Glossary of Equity Finance Terms:
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Accredited Investor: See Angel
Affiliate (Also referred to as an Affiliated person or
insider): an individual who directly or indirectly, using one or more intermediaries,
controls or is controlled by, or is under common control of the issuer. In other words, an
affiliate is any officer or director of a public company or is a shareholder with five
percent (5%) of the shares of the public at the time the shares were issued. Affiliates
are subject to greater reporting requirements, prohibitions against trading on information
not known to the public, and related regulations whose purpose is to protect the public
Affiliated Person: See Affiliate
Analyst (Also called a Financial Analyst): an
individual, usually employed by a brokerage firm, who evaluates the merits of specific
public companies and industry trends for the purpose of advising investors to buy or sell
stock or related financial instruments.
Angel or Accredited Investor: an American private
investor or group of private investors. They meet the net worth and income requirements of
the Securities and Exchange Commission. They are willing to invest in business ventures in
various stages of maturity. Generally, this definition signifies individuals investing
their personal funds and often syndicating the remaining financing amount with other
Annual Shareholders Meeting: a meeting which is
required by law. An American or Canadian public company must hold an annual meeting open
to all its shareholders. The shareholders must receive ample notice of this meeting and
the issues that will be resolved by a vote of the shareholders. The notification of the
meeting is usually sent with the Annual Shareholder Report. Common issues resolved at
shareholder meetings include the election of Directors, compensation of officers, and
issues related to the company's corporate vision. Each shareholder has the right to vote
the shares they own. Usually, this means the insiders holding the control block of stock
make corporate policy.
Annual Shareholder Report: required by law. This
report is prepared by the company and must be distributed to all registered shareholders
and to those unregistered shareholders who request it. It includes information about
management, operations, facilities, corporate vision, and an audited financial statement.
Authorized Shares: number of shares that the
shareholders have agreed will be the maximum number of shares the company can issue. This
number is usual fifty million to one hundred million shares.
Bailout: excessive selling by shareholders due to a loss of confidence in the
Bankruptcy Reorganization: an American business, in
a state of insolvency, files for protection from its creditors under Chapter 11 of the
U.S. Bankruptcy Code. The business is permitted to continue operations while restructuring
debts and working out a repayment schedule acceptable to a committee of its creditors.
(Also see Turnaround)
Barrier: selling by public shareholders, who
purchased their stock at or near the peak of the last upward move of the company's share
price. This selling usually results from a major decline in the company's share price
followed by a recovery to its previous peak. To avoid barriers, avoid irregular trading
patterns, particularly ones with sharp share price declines.
Bear Market: period during which share prices
generally fall. Investment interest is limited. There are often economic issues such as
high unemployment or declining corporate profits. The 1929 collapse of the shares on the
New York Stock Exchange led to a bear market. The bear market formed the basis of the
Depression that plagued the early 1930's and led to the failure of more than 10,000
Best Efforts: an underwriting agreement in which the
underwriter doesn't guarantee the sale of the shares to be placed. In essence it says,
"we think we can sell your shares. We'll do our best to sell your shares. We
Bid & Ask: National Association of Securities
Deals (NASD) method of trading shares. It applies to the Over-the-Counter (Pink Sheets),
NASD Bulletin Board and NASDAQ markets. The bid is the price the buyer is willing to pay
for a stock. It is lower than the ask which is the price the seller wants for the shares.
A small, experienced NASD brokerage firm will buy the stock at a price between the bid
& ask price. Most national brokerage houses buy their client's stock at the ask price.
If you regularly trade speculative stocks, you'll usually save money with a smaller NASD
Blind Pool: a public company which has raised money
without a specific purpose. This was a popular method for private companies to "go
public" in the 1980's. Usually the merge was done with a reverse split of the shares
of the blind pool followed by the issuance of shares to acquire the private company.
Because the public investors in the Blind Pool usually lost money, the SEC opposes the
creation of Blind Pools.
Blue Sky Laws: refers to State Securities Laws.
Montana, the Big Sky State, was the first State to enact legislation to protect public
Broker-Dealer: refers to any registered member of
the National Association of Securities Dealers (NASD). The term is often used to refer to
brokerage firms who are NASD members. NASD members trade within the Over-the-Counter (Pink
Sheets), NASD Bulletin Board, and NASDAQ trading systems. (Also see Investment Banking
Bull Market: a period when share prices are moving
upward. Investment interest is high. The public views the economy as strong.
Bulletin Board (Also called the NASD Bulletin Board, the
Electronic Bulletin Board, the OTC Bulletin Board and, by stock promoters, the NASDAQ
Bulletin Board): purpose of the Bulletin Board was to trade quality Over-the-Counter
shares of American "reporting" companies and foreign shares legally trading in
the United States. Unfortunately, it has degenerated into trading many "exempt"
securities and fails to inform the investor they are buying shares in companies whose
stock can't trade elsewhere.
Business Incubators: business incubators nurture
young firms, helping them to survive and grow during the start-up period when they are
most vulnerable. Incubators provide hands-on management assistance, access to financing
and orchestrated exposure to critical business or technical support services. They also
offer entrepreneurial firms shared office services, access to equipment, flexible leases
and expandable space--all under one roof. For a list of business incubators online, click incubators
Business Plan: a written document that expresses the
corporate vision about the future of the company. To succeed, your vision must be global.
To be credible, your business plan must rest upon the success to date of your private
Buyout/Acquisition: a stage in the maturity of a
business, or a situation created by special circumstances, where a product line, business
segment, or entire business is purchased by an outside company or perhaps by the existing
management of the business. The process involves thorough valuations of the target
business, sophisticated structuring and extensive negotiations of the terms of the
transaction. A firm may specialize in providing these services and may arrange for the
placement with other firms and institutions, which may be required to complete the
transaction. (Also see Leveraged Buyout and Mergers and Acquisitions)
Cash flow Projections: See Pro Forma
Clean Shell: a reporting company. It has its filings
current. It doesn't have debt. There are no lawsuits, nor reasonable prospects of a
lawsuit against the company. The insiders retain control of 80%-90% of the issued shares.
(Also see Public Shell Corporation)
Comfort Letter: a letter written by an independent
accountant to the underwriter, indicating the results of accounting tests performed on the
financial data as requested by the underwriter.
Convertible Debenture (Also called an Equity Related
Loan): usually refers to loans convertible into equity ownership( shares of the
company at a fixed price) or loans collateralized with equity positions.
CUSIP Number: issued by the Cusip Service Bureau. It
is the number used by the brokerage industry to distinguish between the tens of thousands
of public companies whose shares trade in the United States.
Dealer: See Broker-Dealer
Deficiency Letter: a letter from the SEC commenting
upon problems noted in the review of a registration document filed by a company seeking to
go public or filed as part of the reporting requirements of public companies.
Depository Trust Company: the company that holds the
shares of your company not requested for physical delivery by your shareholders.
Dilution: any increase in the number of shares
issued by the company. An increase in the number of shares without an offsetting
compensation to the company decreases the value of the previously issued shares. Also, it
increases the costs of maintaining a strong share price when the new shares begin to
trade. Assuming the company receives good value for its issued shares, it can offset the
stock support costs by requiring the issued shares be pooled with the insiders' shares.
Divestitures: the distribution of a company's assets
or a business segment by sale, liquidation or other acquisition arrangement. It can also
mean a corporation's orderly distribution of large blocks of another corporation's stock
held for investment.
Due Diligence: a legal requirement that stock
brokers, underwriters and spin-off sponsors must meet to ensure that the statements made
by a spin-off company or public company are accurate and complete. The purpose is to
ensure the public has full and accurate information about a public company or a private
company about to become a public company.
EDGAR: SEC's online public company database. Click EDGAR
Equity: ownership interest in a corporation, usually
represented by the shares of stock which are held by individuals or corporations. Also,
it's the excess of balance-sheet assets over liabilities.
Equity Offerings: a means of raising funds by
offering ownership in a corporation through the issuing of shares of a corporation's
common or preferred stock. (Also see, Initial Public Offering and Private Placement)
Equity Related Loan: See Convertible Debenture
Exempt Offering: private companies can seek public
investment in their company under specific exemptions of the U. S. and State Securities
Acts. The common U. S. Securities and Exchange exemptions are Regulation A & D under
Section 504-506. The common State exemption is the SCOR exemption. The Private Company
must file a questionnaire and conform with a variety of restrictions.
Failure to Disclose: if you file a report or
questionnaire with any State or Federal Securities Agency and it has a material
misstatement of fact in it, you commit a felony. (Also see Statement of Material Fact)
Financial Consultant: an individual or firm
specializing in locating financing. The consultant has the ability to structure a business
plan so that it attracts the needed money. Most consultants offer a stable of related
services that reflects their basic approach to raising risk capital. They usually charge a
retainer. The fee for their services generally comes from a percentage of the amount of
financing obtained. It is usually about 1% of the gross proceeds.
Financial Finding Service: See Financial Consultant
Finder: someone who arranges an introduction between
a business person seeking a service and someone they feel might help that business with
that service. Most finders know other finders. The business person ends up in a daisy
chain where no one can actually help them. Finders charge a fee for making successful
introductions. Usually, the fee is 10% of the value of the service to the business person.
Firm Commitment: An underwriting agreement in which
the underwriters agree to place the entire underwriting. The underwriting contact has a
long list of exceptions that would allow the underwriter to void the agreement. One common
clause in many underwriting agreements is the underwriter may withdraw if "market
conditions" are no longer suitable for the placement of the shares. It is up to the
underwriter to make a subjective determination about "market conditions." For a
firm commitment underwriting agreement you should expect to pay the underwriter 1.5% of
the gross proceeds, as a non-refundable retainer. This payment is made at the signing of
First Round (or Stage 1) Funding: typically funding
that accommodates growth. The company may have finished R&D. Funding is often in the
form of a loan or convertible debenture. This is the stage in the maturity of a business
where the initial growth of the product or service is realized. The initial capitalization
money has been spent. The management and operations are in place. The markets initially
identified are being penetrated using available resources.
Float: See Public Float.
Form 8-K: form which must be filed with the SEC
whenever there is a material change in the affairs of your public company.
Form 10: form filed by a spin-off sponsor in the
course of taking a spin-off public. There are alternatives to doing this filing. However,
your company is better served to meet the SEC's expectations than to avoid their review.
Form 10K: 1934 U. S. Securities Act requires that
every reporting company file this annual report with the SEC. Form 10K is filed
electronically. You can secure copies from the SEC's EDGAR website.
Form 10Q: 1934 U. S. Securities Act requires that
every reporting company file quarterly reports with the SEC. Form 10Q is filed
electronically. You can secure copies from the SEC's EDGAR website.
Form S-1: form which must be filed with the SEC to
qualify a private company for an Initial Public Offering. Initial Public Offering
filing Form S-1 and meeting other requirements, a private company may offer a specified
number of its shares to the public. This is usually done with an underwriter. The result
of the process makes the private company a public (reporting) company. Less than half of
the private companies that attempt to do an IPO succeed. The usual reason for failure is
the costs of the IPO process.
Incubators: See Business Incubators
Initial Public Offering (IPO): occurs when a company
registers its stock with the Securities and Exchange Commission and can sell equity
ownership in the company to the public. Access is gained to a source of capital which did
not previously exist. There are numerous reporting and compliance issues to deal with from
this point forward which could involve a considerable expense. Stock that is publicly
traded on an exchange provides the owner with an established price and a market in which
to buy or sell. (Also, see Form S-1)
Insider: See Affiliate
Intermediate/Second Round Funding: maturing company
where a future leveraged buyout, merger or acquisition and/or initial public offering is
becoming a viable option. It is a stage in the maturity of a business where the business
seeks to expand its product line, expand its facilities, identify and penetrate new
markets and continue the growth phase. Further capitalization and credit financing may be
required to fund this additional growth.
Intrastate Offerings: a private company may offer
its shares under the laws of the State in which it is located. To do so, it must meet the
Blue Sky Laws of that State. Attempts to convert an intrastate offering, after two years,
to a U. S. public company are often met with SEC opposition.
Investment: transfer of capital or other assets to
an enterprise in order to secure a profit for the investor.
Investment Banking Firm: acts as underwriter or
agent, serving as intermediary between an issuer of securities and the investing public.
In addition to new securities offerings, investment bankers handle the distribution of
blocks of previously issued securities, either through secondary offerings or through
negotiations, maintain markets for securities already distributed, and act as finders in
private placements of securities. Many investment banking firms support broker-dealer
operations, serving both retail and wholesale clients in brokerage and advisory
capacities. In addition to underwriting and brokerage operations, investment banking firms
are becoming more involved in other financial services and financing transactions as
defined by each individual firm. Some firms become involved in brokerage operations
specializing in private placement transactions and other investment strategies similar to
venture capital firms. In some instances, a firm's minimum investment figure will relate
to private placements rather than public offerings or secondary public offerings. Firms
specializing in "pink sheets" will usually become involved in riskier
high-growth businesses and have a lower minimum financing requirement. They will, however,
expect high returns on their investments and often require that a company become publicly
traded if it isn't currently a public company. (See also Broker/Dealers)
Investor Relations: to maintain a
strong share price, your public company must develop and implement a strong stock support
plan. The costs of implementing your stock support plan are among the major disadvantages
of being a public company. Because you have a better mousetrap, the world won't beat a
path to your door. You must convince investors to buy and hold your stock.
IPO: See Initial Public Offering
Issued Shares: the total number of shares the
company has issued. Plus, any shares that the company may have a contractual obligation to
issue, such as shares that could be issued as a result of the sale of options and
Issuer: legal term that usually means the public
Junior Company: a Canadian term that usually refers
to a public company with no or very limited business income. The usual reference is to
mineral exploration companies as: "Junior Resource Company."
Later Stage Funding: mature company where funds are
needed to support major expansion or new product development. Company is profitable or
LBO: See Leveraged Buyout
Legend Stock: insider stock that has been restricted
from sale by American Law. It is subject to Rule 144 and often called 144 Stock.
Historically, the stock was restricted for two years. The current restriction is 1 year.
Canadian law restricts the sale of insider stock for 1 year.
Letter of Intent: non-binding letter from the
underwriter to the issuer, confirming the underwriter's intent to proceed with an offering
and the general terms of the underwriting.
Leveraged Buyout or LBO: the buyout of a company's
existing ownership using borrowed funds. The funds borrowed by the investors purchasing
the target company are generally secured by the assets of the target company. (Also see
Limits: a brokerage term that means instructions in
the buying or selling of stock for a client. Usually, the instructions help the client
make money in the market.
Making a Market: efforts by a broker-dealer to
maintain trading activity in a specific stock.
Management Buyout or MBO: MBO is similar to an LBO
where management of the target company desires to acquire ownership of the company. ( Also
see Leveraged Buyout and Buyout./Acquisition.)
Market: a brokerage term for the trading of stock
and the industry associated with the trading of stock.
Market Cap or Market Capitalization: the value of a
public company based upon the multiplication of the company's share price multiplied by
the shares issued in the company.
Market Conditions: refers to the strength of the
market or a market segment, like the interest in computer or airline stocks. Market
conditions are good in a bull market. They are bad in a bear market.
Market Maker: a broker-dealer who has indicated that
they will make a market in the shares of a specific company. The indication does not
necessarily mean the broker-dealer will make a market in the company's shares. In theory,
a market maker is a wholesaler of the company's shares. You must have at least three
market makers to list your shares on the Bulletin Board. You must have at least five
market makers to list your shares on NASDAQ.
Material Fact: any issue related to a business that
would influence an investor in their decision to buy or sell the securities of that
business. (Also see Statement of Material Fact.)
Mergers & Acquisitions (M&A): you want to
buy other companies to expand your asset base. In time, you will want a major company in
your industry to buy you. As a public company, you should use your strong share price to
buy private companies. When it comes time for you to be bought, your strong share price
will ensure a sale price far in excess of your public company's value based upon its
balance shell. Your business plan should reflect your M&A goals. merger and
acquisition are the combination of two companies by the process of joining or sale. If one
company survives it is a merger, if both survive, it's an acquisition.
Merit States: the twelve States that require a
public company to register with the State Securities Commission before selling stock in
their State. They are called "Merit" because they can reject an applicant public
company using "lack of merit" as their justification. Unless the company or the
underwriter does business in a Merit State, it isn't worth the cost and effort to meet the
filing requirements. The company is better served waiting until it trades on NASDAQ or any
American stock exchange. At that time, it can trade in every Merit State without making a
MESBIC's: MESBIC's are Minority Enterprise SBIC's
that function similarly to SBIC's which see, but can only invest in 51% or more
minority/disadvantaged individual owned enterprises. (Also see SSBIC.)
Mezzanine Funding: company's progress makes
positioning for an Initial Public Offering viable. Venture funds are used to support the
NASD (The National Association of Securities Dealers):
members trade shares on the Over-the-Counter, Bulletin Board, and NASDAQ markets. The NASD
includes virtually every American investment banking firm and dealer in the
over-the-counter market. The organization imposes regulations on its members ensuring
moral and ethical standards are maintained. The organization maintains a quotation system
(NASDAQ) for publicly traded securities which are traded over-the-counter (and not traded
on exchanges such as the New York Stock Exchange or the American Stock Exchange).
NASD Bulletin Board: See Bulletin Board
NASDAQ: electronically trades stocks. The share
volume is greater than the American Stock Exchange. It's divided into two markets. The
National Market System (NMS) shares are quoted in many financial newspapers and major
general circulation newspapers. There is the Small Capital (Small Cap) Market. To list
your company on the Small Cap Market, you must have assets of $4 million, net worth of $2
million, Bid price of $3.00+, a float over 100,000 shares, seven market makers, and over
500 shareholders. Usually, the first stock exchange beyond the OTC/Bulletin Board Market
is NASDAQ. Companies with smaller asset size not qualifying for listing on the large
exchanges would have their securities quoted on NASDAQ. "Market makers" supply
bid and offer prices for the securities quoted.
National Association of Securities Dealers Automated
Quotations: See NASDAQ
Newsletter Editor: financial advisory newsletters
are a principal source of investors for companies that don't qualify for review by
Offshore Private Placement: an exempt offering of
shares, options, warrants, etc; to non-residents of the United States.
Online Brokerage firm: an NASD brokerage firm that
offers to trade stocks for clients who use the Internet. These firms charge very low
commissions. A few may offer clients shares in Initial Public Offerings, but most solely
trade stock for their clients.
Options: a right to buy stock at a specific share
price. The specific share price is called the exercise price. Usually, investors purchase
options at a very low price betting the share price will appreciate above the exercise
OTC: See Over-the-Counter
Over-the-Counter or OTC: a security that is not
listed and traded on an organized stock exchange. It is also a market in which securities
transactions are conducted through a telephone and computer network, connecting dealers in
stocks and bonds rather than on the floor of an exchange. Securities traded in this manner
do not meet the listing requirements of NASDAQ,the New York or the American Stock
Exchanges. Rules for trading over-the-counter stocks are written and enforced mainly by
the NASD. The basis for the trading are the published Bid/Ask prices of shares printed by
National Quotation Bureau, Inc. of New Jersey on pink paper and called "the Pink
Sheets." (Also see Bulletin Board and Pink Sheets)
Penny Stocks: shares that do not trade on NASDAQ nor
on any stock exchange. The share price is below $5.00. These stocks trade on the pink
Pink Sheets: a daily publication (so named for the
color) of the bid and ask prices of thousands of over-the-counter stocks. Companies whose
stocks are quoted here are also called "Penny Stocks." They have smaller asset
sizes and share prices. They do not qualify for listing on NASDAQ. (Also see
Over-the-Counter, Bulletin Board, and NASDAQ.)
Player: a slang term used in the equity finance
industry for anyone who is knowledgeable about and participates in the market.
Pooling Agreement: an agreement by all the insiders
in a public company to place their shares in a central depository for a specific period of
time. This agreement ensures that none of the insiders can sell any of their stock during
the period the public company matures to success. The pooling agreement is often longer
than the period the insider shares are restricted. (See Legend Stock.)
Preferred Stock: a class of capital stock of a
corporation sometimes paying dividends at a specified rate and receiving preference over
subordinate classes of capital stock, such as common stock, in the payment of dividends or
liquidation. Preferred stock ordinarily does not carry voting rights and may have various
other features which either restrict its residual rights to corporate profits or enhance
Primary Offering: Canadian term for an Initial
Public Offering. Used in the States as an alternative term for an Initial Public Offering.
Private Investor: See Angel
Private Lender: an institution or an individual who
provides funding in the form of debt. The term of the debt will usually be intermediate (5
to 10 years). Many of these sources indicate a preference to being contracted by other
financing sources and finance professionals through syndication rather than contracted by
the actual companies seeking financing.
Private Placement: an exempt offering of securities.
In the United States, it usually involves a limited distribution (generally 35 or fewer
participants) of restricted stock to accredited private investors (Angels). The sale is
usually exempt from SEC registration requirements. The investors execute an investment
letter stating that the securities are being purchased for investment without a view
Privatization: the process of converting
Government-owned industries into private or publicly owned industries.
Pro Forma (Also called cash flow (S/B cash flow)
projections): the presentation of financial information such as a balance sheet,
income statement or forecasted cash flows where the amounts are hypothetical. These are
typically presentations of future expected results based on assumptions and actions to be
Promoter (also called a Stock Promoter): a sales
person who convinces investors to buy the shares of a particular public company. Promoters
supply a vital service that can maintain the share price of the public company. Too often
these sales persons make claims for the public company that are unjustified. The result
can be an SEC investigation and the filing of criminal charges against the promoter and
the principals of the public company.
Prospectus: the selling document, reviewed by the
SEC, offering pertinent information to public investors about a public company. It is
commonly associated with Initial Public Offerings.
Public Company: any company that files a Form S-1
with the SEC and raises money from the public. Any company with 300 or more shareholders
as defined in the U. S. 1933 Securities Act and elects to become a reporting company.
Under the U. S. 1934 Act, any company with 500 or more public shareholders or a company
with some public shareholders and assets of $5 million dollars must become a reporting
company. A public company is a reporting company. The company must file Form 10K and forms
10Q every year with the SEC.
Public Float (Also called the float): that portion
of the issued stock not held by affiliates (insiders) of the public company.
Public Shell Corporation (Also called a shell): a
reporting company without assets, but current on its filings with the SEC. Buyers should
be wary of intrastate offerings, SCOR offerings and OTC companies that aren't current with
their SEC filings being sold as Public Shell Corporation. The axiom of the shell market
is: caveat emptor. (Also see Clean Shell)
Quiet Period: if you elect to do an Initial Public
Offering, you are legally forbidden from seeking any sort of publicity about your company
from the time you reach an understanding with your underwriters to ninety days after your
shares commence trading.
Rating Service: see Standard Manual Exemption
Recapitalization: an effort to reorganize an
existing company and find new sources of capital for that company. It's often associated
with a Chapter 11 filing and efforts to turn around the company.
Register: an agency, often the transfer agent
responsible for the issuance of share certificates, which verifies that cancelled share
certificates are in balance with the issued share certificates.
Registration: the requirement under U. S. Securities
Acts postulating the method for filing information with the SEC.
Registration Statement: the document filed with the
SEC containing the information required by Law.
Regulation A (Also called Reg A or a 504 Exemption):
Provision under the 1933 U.S. Securities act for exempting some private companies under
certain conditions from the filing requirements of the Act. If the Private Company meets
the requirements, they are allowed to attempt to raise up to $5 million dollars without
filing Form S-1 with the SEC.
Regulation D (Also called Reg D or a 504 Exemption):
Provision under the 1933 U.S. Securities act for exempting some private companies under
certain conditions from the filing requirements of the Act. If the private company meets
the requirements, they are allowed to attempt to raise up to $1 million dollars without
filing Form S-1 with the SEC. The Reg D filing format is a simple question and answer
format. It allows public investment in your private company.
Reporting Company: any company required to file Form
10K and 10Q or Form10KSB and Form 10KSQ with the SEC. The term comes from the 1934 U. S.
Securities Act. In the language of the Act, reporting company refers to any spin-off in
which 500 or more public shares become shareholders of a private company. (Also see Public
Restricted Stock: See Legend stock.
Reverse Merger: the acquisition by a reporting
company (Public Shell) of a private company by the issuance of a block of stock that gives
the private company over fifty percent (50%) control of the public shell. It appears to be
an inexpensive method of going public. Any private company that elects this method of
going public commits financial suicide. There are two common problems with reverse
mergers. The insiders of the public shell retain their shares. They always sell their
shares into any attempt by the private company to strengthen its share price. The result
is the private company fails as a public company and the past insiders pocket a million
dollars for killing the company. Often private company management believes that SCOR
failures, Intrastate offerings and a variety of pseudo-public companies are reporting
companies. If the company isn't filing 10Ks and 10Qs with the SEC, it isn't a public
Reverse-Split (Also called a rollback): by vote at a
shareholders' meeting, this is a decision to reduce the number of shares issued by the
public company. It is always part of a shell buyer's strategy. It will alienate the
shell's current public shareholders and the shell's Market Makers. It's essential to allow
the shell company to develop into a strong public company. Without a shell sale, the
decision to do a reverse split is a guarantee of financial suicide for present management.
Rollback: See Reverse-Split
Rule 144: See Legend Stock
Rule 15c2-11: the requirement that market makers
keep relevant information about the public companies in which they make a market. Also, it
refers to the filing by these market makers with the NASD for trading the company's shares
on the Bulletin Board.
SBIC (Small Business Investment Corporation):
Government leveraged firms investing in established companies for buyouts, funds for
IPO's, strategic partnerships or bridge financing. They are privately owned but licensed,
regulated and financed by the SBA. They have the ability to leverage privately raised
capital with government funds and make capital available to small businesses which meet
standard criteria. SBIC's may buy stock in a new venture, or provide capital through debt
or convertible debentures. Since SBIC's must service the debt they borrow from the SBA,
investments are typically in the form of loans with favored interest rates coupled with
the right to buy stock (See Convertible Debenture). This structure gives the SBIC
immediate returns to service their debt. This may not be a good source for start-up
ventures likely to lose money in their initial years. The investment objectives are
similar to those of venture capitalists. (Also see Venture Capitalists) Small businesses
that qualify have a net worth less than $6,000,000, after tax profits of $2,000,000 or
less for two years prior, and cannot be investment companies, lending institutions, or
manufacturing companies with over 500 employees (unless meeting the net worth and net
SCOR (Or Small Corporate Offering Registration also
known as ULOR or Uniform Limited Offering Registration): allows you to raise up to $1
million by filing a U-7 Form with the State in which your private company is located. To
meet Federal exemption requirements, you must file a Reg D questionnaire with the SEC.
Secondary Public Offering: refers to a public
offering subsequent to an initial public offering. A secondary public offering can be
either an issuer offering or an offering by a group that has purchased the issuer's
securities in the public markets.
SEC: See Securities and Exchange Commission
Securities and Exchange Commission: the U. S.
Federal agency primarily responsible for regulating the trading of stock in the United
States. They process the filings of reporting companies. They review Initial Public
Offering and other public company filings. They have the power to file criminal charges
against those they suspect of felony violations of American Securities laws.
Security: legal term for stock or shares
Second Round Funding: See Intermediate/Second Round
Seed Capital: a source of funding for the early
stages of a start up venture where the product, process, or service is in its conceptual
or developmental phase. (See Angels, who are the usual source of seed capital.)
Seed/Startup Funding: earliest stage of business,
typically no operating history. Investment is based on a business plan detailing the
management group's backgrounds along with the defined market and financial projections. It
is the first stage in the maturity of a business. It encompasses the point of initial
concept upon which the business is founded, and typically is considered to span through
the point the business has a product or service in place and is beginning to generate
revenue from operations. The company is poised to launch into its marketing plan and a
capital infusion is required. This phase may be considered to run even as far as the
second or third year of operations. Each individual or institution attaches a slightly
different ending point for this stage. The usual sources of risk capital are Angels and
Short Sale: the sale of shares that are not owned by
the seller. The shares can be borrowed from a depository trust company or they can be
created by a broker. The act of short selling, by adding to the float, makes it harder for
the company to maintain a strong share price. The stock market is a war between the short
sellers and the public company's supporters. Usually, the short sellers win.
Specialist: person who is charged with the
responsibility to stabilize shares trading on traditional stock exchanges. The person is
employed by a brokerage firm with a seat on the stock exchange. NASD brokers refer to
their efforts to create the same effect as "stabilization."
Special Shareholders Meeting: whenever a public
company must make a major change in its corporate policy, it must call a special meeting
of its shareholders. Three weeks notice must be given and all shareholders notified.
Speculative Stocks: See "Penny Stocks"
Speculator: an individual or firm that buys or sells
a stock with the intent of making a short term profit on the trade.
Spin-off: a public (reporting) company that has over
500 public shareholders and comes to exist because an existing public company has
distributed shares of the subsidiary or private company to its 500 plus shareholders.
Spin-off Sponsor: a public company with over 500
resident American shareholders who accepts the responsibility for a private company
becoming a public company. The legal basis for the practice is found in the 1934 U. S.
Securities Act. Thousands of corporate subsidiaries and private companies have used the
process. It relies on the filing of a Form 10 with the SEC.
Spread: the difference between the bid and ask
SSBIC (Special Small Business Investment Corporation):
set up to fund socially or economically disadvantaged entrepreneurs. (Also see
Startup Funding: See Seed/Startup Funding
Statement of Material Fact: a claim made by a public
company that would influence the decision of an investor to buy or sell a particular
stock. Usually false statements of material fact are felonies under the U. S. and Canadian
Provincial Securities Acts. (Also see Material Fact)
Stock Promoter: See Promoter
Stock Support Plan: Your company needs a business
plan to outline your plans for development. If you are a public company, you need a stock
support plan to outline your plan for developing and maintaining a strong share price.
Without a strong share price, you can't use your stock to buy assets that will make your
company's balance sheet stronger.
Stabilization: See Specialist
Standard Manual Exemption (Also called the Rating
Service Exemption): State Securities Commissions regulate laws that must be followed
in every state in which your stock trades. Thirty eight states offer an exemption from
filing with the State called a "manual" exemption. The filing exemption usually
exists for companies rated by Moody's, Standard and Poor (S&P) and Dun &
Bradstreet. It is cheaper and faster to seek an evaluation by a rating service than to
file your materials in 38 States.
Street Stock: refers to the shares held by the
depository trust company. Also, it can refer to shares being offered by insiders but not
through a NASD broker-dealer.
Suitable Investor: defined by the U.S. 1990 Penny
Stock Law. It requires that investors unfamiliar with penny stocks carefully consider
buying these stocks. The stock broker is required to make new penny stock buyers suitable
investors before selling them penny stocks.
Syndication: a group of individuals or companies
which has formed a venture to undertake a project that would not be feasible to pursue
alone. It usually refers to doing an underwriting or private placement for a public
Third Stage: the stage in the maturity of a business
where the business has established itself strongly in all of its markets with its products
and reputation. It is at this time the company usually elects to do an Initial Public
Transfer Agent: a firm that keeps the official
records of the names and addresses of the company's registered shareholders and handles
the transfer of shares from one person to another. Usually, they are also the company's
Turnaround: the reversal of unfavorable
circumstances of a business where an investment opportunity may exist. A firm may work
with such a business to restructure the management and finances in order to take the
greatest advantage of more favorable circumstances. There are organizations like the
Turnaround Management Association that specialize in turning around failing companies.
Unregistered Shareholders: unless the shareholder
contacts the company or requests that his broker send the company the shareholder's name
and address, the company won't automatically know who owns their stock. These shareholders
are the company's unregistered shareholders. In a public company, the majority of the
shareholders will be unregistered shareholders. The public company's goal should be to
identify their unregistered shareholders in order to communicate with them so as to
encourage the stockholder to hold his/her stock.
ULOR: See SCOR
Underwriter: usually, an underwriter is an
investment banking firm or broker-dealer that has agreed to raise money for your company
to justify the time and costs of doing an Initial Public Offering. Outside the United
States, an underwriter is often a fund with a large number of managed accounts.
Underwriting: an investment banking firm or
broker-dealer acting as underwriter sells securities from the issuing corporation or
government entity to the public. A group of firms may form a syndicate to pool the risk
and assure successful distribution of the issue. There are two types of underwriting
arrangements: best efforts and firm commitment.
Venture Capital: the process by which investors fund
early stage, more risk oriented business endeavors. A venture capital funding arrangement
will typically entail relinquishing fifty percent or more ownership and control of the
business. Offsetting the high risk the investor takes is the promise of high return on the
investment. The investment is usually in the form of stock or a convertible debenture. As
the business matures, an initial public offering may take place, or the business merged or
sold, or other sources of capital found. Any of these would occur with the intention of
buying out the venture capitalists. Venture capitalists typically expect a 26% annual
return on their loan investment at the time they invest in the private company. Venture
capitalists typically invest in high growth companies with the potential to generate
revenues of $20 million in any one company, but typical investments range from between
$500,000 and $5 million. Management experience is a major consideration in evaluating
Venture Capitalist: a firm organized for the purpose
of investing in private companies. The infusion of capital is expected to take the private
company to the point of qualifying to do an Initial Public Offering, Usually, venture
capitalists expect at least 60% equity interest in the private companies in which they
Warrants: See Options
Window: period of time that investors are willing to
participate in underwritings. Usually this period coincides with a bull stock market.
Immediately after a market crash, it is nearly impossible to raise risk capital from
investors. (Also see Market Conditions.)
*Reprinted from ZDNet Inc. October 2000, with
permission. Copyright (c) 2000 ZDNet Inc. Content originally appearing in Ziff
Davis Smart Business is the copyrighted property of Ziff Davis Publishing Holdings Inc. Copyright
(c) 2000. All Rights Reserved.