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  1. 1. Part V: Investment Banking Topic 15 – Securities Underwriting
  2. 2. Investment Banking Investment banking : involves activities related to underwriting and distribution new issues of debt and equity securities
  3. 3. Investment Banking <ul><li>Primary Markets : Newly issued securities </li></ul><ul><ul><li>Raise new capital for the firm </li></ul></ul><ul><ul><li>Agents (investment banks) create a public market for the client’s securities </li></ul></ul><ul><li>Secondary Markets : Previously issued securities </li></ul><ul><ul><li>Market makers facilitate trading of previously issued securities </li></ul></ul><ul><ul><li>Trades through agency transactions match buyers and sellers (ie. brokers operating through an exchange like the NYSE) </li></ul></ul><ul><ul><li>Trades through principal transactions – institutions trading on their own account a (taking a long or short position in a security) </li></ul></ul>
  4. 4. Primary Market Choices <ul><li>Financing choices available to the firm : </li></ul><ul><ul><li>Venture capital </li></ul></ul><ul><ul><li>Private equity </li></ul></ul><ul><ul><li>Bank financing (loans) </li></ul></ul><ul><ul><li>Private security issuance (fewer than 35 investors) </li></ul></ul><ul><ul><li>Public issue of securities </li></ul></ul><ul><li>Investment bank focus </li></ul><ul><ul><li>on items (4) and (5), underwriting issuances </li></ul></ul><ul><ul><li>but are also increasingly engaged in (1) and (2), taking positions in private firms on behalf of their customers or on their own account </li></ul></ul>
  5. 5. Types of Public Security Issuances <ul><li>There are several different ways in which a firm can raise capital in public markets , including: </li></ul><ul><ul><li>Initial Public Offering (IPO): A private firm issues publicly traded shares for the first time </li></ul></ul><ul><ul><li>Seasoned Equity offering (SEO): An already public firm issues new shares, again. </li></ul></ul><ul><ul><li>Carve-out : A corporation issues shares in a subsidiary to the public </li></ul></ul><ul><ul><li>Spin-off : Firm issues all subsidiary shares to current shareholders of the firm </li></ul></ul><ul><ul><li>Fixed income : Debt issuances (corporate bonds) </li></ul></ul><ul><ul><li>Direct Public Offering (DPO) : Shares are offered direct to public shareholders </li></ul></ul><ul><li>Questions that highlight the differences between each type of offering : </li></ul><ul><ul><li>Is capital being raised by the firm? </li></ul></ul><ul><ul><li>Is this the first time raising capital in public markets? </li></ul></ul><ul><ul><li>What type of security is being issues (debt/equity)? </li></ul></ul><ul><ul><li>Who is the original owner of the firm (entrepreneur, public firm)? </li></ul></ul>
  6. 6. Types of Public Security Issuances <ul><li>IPO Issuances : </li></ul><ul><ul><li>This is the most visible type of security issuance with respect to exposure in financial publications </li></ul></ul><ul><ul><li>Consider the Google IPO of 2005 and the news surrounding the issuance events </li></ul></ul><ul><ul><li>IPO firms are being valued by the “market” for the first time, and establishing the initial valuation (based on firm private information) and finding public market investors willing to pay that valuation is the specialization of an investment bank </li></ul></ul><ul><li>SEO Issuances : </li></ul><ul><ul><li>Market values are already established, so placing these securities is generally less difficult than an IPO since there is less asymmetric information. </li></ul></ul><ul><ul><li>Types of SEO’s </li></ul></ul><ul><ul><ul><li>Follow-on offering : Is an SEO in which new shares are issued to the public </li></ul></ul></ul><ul><ul><ul><li>Secondary offering : Is an SEO in which existing shares held by current owners (like the found of the firm – Bill Gates of Microsoft for instance) are sold to the market </li></ul></ul></ul>
  7. 7. Types of Public Security Issuances <ul><li>Carve-outs : Firm issues shares in a subsidiary to the market for the first time </li></ul><ul><ul><li>This is often confused with a spin-off, but it is NOT a spin-off </li></ul></ul><ul><ul><li>A carve-out is essentially an IPO of a subsidiary of a public firm </li></ul></ul><ul><ul><li>e.g. Freescale was carved out of Motorola, Kraft from Philip Morris, Agilent from Hewlett Packard </li></ul></ul><ul><ul><li>The parent firm (original owner of the carved out firm) usually retains a majority interest in the new issue </li></ul></ul><ul><ul><li>The parent firm retains the proceeds from the public offer (they are raising capital) </li></ul></ul><ul><ul><li>Pricing shares of carved out firms is different from an IPO firm since many of the assets and earnings were previously reported to the public through the parent firm’s SEC filings </li></ul></ul><ul><ul><li>The parent firm must clearly define which assets are included in the carved out firm, include debt liabilities </li></ul></ul><ul><ul><li>Tax considerations: the parent generally will not issue more than 20% of the subsidiary’s equity if it plans to subsequently spin-off the subsidiary (see next slide) </li></ul></ul>
  8. 8. Types of Public Security Issuances <ul><li>Spin-off : A parent firm issues shares of a subsidiary to current owners of the parent firm </li></ul><ul><ul><li>The subsidiary becomes a stand-alone firm, with no tie to the original parent except for common owners </li></ul></ul><ul><ul><li>Shares go to existing owners similar to a stock dividend, so only current owners of the parent receive the distribution </li></ul></ul><ul><ul><li>No capital is raised by the parent firm in this process (as is the case for a carve-out) </li></ul></ul><ul><ul><li>Spin-offs generally occur after a carve-out, subsequent to an established secondary market for the subsidiary. </li></ul></ul><ul><ul><li>Pure spin-off, in which no public shares of the subsidiary pre-exist, are rare </li></ul></ul><ul><ul><li>Example: </li></ul></ul><ul><ul><ul><li>AT&T carved out Lucent, selling 17.6% of outstanding shares to the public market </li></ul></ul></ul><ul><ul><ul><li>One year later, AT&T spun-off the remaining 82.4% to AT&T shareholders </li></ul></ul></ul><ul><ul><ul><li>AT&T share value dropped from approximately $52 to $38 after the spin-off </li></ul></ul></ul><ul><ul><ul><li>Lucent began trading at a market value essentially equal to this $14 difference, thus AT&T shareholders effectively owned the same firm, but divided into separate securities. </li></ul></ul></ul><ul><ul><li>Tax consideration: a spin-off is a tax-free distribution if at least 80% of the subsidiary’s equity is distributed </li></ul></ul>
  9. 9. Carveout A L E AT&T Balance sheet Lucent Technologies Lucent operations is an asset (subsidiary) owned by AT&T Lucent liabs Part of AT&T’s liabs help support this operation Lucent equity Lucent contributes to AT&T equity cash Carve-out : AT&T sells 17.6% of this asset to the market AT&T receives cash in return Lucent technologies is a “mini” firm contained within AT&T, but becomes delineated from AT&T operations once it is carved out. AT&T owns the remaining 82.4% of the equity. The contribution of Lucent to AT&T equity decreases by this same amount
  10. 10. Spin-off A L E AT&T Balance sheet ($52/shr) Lucent Technologies Lucent liabs Lucent equity cash AT&T distributes the remaining 82.4% stake in lucent operations to AT&T shareholders A L E Lucent Spin-off $14/shr A L E cash $14/shr New AT&T $38/shr
  11. 11. Types of Public Security Issuances <ul><li>Fixed Income : Debt issuances </li></ul><ul><ul><li>Corporate Debt </li></ul></ul><ul><ul><ul><li>The firm hires underwriters in the same spirit that they would do for an equity issuance </li></ul></ul></ul><ul><ul><li>Federal Debt (Treasuries, Bonds) </li></ul></ul><ul><ul><ul><li>Recall from before, these are done at auction. </li></ul></ul></ul><ul><ul><li>Municipal & State bonds </li></ul></ul><ul><ul><ul><li>Hire underwriters similar to a corporation </li></ul></ul></ul><ul><li>Direct Public Offering : Shares offered direct to the public. There is no underwriter or other intermediary between the firm and shareholder </li></ul><ul><ul><li>Direct Public Offering (DPO): Relies on word of mouth (Google thought about doing this through an auction. Requires high reputation and notoriety.) </li></ul></ul><ul><ul><li>Direct Purchase Plan (DPP): Plans that allow investors to buy firm shares directly from an already public firm (e.g. You can buy shares of Disney direct from the firm) </li></ul></ul><ul><ul><li>Direct ReInvestment Plan (DRIP) : Dividends are automatically reinvested in firm equity </li></ul></ul>
  12. 12. Why go Public? <ul><li>Lack of other financing choices </li></ul><ul><ul><li>Private financing unavailable </li></ul></ul><ul><ul><li>Too much debt, so firm optimizes capital structure </li></ul></ul><ul><li>Allow current investors to cash out </li></ul><ul><ul><li>Founders demand liquidity, want to sell stake in firm </li></ul></ul><ul><ul><li>Issue seasoned equity – “secondary share offering” </li></ul></ul><ul><ul><li>Firm is valued by the market, shares sold get market price </li></ul></ul><ul><li>Future source of capital </li></ul><ul><ul><li>Establish the firm in public capital markets for future capital raising (SEOs, bond issuances) </li></ul></ul><ul><ul><li>Lowers the cost of capital (cost of equity mitigates cost of debt) </li></ul></ul><ul><ul><li>Diversification / Risk sharing </li></ul></ul><ul><ul><li>Increases transparency of firm actions </li></ul></ul><ul><li>Employee compensation </li></ul><ul><ul><li>Firm can offer incentive contracts – stock options </li></ul></ul>
  13. 13. Why not go Public? <ul><li>Going public is costly and may not be appropriate for all firms, even when they are in need of additional financing </li></ul><ul><li>Ownership is diluted </li></ul><ul><ul><li>Decision making is delegated to an increased number of owners </li></ul></ul><ul><ul><li>Founder (entrepreneur) loses control </li></ul></ul><ul><li>Public monitoring increases </li></ul><ul><ul><li>SEC filing requirements (Disclosure) </li></ul></ul><ul><ul><li>Competitors benefit from transparency </li></ul></ul><ul><ul><li>Regulators have increased authority (legal restrictions to public firms) </li></ul></ul><ul><li>Direct financial costs </li></ul><ul><ul><li>Filing costs of prospectus and subsequent federal filings – requires additional staff </li></ul></ul><ul><ul><li>Investment banks and new investors charge the firm via large transactions costs </li></ul></ul><ul><ul><ul><li>Shares are under priced (can be greater than 15%) </li></ul></ul></ul><ul><ul><ul><li>Underwriters collect fees (7% of gross proceeds) </li></ul></ul></ul>
  14. 14. Securities Underwriting <ul><li>Underwriting : To assume financial responsibility and guarantee against failure </li></ul><ul><ul><li>Insurance underwriters create contracts that indemnify (protect against loss) their customers (auto liability, life insurance, flood protection etc.) </li></ul></ul><ul><ul><li>Securities underwriters guarantee the placement of new debt or equity with public financial markets </li></ul></ul><ul><ul><ul><li>Historically investment banks (e.g. Goldman Sachs, Merrill Lynch, Morgan Stanley etc.) have specialized in securities issuance </li></ul></ul></ul><ul><ul><ul><li>Since GLB in 1999, commercial banks and insurance companies can also engage in securities underwriting, either directly, or through the addition of an affiliate (ie. Salomon Smith Barney as part of Citigroup) </li></ul></ul></ul><ul><ul><li>Underwriting process </li></ul></ul><ul><ul><ul><li>Is similar for all securities and issuance type </li></ul></ul></ul><ul><ul><ul><li>The IPO process involves the most asymmetric information and thus is the most complex, so we will use this as an example </li></ul></ul></ul>
  15. 15. The IPO Process <ul><li>Firm selects an underwriter (investment bank) who also acts as the advisor, basing the decision on: </li></ul><ul><ul><li>The reputation and expertise of the underwriter (the advisor must be credible) </li></ul></ul><ul><ul><li>Follow-on products like research coverage </li></ul></ul><ul><ul><li>Prior relationships between the firm owners (often VC’s) and investment banks </li></ul></ul><ul><ul><li>Distribution channels available to underwriter (institutional clients) </li></ul></ul><ul><ul><li>The investment banks willingness to take on the firm (high reputation underwriters may not risk their reputation on a firm with uncertain prospects) </li></ul></ul><ul><li>Firm and underwriter agree on the offering method : </li></ul><ul><ul><li>Firm commitment : firm sells the entire issue to the underwriter who then attempts to sell it to the public ( insured ) – Although the underwriter fully commits to purchasing the issue, the price is not agreed (or committed to) until later in the issuance process. </li></ul></ul><ul><ul><li>Best effort : underwriter makes no promise about the price, but makes a best effort to sell at the agreed price ( uninsured ) </li></ul></ul><ul><ul><li>Rights offering : securities are first offered to existing shareholders (not common in the U.S.) </li></ul></ul><ul><ul><ul><li>Rights offer can be insured or uninsured </li></ul></ul></ul>
  16. 16. The IPO Process <ul><li>Valuing the offer : Underwriter performs its due-diligence and provides a value of the firm </li></ul><ul><ul><li>Firm opens its books to the underwriter so that they have full information for determining value – the underwriter is the agent that reduces asymmetric information </li></ul></ul><ul><ul><li>Discounted cashflow analysis is one valuation method, but more commonly, underwriters identify a peer group of publicly traded firms and use multiples of different financial metrics to provide a range of values (PE, Mkt-book, ROS, ROA etc.) </li></ul></ul><ul><ul><li>Firm and underwriter agree and set an offer range, which may change once the underwriter has a better assessment of market interest in the offering. </li></ul></ul><ul><ul><li>Six to 8 weeks have passed from the selection of the underwriter until the end of the due diligence. </li></ul></ul>
  17. 17. The IPO Process <ul><li>SEC filing : The underwriter files a registration statement with the SEC that gives specific information on the offering, firm history, financials and future plans. </li></ul><ul><ul><li>SEC spends up to 20 days reviewing the filing (this is known as the waiting period , or cooling-off period ) </li></ul></ul><ul><ul><li>The exact length of the waiting period can change, particularly if the SEC asks for additional documentation, or the firm violates quiet period rules (see subsequent slides) </li></ul></ul><ul><ul><li>The intended exchange (NYSE, NASD, AMEX) reviews the filing as well </li></ul></ul><ul><ul><li>The filing contains two parts, one that is made available to the public (prospectus) and another part that is kept private, only for SEC use. </li></ul></ul><ul><ul><li>Since the prospectus is not effective until final approval from the SEC, preliminary copies that circulate to prospective investors are printed in red ink along the left side of the front cover, giving the preliminary prospectus the nickname “ red herring ” </li></ul></ul>
  18. 18. The IPO Process <ul><li>Syndication : The underwriter arranges a syndicate to help with the distribution </li></ul><ul><ul><li>The primary ( original) underwriter is designated the “lead” underwriter </li></ul></ul><ul><ul><li>Underwriter may take on a co-manager (co-lead) to help with the underwriting </li></ul></ul><ul><ul><li>The lead underwriter allocates portions of the offering to syndicate members with the primary purpose of a syndicate to risk share </li></ul></ul><ul><ul><li>Syndicate members may be lead underwriters on other offerings, so the relationships are frequently based on equal stature in terms of mutual respect. “you buy from me this time and I’ll buy from you next time.” </li></ul></ul><ul><ul><li>Securities underwriting syndications is similar in nature to loan syndication by banks </li></ul></ul>
  19. 19. The IPO Process <ul><li>Road show : Begins a few weeks prior to the IPO, and before the SEC approval of the prospectus, typically lasting 2 weeks. </li></ul><ul><ul><li>The lead underwriter visits large investors (institutional) to solicit interest and build a demand schedule (a.k.a book building ) </li></ul></ul><ul><ul><li>Book building occurs with “special” clients of the underwriter, including institutions (Fidelity, Janus etc.) and wealthy private investors. </li></ul></ul><ul><ul><li>Book building is also spreading to smaller clients through electronic road shows, aided by the internet (SEC likes this a lot). </li></ul></ul><ul><ul><li>Only once the waiting period is over, can the investment bank/underwriter solicit specific pricing and demand information from investors. </li></ul></ul><ul><ul><li>The waiting period usually ends a few days prior to the IPO, allowing investment banks to reach what they think will be an equilibrium (final) offer price. </li></ul></ul><ul><ul><li>Although firms and underwriter cannot make forward looking statements once the prospectus has been filed with the SEC (see quiet period rules), road show discussion often communicate this information privately </li></ul></ul>
  20. 20. The IPO Process <ul><li>Offer : Underwriter sells the issue and an exchange begins trading the issue in a secondary market </li></ul><ul><ul><li>Depending on demand for shares, the underwriter may have to ration shares to investors. </li></ul></ul><ul><ul><li>Shares are sold to investors prior to trading in secondary markets </li></ul></ul><ul><ul><li>After the shares are placed, the appropriate market maker begins trading the shares </li></ul></ul><ul><ul><li>New investors who didn’t get an allocation of the primary shares can now buy shares in the open market </li></ul></ul><ul><ul><li>Investors who received an initial allocation of shares can begin selling them to new investors </li></ul></ul><ul><ul><li>Investors who are allocated shares and immediately turn around and sell them in the market are not viewed favorably by investment bankers and may be cut off from future allocations. </li></ul></ul>
  21. 21. The IPO Process <ul><li>Quiet Period : A rule originally implemented as part of the 1933 Securities Act </li></ul><ul><ul><li>The period of time during which the underwriter and management of the IPO firm cannot make forward looking statements other than what is already in the prospectus </li></ul></ul><ul><ul><li>This allows (in theory) all investors to make an investment decision based on the same set of information (issue of fairness) </li></ul></ul><ul><ul><li>Quiet period starts at the time the prospectus is filed, and ends 40 days (until July 2002, it was 25 days) after the IPO. </li></ul></ul>waiting period Hire File w/ SEC End Quiet Underwriter SEC approval Period - 6 weeks -20 days -3 -1 0 40 days IPO is effective Quiet Period Issue
  22. 22. The IPO Process <ul><li>Quiet Period : continued </li></ul><ul><ul><li>Depending on the length of time it takes for SEC approval, the total time quiet period time can vary. </li></ul></ul><ul><ul><li>Verbal agreements between underwriter and investors (particularly institutions) can be made during this period (prior to the IPO) </li></ul></ul><ul><ul><li>Non affiliated investment banks are allowed to make comments during this period, but generally they do not. </li></ul></ul><ul><ul><li>Once approved by the SEC, the issuing firm can immediately make the IPO “effective” but generally some time passes (a day or two) to finalize the IPO price. </li></ul></ul><ul><ul><li>Once the IPO is effective, shares are quickly allocated to investors, that same day, or by the following day. </li></ul></ul><ul><ul><li>Once allocated, the chosen stock exchange commences trading in the security, and investors receiving allocation, or original owners of shares, can trade with other investors. </li></ul></ul>
  23. 23. The IPO Process <ul><li>Fees : Underwriters charge issuing firms for their services </li></ul><ul><ul><li>Fees are earned for reducing the asymmetric information between investors and the firm </li></ul></ul><ul><ul><li>Investment banks (underwriters) use their reputation in a repeated game setting (they do this over and over with different firms) to convince investors of the firm’s type </li></ul></ul><ul><ul><li>For firm commitment offerings, fees come from the following sources </li></ul></ul><ul><ul><ul><li>Gross spread : price sold to market – price bought from firm. Typically this is 7% of gross proceeds </li></ul></ul></ul><ul><ul><ul><li>Underpricing = closing price at end of first trading day – the offer price. Underwriters generally under price the offer by as much as 15%, and much more in certain cases. </li></ul></ul></ul><ul><li>Components of Gross Spread : </li></ul><ul><ul><li>Selling concession: 60% of fee is distributed to syndicate members to compensate for distribution </li></ul></ul><ul><ul><li>Lead receives 20% </li></ul></ul><ul><ul><li>The remaining 20% is used to cover the underwriting expenses, particularly the road show </li></ul></ul>
  24. 24. IPO Underpricing <ul><li>Underpricing : Generally believed reasons for why underpricing occurs: </li></ul><ul><ul><li>Reward large institutional and private investors for repeat business and disclosing their demand schedule during the road show (this allowed the underwriter to price this issue, so a discount is just payment of services rendered by the institutions ) </li></ul></ul><ul><ul><li>Underwriters are looking for repeat business from investors, so they under price the issue to leave a good taste in their mouth. </li></ul></ul><ul><ul><li>Agency problem : underwriters might under price because they don’t want to work hard, and selling at a lower price is easier. </li></ul></ul><ul><ul><li>Reduce legal liability : Underwriter doesn’t want to be accused of over pricing an issue, and to reduce this likelihood, they intentionally under-price </li></ul></ul><ul><ul><li>Winner’s curse : Since “good issues” will be fully allocated (over subscribed), need to compensate for successfully subscribed “bad issues”. The winners curse simply refers to the fact that you are more likely to get your full demand of shares (the schedule that you gave to the underwriter) when the issue is “bad”. Hence, the underwriter under prices all issues to compensate for this effect. </li></ul></ul><ul><ul><li>Compensation to preferred clients . During the height of the dot.com boom, many CEOs and senior managers of firms considering going public would get allocations of IPO shares from other firms going public. These shares were offered by investment banks hoping to win future business. </li></ul></ul>
  25. 25. Cost of Underpricing Money “left on the table” Source: Jay Ritter IPO webpage http://bear.cba.ufl.edu/ritter/ipodata.htm
  26. 26. Cost of Underpricing Money “left on the table” Underpricing of U.S. firms by year Dot.com boom years Source: Jay Ritter IPO webpage http://bear.cba.ufl.edu/ritter/ipodata.htm
  27. 27. IPO Performance 2000 <ul><li>Notice from the characteristics of firms that went public in 2000, just before the stock market decline: </li></ul><ul><li>Only a small fraction of total shares are offered to the public (10-20%) </li></ul><ul><li>Most are technology firms, particularly internet and biotech. </li></ul><ul><li>Under pricing is as high as several hundred percent </li></ul><ul><li>Few firms are trading above their original list price </li></ul><ul><li>Many firms have delisted. </li></ul>Source: Hoovers online
  28. 28. IPO Performance 2001 Source: Hoovers online <ul><li>IPO performance in the first </li></ul><ul><li>quarter of 2001, after public </li></ul><ul><li>markets began to dry up, saw on </li></ul><ul><li>18 IPO’s, down from 76 during the </li></ul><ul><li>same time in 2000 </li></ul><ul><li>Notice the absence of technology firms from this list. </li></ul><ul><li>Under pricing is far less than the year prior </li></ul><ul><li>Higher floats are offered (more shares issued) </li></ul><ul><li>Many of these firms have done well since the offering </li></ul><ul><li>Only firms of “good” type could make it into public markets during after the bubble burst, and their post performance is indicative of this relative to firms issued the prior year. </li></ul>
  29. 29. IPO Performance 2005 Source: Hoovers online <ul><li>IPOs in first quarter of 2005 </li></ul><ul><li>Floats are still higher; >30% is not uncommon. </li></ul><ul><li>Technology companies have not yet returned to their pre-bubble era </li></ul><ul><li>Under pricing is still prevalent, but at much lower levels. </li></ul>
  30. 30. Shelf Registration of Securities <ul><li>Shelf Registration of Securities (Rule 415): Approved in 1982, it allows for firms to file one registration statement to be used for any number of future equity/debt issuances. </li></ul><ul><ul><li>The name shelf registration came about since the securities can be viewed as sitting on the shelf </li></ul></ul><ul><ul><li>A secondary market must already exist for the security class being filed </li></ul></ul><ul><ul><li>Security classes are not limited to equity (bonds too) </li></ul></ul><ul><ul><li>One filing is accommodates up to two years of future offerings </li></ul></ul><ul><ul><li>This type of registration is used for seasoned equity offerings. </li></ul></ul><ul><ul><li>One filed, firms can offer shares more quickly, and potentially offer at a more attractive time. </li></ul></ul>
  31. 31. Private Placements <ul><li>Private Placements : Firms can skip the public issuance process by going straight to large investors </li></ul><ul><ul><li>Buyers are insurance companies, wealthy individuals, mutual funds, other firms etc. </li></ul></ul><ul><ul><li>Private placement can be below market price. </li></ul></ul><ul><ul><li>According to the 1933/34 Securities Acts, issuing firm is NOT required to register these securities provided that the offering meets the following three criteria: </li></ul></ul><ul><ul><ul><li>Must be sold within the state issued </li></ul></ul></ul><ul><ul><ul><li>no simultaneous offering to the public </li></ul></ul></ul><ul><ul><ul><li>issue must be less than $1 million </li></ul></ul></ul><ul><ul><li>1982, Regulation D provided exemptions to the 1933 ACT: </li></ul></ul><ul><ul><ul><li>added that an issue can not be advertised or generally solicited similar to a public offering </li></ul></ul></ul><ul><ul><ul><li>Provided for larger issues depending on number of investors and their level of accreditation (no little guys). </li></ul></ul></ul><ul><ul><li>1990, rule 144A removed a costly restriction, that privately placed shares not be traded for 2 years. </li></ul></ul>