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Going Public in the USA and the Valuation of IPOs

Diplomarbeit 2001 193 Seiten

BWL - Investition und Finanzierung


Table of Contents



List of Appendix



1 Introduction
1.1 Relevance of the Topic
1.2 Objectives of the Thesis
1.3 Structure of the Thesis

2 The U.S. Stock Exchanges
2.1 New York Stock Exchange
2.1.1 Overview
2.1.2 The New York Stock Exchange Market Data
2.1.3 NYSE Listing Requirement
2.2 Nasdaq
2.2.1 Overview
2.2.2 Nasdaq Market Data
2.2.3 Nasdaq Listing Requirements
2.3 Amex
2.3.1 Overview
2.3.2 Amex Market Data
2.3.3 Amex Listing Requirements

3 The U.S. Regulations and Authorities
3.1 The SEC
3.2 The NASD
3.2.1 Profile of the NASD
3.2.2 NASD Regulation
3.2.3 The Nasdaq Stock Market, Inc
3.2.4 American Stock Exchange LLC
3.2.5 NASD Dispute Resolution, Inc
3.3 State Regulations
3.4 Securities Act of 1933
3.4.1 Registration requirements
3.4.2 Registration Exemption
3.4.3 Liabilities under the Securities Act
3.5 Securities Exchange Act of 1934
3.5.1 Registration Requirements
3.5.2 Liabilities under the Exchange Act

4 American Depositary Receipts
4.1 Function of ADRs
4.2 Reasons for ADRs
4.3 Types of ADR Programs
4.3.1 Unsponsored versus Sponsored ADRs
4.3.2 Public versus Private ADR Programs
4.3.3 Non-Capital versus Capital Raising ADR Programs
4.4 The Depositary Bank
4.5 ADRs and Accounting Standards
4.5.1 Accounting Requirements for Non-U.S. Companies
4.5.2 Accounting According to Item 17
4.5.3 Accounting According to Item 18
4.6 The ADR Market

5 The IPO Team
5.1 Underwriters
5.1.1 Function of the Underwriter
5.1.2 Selecting the Underwriter
5.1.3 Types of Underwriting
5.2 Attorneys
5.3 Accountants
5.4 Financial Public Relations
5.5 Consultants and Advisors
5.6 Financial Printers

6 The IPO Process
6.1 Preparation and Organizational Change
6.1.1 The Company’s IPO Maturity
6.1.2 Preparing for the Transition
6.1.3 Legal Preparation Incorporating the Company Legal Due Diligence
6.1.4 Financial Reporting Preparing the Financial Reporting System Financial Due Diligence
6.2 Registration Process
6.2.1 Registration Overview
6.2.2 Registration Statement
6.2.3 Waiting Period
6.2.4 SEC Review Process
6.2.5 Road Show
6.2.6 Quiet Period
6.2.7 Costs of Going Public
6.3 Registration on a National Stock Exchange and Nasdaq
6.4 Valuation Methods
6.4.1 Discounted Cash Flow Terms of Cash Flow DCF Models Equity Approach Entity Approach Total Cash Flow Approach Adjusted Present Value Approach
6.4.2 Multiples

7 Post-IPO Obligations
7.1 Continual Reporting
7.1.1 Periodical Reporting
7.1.2 Non-Periodical Reporting
7.2 SEC Rule 144
7.3 Aftermarket Obligation
7.3.1 Stabilization Activities by the Underwriter
7.3.2 Investor Relation Program
7.3.3 Financial Community

8 Case Study EPCOS AG and Infineon Technologies AG
8.1 Company Description
8.1.1 EPCOS
8.1.2 Infineon
8.2 Deal Structure
8.2.1 EPCOS Formation of the Corporation The Offering IPO Expenses Use of Proceeds
8.2.2 Infineon Formation of the Corporation The Offering IPO Expenses Use of Proceeds

9 Economical Benefits of the IPO
9.1 Siemens’ Divesting Benefits
9.2 Finance-political Opportunities
9.2.1 Widen the Shareholder Structure General Reasons U.S. Investors Private Investors Institutional Investors Limitations of Institutional Investors Success Factors Investor Relations
9.2.2 Capital Raising Aftermarket Trading in the U.S
9.2.3 Reducing Cost of Capital Cost of Capital Models Capital Market Segmentation Overcoming the Capital Market Segmentation
9.2.4 Mergers & Acquisitions Currency Reasons for M&A Using Stocks for M&A
9.3 Personal-political Opportunities
9.3.1 Management Stock Ownership
9.3.2 Employee Stock Ownership
9.4 Market-political Opportunities
9.4.1 Communication with Financial Community
9.4.2 Increasing Recognition Image of the NYSE Listing Increasing Recognition among Suppliers Increasing Name Recognition among Customers Increasing Name Recognition among Competitors Image as a Global Player
9.5 Aftermarket Development
9.5.1 Financial Results EPCOS Infineon
9.5.2 Stock Performance EPCOS Infineon

10 Recommendation

11 Conclusion

Appendix A –EPCOS Offering

Appendix B – EPCOS Selected Financial Data

Appendix C – Infineon Offering

Appendix D - Infineon Selected Financial Data


Interview Partner


Table 1: NYSE Market Data 1999

Table 2: NYSE Listing Requirements

Table 3: Alternative Listing Requirements for Non-U.S. Companies

Table 4: Listing Fees at the NYSE

Table 5: Nasdaq Market Data 1999

Table 6: Nasdaq National Market Initial Listing Requirements

Table 7: Nasdaq National Market Continuing Listing Requirements

Table 8: Nasdaq SmallCap Market Initial and Continuing Listing Requirements

Table 9: Fee Structure for the Nasdaq National Market

Table 10: Amex Market Data 1999

Table 11: Amex Financial Listing Guideline for U.S and non-U.S. Companies

Table 12: Amex Distribution Guideline for U.S. Companies

Table 13: Amex Distribution Guideline for non-U.S. Companies

Table 14: Types of ADR Programs in the U.S

Table 15: Total Number of IPOs by Lead Manager in 1999 and 2000

Table 16: Total Number of IPOs by Attorneys in 2000 and 1999

Table 17: Total Number of IPOs by Accountants in 2000 and 1999

Table 18: Overview of DCF Approaches

Table 19: Reasons of Foreign Listings

Table 20: Percentage of Holdings of U.S. Investors in Equity

Table 21: Holdings of Corporate Equities from Institutional Investors in the U.S

Table 22: Investor Relations in the U.S

Table 23: Capital Structure of EPCOS and Infineon at the IPO

Table 24: NYSE Listed Bonds

Table 25: EPCOS Financial Statement Summary

Table 26: EPCOS Consolidated Net Sales by Segments

Table 27: EPCOS Consolidated Net Sales by Regions

Table 28: Infineon Financial Statement Summary

Table 29: Infineon Consolidated Net Sales by Segments

Table 30: Infineon Consolidated Net Sales by Regions


Figure 1: Market Size of International Stock Exchanges

Figure 2: Role of Market Makers at the Nasdaq

Figure 3: Creation and Trading of ADRs

Figure 4: Annual Reporting Form 20-F

Figure 5: Total Number of Depositary Receipt Programs

Figure 6: Number of Public Depositary Receipt Offerings

Figure 7: Total Capital Raised in Public Depositary Offerings

Figure 8: Total Capital Raised in Private Depositary Offerings

Figure 9: Financial Public Relations During the IPO

Figure 10: Periods During Registration under Securities Act

Figure 11: Registration Form S-1

Figure 12: Overview Valuation Models

Figure 13: Derivation of Free Cash Flow

Figure 14: Overview Cash Flow

Figure 15: Ownership of EPCOS before Reorganization

Figure 16: EPCOS’ Shareholder Structure

Figure 17: Infineon’s Shareholder Structure

Figure 18: EPCOS’ Stock Performance since the IPO

Figure 19: Stock Performance Comparison of EPCOS vs. S&P 500 and Dow Jones

Figure 20: Infineon’s Stock Performance since the IPO

Figure 21: Stock Performance Comparison of Infineon vs. S&P 500 and Dow Jones

List of Appendix

Appendix A –EPCOS Offering

Appendix B – EPCOS Selected Financial Data

Appendix C – Infineon Offering

Appendix D - Infineon Selected Financial Data


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1 Introduction

1.1 Relevance of the Topic

In the course of trade liberalization, globalization, and multi-national corporations, companies and private persons invest in and are financed by cross-boarder transactions. There are several key trends that are globalizing the world economy and driving business to become more multinational to survive and prosper. Some of the most important changes include dropping borders, growing cross boarder trades and investments, the rise of global products and global customers, privatizations of companies, and the growing sophistication of information technology[1]. As companies concentrate on multinational strategies[2] they also have to attract investors of the major capital markets all over the globe. Furthermore, companies, which are privatized[3] or do spin-offs[4], have such a high enterprise value[5] that these companies cannot raise sufficient capital on a national market, but have to look for additional foreign investors. A company can use a variety of financial instruments to financing its capital. The finance theory distinguishes between equity and debt finance[6]. A debt finance might not be practical for a privatization or a spin-off because of the size and complexity of the company’s business. Selling the whole or a part of the company through equity is also done for strategic reason. First of all, the company can raise new equity capital through an Initial Public Offerings (IPOs) but enables also future capital demand. Second, the company attracts new investors and diversifies the ownership structure, which is positive in the case of unfriendly takeovers. The unfriendly buyer has to convince a large number of investors in order to receive the voting majority. Third, the new capital can be used for expansion and growth either for internal growth through Research & Development or through the acquisition of new companies[7]. Equity capital facilitates mergers or acquisitions due to a possible payment in equity instead of cash. Beyond the financial reasons, market reasons e.g. better image and higher name recognition, personal purpose e.g. increase recruiting power, and other motives like better investor relations are important considerations for an enterprise[8].

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Figure 1: Market Size of International Stock Exchanges

Having a multinational business, companies need to attract international investors. The United States of America (USA) as the world largest economy[9] has also the stock exchange with the world’s largest aggregate market value. In 1999, the listed companies at the New York Stock Exchange (NYSE) had a market volume of $[10] 12.3 trillion[11]. Furthermore, the National Association Securities Dealer Automated Quotation Systems (Nasdaq) is one of most liquid market with an average daily volume of 1,071.9 million shares in 1999[12]. Therefore, the U.S. capital market is the world’s most attractive and important stock market for investors and corporations. A key element of the U.S. stock markets is the strict and stringent stock exchange regulations, which ensures investor’s confidence and smooth trading. But the complex rules and regulations also complicate the listing of a foreign company at an U.S. stock exchange since stock exchange regulations and U.S. General Accepted Accounting Principles (GAAP) are often stricter than the foreign capital market rules and regulations. Nevertheless, a listing at an U.S. stock exchange is crucial and vital for multinational corporation due to the prior mentioned reasons.

1.2 Objectives of the Thesis

The objectives of this thesis are to give an overview of the going public procedure and the registration requirements for U.S. stock exchanges. Hereby, the paper just focuses on the major U.S. stock exchanges NYSE, Nasdaq and the American Stock Exchange (Amex). The regional stock exchanges are not subject of this paper because of their secondary role on the U.S. capital market. The discussion of the IPO process and the listing requirements can only be an overview rather than a complete guideline because of the complexity of the topic. Consequently, the paper discusses mainly the going public process including U.S securities laws, rules, and regulations for domestic companies rather than the IPO requirements for non-U.S. firms. It has to be pointed out that potential issuer need to obtain professional advice of experienced attorneys, accountants, investment bankers, and advisors in order to achieve a successful going public.

Second, the paper gives on overview of valuation methods. However, the paper emphasizes only on those valuation approaches, which are used for valuing firms at IPOs. The discussion of the valuation methods covers a brief introduction and focuses only on the application of the approaches rather than a deep theoretical and mathematical derivation. For a detailed discussion of valuation approaches, it is advisable to consult more thorough literature, which is mentioned in the appropriate chapter.

Third, the thesis discusses the economical benefits of an initial public offering on U.S stock exchanges. The discussion concerns only the economical benefits and opportunities of the listing on the U.S. capital market. The economical costs and drawbacks of the listing are not subject to the discussion. Due to continuing globalization, the benefits of the going public in the U.S. are discussed through a case study of two non-U.S. companies.

Finally, the thesis gives recommendations for potential non-U.S. issuers that may pursue a listing on one of the U.S. stock exchanges. These recommendations are only based on prior discussion of economical benefits. However, the recommendation does not give any legal advice for potential issuer. It has to be emphasized unequivocally that companies need to see an experienced SEC attorney for legal recommendations.

1.3 Structure of the Thesis

This paper consists of two major parts. The first part discusses the listing process for corporations at major U.S stock exchanges. In the case where specific laws, rules, or regulations apply for foreign companies, these are discussed shortly since the core focus is on U.S companies that are going public. Though, the thesis explains listing opportunities and requirements in a separate chapter. The paper further explains the U.S. stock exchange regulations and authorities, the participating and necessary parties of an IPO process, the registration process, and the company’s aftermarket obligations.

In the second part, the thesis demonstrates the economical benefits of a listing in the United States. In order to discuss the benefits, the paper indicates the IPO experiences and benefits through a case study of EPCOS AG and Infineon Technologies AG, which are German companies listed on the NYSE.

2 The U.S. Stock Exchanges

2.1 New York Stock Exchange

2.1.1 Overview

In 1792, the NYSE was founded as the first organized stock exchange in New York. The stock exchange registered as a national securities exchange with the U.S Securities and Exchange Commission (SEC) on October 1, 1934[13].

The Board of Directors that manages the NYSE consists of 26 members, comprised of a Chairman and Company Executive Officer (CEO), twelve representatives of the public, and twelve representatives of the securities industry[14]. As of December 31, 1999, the NYSE had 414 member organizations, which own a “seat” on the trading floor whereas the total numbers of seats equals 1,353[15].

Having a seat at the NYSE is an important matter for investment banks as Rule 54 of the NYSE states: “only members shall be permitted to make or accept bids and offers[16]. The NYSE is a customer-driven auction system where a group of specialists, who are assigned to a specific security, maintain a market by posting firm bid and ask quotes[17]. The specialists are critical to the auction process as they manage the auction process, maintain the market fairness, and provide essential information to the broker. While interactions of buyers’ and sellers’ orders often determine the price of the listed stock, occasionally, the specialist buys and sells from personal inventory in order to improve liquidity in the market.

The other party of a security deal is the broker, who can either be a commission broker or an independent floor broker. Brokerage houses employ

commission brokers, who trade securities on behalf of the general public. These sales representatives are also called “registered representatives” since they must pass a qualifying examination[18] and are registered with the NYSE and SEC. Independent floor brokers work for themselves. They handle orders from brokerage houses that do not have full-time brokers or are off the floor.

Bid and offers variations can be quoted in fractional price steps of 1/32 of a dollar[19]. On August 28, 2000, the NYSE instituted a program to convert listed equity securities from trading in fractional price to trade in decimal price form. Effective January 29, 2001, the stock exchange anticipates the completion of the conversion of all listed equity securities[20].

2.1.2 The New York Stock Exchange Market Data

The NYSE is the largest equity market place in the world. As of year-end 1999, 3,025 companies were listed on this stock exchange with an aggregate market value of $12.3 trillion. 405 companies were foreign companies[21]. In the same year, 21 domestic and 28 non-U.S. companies listed their shares at the NYSE and raised $54.4 billion equity capital. The size of the market provides also an outstanding liquidity to the market participants. In 1999, an average of 809 million shares was traded daily on this stock exchange whereas in peak times over 1,300 million shares changed hands on one day[22].

Table 1: NYSE Market Data 1999

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2.1.3 NYSE Listing Requirement

Beside the SEC filing requirements, companies have also to fulfill quantitative listing standards of the stock exchange where the listing is pursued. The NYSE has the highest listing standards for IPOs compared to other U.S stock exchanges[23]. The New York Stock Exchange publishes a set of standards, which domestic firms must meet in order to obtain listing. Non-U.S companies can choose an alternative set of international standards. Therefore, foreign corporations are allowed either to meet the domestic standards or the alternative standards designed to enable major non-U.S. companies to list in cases where it may be difficult to meet the minimum distribution requirements of the U.S. standards[24].

If a non-U.S. candidate appears to fall short of one or more of the listing criteria, it is recommended that the firm contacts the NYSE international listing staff to discuss the situation in detail.

Table 2: NYSE Listing Requirements

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The alternative worldwide listing requirements for non-U.S. companies do only apply if there is a broad liquid market for the firm’s shares in its country of origin. The NYSE requires that non-U.S. corporations meet the following standards at the time of listing.

Table 3: Alternative Listing Requirements for Non-U.S. Companies

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In order to list on the NYSE, a firm has to meet the listing requirements, register the listed securities with the SEC, file an application with the NYSE, sign a listing agreement, and pay the initial listing fee. The application forms can be obtained from the NYSE listing representative. The listing is not really a difficult or complicated process. The company can obtain support from competent law firms and investment banks familiar with the process[25]. After the company has filed the complete application, the NYSE makes a public announcement notifying the U.S. securities industry of the applied listing.

The applying companies have to pay a listing fee to the NYSE and in addition a continuing listing fee in order to retain the firm listed on the NYSE. Payable upon listing is the initial listing fee and the first year’s continuing annual listing fee. For the following year, the payment is to be made in advance. The firms have to pay at least the minimum continuing annual listing fees. Exceeds the continuing annual fee the minimum amount then the companies have to pay the actual amount. In addition, a maximum continuing annual fee of $ 500,000 has been established[26].

Table 4: Listing Fees at the NYSE

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The NYSE has also issued a separate initial fee structure for foreign shares and ADRs. Foreign companies have to pay the same initial listing fee but at least a minimum of $100,000. If a company issues less than 10 million shares, it has to pay the minimum charge[27].

2.2 Nasdaq

2.2.1 Overview

The Nasdaq stock exchange is nothing else than an electronic market place where market makers place firm bid and ask price in the systems. The Nasdaq was founded in 1971 as the world’s first complete screen-based stock market[28].

The National Association of Securities Dealers (NASD), which is a self-regulatory organization under the Securities Exchange Act of 1934, regulates and runs the Nasdaq Stock Market[29]. The NASD has a governing Board with the majority of governors working in the securities industries[30]. Through its subsidiaries NASD Regulation, Inc. and the Nasdaq Stock Market, Inc., the NASD develops rules and regulations. As of year-end 1999, the organization oversees more than 505,000 registered securities professionals and their business activities. The Nasdaq Stock Market monitors trading through the automated StockWatch Automated Tracking system on a monthly, weekly, and daily basis[31].

As the Nasdaq want to become the first fully global stock exchange, the Nasdaq cooperates with other international stock exchanges and extends trading during European trading hours. Nasdaq International provides extending trading for Nasdaq National Markets, Nasdaq foreign securities (except Canadian), American Depositary Receipts (ADRs), and equity securities listed on an U.S. securities exchange[32]. Beginning in early 2001, the Nasdaq intends an trading extension to Asia. On July 14, 2000, the stock exchange signed a memorandum of understanding with the Osaka Securities Exchange in order to open a new Nasdaq Japan Market[33]. Furthermore, Nasdaq signed regulatory agreements with the Stock Exchange of Hong Kong and plans to open a Nasdaq office in Shanghai, China[34].

Until recently, the Nasdaq market was a dealer-driven auction market. In contrast to the floor-based stock markets, Nasdaq has no single specialist through which transactions pass. Nasdaq’s market structure allows multiple market participants to trade stocks through sophisticated computer network linking buyers and sellers from around the world. Market makers display firm bid and ask quotes on the screen and compete actively for investors buy and sell orders. These participants help to ensure transparency and liquidity[35]. Market Makers are required to:

- Disclose their buy and sell interest by displaying two-sided quotes in all stocks in which they choose to make a market.
- Display both quotes and orders in Nasdaq, in compliance with the SEC Order Handling Rules.
- Honor their quoted prices and report trading in a timely manner. Failure to do so leads to disciplinary actions.

In 1997, Nasdaq implemented new order handling rules after the SEC criticized the NASD[36]. The new system requires certain customer limit orders to be displayed in Market Maker and Electronic Communication Networks (ECN) quotes. ECN is a private trading system from certified brokerage houses. As a result, Nasdaq is now a quotation- and order-driven market[37]. Furthermore, all prices are quoted in steps of 1/16 of a Dollar. As the NYSE, the NASD prepares to implement to decimal pricing by March 31, 2001[38].

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Figure 2: Role of Market Makers at the Nasdaq

2.2.2 Nasdaq Market Data

The Nasdaq is the most liquid stock exchange in the U.S. As of year-end 1999, the average daily volume was 1,071.9 million shares whereas in peak-time over 2,000 million shares changed ownership[39]. The aggregate market volume of 4,829 listed companies total the amount of $5,205 billion[40]. Of the 4,829 listed companies were 4,400 domestic and 429 foreign companies[41]. In the same year, 427 domestic and 58 non-U.S. firm raised new equity capital of $50.4 billion through an IPO. 281 companies with an existing listing raised $53.5 billion through secondary public offerings[42].

Table 5: Nasdaq Market Data 1999

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2.2.3 Nasdaq Listing Requirements

In order to attract a wide variety of companies, the Nasdaq Stock Market provides two different market segments. The larger market with keener listing requirements is the Nasdaq National Market where more than 4,400 firms amount to more than 99% of the aggregate Nasdaq market capitalization[43]. The Nasdaq SmallCap Market appeals to emerging growth companies. As the smaller capitalization tier of the Nasdaq, the financial criteria on this market are somewhat less stringent than on the Nasdaq National Market[44].

The Nasdaq provides three requirement options for an initial listing at the Nasdaq National Market and two options for the continuing listing requirements. On the other hand, the Nasdaq SmallCap Market has no initial or continuing listing options.

Table 6: Nasdaq National Market Initial Listing Requirements

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Table 7: Nasdaq National Market Continuing Listing Requirements

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Table 8: Nasdaq SmallCap Market Initial and Continuing Listing Requirements

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The Nasdaq Stock Market has a separate entry and annual fee structure for the National and the SmallCap Market. Moreover, the stock exchange issued a separate annual fee structure for ADRs.

Table 9: Fee Structure for the Nasdaq National Market

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Firms have to pay $2,000 or $0.01 per additional share, whichever is higher, up to $17,500 per quarter and $35,000 annually for listing additional shares on the Nasdaq National or SmallCap Market. Non-U.S. issuers are not required to pay listing of additional shares[45].

The entry and annual fee schedule of the Nasdaq SmallCap Market is structured more simply. The one-time charge listing fee is $5,000. In addition, the company has to pay the greater of $1,000 or $0.001 per share, not to exceed $5,000. Consequently, the listed companies pay a maximum of $10,000 at the Nasdaq SmallCap Market for initial listing. The continuing listing fee is constructed as a flat rate per issuer of $4,000 annually[46].

The annual ADR fee structure is held as simple as the one on Nasdaq SmallCap market. On the Nasdaq National Market, the companies have to pay the greater of $500 or $0.0005 per share plus participation fee of $2,000. The maximum annual fee for ADRs must not exceed $8,000[47].

2.3 Amex

2.3.1 Overview

The initial steps for the foundation of the American Stock Exchange were laid in the early part of the twentieth century. Brokers adopted formal requirements for membership and trading and transformed the exchange, whose origin goes back to the late 1700s, into an organized exchange[48]. The Amex is the second largest floor-based U.S. stock exchange[49] with 661 regular members. Only members are allowed to buy and sell securities at the Amex[50].

The Amex is an auction market, in which security prices are determined by public bids to buy and offers to sell. The majority of the order flow comes in electronically. The remaining orders are initiated directly on the trading floor by registered brokers. The order flow is centralized to specialists, which are required to yield priority to public investors ensuring the best available price. The specialists quote prices in steps of 1/16 of a Dollar, but as the SEC ordered the Amex will convert to decimal price quotations on March 31, 2001[51]. Each listed company chooses up to three specialists who are responsible for overseeing all trading in its assigned stocks. Basically, the specialists have four different obligations at the Amex:

- Maintain a fair and orderly market,
- Act as brokers’ broker executing limited orders,
- Bring buyers and sellers together,
- Serve as dealers in order to increate interest in a stock and ensure liquidity[52].

As the Nasdaq Stock Market, the National Association of Securities Dealers, which is the industries’ largest self-regulatory organization controls the Amex. The Board of Governors, which consists of members from the NASD and the securities industry, manages the stock exchange[53].

2.3.2 Amex Market Data

The American Stock Exchange is the second largest floor-based U.S. stock market. As of year-end 1999, 769 companies were listed on this stock exchange with an aggregate market capitalization of $142 billion[54]. During the last year, eleven companies chose the Amex in order to raise initially equity capital in a value of $138 million. In 1999, eleven listed companies raised $794 million additional capital[55]. The average daily share volume was 32.5 million shares[56].

Table 10: Amex Market Data 1999

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2.3.3 Amex Listing Requirements

The Amex has divided its listing requirements into financial and distribution guidelines. The financial guideline offers two different requirement alternatives and the distribution one offers three different alternatives. Moreover, the Amex distinguishes between U.S. and non-U.S. companies whereas the requirements vary only marginal. The Amex does not have continuing listing requirements.

Table 11: Amex Financial Listing Guideline for U.S and non-U.S. Companies

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Table 12: Amex Distribution Guideline for U.S. Companies

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Table 13: Amex Distribution Guideline for non-U.S. Companies

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3 The U.S. Regulations and Authorities

3.1 The SEC

The Securities and Exchange Commissions is the primary overseer and regulator of the U.S. securities markets and their key participants. The authority was founded in 1934 through the Securities Exchange Act and was based on the great crash of 1929. Prior to the crash, stock markets and companies had not been controlled effectively by federal regulations. And financial disclosure requirements had been ineffective[57]. As a result, the U.S. Congress issued securities laws and regulations in order to “protect investors and maintain the integrity of the securities markets[58]. Primary goal of the regulations is transparency and comparability of financial information and company results. Thus, investors should have access to essential corporate information to make their own investment decisions based upon opportunity and risk factors. Furthermore, people who trade securities must treat investors fairly, putting investors’ interest first[59].

The SEC is comprised five Commissioners, who are presidentially appointed for five years, four Divisions and 18 Offices. Approximately 2,900 people work in the headquarters in Washington, DC and its eleven regional and district offices[60]. The most important division is the Division of Corporate Finance for domestic issuer and the Office International Corporate Finance for non-U.S. issuer. These offices review the registration statement filed by the company under the Securities Act[61].

As an “independent federal agency”[62], the SEC must only report to the U.S. Congress and is not subject of presidential supervision. As a result, the agency is not only an executive administration agency but has also quasi-legislative and quasi-judicial functions[63].

Due to its quasi-legislative capacity, which is derived from pieces of the Securities Act, Exchange Act, and Investment Company Act of 1940, the SEC has the authority to issue new Rules. Rules are additional specifying notes to laws[64]. Each issued Rule becomes part of a specified field, which is called “Regulations”. In addition, the agency releases a variety of Forms, which specifies the company’s reporting requirements. Furthermore, the SEC issues releases, which have only noncommittal guideline and recommendation character.

A key competence is the SEC’s civil enforcement authority, which entitles the SEC with the competence to investigate, to file case in federal court, and to find sanctions. In case of criminal violations, the SEC is bound by law the case to lead to the district attorney[65].

Besides the SEC, Self-Regulatory Organizations (SROs) play an important role in the U.S. securities regulations. SROs are the stock exchanges, the NASD, Municipal Securities Rulemaking Board, transfer agent, and clearing agents[66]. A SRO is a member of an organization that creates and enforces rules for its members based on the federal securities laws. The effectiveness of the SROs is ensured by Section 15(b)(8) Exchange Act, which states that all brokers or dealers have to be registered with a securities association. At the same time, SROs have to be registered with the SEC. Thus, the SEC has control authority over SROs.

3.2 The NASD

3.2.1 Profile of the NASD

The National Association of Securities Dealers filed for registration with the SEC in June 1939. On August 29, 1939, the SEC approved the application for registration of the NASD as a national securities association under Section 15A of the Exchange Act[67]. The NASD received its establishment under the authority of the 1938 Maloney Act, which provided the establishment of national securities associations to supervise the OTC markets. The NASD is the largest Self-Regulatory-Organization in the U.S. with a membership that includes every broker dealer in the U.S. that does a security business with the public[68]. The organization runs and oversees the Nasdaq Stock Market and the Amex, as well as the OTC securities markets. The association has a governing Board of Governors, which are mainly from outside the association[69].

Through its subsidiaries Nasdaq Stock Market, Inc, American Stock Exchange LLC, NASD Regulations, Inc., and NASD Dispute Resolution, Inc., the NASD develops rules and regulations, oversees the activities of security firms and professional, and designs and operates marketplace services and facilities[70].

3.2.2 NASD Regulation

The NASD Regulation (NASDR) was established in 1996 as a separate independent subsidiary of the NASD with the intention to separate the regulation of the securities professionals from the operation of the marketplace facilities. The objective of the NASDR is the regulation of the securities markets for the benefit and protection of the investor[71]. It carries out its regulatory responsibilities through the issue of NASD rules and regulations. Furthermore, it oversees all security firms, branch offices, and registered securities professionals and examines its members anywhere from annually to once every four years. Routine examination seeks to determine member compliance with the antifraud provisions of the Securities Act, the Exchange Act, and the NASD advertising rules[72]. In addition, the organization regulates the markets operated by its sister subsidiaries, The Nasdaq Stock Market, Inc. and American Stock Exchange LLC.

3.2.3 The Nasdaq Stock Market, Inc.

The Nasdaq Stock Market, Inc. has the obligation to develop, operate, and maintain systems, services, and products for a number of securities markets. It is also responsible to develop listing requirements applicable for the markets it operates. The Nasdaq Stock Market, Inc. develops and maintains technological infrastructure for the collection and analysis of trade and quotation information. Through its StockWatch unit, the company monitors trading activities on a daily, weekly, and monthly basis. Furthermore, the company runs Nasdaq International, the OTC Bulletin Board, the PORTAL Market, and the Fixed Income Pricing System (FIPS)[73].

3.2.4 American Stock Exchange LLC

The American Stock Exchange is the primary exchange that offers trading for a cross full range of equities, Index Shares, and options. In addition to its role as a national equities exchange, the Amex is the leader in Index Share listings and the second largest options exchange in the U.S. The Amex market structure supports an alliance of people and technology. More than 80% of Amex order flow comes into the market electronically, registered floor brokers initiate the remaining orders directly on the trading floor[74].

3.2.5 NASD Dispute Resolution, Inc.

The NASD Dispute Resolution, Inc. handles the dispute resolution program that is the most recent part of the NASDR. The subsidiary became operational in the summer of 2000. The firm offers arbitrators and mediation services to help to resolve business disputes between investors, securities firms, and their employees. Mediation is a formal voluntary process, in which an impartial mediator facilitates negotiation between disputing persons or entities. The participants work out their own solution. Arbitration, on the other hand, is final and binding. After all parties complete their presentations, the arbitrators study the evidence, and then decide how the matter should be resolved. For each case, the participants choose their mediators and arbitrators[75].

3.3 State Regulations

While the SEC directly, and through its oversight of the NASD and the various exchanges, is the main enforcer of the nation’s securities laws, each individual state has its own securities regulatory body[76].

The economical growth in the USA in the late 19th century and early 20th century resulted in an increasing capital demand. Companies covered its capital demand through the issue of new securities. Increasing fraudulent trade practices and activities raised the claim for more stringent state securities regulation[77]. In 1911, Kansas was the first state to adopt the first securities law, which in general is called “Blue Sky Laws”. By 1929, about half the states adopted similar laws, but each state had its own variations, which caused nationwide registration problems. In 1956, the Uniform State Securities Act was approved, which ties the state’s securities law into federal law. As a result, Blue Sky Laws lean against federal law and most of the states have adopted the Uniform State Securities Act, but some still have their own regulation. Some states rely on the effective federal SEC registration, whereas they have the authority to issue own registration requirements. Of interest is, that Delaware and the District of Columbia are the only ones that do not have a local securities law[78]. Most states provide an exemption from registrations for transactions in securities, which are listed on a national or qualified regional stock exchange[79]. For example, nearly every state has an exemption for a transaction in a security, which is listed on the NYSE. Alabama, Connecticut, and the District of Columbia do not; and California and Florida allow the exemption in limited circumstances[80].

Against the SEC disclosure requirements, which pursue the publication of all material investment information, some of the states pursue a merit approach. The merit approach aims at the investment worthiness of company and its securities. As a result, the state’s securities commission or review board can deny the registration if it “does not like the offerings on its merits [...]. Period! No question asked[81]. Merits review states have an approval statute as opposed to the federal disclosure rules. Other states use a qualification review, that is basically the same as a merit review, a coordination review, that allows sales only after SEC declares effectiveness to the issue, or after a notification review, that requires the issuer to file a Notice of Intention to sell the issue[82].

3.4 Securities Act of 1933

3.4.1 Registration requirements

As a consequence of the Crash at the stock exchanges in 1929 and the following Great Depression, the U.S. Congress issued the Securities Act of 1933 (Securities Act)[83]. The goal of the Securities Act is to provide investors with full and fair information about securities offerings. Companies have to ensure disclosure of all sources of information about the firm in a carefully and uniformly document called prospectus. The disclosure-based system requires the disclosure of material information and is based on whether the applicable standards of disclosure are satisfied. The SEC does not evaluate the investment worthiness of the company[84]. The idea of the Act is that investors can make investment decisions if they have access to current and reliable information.

The Securities Act regulates the public offer and sale of securities in the United States. According to Section 5 of the Securities Act, a firm must provide a registration statement to offer securities in the U.S. unless the offering satisfies one of the exemptions provided in the Securities Act. According to Section 7 and 10 of the Securities Act, issuers have to disclose information about the company’s business, the risks, the financial situation, the directors and person, who hold more than 10% of the outstanding stocks, proceeds, and underwriters.

Under Section 8(a) Securities Act, the registration statement becomes effective 20 days after the filing except the SEC is not satisfied with the provided information. But the SEC may suspend the 20-day automatic provision[85]. If the registration statement does not provide required information, the SEC requires improvements of the registration statement. In general, the SEC requires through its “comment/deficiency letter“ additional information, on which the company responds with a filing of amendments[86].

3.4.2 Registration Exemption

Besides the general registration requirements of securities in the U.S., there are a broad variety of exemptions under the Securities Act. Section 4 of the Securities Act regulates the exempted transactions. Section 4(1) governs the exemption of transactions by any person other than an issuer, underwriter, or dealer. Beyond it, Section 4(3) regulates a variety of transactions of dealer, which are exempted from the registration requirements. Consequently, the securities registration requirements only relate to the primary market and exempt transactions of the secondary market[87]. Since the objective of this thesis focuses on the Initial Public Offerings in the U.S., only an overview of the securities registration exemption will be given.

The most important exemption rule for issuers under the Securities Act is Section 4(2) of this title. This section exempts from the registration requirements of offers and sales in “transactions by an issuer not involving any public offering[88]. The limits of this exemption have been established by case law and administrative materials and are not well defined. The underlying principle is that the exemption should be available only in those cases in which the purchasers of the securities do not require the protection of the Securities Act. Of interest is, that the number of purchasers must be limited and there must be no general solicitation of purchasers or advertising of the offering[89].

In addition to the general exemption for private placements and the indistinct application of Section 4(2) Act, the SEC established Regulation D (commonly referred as “Reg D”) under the Securities Act. Reg D consists of six basic rules. The first three rules, Rule 501, 502, and 503 are concerned with the definitions, conditions, and notification. The last three rules, Rule 504, 505, and 506 deal with the specifications of raising money. Rule 504 pertains to securities sales up to $1 million, Rule 505 applies to offerings from $1 million up to $5 million, and Rule 506 is for securities offerings exceeding $5 million[90]. Rule 506 is a “safe harbor rule” which provides that conforming transactions are deemed to qualify for the Section 4(2) exemption[91]. As a result, issuers can relate either to Rule 506 or Section 4(2). Issuers, who want to rely on Rule 506, have to satisfy the following conditions:

- The offering amount must be for offerings over $5 million.
- Sales cannot be made to more than 35 nonaccredited investors. The nonaccredited investor must be capable of evaluating the merits and risks of the investment.
- No general solicitation is allowed.
- The issuer must use reasonable care to assure that the purchasers are not acquiring the securities with the view to resale or distribution[92].

Another exemption under the Securities Act is the Rule 144A offerings. Issuers do not have to register the securities with the SEC if the securities are only offered QIBs[93], the shares are eligible for resale under Rule 144A, and the seller takes responsible steps to ensure that the buyers are aware of the Rule 144A exemption[94].

Finally, intrastate offerings are also exempted from registration according to Section 3(a)(11) of the Securities Act and Rule 147. It excludes “any security which is a part of an issue offered and sold only to persons resident within a single State [...] where the issuer of such security is [...] a corporation, incorporated by and doing business with, such State [...]”[95]. Of interest is, that the issuer must disclose in writing the limitation on resale. A precedent has been established in courts that all stocks must stay up to two years in the original state – depending on the court[96].

3.4.3 Liabilities under the Securities Act

Important to issuers and investors are the liability regulations of the Securities Act. Section 11(a) regulates the liability of material misstatements or omissions in the registration statement. Basically, every person, who signed the registration statement, every director, every expert, and every underwriter is reliable under this section. It is most important, that the investor does only need to proof that (i) the registration statement contains a material untrue or omitted fact and (ii) he sustains a financial loss. The investor is also eligible to sue if he did not read the registration statement. The defendant may only repulse an action if he can proof, that the investor knew about the incorrectness of the facts[97]. The liability amount is the difference between the issue price and the price at the days of the institute proceedings.

In addition, the Securities Act also regulates liability of persons, which sells unregistered securities. According to Section 12(a), any person is reliable, who “offers or sells a security in violation of Section 5 [...]”. Section 12(b) also creates liability for material untrue or omitted statements, which are not included in the registration statement, i.e. also oral statements are included. Thus, persons who have sold or contributed a substantial factor to the sale can be made reliable under the Securities Act[98].

3.5 Securities Exchange Act of 1934

3.5.1 Registration Requirements

In 1934, the U.S. congress adopted the Securities Exchange Act of 1934 (Exchange Act), which focuses mainly on the trading of securities in the secondary markets, the activities of participants in those markets, registration and disclosure requirements for public companies. Hence, the Exchange Act comprises a more complex area than the Securities Act[99].

Relating to the single company, the Exchange Act requires companies to register classes of securities for listing with the SEC. According to Section 12(g), companies have to register their securities with the SEC if the securities are traded on the non-Nasdaq OTC market, the issuer has more than $5 million assets[100], and a securities is held by more than 500 persons in the United States. Non-U.S. companies can apply for registration exemption under Rule 12g3-2(b)[101]. In addition, public companies have to fulfill the periodical reporting requirements of the Exchange Act, which provide investors with current company information. Firms have to file an annual report on Form 10-K within 90 days, a quarterly report on Form 10-Q within 45 days, as well as Form 8-K for significant events occurred within the company, its control or management within 15 days. Non-U.S. companies have to provide an annual report on Form 20-F within 180 days, which has basically equivalent reporting requirements as Form 10-K[102]. In addition, the SEC exempts non-U.S. companies from quarterly reporting requirements. Non-U.S. firms have only to file such reports on Form 6-K, which they also have to file with the securities authority in their home country[103]. Of interest is, that the provided information from non-U.S. companies to the SEC is not “filed”, thus is excluded from the liability provisions of the Exchange Act[104].


[1] See Cullen (1999): 8.

[2] See id. (1999): 145 and Yip (1995): 27.

[3] e.g. Deutsche Post AG

[4] e.g. EPCOS AG and Infinion AG

[5] See Krog (2000): 145.

[6] See Jahrmann (1999): 24 and Perridon/Steiner (1988): 199.

[7] See Küting./Hayn (1993): 401-402. Arkebauer/Schlutz (1998): 4-7.

[8] See Küting/Hayn (1993): 401-402

[9] See Financial Times Deutschland, December 19, 2000, 18.

[10] If not mention differently the currency is US-$

[11] See NYSE (2000): 99.

[12] See

[13] See NYSE (2000): 89

[14] See

[15] See NYSE (2000): 102

[16] See NYSE (1995): Rule 54 Dealings on Floor - Persons

[17] See Arshadi (1998): 2

[18] Series 7 and 63

[19] See NYSE (1995): Rule 62 Variations

[20] See NYSE, PT 0074, December 13, 2000 and Press Release from November 6, 2000

[21] See Deutsche Börse (2000): 73

[22] See NYSE (2000): 92-99

[23] See chapter 2.2.3 Nasdaq Listing Requirements and 2.3.3 Amex Listing Requirements

[24] See Shapiro (1998): 305-306

[25] See Shapiro (1998): 309

[26] See NYSE (2000): 37

[27] See Nasdaq Stock Market (2000a): 63

[28] See Nasdaq Stock Market (2000b): 2

[29] See NASD (1998): 1

[30] See also chapter 3.2 The NASD

[31] See NASD (1998): 9

[32] See id.: 9

[33] See

[34] See Nasdaq (2000a): 38

[35] See Nasdaq Stock Market (2000): 2-2

[36] See Arshadi (1998): 5

[37] See

[38] See NASD, June 13, 2000

[39] See Nasdaq Stock Market (2000): 1-1

[40] See Nasdaq Stock Market (2000): 3-3

[41] See Deutsche Börse (2000): 73

[42] See

[43] See

[44] See

[45] See Nasdaq Stock Market (2000a): 8-3

[46] See Nasdaq Stock Market (2000b): 6

[47] See id.: 6

[48] See

[49] See Deutsche Börse (2000): 73

[50] See

[51] See NASD, June 13, 2000

[52] See

[53] See NASD (2000): 62

[54] See

[55] See

[56] See NASD (2000): 32

[57] See KPMG (1999): 4, Toepfer (1999): 28-29 and


[59] See Toepfer (1999): 29

[60] See

[61] See Arkebauer/Schultz (1998): 130

[62] See Toepfer (1999): 30

[63] See Küting/ Hayn (1993): 402 and Arkebauer/Schultz (1998): 130

[64] See Toepfer (1999): 31

[65] See

[66] See

[67] See

[68] According to Section 15(b)(8) of the Exchange Act, all broker dealer have to be registered with a securities association pursuant to Section 15A of this title. Article III of the By-Laws of the NASD defines the eligible members.

[69] See NASD (1998): Administrative

[70] See id. (1998): Administrative

[71] See id. (1998): Administrative

[72] See NASD (1998): Administrative

[73] See

[74] See NASD (2000): 17; www.; and also chapter 2.3 Amex

[75] See www.

[76] See Astarita (2000): 1

[77] See Toepfer (1999): 28

[78] See Arkebauer/Schultz (1998): 218

[79] See Hazen (1985): 228

[80] See Astarita (2000): 1

[81] Arkebauer/Schultz (1998): 219

[82] See id. (1998): 220

[83] See KMPG (1999): 4

[84] See Lane/Dudek (1998): 337

[85] See Arkebauer/Schultz (1998): 211 and Barker (1998): 65

[86] See Section 8 of the Securities Act and Ratner (1996): 40

[87] See Toepfer (1999): 34

[88] Section 4(2) of the Securities Act

[89] See Morrison/Stanger (1998): 108

[90] See Arkebauer/Schultz (1998): 142 and Toepfer (1999): 34-36

[91] See Morrison/Stanger (1998): 109

[92] See Morrison/Stanger (1998): 109-110

[93] See chapter 4.3.2 Public versus Private ADR Programs

[94] See Morrision/Stanger (1998): 102 and Citibank (1995): 14

[95] Section 3(a)(11) Securities Act

[96] See Arkebauer/Schultz (1998): 151

[97] See Toepfer (1999): 38 and Section 11(a) Securities Act

[98] See Ratner, D. (1996): 80

[99] See Lane/Dudek (1998): 338

[100] Section 12(g) Exchange Act, the Section requires companies with an asset more than $1 million, whereas with Rule 12g-1 the SEC increased the amount to $5million.

[101] The exemption is discussed in detail in chapter 4.3.3 Non-Capital versus Capital Raising ADR Programs

[102] Section 13 Exchange Act, see also Toepfer (1999): 40 and KPMG (1999): 187

[103] See Toepfer (1999): 40

[104] See Lane/Dudek (1998): 359


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Fachhochschule Kiel – Wirtschaft
börsengang valuation going public



Titel: Going Public in the USA and the Valuation of IPOs