Chapter 9 - The Post Effective Period

What is the quiet period that occurs after the start date of an offering ? How long does it last for IPOs vs secondary offerings? 4 Exemptions ?

- a quiet period imposed by FINRA, in which the underwriter's research analysts may not publish research reports about the issuer, or make any public appearances related to the issuer For IPOs- the quiet period lasts for 10 calendar days and applies to analysts working for any distribution participant. For other offerings, the quiet period lasts for 3 calendar days and applies only to analysts working for a firm that acted as a manager or co-manager. FINRA allows four exceptions: 1. no quiet period if the issuer if EGC. or 2. no quiet period if issuer is an investment company that has been a reporting issuer for 12 months, and analyst's employer is not the issuer's affiliate or investment adviser. or 3. If a research report or public appearance is relevant to "the effects of significant news or a significant event on the subject company," then the report may be released or the appearance made before the end of the quiet period. or 4. There is no quiet period for research reports if the offering is a follow-on offering of an actively traded security and the research report meets the standards for safe harbor under SEC Rule 139. The most common cases of safe harbor under Rule 139 include the issuer being a WKSI or seasoned issuer, or the report being about the issuer's industry in general. Note that meeting the standards of the Rule 138 safe harbor for research reports about the issuer's other securities does not count.

Denial, Suspension, or Revocation of Registration that is non-exempt

-The SEC may summarily suspend trading in any non-exempt security for up to 10 business days and suspend all trading of non-exempt securities on any securities market for up to 90 days. The Commission can take these actions when it deems them necessary to protect investors.

Flipping

-occurs when investors who buy shares in an offering resell them within 30 days of the offering date. Assuming the stock rises or "trades up" on opening, the flipper makes a quick profit, but if a lot of flipping, the stock price drops - so goal is to try best to minimize allocation of shares to institutional investors who will flip

Syndicate short positions

1. Are created from syndicates overselling. Its the # of additional shares the syndicate owes due to over-allotment syndicate must eventually cover its short position by 1.if the price falls below the POP,= (syndicate covering transaction:* - underwriters will cover their short position by buying shares in the market at the lower price.The syndicate gets to pocket the difference (because recieved offering price for every over-alloted share that is now paying amrket price ) 2.if the price rises above the POP, the underwriters will *exercise the greenshoe option* and have issuer release additional shares. The underwriter will then earn money from the underwriting proceeds of the additional shares. *must notify exchange in advnace of this transaction or FINRA if OTC security

Two things worth noting about the relationship between Regulation FD and insider trading are:

1. Compliance with Regulation FD is not a safe harbor against charges of insider trading. Whether or not a person has complied with Regulation FD is a separate issue from whether or not that person has committed insider trading. 2. SEC rules specify that mere awareness of material nonpublic information is enough to conclude that a trade was made "on the basis of" the information.

how many copies of final prospectus must be filed with SEC?

10

if a prospectus is distributed more than 9 months after the effective date, the information in the prospectus cannot be more than __ months old. So you just need to update it and can continue distributing prospectus voluntarily

16 months (

Methods of Retention

A firm must keep most records easily accessible for the first two years they are retained. -All records may be kept either as a hard copy or as an electronic file, if cant be edited -can be held w outside service bureau/ depository/ bank as long as files notice w SEC inddicating the name of co holding records for and gives SEC access during bus hours - SEC requires allr ecords to "be ready at all times"

General Ledger

A ledger that contains all accounts needed to prepare financial statements (all records of assets + liabl, income + expesnses, and capital accounts)

(biggest kahuna ) Three-Year Records

A memorandum of each brokerage order given or received for the purchase or sale of securities memorandum must include: » Terms and conditions of the order » Account for which it was entered » Time the order was received » Time of entry » Price at which executed » Identity of each associated person, if any, responsible for the account » Identity of any other person who entered or accepted the order on behalf of the customer » Time of execution or cancellation • A memorandum of each purchase and sale for the firm's account. This must show the same information as above. • Copies of customer trade confirmations and copies of notices of all other debits and credits for customer accounts • Authorization records to draw funds from a customer's accounts using a check or another negotiable instrument if the authorization is separate from the check. These must be kept for three years from the check's expiration. • Copies of office inspections • Identification data on beneficial owners of all accounts. This must include the beneficial owners' names and addresses. • A sole or lead underwriter must keep records of stabilizing bids, syndicate covering transactions, and penalty bids. These records must include the following: » The name and class of the security stabilized, or for which a penalty bid has been imposed or syndicate covering transactions effected » The price, date, and time of the stabilizing transaction, and whether any penalties were assessed » The names and addresses of the members of the syndicate or group » The respective commitments of each member of the syndicate or group, or their percentage participation for standby or contingent underwriting » The dates when any penalty bid was in effect • For all associated persons (must be kept for three years after employment is terminated): » Application for employment and any related questionnaires » Fingerprint records • Compliance, supervisory, and procedures manuals describing the firm's policies. These manuals must be kept for three years after their expiration dates. • Any report that FINRA or another SRO has required the firm make to it pursuant to an order or settlement, and each securities regulatory authority examination report

penalty bid

An arrangement that permits the managing underwriter to take away a selling concession from a syndicate member whose securities were originally sold by a flipper -used to refer both to the provision in the agreement that gives the managing underwriter this power, as well as to the actual "bid" that led to the "penalty," - acts as an incentive for syndicate and selling group members to try to avoid selling to potential flippers. - like to syndicate covering trans, advanced notice of penalty bid itself must be given to exchange where trans. may occur or in the case of OTC, to FINRA

Rule 105 prohibits any person from purchasing securities in an offering if that person shorted the same securities during a restricted period that is the shorter of: • The period from five business days before pricing through the time of pricing • The period from the initial filing of the registration statement through pricing but there are exemptions...

Best-Efforts Offerings. The prohibition on short selling applies only to firm commitment offerings. • Separate Accounts. If the primary market purchase took place in a separate account from the short sale, and decisions for each account are made separately and without coordination, then the purchase is exempt. • Investment Companies. A primary market purchase by a registered investment company is exempt if the corresponding short sale was made by an affiliated investment company or separate arm of the company. • Bona Fide Purchases. The SEC will accept short selling followed by a primary market purchase as legitimate trading activity, rather than an attempt to manipulate the offering's price, if the trading activity meets certain criteria regarding amount, timing, and reporting.

Regulation M allows stabilizing bids conditions:

Bid price. The rules for how high a stabilizing bid can go are complicated, but for most purposes the maximum stabilizing bid is either the offering price or last independent bid, whichever is lower. • Priority. Any person making a stabilizing bid must grant priority to any independent bid at the same price, even if the bid is for a different number of shares. • Single bid. Only one stabilizing bid is allowed in any one market at the same price at the same time. For example, only one market maker may enter a stabilizing bid on Nasdaq, though the bid may be carried over to another market such as the NYSE. A stabilizing bid may be increased or decreased, but not without first discontinuing the prior stabilizing price; nor can it be raised higher than the highest current independent bid. • Firm commitment. Stabilizing bids are only allowed for firm commitment underwritings. • Transparency and notification. » The prospectus must disclose the possibility that stabilizing bids may be used. » Prior notice must be given to the exchange or market where a stabilizing bid will be placed. » When a stabilizing bid is placed, it must be identified as a stabilizing bid. » Distribution participants have to keep each other informed about their stabilizing bids, including the name and class of any security being stabilized, the date and time of the first stabilizing purchase, and the date and time when stabilizing was terminated. No stabalizing bids allowed for OTC equity securities

Records to be Kept Current for Each Office

Broker-dealers must also maintain several other categories of records for which the rules do not specify a retention period. Rather, these records must simply be kept current for each office. Such records include: • Records of all agreements pertaining to the relationship between the broker-dealer and each associated person, including a summary of the associated person's compensation arrangements and a description of the method by which compensation is determined, as well as listing each purchase and sale of a security attributable to that person for compensation purposes • Records documenting that the broker-dealer has complied with, or established policies reasonably designed to establish compliance with, rules that require a principal to approve advertisements, sales literature, or communications • A record listing each principal who is responsible for establishing policies and procedures to ensure compliance with applicable laws and regulations, where approval or acceptance by a principal is required • A list of the persons at that office, by name or title, "who, without delay, can explain the types of records the firm maintains at that office and the information contained in those records"

Four-Year Records

Customer complaint records shall be kept at the Office of Supervisory Jurisdiction under whose jurisdiction the complaint was filed and maintained for at least four years. These records should include the complainant's name, address, and account number; the date the complaint was received; the name of any other associated person identified in the complaint; a description of the nature of the complaint; and the disposition of the complaint.

Delivery of a Prospectus Exchange-listed securities vs OTC securities - IPOs Follow on offerings

Exchange-Listed Securities - IPOs: for non-reporting co... offering date + 25 days - Follow-On Offerings: No requirement after the offering date __________________________ OTC Securities -IPOs: offering date + 90 days =Follow-On Offerings: offering date + 40 days

spinning,

FINRA expressly prohibits spinning, which is allocating shares in an IPO to corporate officers or executives: • of the issuer; • of a company that has done investment banking business with the firm during the previous 12 months; • of a company expected to do investment banking business with the firm during the upcoming 3 months; or • who have an express or implied arrangement to direct investment banking business to the firm in exchange for the allocation.

Six-Year Records

If SEC or FINRA rules do not specify a time period for how long a specific type of record should be retained, it should be kept at least six years. Additionally, the following types of records must be kept for six years: - blotters

itemized statement of syndicate expenses to each member of the selling syndicate includes:

Legal fees, Advertising, Travel and entertainment, Closing expenses, Loss on oversales, Telephone, Postage • Communications, Co-manager's expenses, Computer and data processing charges • Interest expense • Miscellaneous

Merger, acquisition, and exchange offers prohibitions

Merger, acquisition, and exchange offers do not use these tiers. Instead, the restricted period always starts on the day that offering materials are first distributed to security holders, and ends when the distribution is complete.

exemptions to prohibition

Normal offering activity. Transfers of the securities between distribution participants are exempt. Furthermore, normal sales and marketing by participants or issuers will not be considered an attempt to get around the rule by inducing a third party to make a bid or purchase. • Research reports. A research report from a distribution participant is exempt if it falls under one of the gun-jumping safe harbors for research reports. • Certain activities covered elsewhere in Regulation M. Nasdaq passive market making, syndicate covering transactions, and stabilizing bids by distribution participants are exempt if they comply with the relevant parts of Regulation M. These are all discussed in the sections that follow. • De minimis transactions. A distribution participant may purchase less than 2% of the security's ADTV, but only if it is not also engaging in passive market making (see below). • Options, warrants, rights, and convertible securities. Either an issuer or a participant can obtain the security by exercising any of these. • Certain investment company shares. All mutual fund shares are exempt with regard to both issuers and participants. So are all unit investment trust shares and certain closed-end investment company shares . • Certain bonds, preferred stock, and asset-backed securities. Nonconvertible bonds, nonconvertible preferred stock, and asset-backed securities are exempt with regard to both issuers and participants, if they are investment-grade . • Independent plans. An issuer's employee retirement plan, dividend reinvestment plan, or similar plan where purchasing decisions are made by an agent independent of the issuer, are exempt.

Regulation FD exemptions

Notably, Regulation FD does not apply to statements made as part of a public offering, such as at a road show. The regulation also does not apply to those who owe a duty of trust to the issuer (such as lawyers, accountants, or investment bankers) nor to those who have expressly agreed in writing to keep the information confidential (such as a credit rating agency).

8-k filing to comply w reg FD

Note: Normally, an 8-K must be filed within four business days of the triggering event. But an 8-K filed to comply with Reg FD must be filed by the Reg FD deadline (i.e., either immediately or within 24 hours).

Prelim prospectus vs final prospectus: copies filed + when copies of amended version filed + when

Preliminary Prospectus copies filed + when : 5 ; with registration statement copies of ammended version filed + when: 5; by date of first use ___________________ final prospectus: copies filed + when: 10; shortly after effective date (extent varies) copies of amended version + when: 10 ; within 5 days of first use * you can alter final prospectus pricing information and still have it be considered the original / unaltered prospectus as long as its within 15 days of effective date and price deviates no more than 20% from upper or lower limit of price given in registration stmt - and change must be filed within 2 bus days to sec

Customer account information.

Records of customer account information must be retained for at least six years after the information was last updated. Members also need to preserve a record of the last update to any customer account, or the original account information if there were no updates, for at least six years after the account is closed.

final settlement date.

Syndicate accounts must be closed within 90 days after the syndicate settlement date.

Five-Year Records

The Bank Secrecy Act mandates that Monetary Instrument Logs (MILs), Currency Transaction Reports (CTRs), and Suspicious Activity Reports (SARs), as well as all documentation related to them, be retained for five years from the date of the filing.

Regulation M

The SEC restricts distribution participants (underwriters and issuers) from bidding for or making secondary market purchases of the stock that is being offered in a distribution for a certain restricted period

syndicate settlement date.

The date on which all securities are delivered to the underwriter

Regulation FD

The federal regulation governing corporate officials who are required to make public (fair disclosure) any information disclosed to analysts or investors -The "FD" stands for "fair disclosure," 3 basic elements to fall under reg FD: • The disclosure must be made by a senior official of the company, or an employee or agent who regularly communicates with investors and securities professionals, such as people employed in an investor relations or public relations capacity. Regulation FD does not cover disclosures by lower-level employees who do not regularly communicate with investors. • The disclosure must be of material nonpublic information, which is information not known to the public and having a substantial likelihood that a reasonable investor would consider it important in making an investment decision. • The disclosure must be made (1) to an analyst, broker-dealer, investment adviser, or other specified securities market professional, or (2) to a shareholder, if it is reasonably foreseeable that the shareholder will trade on the basis of the information.

Written authorization granting discretionary authority. T

These include all written guarantees of accounts and all powers of attorney, as well as other evidence that discretionary authority has been granted to a firm. Additionally, all copies of resolutions empowering an agent to act on behalf of a corporation are included in this requirement.

Customer Ledgers Securities record (also called the stock record).

These ledgers separately itemize each cash and margin account of every customer. They must include a detailed record of all credits and debits made on each account. This record gives information on the owner and physical location of every stock held by the firm. It also includes the position (long or short) that each customer and the firm holds in a security.

Tier 1, 2, 3 different tiers depending on how easily the price of a security can be manipulated?

Tier 1: These are also known as actively traded securities. The prices of these securities are not easily manipulated. There is no restricted period for these securities. To qualify as an actively traded security, a security must meet both of these criteria: 1. It must have an average daily trading volume (ADTV) of at least $1 million. and 2. The total market value of the securities not held by affiliates of the issuer must be at least $150 million. (Recall that this is called the public float.) • Tier 2: Medium traded securities must have an ADTV of at least $100,000 and a public float of $25 million. The restricted period is from one day prior to pricing of the security until the person's participation in the distribution is complete. • Tier 3: Lightly traded securities have an ADTV of less than $100,000 or a public float of under $25 million. The restricted period is five days prior to pricing until the person's participation in the distribution is complete.

stabilizing bid

a bid or purchase from an offering's underwriter, made in an effort to prevent or slow a decline in the offering's price.

Fixed pot arrangement

allocation of sales credits on "pot sales" is pre-determined among the underwriters and does not depend on who originates institutional sales

Dutch auction IPO.

alt method to book keeping - ex is google did this during IPO -Dutch auction is an auction in which each bidder places a bid for a certain number of shares at the highest price he is willing to pay. THat is put into a tier system (from highest to lowest price) - the price you / everyone actually ends up paying is the price the final bids were sold at e.g. CO ex is selling 100 shares -Bob bid $100 for 50 -sally bid $90 for 40 -Tom bid $80 for 30 -Nicole bid $70 for 20 = because only have 100 shares to sell, cut off is at Tom, So Bob, sally and tom all pay $80 for their shares. Nicole gets none. The amount of shares they get (since its oversubscribed 50 + 40 + 30 = 120 shares) if said in prospectus it would be based on pro-rata, would mean everyone would get 100/120 = .83 (83%) of their shares -Because the bids are more than just IOIs, a Dutch auction cannot commence until after the effective date. -still do roadshows wtih Dutch Auction (unless your google and already drum up a lot of ppl bc of name lol)

deal file

an archive of relevant information and documentation for a specific offering benefits: prevents the problem of relevant information being scattered throughout an organization's files. -aids in compliance with recordkeeping requirements,

reference security

any security that the offered security can be converted into or exchanged for. ie convertible bonds that convert to common shares mean common stock is a refrence secruity

Blotters.

daily records containing itemized reports of all purchases and sales of securities, receipts and deliveries of certificates, receipts and disbursements of cash, and all other debits and credits. include: • The account from which a cash transaction was effected • The name and amount of securities involved • The unit and aggregate purchase or sale price • The trade date • The name or other designation of the person from whom securities were purchased or received or to whom they were sold or delivered

Going Out of Business

if any person subject to the recordkeeping rules leaves the securities business or ceases to be registered, that person must continue to preserve records as required by the rules.

capped jump ball,

lead underwriter usu wins a large amount of designations by institutions because of invovlement w road shows, so in capped, percentage of the pot available to the lead underwriter is limited.

naked syndicate short position ? Risks

name for the short position when the lead underwriter decides to over-allot even if there is no greenshoe option, or to sell shares beyond the amount stated in the greenshoe option. . To deliver the naked short shares, the underwriters can either borrow shares, a little like a short sale, or buy them back in a syndicate covering transaction. If the price begins to fall, the lead underwriter can stabilize the price by buying back the oversold shares. risk: The main risk of a naked syndicate short position is that if the price goes up, the syndicate will have to buy back shares in the market at a loss. Any loss incurred by a naked syndicate short position will be shared by the syndicate on a pro-rata basis according to how the shares were allocated (e.g., a syndicate member allocated 10% of shares will absorb 10% of the loss). -Additionally, there is the risk of failure to deliver if enough shares cannot be borrowed. For example, in an IPO there might not be enough shares in circulation for the syndicate to locate the number of shares it needs to borrow.

Reg M defines a passive market maker as________

one whose market making meets these requirements: Price limitation. A passive market maker's bids and purchases for the security may not exceed the highest independent bid at the time of the transaction. If all independent bids for the security fall to a price below the passive market maker's bid, the market maker must promptly lower its bid accordingly. • Purchase limitation. On each day of the restricted period, a passive market maker's net purchases are limited to the greater of 30% of the security's ADTV or 200 shares. • Bid identification. A passive market maker must designate its bid as a passive market making bid. • Reporting to FINRA. A passive market maker is required to notify FINRA in advance of its intent to engage in passive market making, and it must submit information regarding any passive market making purchases. • Exclusions. Passive market making is not permitted for at-the-market offerings, best-efforts offerings, or when a stabilizing bid (see below) is in effect.

over-allotment option, also called a greenshoe option definition?

provision in a UA that gives the underwriter the option to require the company to issue up to 15% more shares in the offering. Most stock offerings have a greenshoe option, -this option must be written into UA including # of shares that could be created if option excerciserd

free retentions,

quantities of shares that are made available to each underwriter for direct sale.

pre-syndicate bid

stabilizing bid made on Nasdaq before the effective date of a follow-on offering. The lead underwriter must notify Nasdaq prior to making a pre-syndicate bid, and must inform Nasdaq whether the bid should be converted to a traditional bid once the issue becomes effective.

Allocation, also called circling,

the dividing up of an offering's available shares among the investors who submitted indications of interest during the book-building process. Some allocation decisions are relatively straightforward—e.g., underwriter must ensure that there are enough round-lot shareholders to meet the listing requirements of stock exchanges. - more complex when oversubscribed offering

Records associated with the foundation of a firm must be kept for ____-

the firm's lifetime—for example, a partnership's partnership agreement or a corporation's articles of incorporation. Minutes of partners' or directors' meetings and stock certificate books also fall into this category.

competitive pot / jump ball

the institution designates the participant(s) that receive the concession. - sometimes limited to 60% of total pot, with remianed on fixed basis

over-allotment

when An underwriter will often sell more shares than will be issued at the public offering. -it's a way for the underwriter to have some control over the price of the security in the secondary market, as well as a way to make additional money.