The meanings in this glossary are from our perspective as direct public offering advisors.  Words in italics are ones that have their own definition in the glossary, in their alphabetical order.  Some of the terms are also linked to our related commentaries section on this website.  Nothing in this Glossary, or other material on this website, is to be considered legal advice or anything other than a brief summary of a personal understanding or view.

Absolute return  This is one of the buzzwords for an approach to return on investment, or ROI.  Its guru is David Swensen, author of Pioneering Portfolio Management and manager of the Yale University endowment fund, which averaged a 17% annual return in the 1995-2005 period.  Yale had less than 20% of its assets in U.S. shares and bonds.  It had invested in private equity funds, hedge funds, land and other nontraditional assets.  Other money managers have copied the absolute return approach.  However, according to another guru, Warren Buffet:  "What the wise man does in the beginning, the fool does in the end."

Acceleration  Securities cannot be sold unless a registration statement has become effective with the SEC, or a specific exemption applies.  The law says that the effective date occurs automatically 20 days after it is filed, unless an SEC stop order or refusal order is in effect.  The way it really works is that each filing includes a delaying amendment so that it cannot become effective automatically.  Once the SEC staff reviewer says  that there will be no more comments, the lawyers file a request for acceleration of the effective date to a selected day and time.

Accelerator  When a venture capital firm invests in an early stage business, its exit plan is generally to get a very large cash return in as short a period as possible.  An "accelerator" is the person or consulting firm responsible for speeding up growth so that the business can have a liquidity event, such as attracting an underwritten public offering or an acquisition by a big company.  This may not fit the goals of the entrepreneur.  In direct offerings, investors come from the communities of people who share those goals.  They provide patient money.

Accredited investors  Federal and state securities laws have exemptions from registration for securities sales to persons wealthy enough to be accredited investors.  For individuals, the basic minimum is a $1 million net worth or $200,000 annual income.  Federal safe harbor rules will allow sales without registration to no more than 35 persons who are not accredited investors. 

Aftermarket  The trading market that develops for shares after the public offering is over.  We believe that any direct public offering client needs to put in place a method for investors to convert their securities back into cash.  Conventional aftermarkets are all “interdealer” systems, where an investor must open an account with a securities firm and place an order to buy or sell shares.   For listed shares, a specialist on the stock exchange will match orders received from forwarding securities firms.  Orders are matched in the over-the-counter market by a securities firm acting as a market maker.  The quality of the aftermarket is measured by its ability to absorb bid price or asked price orders without major disruptions in the price.  That ability is a function of the market’s liquidity, which depends upon its float--the number of shares owned by the public, rather than by company insiders--and the extent to which the public is active in trading the shares, rather than holding them for the long term.  For small direct offerings, there may be an order matching service, which brings together people who wish to sell with those who wish to buy.

Agents  An individual performing services for an issuer or broker-dealer in the offer and sale of securities.  The SEC and state securities regulators require registration or licensing of agents, unless they are within the definition of a specific exemption.  In a direct public offering, the issuer's employees will often all be within an SEC exemption.  They will also be within exemptions, or simplified licensing procedures, provided by most state securities regulators.

Agreement among underwriters  In the last few weeks before the effective date of an underwritten public offering, the managing underwriter will be putting together an underwriting syndicate of other securities firms.  When the underwriting agreement is signed, the firms who have joined will sign an agreement among underwriters, assigning them an allotment of shares they are technically required to buy from the company as an underwriter.  These agreements don't exist until the syndicate members have gathered enough indications of interest to sell at least all of the offering, at a price the issuer will accept, and the lawyers are confident that the SEC effective date is within a few hours. 

AIM (formerly the Alternative Investment Market)  The London Stock Exchange's trading market for small business.  Of the 1,600 issuers listed on AIM, 90% have a market capitalization of less than $200 million.  Nearly 300 are based outside England, over 50 in the United States.  Instead of regulatory review before an IPO, there is a review by a division of the securities firm that will sell the shares.  These nearly 100 "nominated advisors," or "nomads," are monitored by the Exchange staff.  If a nomad resigns, trading in its shares is suspended.  

All hands meetings  Part of the ritual for an underwritten public offering.  These gatherings include an initial planning meeting (the “kickoff meeting”) and sessions for reviewing drafts of the registration statement.  They include two or more representatives each from the issuer, the issuer’s general counsel and its securities lawyers, the managing underwriter, the law firm representing the underwriters, and the auditors.  The kickoff meeting may have people from the financial printer, transfer agent, and registrar.  The meetings go on for at least a full day, often for two or three days and into the night.  The kickoff meeting is often consumed with a power struggle among representatives of the investment bankers, the issuer and their respective counsel to settle who will be the “quarterback” for the preparation process. 

All-or-none offering  Each public offering will have a total number of shares to be sold.  Sometimes, in a best efforts underwriting, a condition of the offering will be that all shares offered must be sold or the offering is cancelled and none of the shares will be sold.  This makes the "best efforts" really the same as a firm commitment underwriting, where there is only a letter of intent to sell the offering until the underwriter has indications of interest for at least the entire amount.

Allotment  In an underwritten public offering, each securities firm in the underwriting syndicate is allocated an allotment of shares to sell.  As a practical matter there is very little relationship between the allotment and actual sales.  Technically, the agreement among underwriters could force each member of the underwriting syndicate to take its allotment.

Analyst effect  How decisions by a company's management are affected by the actions of Wall Street securities analysts.  Many money managers for institutional investors will not buy securities unless they are rated by analysts.  Most brokers recommend trades to their customers based on reports of their securities firm's analyst.  With financialization, those analysts are almost always focused entirely on predicting short-term changes in the market price of the securities.  As a result, an issuer's board of directors and officers will often make business decisions under the influence of how they believe securities analysts will react.  This effect can be compounded if the issuer's management has significant stock options valued by the current market value. 

Angel investors  Also known as informal investors, these are people who invest money in the business at its start-up, or early, “seed capital” stage, before other sources of capital would be available.  They are usually relatives or friends of the entrepreneur, or individuals with the wealth and experience to take significant risks for possible long-term rewards.  Angel investors and entrepreneurs often get together through acquaintances or finders.  According to Kelly Spors in the October 30, 2007 Wall Street Journal, "a growing number of these groups are aligning themselves with a mission and funding all sorts of businesses that support the cause."  The transaction is usually negotiated as a private placement.  Angel investors are the largest source of external equity capital for small businesses in the United States, with about $25 billion a year invested by over 250,000 individuals in nearly 50,000 ventures.  Information about angel investing is maintained by the Center for Venture Research at the University of New Hampshire, wsbe.unh.edu/cvr, and the Angel Capital Association, www.angelcapitalassociation.org.

Annual report  Financial statements and a management’s discussion and analysis of the issuer’s operations and condition.  Reporting companies, those with registered shares under the federal Securities Exchange Act of 1934, or issuers which have registered a public offering under the Securities Act of 1933, must file an annual report with the SEC, following Form 10-K or, for a small business, Form 10-KSB.  Most states require corporations to send annual reports to their shareowners.  These usually require audited financial statements, but their form and content is left to management’s preference.

Arbitrage  Strictly speaking, arbitrage is the simultaneous buying and selling of the same thing in different markets without risk, in order to make a profit from the difference in price quotations between the markets.  Recent practice has included “risk arbitrage,” where the buying and selling are not simultaneous and there is some risk that the price difference will turn unprofitable.  (A example has been buying shares in the stock market, expecting a takeover offer at a higher price.)  When an underwritten public offering is expected for a company that already has shares in the trading market, the arbitrageurs will sometimes sell the shares short, that is, place sell orders for shares they do not yet own (naked short selling).  This drives the market price down.  As the effective date approaches, the lower market price causes the underwriters to negotiate for a reduced offering price.  The arbitrageurs then buy shares in the underwriting to cover their short sales.  Where there is no existing market, these short sales may occur in a when-as-and-if-issued-market.  In a direct public offering, the offering price will have been set before any public filing or announcement.  As a result, the effect of selling pressure in the trading market would be to cause a postponement of the offering.  The issuer can also remove the incentive for arbitrage by setting a maximum on the number of shares anyone may purchase in the offering, so an arbitrageur could not buy enough to cover the short sales.

Articles of incorporation  This document is filed, generally with a state agency, to create a corporation.  It is called a charter in some states and has been used for businesses for over 600 years.  Until the 1800s, the states imposed conditions, such as the kind of business that could be operated by the corporation or how long it could exist.  Today, a corporation can conduct any legal business, for a perpetual term.  Court decisions have made corporations "persons," entitled to constitutional protection.  

Asked price  Shares traded in the over-the-counter market will have prices quoted by their market makers, either on  one of  the NASDAQ markets or in the Pink Sheets.  The quotations are for the bid price (what the market maker will pay to buy at least 100 shares), or the asked price (what it will take to sell at least 100 shares).  For listed shares, bid and asked quotations are channeled through a specialist, a dealer who does business at a post on the stock exchange trading floor. 

Audited  Financial statements are audited when the auditors have completed a review of the records for a business, including confirmations from banks and selected creditors, vendors, customers and others.  Their review must conform to "generally accepted auditing standards" of the public accounting profession.   The audit generally results in an opinion letter that the financial statements "fairly present" the financial condition and experience of the business and have been prepared in accordance with generally accepted accounting principles, applied on a consistent basis (a "clean opinion").  The opinion may contain "except for" or "subject to" language (a "qualified opinion").  The auditors may even say they are unable to express an opinion (a "disclaimer").   Most public offerings of securities require audited financials, with a clean opinion, under SEC forms or state blue sky rules. 

Auditors  A firm of certified public accountants, independent of the company, that reviews the company’s financial statements for the purpose of issuing an opinion on their fairness.  There are the Big Four firms that audit companies that account for 99% of U.S. market capitalization, because underwriters and money managers insist upon those firms.  In direct offerings, a regional or local firm that does audits may provide better service at lower costs.  Securities regulators and individual investors in DPOs have shown no preference for a Big Four firm.

Backdooring  In some underwritten initial public offerings, speculators will commit to buy shares at the offering price, then immediately sell the same shares back through another broker.  If it is a hot new issue, the price will have jumped up in the aftermarket, so the speculator makes a fast profit as a flipper of the shares.  If the market reception has been cool, the speculator’s shares will likely be sold “through the back door” to the underwriting syndicate, which has committed to buy shares at the offering price, for stabilization of the aftermarket price.

Backing away  When a  market maker refuses to honor its asked price or bid price on an over-the-counter share.  This is in violation of FINRA and SEC rules.

Bad boys  Past offenders under securities fraud laws.  When the SEC has authorized exemptions from full registration statements, such as Regulation A and SCOR, it prevents their use by a corporation affiliated with persons who have, within the previous five years, been convicted of securities fraud or who are subject to any enforcement order by a securities regulator.  States have similar rules.  Filings under the securities laws may require disclosure of bad boy affiliations.

Bedbug letter  A major part of any public offering of securities is compliance with federal and state securities laws.  Usually, this requires filing a registration statement with the SEC and receiving a letter of comment (deficiency letter).  When the regulatory reviewers consider the company or its registration statement to have problems that cannot be fixed by recommended changes, they suggest that the registration statement be withdrawn.  This bad news is called a bedbug letter.

Behavioral targeting  A form of microtargeting that presents advertisements and messages to individuals based on their Internet use.  For Microsoft Hotmail customers, for instance, the December 26, 2006 Wall Street Journal reported that Microsoft combines the information it gathers from a person when a Hotmail account is opened with the words searched and results from the person's use of its LiveSearch.  This allows advertisers to target ads sent to the Hotmail customers' computers.

Best efforts underwriting  When a securities firm agrees to use its “best efforts” to sell shares as an agent for the issuer.  It is not technically an underwriting since that term means buying all the shares offered and reselling them to investors (a firm commitment underwriting).  Most best efforts agency agreements will have a minimum as well as a maximum number of shares that must be sold within the offering period.  If the minimum is not met, the offering is cancelled and all money collected from investors is returned.  Some best efforts are all-or-none offerings.  That is really how a firm commitment underwriting works, since the underwriter is not legally bound to buy the shares until it has collected indications of interest for the entire offering.  The term "best efforts" is defined by the Uniform Commercial Code as a "more rigorous standard than 'good faith.'"  Without objective measurements (such as the number of brokers assigned to sell and the amount of their time they will devote to the offering) "best efforts" doesn't create any enforceable standard.

Beta  A measure of a company’s share price volatility--how wide the ups and downs of its trading price will be, compared to the market generally.  Stock market averages, like the Standard & Poor’s 500, will be assigned the number 1.00 to reflect how much it would move on news about earnings, dividends, new products, etc.  Shares of a very stable, mature company might move even less on that news, with a beta of, for instance, 0.74.  On the other hand, an emerging growth company, especially in a competitive new technology or market, could have a beta of 2.00 or more.

Bid price  The price at which the bidder will buy a specified number of shares (see asked price).

Big Four  The largest international independent public accounting and consulting firms.  They are auditors for most large corporations with publicly traded shares.  Recent consolidations have reduced the “Big Eight” to these four:  Deloitte Touche Tohmatsu, Ernst & Young, KMPG and PricewaterhouseCoopers.

Blank check offerings  Public offerings where the prospectus explains the general intended use of the offering proceeds but gives management the discretion to choose how much will be spent for any one purpose.  Blank check offerings are often made by a specified purpose acquisition company, when the intended use of the proceeds is to acquire another business in a specified industry.  According to the December 24, 2007 Wall Street Journal, there were 66 SEC-registered blank check offerings in 2007, raising $12 billion, or 23% of the total number of U.S. IPOs and 18% of the total amount raised by IPOs. The SEC and state securities regulators  require additional disclosure and restrictions on blank check offerings.  These include returning the proceeds to investors if an acquisition is not made by a target date (usually 18 months to two years) and requiring an 80% approval by shareowners of the acquisition.

Blind pool offerings  Public offerings made without any specific business described for use of the offering proceeds.  In addition to the limits on blank check offerings, some state securities regulators will prohibit blind pool public offerings.  However, there have been recent large blind pool offerings, registered with the SEC but exempt from state registration as covered securities.

Blue sky laws  Nearly every state has its own state securities regulator with whom a filing must be made for any public offering of securities to its residents.  The governing laws were enacted to stop offerings that had no more substance behind them than “the blue sky.”  There are great differences among the states in their blue sky requirements--both in the standards they impose and the detail work necessary to qualify an offering.  Many are so-called merit states, where the regulatory staff actually judges the quality of the company and the terms of its share offering.  The standard for most merit states is that the proposed investment be fair, just and equitable to the local citizens.  Only limited coordination exists among the states (through NASAA) and with the SEC, so that companies will have to consider blue sky costs and delays when designing their marketing program.  The blue sky laws private for exempt transactions, as well as licensing and exemptions for securities broker-dealers and agents.

Board of directors  The governing body of a corporation which sets policy and appoints major officers.  Directors are elected by the shareowners.

Bonds  Debt securities for borrowings due to be repaid a year or more  after they are issued.  They are generally marketable securities and many are listed on stock exchanges.  Corporate bonds are often subject to an indenture.  There is no standardization among bonds; investors need to study the bond terms, as well as the credit and prospects of the corporate issuer.  Bonds of large corporations are usually rated securities.  There have been occasional direct public offerings of corporate bonds, and even state and municipal bonds, but nearly all of them are sold in underwritten public offerings or private placements by broker-dealers, mostly to money managers.  However, the United States Treasury has a huge established direct public offering system for its debt securities, called Treasury Direct.

Book value  The amount of a corporation’s shareowners’ equity, as shown on its financial statements.  Also called net worth.  Literally, the difference between the amount of the corporation's assets and its liabilities, according to its own accounting records.  In many businesses, accounting methods and fluctuations in market value make the book value of academic interest only.

Bottom line  This has become slang for "the net result." It initially referred to the last item on a statement of operations prepared for a business, usually titled "net income" or "net profit."  However, these statements measure financial results only, in accordance with rules of the public accounting profession and the SEC.  Some people argue for a "multiple bottom line," which would show results of the business operations on the public, the environment, employees or other stakeholders.  Others respond that the long-term financial interests of the business and its shareowners will necessarily include those factors, in contrast to the very short-term interests demanded by financialization of the stock market.  Proponents of the single bottom line argue that asking management to serve other interests will lead to conflicts of interest and distraction from the primary purpose of the business.

Bought deal  When an investment banker or other financial intermediary has arranged for the purchase of an issue of securities, before offering to buy them from the issuer.  This has become a frequent way for large corporations to sell securities, particularly debt.  They can use a shelf offering, so that the issue is legally ready for immediate public offering, and then wait to be approached with a bought deal. 

Bracket underwriters  Securities firms with the ability to be managing underwriters are arranged by tacit understanding into brackets.  This explains the pyramid of alphabetical listings in the tombstone ad announcing a public offering.  The rankings are based upon the number and stature of their corporate clients, their ability to originate new financial products, their coverage of institutional investor customers, and the number of their registered representatives.  From four to seven firms at any one time seem to be at the top--the “bulge” or “special” bracket.  Next is the “major” bracket, composed of most other large Wall Street firms.  There was, into the 1970s, a large “submajor” bracket of medium-sized Wall Street brokerages dealing primarily with individuals; these are now gone.  A “mezzanine” bracket remains, consisting of Wall Street specialty houses and a few active underwriters in other cities.  In the bottom bracket are the “regionals,” that is, firms with offices only in one section of the country (with a small presence in New York).

Breaking the syndicate  During a period after the effective date, underwriters can conduct stabilization activities.  These usually involve placing buy orders at the offering price and accepting any offers to sell back shares purchased in the underwriting.  The agreement among underwriters provides the authority for these transactions and spreads their cost among underwriting syndicate members.  That authority terminates 30 days after the effective date unless the managing underwriter decides to shorten or extend it, usually by breaking the syndicate before the 30 days is over and letting the shares seek their market price in the aftermarket.

Broker  Defined in the securities laws as a person in the business of buying and selling securities for the accounts of others.  In everyday usage, “broker” or “stockbroker” refers to an individual who talks with investors about their investments and causes their buy or sell orders to be executed.  This may be a registered representative of a securities firm, an independent broker-dealer, or a financial planner.

Broker-assisted  Direct public offerings can be successful without using any commissioned sales people.  However, the size of the offering, its timing, or other factors may suggest using licensed brokers to sell part of the offering.  They can be allocated a portion of the shares to sell on a best efforts basis to their own customers or by cold calling to prospects they generate.  Or, the issuer can deliver the names and telephone numbers of people who have requested a prospectus to selected brokers and pay a negotiated commission rate for their conversion into sales.

Broker-dealer  Individuals who have passed an examination and have met other standards can be licensed as a broker-dealer principal.  This gives them and their corporate employer the right to engage in the business of buying and selling securities, both for the accounts of others (a broker) and for their own account (a dealer).  They usually hire registered representatives to build a book of customers for the broker-dealer firm.

Brokerage firm  The business organization which operates under a broker-dealer license, more often and accurately called a securities firm.  Before the 1960s they were nearly all partnerships.  Now they operate primarily as corporations, either publicly owned or as the subsidiary of a large insurance company or conglomerate.

Bullet-dodging  The amount of profit on stock options given to management of a corporation depends upon the increase in market value of the corporation's shares between when the option was granted and when it can be exercised and the shares sold.  "Bullet-dodging" is the practice of granting options shortly after the corporation has publicly released bad news, which has temporarily driven its stock price down.  It is the mirror image of spring-loading.   

Business  An entity that sells products or services to fulfill human needs or desires.  The most frequent forms are a proprietorship (ownership by one individual), partnership and corporation.  Businesses are generally operated for profit, with revenues expected to be greater than expenses, although some are cooperatives or nonprofit entities.  

Buybacks  Public corporations repurchased $437 billion of their own shares in 2006, up from $300 billion in 2005 and $131 billion in 2003, according to estimates by Standard & Poor's.  The announcement for a buyback will often say that this is the best use of available corporate cash, because the shares are undervalued by the market.  It also reduces the number of shares issued, increasing the earnings per share calculation for comparison to past years; it offsets the increase in shares from exercise of management stock options; it can increase the share price by reducing the amount that would be offered for sale and it can signal to short-term investors that management will act to maintain or increase the share price, putting a "floor" on their risk of loss.  Buybacks have recently far exceeded dividends as a way to pay cash out to shareowners.  In many cases, the amount a corporation has paid for buybacks has about equaled the amount received by its officers and directors who sold shares as they were received in exercise of stock options. 

Buyouts  When a corporation or investment group buys all of a public corporation's shares (or at least a controlling interest).  Often referred to as a takeover, especially when it comes as a surprise to management of the business acquired.  The $3.2 trillion record of buyouts in 2000 was attributed to the high (26.4) price-earnings ratio of the Standard & Poor's 500 companies who did most of the acquiring.  Over 70% of the buyouts were made by issuing the acquirer's shares in exchange for the shares of the business being acquired.   A new record will be set in 2006, with 60% being paid for in cash.  This was made possible by low interest rates on the acquirer's borrowings and the lower price-earnings ratios for acquired companies.  Buyouts, like buybacks, reduce the number of shares held by public investors and increase the number held by financial intermediaries, with the goals of financialization.  According to the Federal Reserve Board, the dollar decrease in outstanding shares from buyouts and buybacks was more than the increase from new shares issued  in ten of the last 12 years.  In 2006, the net decrease was over $500 billion.

Bylaws  These rules are adopted by a corporation's board of directors.  They are subject to the corporation's articles of incorporation and deal with the selection and duties of officers and directors, meetings of shareowners and other procedural matters.

Caller ID service  Using a telephone company central office switch and an inexpensive computer system, a customer’s file can be automatically displayed on a monitor as the customer is calling in (or as an outbound call is being placed).  Where available for direct public offerings to an issuer's customers and other communities, this service can improve conversions, particularly from inbound telemarketing.  The monitor can display the caller’s name, address, dates of the response and fulfillment, caller’s priority for the marketing program, and all demographic information accumulated. 

Capital  Also known as capitalization.  The amount of long-term money available to a business.  The total of shareowner investment, earnings retained in the business, and borrowings which will not come due for more than a year.  By the mechanics of double entry bookkeeping, capital is equal to assets minus short-term debt (due within a year).  Equity capital or equity is that part of the company’s capital that comes from shareowner investment and retained earnings.  It is more often called net worth or shareowner’s equity.

Capital formation  The process of adding to a company’s capital.  It usually refers to issuing equity or debt securities.  The largest source of capital, retained earnings, is often all that large public corporations need to continue their growth.  Earlier stage businesses need to market their securities, either by direct offerings or through securities firms.

CEO  The chief executive officer of a corporation, usually also its president or chairman of the board, or both.  While the CEO is selected by the board of directors, the corporate governance process of many large corporations may allow the CEO to decide who becomes and stays on the board.  With money managers as large shareowners, and most shares held in street name, a CEO may have near dictatorial powers, so long as the goals of financialization are served. 

Certain transactions  When money or property has passed between the company and one of its insiders, it may require explanation in the prospectus.  The name, certain transactions, comes from the instructions accompanying the SEC forms for registering a public offering.  For example, when an entrepreneur hopes to take a company public, it is wise to avoid any of the situations that would need description in the certain transactions section.  They may make it difficult to qualify the offering under the blue sky laws of a merit state.  Descriptions of certain transactions tend to be lengthy and complicated, causing prospects to reject the offering based on their “smell test.”

Charter  Another name for articles of incorporation, or for the document that is filed to create a limited liability company.

Cheap shares  When insiders have invested in the company within three years before the public offering, the amount they paid will be compared with the offering price to the public.  A big difference raises the cheap shares issue, which must be dealt with satisfactorily for the public offering to be cleared through SEC and state blue sky laws.  A NASAA Statement of Policy defines “cheap stock” (shares) and provides for their escrow, or lock up as a condition to qualify the public offering in some states.  While in escrow or lock up, the shares cannot be traded.  Release of the shares is typically conditioned upon meeting a three-year earnings test (see promotional shares).

CIK  The SEC assigns a Central Index Key number to a business or individual filing disclosure documents with the SEC's EDGAR system.  The Edgar retrieval page on www.sec.gov allows access either by the filer's name or its CIK number.

Closing  In an underwriting, the closing is generally a week after the effective date of the underwriting.  That will be when the company delivers share certificates and the underwriters pay for the shares they have sold, less their commissions and expenses.  In a direct public offering, the offering closes when all the securities offered have been sold or a closing date has been reached and no more orders are accepted. 

Cold calling  When a broker or agent makes telephone solicitations to strangers, usually from a list of prospects.  Securities laws require a prospectus to be delivered before shares can be sold, so cold calling can only be for gathering indications of interest in the shares.

Cold comfort  Sometimes called “negative comfort.”  A representation made by someone independent of the issuer, to the effect that although they have not checked everything, what they did review revealed nothing wrong.  The issuer’s auditors are required to give the underwriters a “cold comfort letter” just before the underwriting agreement is signed.  It lists several pages of “special procedures” the auditors have performed.  The letter explains that this was not an audit and gives the cold comfort that “nothing came to our attention that caused us to believe that” there are any misleading errors or omissions in the material reviewed.  Getting this letter is part of the underwriters’ due diligence defense against claims by any investors who lose money on their investment.

Collateralized debt obligations (CDOs)  A security that includes an obligation to pay interest and repay principal, with that obligation secured by a pledge of specific financial assets, such as real estate mortgage loans, credit card debt or even royalties to be received from music licenses.  They are often rated securities and can be extremely complex, involving major fees to financial intermediaries, lawyers, trustees and consultants.  The CMO is usually divided into tranches and marketed to investors with different risk/reward analyses.

Common shares  Also known as common stock.  These are the basic units of ownership in a corporation.  Their voting rights elect the board of directors, which sets policy and hires and fires management.  When a corporation is sold or liquidated, whatever is left, after paying off creditors and any senior securities, belongs to the owners of common shares.  Some corporations have more than one class of common shares, usually as a way to keep voting control in the founders’ family.

Community  A group of people who share a common interest.  Direct offerings market shareownership to the communities served by the business.  These will include its customers, suppliers, employees, neighbors and people who have a strong interest in the primary purpose of the business.  A community may also be defined by the means used to communicate with them.  For instance, many "online communities" have grown around websites and blogs.  The great success of microcredit lending has been attributed to the requirement that the entrepreneur borrowers have a community of peers, with responsibilities among them for meeting lending terms.  Businesses who use direct offerings increase the bond with members of their communities, who then act as ambassadors of good will in promoting the business, addressing any political issues affecting the business and making suggestions to management.  Good advice on  how a business may create and maintain communities,  is available at http://blog.guykawasaki.com/2006/02/the_art_of_crea.html.

Community-owned businesses  Most businesses with publicly-traded shares have turned over the sale of their securities to securities firms.  As a result, they are owned by customers of securities firms.  With increasing financialization of investments, these owners may have no interest in the business, its markets, products, services, local economy or management -- their only interest is in an expected short-term increase in the security's price.  Through direct public offerings, a business can market its shares in direct communication with its communities.  The initial microcredit model, Grameen Bank, founded by Nobel laureate Muhammad Yunus, required a borrower to be in a community of about five other borrowers, with responsibilities to each other.  After the start-up or seed capital stage, the next level for growing businesses is to expand its community of owners to customers, neighbors, vendors, employees and others who believe in what the business is doing.  

Confirmation  Shares are sold in an underwriting when brokers telephone their customers and prospects.  Since this takes place a week or so before the effective date, there is no final prospectus available.  Securities laws require delivery of a prospectus before a “sale.”  To get around this, when an investor says "yes," it is called an indication of interest or “circling a number of shares.”  Then, on the effective date, the prospectus is mailed to the investor along with a confirmation showing the company’s name, number of shares, and amount due in payment.  The investor either pays on the settlement date or reneges on the sale.

Conflict of interest  Officers, directors and partners are stewards of investors' capital and owe a fiduciary duty to the business and all its owners.  Sometimes, they are presented with a choice between serving the owners' interests or serving their own selfish interest.  Many legal rules and internal documents are intended to identify and resolve conflicts of interest. 

Control person  Securities laws place potential liability for investor losses onto persons who “control” the company.  They include executive officers, directors, and the owners of more than five percent of the company’s shares.  Control persons are insiders subject to special rules about trading in the company’s shares and passing on information about the company that would be important to a decision about buying or selling its shares.

Conversion  A direct public offering follows the steps of direct marketing:  (1) the proposition (offer to provide a prospectus), (2) the prospects’ response in requesting the prospectus, (3) fulfillment through delivery of the prospectus, and then (4) conversion of the prospects into shareowners.

Convertible bonds  Bonds that can be converted into shares of common stock, or other securities, generally at a price higher than the market value at the time the bonds are sold.  Companies will issue convertible bonds because they give investors the extra incentive of a profit from any increase in the share price.  In exchange, the company may be able to set a lower interest rate than straight bonds would need.  The company also avoids having to raise capital by selling shares at a price it believes is too low at the time.

Corporate cleanup  When a company is owned entirely by an entrepreneur, it may be used to minimize taxes and meet other personal needs.  Its structure may reflect negotiations with angel investors or venture capitalists.  There may be a certain casualness about corporate proceedings.  When presented to the public, the SEC and state securities regulators, the business should be simple, tidy, and as independent as practicable.  This transformation is called corporate cleanup and includes contributions by the securities lawyer, securities marketing advisor and management.

Corporate governance  Corporations are much like the parliamentary form of government, with each share similar to one registered voter.  Shareowners elect directors.  The board of directors makes policy, appoints officers, and monitors their performance.  The rights and responsibilities of shareowners, directors, and officers are determined by laws of the state from which the corporation has its charter.

Corporation  An entity formed to conduct a business.  A corporation is created in the United States by filing articles of incorporation, or a charter, with a state official.  It is then a "resident" of that state, governed by the state's laws and is entitled to many of the same rights and privileges as an individual.  It is subject to federal and state income tax, with some exceptions.  Current laws allow a corporation to conduct unlimited lawful activities and to exist in perpetuity. 

Covered securities  Securities exempted from state registration by a 1996 amendment to Section 18 of the Securities Act of 1933.  This amendment allows public offerings of covered securities to be made without any registration or other regulatory review of the offering  by state securities regulators.   The definitions of a covered security include a security listed, or authorized for listing, on the New York or American Stock Exchanges, the Nasdaq National Market System or any national securities exchange that the SEC rules to have "substantially similar" standards.   The SEC's Rule 146 added securities listed on the Chicago Board of Options Exchange, on Tier 1 of the NYSE Arca Exchange, Tier 1 of the Philadelphia Stock Exchange and options listed on the International Stock Exchange.  Nasdaq petitioned the SEC in late 2006 to add its Nasdaq Capital Market as a covered security.   A covered security also includes one issued in a transaction exempt from SEC registration under its private placement Rule 506.

CUSIP number  All certificates for publicly traded shares require an identification known as a CUSIP number.  They are issued by the CUSIP Bureau in the New York office of Standard & Poor’s Corporation.

Customer information file (CIF)  Nearly every business maintains some sort of information about its customers.  With such computer peripherals as bar code scanning, information can be gathered about buying patterns.  Through access to data banks (available from list brokers, credit card companies, credit bureaus, and government registrations), database enhancement can add extensive statistics and demographics about customers.  Because of their preexisting relationship, customers are usually prospects for a company’s shares in a direct public offering.

D&O policy  An insurance policy purchased by a corporation to pay liabilities and costs resulting from claims made against its directors and officers. This coverage is expensive and has many complex conditions, such as who selects the lawyer for a defendant.  When claims are made, the insurance company often denies coverage.

Dark Pools  An electronic trading network which matches sellers and buyers in secret.  One of the problems with stock exchanges is that so many people can watch the trading activity.  Knowing who is buying or selling which stock can bring out speculative buying and cause the price to move in anticipation of more activity.  By May 2008, there were 42 dark pools, handling 17% of stock trades.  But some traders are using computer algorithms to detect patterns in the dark pools, defeating their purpose.

Database enhancement  Adding externally compiled information to the company’s customer information file.  There are suppliers who compile and sell statistics and demographics on nearly every adult American.  Their data can be added for each name in the customer information file.

Database management  Information management is a major part of any direct public offering.  Information must be gathered, checked, and communicated in order for people to make an investment decision.  In addition, information about the people to whom the shares will be offered must also be acquired and used.  Database management includes names, addresses, telephone numbers, and other useful facts about selected individuals and markets.  Some of this data may be purchased, some developed from responses to advertising, and some built from the company’s own records as well as the knowledge of its employees and advisors.  Database management handles the arranging of that data into categories reflecting the probabilities of investment in certain amounts.  It enables the sorting and displaying of data in the most useful form for selecting media, preparing messages, doing telemarketing, and tracking results.

Dealer  Securities laws define a dealer as one who buys and sells securities for the dealer’s own account.  This contrasts with a broker who buys and sells as the agent for others.  In the 1930s, Congress had almost decreed that each securities firm could be either a broker or a dealer, but not both.  The reason was to separate giving advice to customers from also being an investor.  Instead, the standard license in the business is a “registered broker-dealer.”  Underwriters are dealers, since they technically buy the shares from the issuer and resell them to investors.

Deficiency letter  Often called a “letter of comment.”  After receiving a registration statement for a public offering, the SEC or a state securities regulator will generate a list of comments from the staff assigned to its review.  There are usually separate ones for the text and for the financial statements.  The process generally involves comparing the filing with the agency's rules and recent registrations the agency has cleared for similar businesses.  Since the law does not call upon the SEC to pass upon the adequacy of a registration statement, the comments are only “suggestions.”  Failure to make changes or otherwise explain each suggestion may mean that the registration statement never becomes effective and the offering is cancelled.  Sometimes the staff will send a bedbug letter, telling the company that its registration statement is considered so deficient that it cannot be fixed with an amendment.

Delaying amendment  When a registration statement is on file with the SEC, it would automatically reach an effective date and be usable to sell securities.  To prevent this, securities lawyers routinely include a delaying amendment in the filing.  They then request acceleration of the effective date to a selected time.

Demographics  The use of population statistics to classify prospects by particular characteristics.  Customer information files often have little information beyond name, address, and telephone number.  When lists are purchased, they are often subscribers to particular magazines, purchasers from designated catalogs, or contributors to selected fund-raisers.  At its most basic level, demographics is the selection of target markets by the ZIP code of their residence, which is some indication of household wealth.  Much more demographic information can be added to these files and lists through database enhancement.  Census data now encourages “geodemographics,” the correlation of location with the propensity to invest.  So much information is available from credit bureaus and customer information files, that the science has moved on to “psychographics,” where a mix of data bits will suggest spending patterns and other characteristics useful in planning and executing a marketing program.

Deregister  Companies registered under the Securities Exchange Act of 1934 can deregister if they are not traded on an exchange and have fewer that 300 shareowners.  It is often called "going dark," because a deregistered company no longer files publicly-available information with the SEC as a reporting company.

Derivatives  These are securities that are derived from some other existing security.  For instance, options are rights to buy or sell a security, as in the case of stock options. 

Dilution  Whenever new shares are issued, there is some financial effect upon the company’s existing shareowners, as well as the new investors.  This is usually measured by the increase or decrease in the amount of shareowners’ equity, or book value per share.   Dilution may also refer to the expected earnings or cash flow to come from the use of money received in the offering of new shares.  If a share issuance is dilutive to new shareowners, it will be “antidilutive” to existing shareowners, by increasing their per share amounts.  It is antidilutive to all shareowners when a corporation has a buyback, reducing the number of shares outstanding.

Direct Community Finance  Where loans or investments are made directly between the provider of capital and the steward of capital, both of whom are part of the same community.  Finance without a financial intermediary.

Direct limited offering (DLO)  The direct offering process may be used for direct public offerings, often to many thousands of the issuer's customers and its other communities.  The same basic process can also be used for direct limited offerings, to far fewer people who must each invest a significantly larger minimum amount.  The DLO may qualify as an exempt transaction under SEC rules and with many state securities regulators.

Direct mail  One of the media used in direct marketing.  A marketing proposition is sent by mail to a list of prospects who may communicate their response by mail, telephone, facsimile, or other media.

Direct marketing  When the provider of a product or service markets it directly to the ultimate customer, referred to as disintermediation in the financial services industry.  In the language of direct marketing, the process for a direct public offering involves:
                           The proposition:  “We’ll give you a prospectus.”
                           The response:  “OK, I’d like to see it.”
                           The fulfillment:  “Here is the prospectus.”
                           The conversion:  “This is my order for shares.”
Direct marketing has developed several generations beyond the first solicitations by mail to everyone in selected neighborhoods.  Now it incorporates demographics, database management, list brokers, fulfillment houses and telemarketing specialists.  Media used still includes direct mail, but the proposition may also come through emails, websites, telephone, radio or television.  Fulfillment may be effected by email, password to a website or print, all including the prospectus and selling materials.  The conversion could be handled by the same media.  Recent direct public offerings have allowed all four steps to occur in one computer session, including completion of a share purchase order and payment through credit card or electronic transfer of funds.

Direct offering  Securities are sold by their issuer to investors through direct marketing.  There are no financial intermediaries.  The relationship is directly between the entrepreneur and the communities created as the business is developed.

Direct public offering (DPO)  A direct offering made to large communities, usually requiring a registration statement to be filed with the SEC and filings made under state Blue Sky laws.  This contrasts with an underwritten public offering sold by registered representatives who work for securities firms in an underwriting syndicate.   The United States Treasury is a leader in direct public offerings of its bonds, notes and bills.  Other sections of this website describe direct public offerings by businesses.

Direct stock purchase plan  Corporations may allow purchases of their shares directly, without use of a broker.  This has grown from dividend reinvestment plans to allowing shareowners to buy more than the amount of their dividends.  Then some corporations began offering direct purchase to people who didn't already own their shares.  There will often be minimum and maximum amounts for a purchase.  Pricing is usually at the trading market, or a slight discount.  There is the risk that shares purchased at a discount will be immediately resold into the market, causing downward pressure on the price.

Directed sales  In an underwritten public offering, a money manager for institutional investors will often ask the managing underwriter to take an order for shares and give credit for the sale to a particular securities firm.  The designated firm will then be paid the 60 percent selling concession portion of the underwriting spread.  This is a way for money managers to pay securities firms for research or other services provided “free” under so-called soft dollar deals.

Directors  Representatives elected by the shareowners to the board of directors to make policy and appoint officers.  They are stewards of the corporate assets and operations, on behalf of the shareowners and, some people argue, other stakeholders.  The directors of many large public corporations are effectively selected by its CEO, because of the election process, shares held in street name and the voting practice of money managers.  Corporate governance rules require certain decisions to endorsed by independent directors.  A business which uses direct offerings to raise capital will have more active shareowners, who hold directors accountable to their stewardship.

Disintermediation  When money is transferred directly between the user and the provider without passing through a financial intermediary.  Part of the general trend toward “cutting out the middleman.”  An example has been the commercial paper market, where large corporations lend and borrow among themselves, rather than through bank deposits and bank loans.  A direct public offering is a form of disintermediation because there is no underwriter.

Dividend reinvestment plan  Shareowners may elect to have dividends on their shares used to buy more shares.  Corporations with dividend reinvestment plans may expand them into direct stock purchase plans.

Dividends  Payments of amounts per share by a corporation to its shareowners.  Dividends represent a proportion of the corporation’s earnings (except for liquidating dividends and other unusual cases).  They are usually paid in cash, but may be paid in newly issued additional shares.  Sometimes, the shares of a subsidiary or other corporate assets are distributed to shareowners as a dividend.

Dog and pony show  The road show arranged by underwriters for money managers who are prospects for an underwritten public offering.  Officers of the issuer and securities analyst employees of the underwriters will provide information orally that would be unlawful gun-jumping if furnished in writing.  The meetings are generally closed to individual investors, although the SEC has moved toward requiring open access to road shows made available on the Internet.  Since electronic availability is treated the same as printing, the electronic road shows become limited to what is already in the preliminary prospectus.

Dow Jones average  This usually refers to the Dow Jones Industrial Average, which is a group of 30 large public corporations used as an index for performance of the general stock market.  There is also a Dow Jones Transportation Average and a Dow Jones Utilities Average.

DPO  The acronym for a direct public offering.  It was first used by the Simon & Schuster editors when preparing our first book, Take Your Company Public.  It is often used to contrast the direct public offering process from an underwritten IPO, which offers securities through securities firms as financial intermediaries.

Due diligence  Securities laws allow disappointed investors to recover their losses in court from persons related to the company or involved in a public offering of its shares.  One of the ways to avoid that liability is known as the due diligence defense.  It requires that the defendant make a reasonable investigation into the truth and completeness of the registration statement.

Dutch auction  Where investors bid on shares in public offering, with the final price being set at the highest price that would result in all of the shares offered being sold.  The principal practitioner in the U.S. securities markets is W.R. Hambrecht & Co. (www.openipo.com).  The process requires an investor to have an account with a participating securities broker-dealer.  Google's initial public offering is the major Dutch Auction example so far.

EDGAR  The SEC’s Electronic Data Gathering, Analysis and Retrieval system for companies to file documents by computer media.  Its gradual development has been part of the progress into the electronic age.  A search facility has recently been installed as Edgar makes it more useful for investors to retrieve data in real time for use in their own analysis.

Effective date  This is the precise moment when the registration statement “becomes effective” with the SEC and state agencies.  Only then can the prospectus be used in offering shares to the public.  In an underwriting, timing of the effective date will have been requested by the lawyers to come at the point when the sales efforts are concluded by the underwriters’ brokers.  If those efforts have been successful and the company agrees to the underwriters’ final price, the underwriting agreement will be signed a few hours before the effective date.  Then, confirmations of the sale are sent to investors with a copy of the prospectus.  In a direct public offering, the sales program really begins on the effective date. 

Emerging growth company  A business that is just coming out of its start-up phase and entering the growth company category.  In most periods, candidates for an initial public offering are emerging growth companies.  Since 2000, there have been more IPOs for previously public corporations that were acquired in going private transactions and are again going public, reflecting the financialization of the stock market.

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.  They usually have price/earnings ratios higher than market averages because investors are paying for the discounted present value of expected future earnings and cash flow.  These expectations often change as events unfold, causing the stock price to fluctuate more than market averages (see Beta).

Employee Stock Ownership Plan (See "ESOP" below)  The late Louis O. Kelso co-authored books on broadening access to capital ownership.  As a lawyer, he used an obscure part of the Internal Revenue Code to create a trust for a corporate client, with its employees as the beneficiaries.  The trust borrowed money from a bank to buy all the client's shares from its founders.  The client corporation pledged all its assets to secure the loan and agreed to pay dividends sufficient to service the debt.  With the help of then-Senator Russell Long, tax benefits were increased, including for the lending banks.  However, employees have not realized significant benefits from the technique, since they don't receive dividends, cannot sell their shares and have no voting rights. Most benefits have gone to the former owners who sold their shares, the banks who made the loans and the intermediaries, consultants and lawyers who handled the transactions.

Endorsement  A marketing message that uses someone outside the company to express approval of the product or service being sold.  A “testimonial” is usually a favorable quotation from an individual who is either famous or someone with whom the prospects are expected to identify.  Other endorsements are more subtle.  Advertising in a particular media may connote the media's endorsement, especially if other advertisers are well known.  A powerful endorsement for a direct public offering can come from a sponsor, especially one making a standby commitment--a promise to buy any shares not purchased by prospects.

Entrepreneur  The founder of a business, who has the most at risk, getting the business started and shepherding it through its early stages.  The entrepreneur usually has a primary purpose for the business, beyond earning a living or getting rich.  Holding onto the original objective can become increasingly difficult as the business needs more capital.  Financial intermediaries rarely share the entrepreneur's long-term vision.  A direct offering can raise capital from individuals within the communities who understand where the entrepreneur is headed and share the same objectives.

Equity  In finance and accounting, this term means the owner’s investment in the business.  For a corporation, it is used interchangeably with shareowners’ equity or net worth.  It includes amounts the owners have invested, plus or minus the earnings or losses that have been accumulated from operating the business.

ERISA  The Employee Retirement Income Security Act of 1974.  It cast into stone the “herd instinct” of money managers who invest for pension funds by redefining the common-law “prudent investor” rule.  Congress changed the fiduciary duty from investing other people’s money as a prudent manager would invest its own, to investing the same way as other institutional investors.  This standard gets tested every quarter when money managers file public reports.  One effect has been to turn the stock market into a short-term performance race.  This financialization has discouraged many individual investors from buying or holding shares.  Direct public offerings can operate outside the securities markets dominated by ERISA investors.

ESOPs  (See "Employee Stock Ownership Plans," above)  These are trusts set up to own a company’s shares for the benefit of its employees.  The legal structure was a creation of the Internal Revenue Code seventy years ago and Congress has added several tax incentives for companies to form ESOPs.  They have also been used to put large blocks of publicly traded shares into the hands of a trustee who will protect management from a takeover.  In most cases employees cannot vote, sell, or receive dividends on the shares.  Their interest in the trust is cashed out when they leave the company.  Most ESOPs have been created with bank borrowings which must be repaid out of the company’s cash flow.

Exchange  As defined in section 3 of the Securities Exchange Act of 1934, an exchange includes a "market place or facilities for bringing together purchasers and sellers of securities."  However, section 6 of that act sets standards for a "registered national securities exchange."  In 2006, the Nasdaq was registered.  Others include the New York, American and the remaining regional exchanges. 

Exchange Traded Funds (ETFs)  Shares in these closed-end mutual funds trade on a stock exchange.  This involves another layer of financial intermediary, the fund and its management company, which pays commissions to brokers who sell the ETF's shares to investors.  The first ETFs were marketed as a way to invest in an index, while paying low management fees and having maximum liquidity.  In 2006, nearly 150 new ETFs were introduced, about a third trading on the American Stock Exchange and the rest on the New York Stock Exchange.  New "sector-specific" exchange traded funds are currently marketed as a way to invest in a group of businesses in the same category.  A new ETF will show past theoretical performance, based upon the investment criteria it proposes to use.  This would allow a manager to pick a sector with attractive past performance and create a fund to acquire similar investments.  As quoted from Morningstar Inc. analyst Sonya Morris in the December 28, 2006 Wall Street Journal, "Performance-chasing is a hazardous game and ultimately a loser's game."  According to that article, the SEC is considering ways to speed up the regulatory review for ETFs and even more new ones are expected in 2007.

Exempt securities  Federal and state securities laws read as if they applied to all offers and sales of all securities.  They then define certain kinds as being exempt securities, to which the registration, disclosure, and some antifraud provisions of the laws do not apply.  These include securities of certain types of organizations like banks and government agencies.

Exempt transactions  Securities laws apply to every purchase and sale of securities, unless a specific exemption applies.  Most stock market transactions are exempt, as are private placements.  The SEC and the courts keep the interpretation of exempt transactions rather narrow.  It can be dangerous for an issuer to sell shares without a no-action letter or an opinion of counsel that the proposed transaction is within SEC safe harbor rules or other defined limits.

Exit plan  Venture capital firms, private equity funds and other professional investors will have an exit plan for when they can convert their investment in a business back into cash.  There are often alternative plans, including a sale of the entire business for cash, merger of the business into a corporation with publicly traded shares (which can then be sold in the secondary market) or other liquidity event.  Financialization has resulted in shortened times between investment and exit, as well as forcing the business to change its primary purpose to one which can bring a liquidity event more quickly.

Fair, just and equitable  State blue sky laws often require their state securities regulator to pass upon the quality of the proposed offering of shares to residents.  These are the merit states and a frequent standard is that the terms of the proposed offering, the investment itself, and the method of sale are all fair, just and equitable to the local residents.  Where the offering is limited to prospects meeting certain standards (usually wealth and income), the agency may also pass upon the suitability of the investment for that class of investors.

Fair price provision  Language in the corporation’s charter requiring that all shareowners receive the same price in any takeover of a controlling interest in the shares.  This prevents the “two-tier” offer, where the first group of shares tendered in acceptance of the offer receives one price, while the remaining shares get a lower price in a later offer.  The fair price provision may not be a particularly effective shark repellant, but it does protect shareowners who hold their shares in street name or are otherwise slow in responding to a takeover offer.

Faith-based business  A business that has been formed and is operated in furtherance of the religious commitments of its entrepreneurs, shareowners and management. 

FASB (pronounced “fazby”)  The Financial Accounting Standards Board--an attempt to bring uniformity and understanding to generally accepted accounting principles (GAAP).

Filing date  The day on which a registration statement for a public offering is filed with the SEC (or a filing is made to qualify under state blue sky laws).  It marks the end of the prefiling period and the beginning of the waiting period.

Fiduciary duty  Caretakers of other people's money are under a legal duty to treat that money the way "prudent" people would treat their own money.  That "standard of care" applies to directors and officers, or managing partners, who are stewards of investors' capital.  The standard of care for fiduciary investors was changed by ERISA.

Fiduciary investors  People who make decisions on investing other people's money.  These include money managers and many investment advisors, where they have discretionary authority and owe a fiduciary duty to the ultimate owners of the money for which they are responsible.  They are supposed to avoid any conflicts of interest, such as benefiting personally from selecting a particular investment or financial intermediary. 

Financial Industry Regulatory Authority (FINRA)  A self regulatory organization created by the SEC in July 2007 and operating under SEC oversight.  FINRA is responsible for regulating all securities firms that do business with the public, including professional training, testing and licensing of registered persons, arbitration and mediation.  It is also responsible, by contract, for regulating The Nasdaq Stock Market, Inc., the American Stock Exchange LLC, and the International Securities Exchange, LLC.  FINRA is the consolidation of the former NASD and the regulatory subsidiary of the New York Stock Exchange.

Financial intermediary  Someone in between the stewards of capital and the providers of that capital.  A middleman through which money flows from its source to the business which wants to use that money.  For instance, banks get money from depositors and lend it to businesses;  securities firms channel money from investors to corporations by selling the corporations' securities; mutual funds, hedge funds and private equity funds sell their own securities to raise capital to invest in other businesses, securities or commodities.  The function of intermediaries is to attract and match providers and stewards.  Beyond that, they may provide a transformation of risk, denomination and maturity.  Disintermediation occurs when the money flows directly from the source to the steward, as in a direct public offering. 

Financial planner  An advisor to individuals in their financial affairs.  Financial planners will review their clients’ income, expenses, assets, debts, tax status, and future needs.  Then they may recommend a budget and the purchase of financial products, like insurance or investments.  There is little special government licensing or regulation of financial planners.  Most of them are licensed to sell insurance or securities and earn their living from commissions on sales.  Some are “fee-only” financial planners who accept no commissions and are compensated solely by an agreed fee or percentage of their client’s assets or investment income.   Sometimes this includes incentive arrangements for investment results above performance standards.  Fee-only financial planners who have a large practice become subject to the federal Investment Advisers Act of 1940 and similar state laws.  They are then usually called investment advisors or money managers.

Financial printers  Printing businesses that specialize in printing documents used in corporate or government finance, such as prospectuses, annual reports, and takeover offers.  What distinguishes them from commercial printers is the intensive level of service--speed, accuracy, and responsiveness to nearly every whim of the company’s securities lawyers.  There is, of course, an extra price for this service.  Word processing, especially computer telecommunications and desktop publishing, make it possible for cooperative lawyers, auditors, and other advisors to perform everything but large-scale print runs, eliminating the need for a financial printer.  As a consequence of these changes and the general slowdown in corporate finance transactions, there are only three national survivors:  Bowne, Donnelley and Merrill.

Financialization  An approach to investment exclusively as a way to maximize short-term gains in market value.  Its practitioners include hedge funds, private equity firms, stock traders and executives with stock options.  They place no weight upon how a business affects its customers, employees, or the world.  They may not even be concerned with the business plan or management quality.  The focus is entirely on expected movement in the market price within a brief time.  Financialization has expanded from trading in existing public companies and IPOs to startups and venture capital.  As someone said about Silicon Valley, "things changed when they went from selling products and services to selling stocks."   

Finder  A person who introduces a business to a source of financing--an investor or another financial intermediary, like a bank or securities firm.  Finders typically get paid a fee upon closing of the financing.

Firm commitment underwriting  A public offering of securities by an underwriting syndicate, where the underwriting agreement contains a firm commitment by the underwriters to buy all of the shares.  In practice, the underwriting agreement is not signed until indications of interest have been gathered by brokers for sales of more than all the shares.  Large, older securities firms will usually participate only in firm commitment underwritings and not in best efforts underwritings.  All securities must be sold to persons selected by the participating securities firms and, in hot new issues, those selected have an immediate, often very large, trading profit.

First refusal rights  Some IPO underwriters will require that they be given the right to be the company’s investment banker and receive a fee on future corporate finance transactions.  They will have no obligation, but will have the first refusal rights to any proposed arrangement with a securities firm.

Flipper  There is potential for a “heads-I-win, tails-you-lose” game in underwritten initial public offerings.  Members of the underwriting syndicate will have signed an agreement among underwriters, which binds them to buy back shares at the offering price for stabilization of the aftermarket, for a period as long as 60 days after the effective date of the underwriting.  A flipper will buy the shares in the offering, then sell them back within the next few hours or days.  On a hot new issue, the flipper realizes a quick profit by selling to someone who did not get shares in the underwriting and is willing to pay more for them in the aftermarket.  If the price does not go up, the flipper can resell shares back to the underwriting syndicate (often by backdooring through another broker).  The only cost to the flipper is the brokerage fee on the resale, since the underwriters have fixed a floor price. 

Float  This has two very different meanings.  As a noun, the float is the number of a company’s shares that are owned by the public, rather than owned by the company’s officers, directors, and other insiders.  A minimum float is required by a stock exchange for listed shares and by NASDAQ for its price quotation system.  As a verb, to float shares means to sell a new issue through an underwriting.  The British refer to an underwritten public offering as a “flotation.”

Focus group  A market research tool.  A dozen or so individuals, who are thought to be representative of the target markets for a direct public offering, are invited to meet as a group for two or three hours.  Payment is made to them or a designated charity.  Trained facilitators ask questions and monitor a discussion of the investment proposition and marketing methods.  Company officers and advisors watch through a one-way mirror, and the session is usually recorded by audio or videotape.

Follow-up marketing  The last step in direct marketing is conversion of the prospect into an investor.  This often means initiating follow-up marketing steps, to overcome inertia and indecisiveness.

Founders’ shares  Before businesses go public, their shares are often owned by the entrepreneur and other private placement investors.  The question will be raised of dilution and promotional shares.  Depending upon the difference between the price paid for founders’ shares and the offering price to the public, special disclosure in the prospectus may be required under SEC rules.  If the private placement was made within three years before the proposed public offering, the blue sky laws in merit states may require an escrow of the cheap shares, or even prohibit the sale to their residents as unfair.

Free-riding  When shares of a hot new issue are purchased by securities firms for their own account (or for their employees and their immediate families), rather than for distribution to the public.  FINRA rules prohibit free-riding, but they do not prevent favored customers from getting all the shares available in the underwriting or upon exercise of the Green shoe option.

Free writing period  The time between the effective date and the conclusion of the public offering.  Shares may be offered only by a final prospectus, which is available only after the effective date of the SEC registration.  Any other communication, in writing or on radio or video, may be considered a prospectus in violation of the securities laws.  But, during the free writing period, other selling materials may be used if accompanied or preceded by the final prospectus.  When preparing a time and responsibility schedule, the fulfillment (delivery of the prospectus to prospects) should come immediately after the effective date.  It can then be accompanied with other selling materials and followed with additional marketing tools.

Frontrunning  The practice of some broker-dealers in placing an order in the trading market for shares for themselves, before they place an order for a customer.  They allegedly do this when they expect the customer’s order to cause a change in the price, so that they can then sell their own shares at the resulting higher price (or buy shares at the lower price to cover selling short.)

Fulfillment  In direct marketing terms this occurs when a prospectus is sent in fulfillment of a prospect’s response to the company’s proposition--that it would furnish a free prospectus.

Fully diluted  Per share earnings or other amounts in a company’s financial statements after giving effect to the potential issuance of additional shares.  This occurs when a company has issued warrants or options to purchase shares in the future, often as incentives to employees or investors, or as compensation to an investment banker or other financial intermediary.

GAAP (pronounced “gap”)  An acronym for generally accepted accounting principles, which must be observed in financial statements in order to get a clean opinion from the company’s auditors--a necessity in virtually every public offering.  Conforming to GAAP may be painful for an entrepreneur if the company’s bookkeeping has principally served to save on taxes.  The European Union and other countries have adopted the International Financial Reporting Standards and, in 2007, the SEC permitted foreign countries to use those standards in U.S. filings, instead of GAAP (so that U.S. companies could continue filing in Europe with GAAP.)

Glass-Steagall  The Banking Act of 1933, which separated commercial banks from investment bankers and prohibited commercial banks or their affiliates from underwriting securities.  Because an underwriting is technically an investment in securities and a resale, the underwriter must have capital to cover a prescribed ratio to the amount of the underwriting.  Taking banks out of the business severely limited the number of investment bankers which had sufficient capital to do underwritings.  The Federal Reserve Board of Governors had been gradually relaxing the Glass-Steagall restrictions, and Congress repealed it in its 1999 Gramm-Leach-Bliley Act. 

Going dark  When a company deregisters its securities under the Securities Exchange Act of 1934.  This may be done to avoid the costs of being a reporting company.  A result is that the shares can no longer be listed on any stock exchange or the OTCBB.  They can still be quoted for over-the-counter transactions on the Pink Sheets, but the price has, on average, declined as a result of this change in the market.  Shareowners often sue management for this loss in the market value of their shares.

Going private  When a company with publicly traded shares takes steps to withdraw from the public market.  It may deregister as a reporting company, so that a broker can no longer execute orders to buy or sell on a stock exchange or the OTCBB.  It more often results from management or others offering to purchase shares from the public, usually at a premium to the current market value.

Going public  When a company owned by no more than a few shareowners comes to have publicly traded shares.  The usual method is through an initial public offering.

Going public by the back door  When a business comes to have publicly traded shares without an initial public offering.  This can happen through a series of acquisitions of businesses, paying the former owners in new shares of the acquiring corporation.  It may result from a string of private placements with a gradual widening of shareownership until a trading market develops.  A third way for a business to go public by the back door is for promoters to organize or acquire a shell corporation which already has publicly traded shares, or does a blind pool offering.  Then the shell acquires the operating business, often through a reverse merger.

Golden parachute  An employment contract, requiring a significant amount of severance pay for an officer or director in the event of a hostile takeover of the company.  Golden parachutes are often justified as assuring the shareowners that officers and directors will not block an otherwise favorable acquisition in order to save their jobs.

Green Shoe  In a firm commitment underwriting, the underwriting syndicate agrees to buy a fixed number of shares from the issuer.  The selling efforts will have been concluded before the underwriting agreement is signed, by registered representatives gathering telephone indications of interest from their customers and prospects.  Some of these buyers will renege by refusing to accept and pay for the shares.  Other buyers will be flippers who force the underwriting syndicate to buy back shares as part of their aftermarket price stabilization.  To protect against this, underwriting syndicates take orders for considerably more shares than are included in the underwriting (similar to the overbooking of airline reservations in anticipation of cancellations and “no-shows”).  But if more shares have to be delivered to buyers than are included in the underwriting agreement, the underwriters could be required to cover the shortage through buying shares in the aftermarket.  This would likely drive the trading price up, causing losses to the underwriting syndicate.  In an underwriting for the Green Shoe Manufacturing Company, underwriters first negotiated an option to cover these overallotments by buying more shares from the issuer (or its major shareowners) within 30 days after the effective date.  The first Green Shoe options were for up to ten percent of the shares underwritten.  The maximum is now commonly fifteen percent and the most frequent use of the Green Shoe is to reward the underwriters’ favored clients by getting them hot new issues at the original offering price.  (FINRA rules against free-riding prevent underwriters from themselves investing in hot new issues.)

Growth company  This term is an attempt to classify businesses that are not yet “mature,” but are beyond the “start-up” phase.  Mature companies are in markets that are not expected to get much larger (like some public utilities), or have products that nearly everyone owns and will only replace when worn out (for example, refrigerators).  They usually have a low risk of failure and a low potential for major growth.  Start-ups are very high risk, and, if they succeed, can produce rapid growth in size and share value.

Gun-jumping  Rules of the SEC and state blue sky laws limit the written advertising and publicity that can appear before the effective date and the delivery of a prospectus to each of the offering’s prospects.  If these rules are violated through gun-jumping, the offering may have to be postponed for a “cooling-off period,” or even cancelled.  In the words of the SEC, gun-jumping is publicity or other communications that “may in fact contribute to conditioning the public mind or arousing public interest in the issuer or in the securities of an issuer in a manner which raises a serious question whether the publicity is not in fact part of the selling effort.”  SEC Rule 135 permits a very limited prefiling public announcement of a proposed offering.  In its Release No. 33-8591, effective December 1, 2005, the SEC summarized a new rule as "communications by issuers more than 30 days before filing a registration statement are not prohibited offers so long as they do not reference a securities offering that is or will be the subject of a registration statement."  An underwritten public offering is sold by securities broker-dealers through meetings and telephone calls that take place in the last few days before the effective date, so gun-jumping issues, as with Google, Salesforce and Webvan, have resulted from statements made in media interviews by the issuer's executives, or from accidental delivery of written material to prospects.  In a direct public offering, the relationship with prospective investors needs to have already been built through interaction with customers and other communities.  Otherwise, communications could likely be seen as in anticipation of the offering and "gun-jumping."

Hard money loans  Most loans are made in reliance upon the borrower's projected ability to pay interest and return principal on time.  This may be based upon projections of income and expenses, as well as the perceived character of the borrower or social capital.  By contrast, hard money lenders rely on their ability to get paid by selling assets the borrower has pledged to secure the loan.  Interest rates and fees on hard money loans are usually higher than conventional loans.  Borrowers often take hard money loans with the intention of refinancing them at a lower cost.

Hedge funds  Partnerships or limited liability companies owned exclusively by accredited investors and engaged in trading securities and commodities.  Initially, minimum investments were more than a million dollars, but the entry levels have come way down over the last ten years.  Sales to accredited investors are usually exempt from federal or state registration.  Until 2005, hedge fund managers were exempt from SEC scrutiny and the SEC's attempt to require registration was reversed by the courts.  The "hedge" term comes from their freedom to engage in selling short, a practice not permitted to mutual funds.  They set up another level of financial intermediaries between the individual investors providing capital and the businesses who are stewards of that capital.  Financialization dominates hedge fund investing, with short-term profits the only policy behind decisions.  By 2008, there were over 8,000 hedge funds operating, with 87% of the money from investors in funds managing a billion or more dollars.  A study by University of Chicago, Steven Kaplan and Joshua Rauh (reported by Greg IP in the October 12, 2007 Wall Street Journal) showed that the top 25 hedge fund managers earned more in 2004 that the chief executives of all the S&P 500 corporations. 

Hot new issue  An underwritten initial public offering that trades in the immediate aftermarket at a price higher than the offering price.  According to FINRA rules, member firms and their employees may not trade in hot new issues.  The many hot new issues in 1999-2000, and the favoring of certain securities firm customers, led to litigation and regulatory changes.  

Incubators  Start-up businesses are typically financed on a shoestring.  They need cheap rental space and they need lots of experienced advice for “free.”  Incubators are usually sponsored by universities or community development organizations.  They provide space for several beginning businesses, pool support services, and provide consultation, all at a cost that is usually below market value.  Several incubators are also tied in with groups of informal investors, from whom tenants may be able to raise capital.

Indenture  The contract among a company, investors, and a trustee, governing the issuance of corporate bonds.  These are generally very long and must be filed with the SEC under the Trust Indenture Act of 1939.

Independent directors  Members of a board of directors who meet standards of independence from the corporation, its officers and major shareowners.  In the context of particular corporate transactions, a director is independent or "disinterested" if there is no "conflict of interest," that is, no material financial interest in the subject of the transaction.  Federal and state securities rules define independence by legal relationships and measurable economic interests.  However, courts have examined "bonds of friendship" and other more subtle influences.  In one case, two professors were determined not to be independent, because of the large contributions to their university by the corporation's CEO. 

Index  A group of securities used to measure the performance of individual securities, including their beta and relative price earnings ratio.  The most frequently-used indices are the Standard & Poor's 500 and the Dow Jones Industrials.  There are mutual funds that own shares in the same proportions as the index.  These index funds have usually generated better returns to investors than funds with money managers who select investments.

Indications of interest  A way to communicate the willingness to buy or sell securities at a price on any terms, without creating a legally binding obligation to do so.  This occurs when brokers write orders for shares in an initial public offering.  No sale of shares can occur until the effective date and delivery of a final prospectus to the customer.  In practice, the prospectus in an underwritten IPO is first sent to the customer when it accompanies the confirmation of sale.  The customer then has to pay for the shares at the offering price, or to renege and cancel the order.

Individual investors  People who are investing their own money directly.  Included are IRAs and trusts for family members.  Not included are people who channel their money through mutual funds, pension plans, or other institutional investors.

Influentials  People who influence the decisions of others.  Members of communities to whom acquaintances turn for advice or a role model because of their position, reputation, or personality.  A direct public offering program will try to reach these people first.

Infomercial  also known as “infocommercial.”  A commercial message presented like a feature story.  Most advertisements are short and in a rather standardized format, whether the media is print or electronic.  An infomercial is longer and packaged to resemble news, editorial copy, or programming.  There will be some distinguishable mark, like the word “advertisement” in print or a voice-over in television:  “This special announcement is brought to you by . . . ”

Informal investors  Also known as angel investors.  There is a period between the start-up of most businesses and their initial public offering when capital is needed for the business to become established and profitable.  These businesses will probably not be attractive to venture capital firms, most of which have become institutionalized and unwilling to take risks on little companies with unknown entrepreneurs.  As a result, various networks of informal investors have developed all over the country.  They are often coordinated by incubators, accounting firms, or management consultants.  Information about early stage capital is available from the Center for Venture Research, Whittemore School of Business and Economics, University of New Hampshire, www.wsbe.unh.edu.

Initial public offering (IPO)  For a corporation, the initial public offering is like a coming-of-age rite.  It signals that a company has joined the ranks of successful businesses.  As a matter of practical finance, the first-time sale of shares to the public opens the door to large amounts of capital with no interest expense, no repayment, and no restrictive covenants on management.  For the founders and early investors, it places a market value on their investment and provides the liquidity for some cash return.  In the past nearly every IPO was a firm commitment underwriting through an underwriting syndicate.  Today the developments in direct marketing make possible the direct public offering (DPO).

Inside information  Some investment theorists say that all information about publicly traded shares is readily available to all investors, with the result that the share price always reflects the effect of this information.  The conclusion is that no one would be able to profit more than anyone else by picking individual stocks.  However, some investors, brokers or advisors  claim to have access to inside information, that is, facts or rumors which are not public information but have been leaked by employees, directors and others with a fiduciary duty to the issuer. 

Insider  A person in a position to control the corporation or to have access to nonpublic information which, if publicly known, would likely affect the price of the shares.  The legal definition varies with the particular legal duty involved.  Insider trading is periodically the subject of prosecution and publicity.

Institutional investors  Pools of capital under the control of money managers.  The largest institutional investors are pension funds, insurance companies, mutual funds, and endowments for schools and religious bodies.  Nearly half the shares of America’s largest corporations are owned by institutional investors.  Because they buy and sell investments much more frequently than individual investors, over 70 percent of the trading in corporate shares is done for institutional investors.  After years of poor performance, money managers of many institutional investors have been replaced by index managers who invest in the same shares and proportions as the Standard & Poor’s 500 or other market index.  In recent years, most underwritten IPOs have been sold to institutional investors and individual speculators.

Interactive marketing  This occurs when the company and the prospects can communicate back and forth immediately, without the delay of going from a proposition in one type of media (newspaper or TV) to a response in another (telephone or mail) and on to a fulfillment and conversion.  The oldest interactive marketing (as well as the most costly and time-consuming) is calling upon prospects in person or by telephone.  Electronic means of interactive marketing allow all four steps in a direct offering to take place in one session.

Interdealer market    All the markets for buying and selling existing securities (the secondary market) are available only for transactions made through registered securities broker-dealers.  Securities which are not listed for trading on an exchange are traded in the over-the-counter market.  Interested broker-dealers quote bid prices, at which they will purchase at least 100 shares, and asked prices, at which they will sell at least 100 shares.  These bid and ask prices are made available to the broker-dealers, and through public media, through NASDAQ and the Pink Sheets. 

Internal memoranda  A brief writing, video, or audio tape used to tell registered representatives about a public offering and give them selling points for their telemarketing.  It is unlawful to show internal memoranda to prospects.

International Financial Reporting Standards  A set of accounting standards, developed by the International Accounting Standards Committee and adopted by the European Union.  They are said to be more "principles based" than GAAP, which contains more detailed rules for recording transactions and presenting financi