuates with the business cycle (household appliances, automobile)
• American Depositary Receipt (ADR)
  • Facilitates the trading of foreign stock in US Markets

Preferred Stock:

• NO voting rights

• Designed to provide returns that are comparable to bonds
• Pays a stated dividend (not guaranteed)
  • Stated as a percentage of par
    • Par value is typically $100
• Dividends are paid to preferred shareholders before common shareholders
• There are multiple types of preferred stock

Types of Preferred Stock:

• Non-Cumulative
  • Investor is only entitled to the current dividend; the investor is NOT entitled to unpaid dividend (dividends in arrears)
• Cumulative
  • Investor is entitled to unpaid dividends (those “in arrears”) before common stock dividends may be paid
• Callable
  • Issuer has the ability the repurchase the stock (remove stock from market place)
  • Typically repurchased at a premium over par value 
• Participating
  • Investor MAY receive additional dividends based on the company’s profits
• Convertible
  • Investor may convert into a predetermined number of common stock

Example of Cumulative Preferred Stock:

• 6% cumulative: $6 in Y1, $4 reemaning in Y2, another $6 in Year3

Convertible Preferred Stock:

• An investor bought 4%, $100 par convertible preferred stock at $110/share. The stock is convertible at $10 and the common stock’s price has risen to $12
• What is the conversion ratio? (how many shares of CS will I receive?)
  • Par Value / Conversion Price → $100/$10 = 10 Shares
• Based on the increased price of the common stock, at what price should the preferred stock be trading?
  • Market value of common * Conversion ratio = Price of preferred 
  • $12 * 10 shares = $120/share
  • Since the price of the common stock has risen to $12, the convertible preferred stock should be trading at $120

Allows stockholders to share in dividends paid to common stockholders:

• Participating

Permits the issuer to remove the stock from the market

• Callable

Makes up for dividends that not paid in previous years

• Cumulative

Can be exchanged for common stock

• Convertible 

Preemptive Rights:

• A shareholder’s right to maintain percentage ownership; no dilution
  • Distributed through a rights offering
  • One right for each share owned
  • Only for common shareholders
• Discounted:
  • Shareholders exerciser flights at a price that’s below the current market value prior to a public offering
  • Immediate intrinsic value
• Short-term
  • Typically must be exercised within 4-6 weeks
• Tradable

If you owned 1,000 shares of common stock, you would receive 1,000 rights. If you owned 1,000 preferred stock, you would own 0 rights

Warrants:

• Attached to bonds or stocks; act as “sweeteners”
• Allow holders to purchase a specific number of the company’s common shares
  • Exercise price is above the current market value (premium)
  • Long-term
    • May be exercised years after the original issuance
• May be “detached” and traded separately 

Miscellaneous Equity Rules:

• FINRA Rule 2261 – Disclosure of Financial Condition
  • Upon request, a member firm must make its balance sheet available to customers in either physical or electronic form
• FINRA Rule 2262 – Disclosure of Control Relationship with Issuer
  • Before executing a trade in the issuer’s securities, a broker-dealer must disclose to its customers if it has a control relationship with the issuer 
• SEC Rule 10b-18 – Issuer Purchasing its Own Stock
  • For the issuer’s purchases to not be considered manipulative, the following conditions must be met:
    • Only one broker-dealer used
    • Purchases made late in the day are prohibited
    • Purchase price is restricted
    • Single-day purchase amount is limited