Can someone explain Cap Markets? Forum

[Anonymous User]

Currently a tax associate looking to switch to a corporate practice. A lot of postings for juniors seem to be capital markets. What exactly is the difference between cap markets and other corporate?

Also, in a down economy, is cap markets one of the practice groups that gets slashed?

[BrainsyK]

To answer the economy question, yes, capital markets and finance are typically hit hard during recessions. What CapM is like is from another poster:

There are any number of reasons why no one can describe what a "typical day" is like in cap markets, or most fields of corporate law. Junior associates do work that is different from more senior associates who do work that is different from partners (though at the borders there is going to be some overlap). There's also going to be a very different pace to the day depending on what stage your deals are on - slogging through diligence a month out is a lot different from finalizing documents the day before closing.

Capital markets will also vary greatly depending on if you're representing underwriters or companies (the "company" or "issuer" is the entity that is selling securities in the capital market; the "banks" or "underwriters" are the investment banks that buy the securities directly from the issuer and take the risk of selling the securities to investors"). I'm not really the best person to describe capital markets; I'm just a junior who has dabbled a little in the field. But if you want to know what the capital markets work entails, on an overly-broad and general level:

There are a few different primary buckets of things that fall into capital markets. IPOs, follow-on offerings, general public company SEC reporting work are the big ones I've worked with.

An IPO is a pretty all-consuming transaction. You're working on drafting an S-1, which is a long-ass document that describes everything the SEC requires you describe about the company: what it does, what it's plans are, what it's financials look like, what it's capitalization structure looks like, etc. A lot of an S-1 you can steal from earlier S-1s for similar companies, but much of it gets drafted from scratch for the sections that describe the particulars of the company and it's business model. That makes it somewhat unique among corporate law transaction documents.

Seniors/mid-levels, and partners if they feel like it, will do the lionshare of the drafting. You have "drafting sessions" where people argue about comma placement and about how describe certain risk factors. You sit around and a senior/partner from company counsel will say "anyone have anything on page one? Page two, first paragraph? Second paragraph?" This goes on once a week or so for a month or two, maybe. As a junior, you're doing a lot of diligence during this time. The lawyers for the underwriters will take every factual statement in the S-1 that isn't obviously true on its face and literally circle it with a pen. They'll send that circle-up to the company side lawyers, and the junior there will assemble a binder that contains "back-up": a document that proves that each circled statement is true. (It's a process similar to cite checking law review articles, actually, though no blue booking and you're looking at the truth of actual things, not court cases or other law review articles.) Auditors will generally do this process for the financials, however (phew!). BOTH SIDES will also check into the capitalization of the company: do they have X many shares of Series B Preferred Stock, like they're claiming? Was each amended certificate of incorporation approved under proper procedures per Delaware law? Are there any shareholders that get the rights to register their securities with the IPO? Your diligence will also be about all the material agreements a company has, making sure there are no red flags that should be disclosed in the S-1, or that might require consent of a counter-party. This will basically require reading every major financing document, every board meeting minute, every contract, everything the company has done of note since inception.

There are also questionnaires every officer, director and large stockholder will fill out. The junior will make those and review for any issues, like conflicts of interest of directors or past arrests of officers or the like.

You're also doing something called "rules checking" or "form checking." The SEC has guidelines about what has to be in each filing, and so the junior is generally tasked with going through and ticking off to make sure everything is covered. Does the S-1 describe all the unregistered issuances of securities in the past three years? Does it say how long the proceeds of the offering will last? Have you properly described the lease for the main headquarters? Stuff like that.

There are also ancillary documents and background work. The company needs to register with a stock exchange (NYSE, NASDAQ, etc.). It needs to approve an audit committee charter. It needs to approve new certificates of incorporation for both right before and just as the offering is effective (the "pricing charter" and the "closing charter"). It need to do a stock split to get the right number of shares being offered v. those held by current holders, which will require an amendment to the charter. It needs to redo its stock option plan. It needs a per-cleanance policy for trading the company's stock once it goes public. Directors and officers need to get stet up with EDGAR for their Section 16 filings. The company website needs to get scrubbed for anything that might be seen as conditioning the market for the offering. Juniors and mid-levels on the company side will do a lot of drafting of these documents and those on the underwriter side will be checking everything.

Once the S-1 is in decent shape, you all meet up at the "printers" and hammer every last thing out in person over two or three days. The printers provides conference rooms and an ungodly amount of food for you while some poor shmoe on the company side has to take print-offs of the S-1 and hand mark every single change anyone wants to make on a master copy and give it back to the printer staff, who will make the changes. The junior or mid-level will review to make sure every comma that was supposed to be added actually gets added. Once everyone is signed off, you submit to the SEC (perhaps confidentially at first, depending on the size of the company, thanks to the JOBS Act).

The banks will also want every officer, director, equity and option holder to sign a "lock-up", under which they agree not to sell stock of the company for 6 months after the IPO, to keep the price stable. This will entail underwriter side counsel drafting the lock-up, company counsel chasing down signatures from employees with stock and everyone haggling over the terms of the lockups with the bigger institutional investors (VCs, mutual funds that make VC investments, etc.).

The S-1 gets filed, and the SEC will provide comments. Is this accounting treatment being done correctly? Did you disclose enough information about the relationship between this director's other company and the issuer? Company side counsel will take the lead in drafting responses, with under writer side counsel checking everything to make sure they approve. On the flip side, the S-1 also gets submitted to FINRA, the self-regulatory organization for the banks, and the bank-side counsel will take the lead in answer comments to FINRA. Are the banks buying any securities in the offering? Have they received items of value in the past 180 days from insiders? So on. You'll revise the S-1, you'll get more comments (hopefully fewer), repeat until the SEC and FINRA are signed off.

The banks are running the "road show" in the meantime, drumming up investors who want to buy the securities. Juniors will work with the pritner to prospectuses get printed off "(red herrings" with a price range at first, then final prospectuses post-pricing).

The last big step for the lawyers before closing is pricing: the banks and the company agree on the price to sell the stock at. This is when each party signs the Underwriting Agreement, which is the primary transaction document between the banks and the company. This is more of a mid-level/Senior/partner thing than a junior thing, but you might have some tasks like running changes or researching other underwriting agreements to see other ways to describe certain provisions. You sign, the deal "prices". Some days later, you close - the shares get transferred from the company to the banks, who then sell them to investors. Then some junior make a nice set of binders/CDs with everything in it to distribute for everyone's records.

A follow-on offering is like an IPO, but you did most of the heavy lifting already. You already have the back-up binder that supports all the factual statements, because you lifted them from the IPO S-1 for you new S-1 or S-3, updating as needed. You already drafted the language about what the company does. So you'll work to do what you did in the IPO for anything that's new or updated. You'll have another underwriting agreement to negotiate, another pricing call, another road show, more prospectuses to proof, new statements to provide backup for, etc. Much less work than an IPO but usually on a much condensed timeline. If you're lucky, someone else has done most of the work already with a previously effective S-3 and you can just toss in a new prospectus to update (the "shelf take-down" follow-on).

Ongoing public company work entails making sure that the Company's yearly reports and quarterly reports get filed, that they comply with SEC guidelines, get properly turned into EDGARized forms by the printers, and so on. You'll also need to do 8-Ks if something happens: they fire an executive officer? They have to file something within 2 business days. Much of this is taken care of by the company, but you have to double check everything and rules check. There's also Section 16 work: did an officer get granted new stock options? He's got to file a form with the SEC within 2 business days, and you'll be making sure it's all correct.

That's my experience so far, and I'm sure someone who's been at it for real can chime in.

[Kikero]

That's a very thorough post, but one thing to note is that there is a lot of variety in follow-on offerings. Instead of selling common stock in a public, underwritten offering like the IPO, an issuer might sell common stock in a registered direct offering (selling directly to investors without underwriters). An issuer could also sell securities in a private placement relying on an exemption under the Securities Act and could agree (or not) to register the securities for resale by the purchaser at a later date. Companies can also issue securities other than common stock, either in public offerings or private placements, such as warrants, debt securities, units, etc. All of these transactions have different flavors to them and require different documents (underwriting agreement vs subscription agreement vs placement agent agreement and primary registration statement vs resale registration statement vs no registration statement).

Additionally, capital markets lawyers often help out in public M&A transactions. If shares of a public company will be issued as merger consideration, there will be filings with NASDAQ or the NYSE. If the shares will be unregistered there will often be a registration rights agreement and later a resale registration statement, if the shares will be registered, there will be an S-4. Sometimes, especially in the life sciences space, companies "go public" via a reverse merger with a public company with a low market capitalization. In that case, an S-4 is required and the materials to be included are almost as extensive as an S-1 for an IPO.

Finally, I am sort of a generalist. I do some capital markets work, some M&A work, some VC work, etc. What I really like about capital markets work compared to other areas of corporate law is that it feels a lot more collaborative. Some lawyers view M&A as a zero sum game and negotiations can get heated. In capital markets, partially because all material agreements are public, negotiating is much less intense. The issuer and the underwriters are working together in a way that is not true of the buyer and seller in an M&A transaction or a company and investor in an early stage private company transaction.