Ch. 6: Security Offerings 243
Glass–Steagall Act which prohibited commercial banks and their subsidiaries from affil-
iating with securities firms or underwriting corporate securities was effectively repealed
by the Gramm–Leach–Bliley Financial Modernization Act. The passage of this law
had a direct effect on the securities market by increasing competition for corporate un-
derwriting assignments by allowing entry by commercial banks who could have prior
lending relationships with issuers (see alsoDrucker and Puri, 2007, Chapter 5, this vol-
ume).
Self-Regulatory Authorities (NYSE, NASD) impose various listing requirements on
firms trading securities on their exchanges. In addition, the NASD has responsibility
for regulating many of the activities of broker-dealers and underwriters. In recent years,
both the NYSE and the Nasdaq have imposed new corporate governance requirements
on firms listing in their markets. The NYSE also prohibits listed firms from inducing
dual shares with unequal voting rights since 1994.^5
The passage of the Sarbanes–Oxley Act of 2002 has enhanced shareholder voting
rights by encouraging more independent boards and requiring outside directors take
on major governance roles within the board of directors. This Act has increased the
credibility of firm disclosure requirements by requiring greater auditor independence
and the CEO and CFO to personally certify the company’s annual financial statements.
2.2. Alternative flotation methods
Table 1summarizes the major flotation method choices observed for IPOs, SEOs and
debt offerings. The table starts with “firm commitment” underwriting, which is the pri-
mary choice of publicly traded U.S. firms. Here, an underwriter syndicate guarantees
the proceeds of the issue (net of fees) and organizes the sale of the shares. Given the
prominence of this flotation method, we discuss key aspects of the underwriting process
before commenting on the other flotation methods listed inTable 1.
2.2.1. The firm commitment underwriting process
The time line in a firm commitment offering is roughly as follows: The issuer contacts
an investment bank to form a syndicate guaranteeing the offering. The lead underwriter
performs due diligence (examining the financial status of the issuer), registers the issue
with the SEC, and presents a preliminary prospectus (“red herring”) to key investors
and clients in a “road show”. The preliminary prospectus specifies only a possible price
range for the offering as the firm is not permitted to sell shares prior to SEC registration.
When the SEC approves the issue, the firm meets with the underwriter syndicate and
sets the final offer price (“pricing meeting”) and the offer typically starts the following
day. The underwriter guarantee requires a firm offer price, so the guarantee period starts
(^5) Exceptions are firms with dual class shares prior to listing such as Ford Motor Co., Berkshire Hathaway,
which was grandfathered when these requirements were first implemented.