Lesson 8: Issuing Securities

What is a bake-off? A) Road shows that include high-tech presentations or celebrities to drum up interest B) The allocation of IPO shares in an over-subscribed offering C) A competition between investment bankers to participate in an offering, or to become lead underwriter D) Countdown of the final hours to the effective date and live offering

) A competition between investment bankers to participate in an offering, or to become lead underwriter At a bake-off, investment banks pitch the issuer to demonstrate their desire to participate as well as their underwriting capabilities. The winner of the bake-off is named lead underwriter, head of the syndicate.

Shares acquired from the spouse of an affiliate in a private placement would be considered A) non-affiliated securities B) restricted securities C) an illegal transfer D) immediately saleable

) restricted securities Under Rule 144, shares acquired via a private transaction directly from the spouse of an affiliate are considered restricted securities if the spouse shares the same home as the affiliate.

Lead Manager

-Manages deal -Directs/Leads entire underwriting process -DD on issuer -runs road show & marketing efforts -distribute & allocate shares -Sign underwriting agreement

Accredited Investor

1. Officers and directors of the issuer 2. Institutional investors with over $5m in total assets 3. High-net-worth individuals -Net worth > $1M (excluding home) or -income > $200k ($300k if married) A married couple earns steady incomes of $225,000 and $50,000 annually. They have a net worth of $1,250,000 including a home valued at $350,000. Are they accredited? NO

Exempt Transactions

1. Regulation D 2. Rule 144 3. Rule 144A 4. Rule 146

Exempt Securities

1. US Government Securities 2.) US Government Agency Securities 3. Municipal Bonds 4. Securities Issued by nonprofits 5. Commercial Bank Securities 6. Commercial Paper (maturity no more than 270 days

How much Capital can an issuer raise in the following Reg D Private Placement

504: $5M 506(b): unlimited 506(c): unlimited

How many non-accredited investors can participate in the following REG D Private Placement?

504: Unlimited 506(b): 35 506(c): None

Can an issuer make a general solicitation (pitch to public) under the following Reg D private placement?

504: Yes 506(b): No 506(c): Yes

A public offering of company stock that takes place after an IPO is called

A follow-on offering

Regulation D - Private Placement

A way for companies to raise capital without registering their securities Types: -504 -506(b) -506(c) who raises capital? Any business 504: -how much: $5M -how often: every 12 months -who can invest: 506(b) -how much: unlimited -how often: no limit -who can invest: 506(c) -how much: unlimited -how often: no limit -who can invest:

A new issue of municipal bonds has an aggregate par value of $12 million. The following syndicate orders have been received: $5 million in group orders; $5 million in member orders; $5 million in designated orders. What is the allocation priority for these orders from highest to lowest?

A) $5 million in group orders; $5 million in designated orders; $2 million in member orders.

Company N has 35,000,000 shares outstanding and the following trading data over the previous five weeks: Last week: 78,000 shares traded Two weeks ago: 90,000 shares traded Three weeks ago: 109,000 shares traded Four weeks ago: 82,000 shares traded Five weeks ago: 125,000 shares traded What is the maximum number of shares that could be sold by a corporate insider over the next three months? A) 350000 B) 439750 C) 89750 D) 96800

A) 350000 Under Rule 144, a corporate insider can seller the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks. In this case, 1% of the outstanding shares = 350,000 while the average weekly trading volume over the previous four weeks = 89,750. Therefore, a corporate insider could sell 350,000 shares.

A new issue of municipal securities is coming to market through a negotiated underwriting. The spread for this issue is the difference

A) Between the price paid to the issuer and the price initially offered to the public.

Glen is an associated person of Broker-dealer M. His firm is involved in the upcoming IPO of Issuer O. May Glen purchase the IPO of Issuer O? A) No, as associated persons are prohibited from purchasing equity IPOs in most instances B) Yes, since Glen's firm is involved in the IPO C) Yes, if Glen has made previous purchases of IPOs in the past D) No, unless he purchases the IPO from a broker-dealer which is not involved in the offering

A) No, as associated persons are prohibited from purchasing equity IPOs in most instances FINRA rules generally prohibit associated persons of a broker-dealer from purchasing equity IPOs. There are several exceptions, such as a scenario where the issuer directs shares of its IPOs to specific parties, which can include associated persons of a FINRA member firm.

Which of the following information would be included in a prospectus? A) Proposed use of the issue's proceeds. B) A list of employees of the issuing corporation who earned in excess of $1 million dollars in the previous year. C) A statement that the SEC has approved the securities for sale. D) A statement that the SEC has confirmed the accuracy of all financial information included in the prospectus.

A) Proposed use of the issue's proceeds. Among the information included in the prospectus is a description of the issuer's business, biographical data on officers and directors; the company's capitalization, supported with certified financial statements; and the proposed usage of the issue's proceeds. The SEC does not approve new issues of securities; it releases them for sale based on the availability of sufficient information for customers to make informed investment decisions.

According to FINRA rules, IPOs may not be sold to A) Restricted persons B) Affiliated persons C) Control persons D) Qualified institutional buyers

A) Restricted persons Initial public offerings may not be sold to restricted persons. A broker-dealer is obligated to make a bona-fide offering to the general public with respect to these types of offerings.

When does the SEC require the lead underwriter of a public offering to publish a tombstone ad? A) There is no requirement B) 20 days before the effective date C) At any time before the effective date D) At the start of the cooling-off period

A) There is no requirement Tombstone ads are an important way investment bankers communicate terms of a public offering to the financial community and institutional investors, prior to the offering's effective date. However, they are not required and are not approved by the SEC. They are always at the option of the issuer or underwriter.

Exemptions Under '33

An Exempt Offering -Exempt Securities -Exempt Transactions Exempt Securities 1. US Government Securities 2.) US Government Agency Securities 3. Municipal Bonds 4. Securities Issued by nonprofits 5. Commercial Bank Securities 6. Commercial Paper (maturity no more than 270 days Exempt Transactions 1. Regulation D: Private Placement 2. Rule 144: Control & Restricted Stock (allows insiders to sell their holdings of company stock) 3. Rule 144A 4. Rule 146 5.) Rule 147

All of the following investors would be considered Qualified Institutional Buyers EXCEPT A) A broker dealer managing a securities portfolio for clients of $75 million B) An individual investor with a securities portfolio of $75 million. C) An investment company registered under the Investment Company Act of 1940 D) A manufacturing company with a securities portfolio of $110 million

B) An individual investor with a securities portfolio of $75 million. Under Rule 144A, Qualified Institutional Buyers (QIBs) are defined as: -Insurance Companies -Investment Companies -Business Development Companies -Investment Advisers -Broker dealers owning and investing discretionary assets of at least $10 million -Any other institution with discretionary assets of at least $100 million

Indications of interest provided by clients of a broker-dealer A) Are deposited into an escrow account pending the completion of the offering. B) Are non-binding on the client C) Must be accompanied by a deposit of 1% of the total purchase price D) Must be forwarded to the issuer

B) Are non-binding on the client

What are the two most important public disclosure documents that a company files with the SEC in the process of "going public?" A) Tombstone and prospectus B) Registration statement and prospectus C) Offering memorandum and legal opinion D) Tombstone and Schedule 10K

B) Registration statement and prospectus The registration statement and prospectus contain the most important disclosures that are required of publicly offered securities under the '33 Act. Prior to the offering, the SEC will review the registration and preliminary prospectus for completeness, and it may request amendments or additions in these documents, before the offering can proceed. Recall, however, the SEC never actually approves or disapproves of the actual securities.

The responsibility of applying for a CUSIP number in a negotiated offering of GO bonds rests with A) Bond counsel B) The managing underwriter C) The transfer agent D) The issuer

B) The managing underwriter It is the responsibility of the managing or lead underwriter to apply for the CUSIP number for a new municipal bond issue being sold on a negotiated basis.

The agreement among underwriters is signed by A) Selling group members B) The syndicate members C) The issuer and the syndicate manager D) Bond counsel

B) The syndicate members

The cooling off period after the filing of a registration statement ends A) upon final pricing of the offering B) When the SEC declares the registration effective C) 30 days after the registration statement is filed, unless extended by the SEC D) upon completion of the offering

B) When the SEC declares the registration effective The waiting period is defined by the registration statement and effectiveness. It begins with the filing and ends when the SEC declares the registration effective. During this time, the issuer and related parties may communicate with the public to gauge the demand for the offering.

Raising Capital

Businesses can raise capital by selling securities But, an offer or sale of any security must either be: 1.) Registered with the SEC, or 2.) Conducted under an exemption

What is the minimum cooling-off period for a public securities offering? A) 10 days B) 30 days C) 20 days D) 60 days

C) 20 days The cooling-off period begins with the filing of a registration (S-1) with the SEC. It then lasts at least 20 days but in any case until the SEC has approved the registration

Under the Securities Exchange Act of 1934 all of the following persons are defined as insiders EXCEPT A) An officer of the firm that does not own stock in the company B) An owner of more than 10% of the outstanding stock of a corporation C) A staff accountant who has worked for the company for more than 10 years. D) A non-affiliated director of the firm

C) A staff accountant who has worked for the company for more than 10 years. The Securities Exchange Act of 1934 defines insiders as officers, directors and owners of more than 10% of the outstanding stock of a corporation

A registered representative of a municipal securities firm has just been elected mayor of his small city. The city is preparing to issue new bonds to build a police station. This relationship is I. prohibited; the representative cannot hold the position of mayor and continue his current sales responsibilities II. not prohibited; the representative can hold the position of mayor and continue his current sales responsibilities III. a financial advisory affiliated relationship IV. a control relationship A) II and III B) I and IV C) II and IV D) I and III

C) II and IV A control relationship exists when a brokerage firm or an employee of a firm is in a position to control or influence the issuance of securities by an issuer. Control relationships are not prohibited but are subject to stringent disclosure requirements.

Which of the following statements is TRUE regarding official statements for new issues of municipal securities? A) Issuers must prepare an official statement for all new issues B) If available, an official statement must be filed with the SEC prior to the offering C) Official statements are used by syndicates in the marketing of the issue D) Issuers are subject to registration and filing requirements of the Securities Act of the 1933

C) Official statements are used by syndicates in the marketing of the issue Municipal issuers are exempt from the full disclosure and prospectus requirements of the Securities Act of 1933.The issuer will usually provide an official statement because it is used by the syndicate for marketing the new issue. If one is prepared, it does not have to be filed with the SEC.

What name is given to a type of securities registration that allows the issuer to make multiple offerings of equity or debt securities under the same prospectus? A) Retroactive B) Continuous C) Shelf D) Serial

C) Shelf A shelf registration allow securities issuers to make multiple offerings of equity or debt securities over up to a three-year period, without having to file a new registration or prospectus. They are limited to well-known seasoned issuers (WKSIs).

A standby underwriting is used A) in a best-efforts underwriting B) in a secondary offering C) in a rights offering D) for a company going public for the first time

C) in a rights offering A standby underwriting is used in a rights offering. In a standby underwriting, a bank stands ready to sell any unsold shares after all shareholders have exercised their right to maintain a proportionate interest in the company.

According to Federal law and industry regulations, a firm must deliver a prospectus A) at or before a trade is entered for newly issued securities. B) prior to offering new securities for sale. C) no later than with the confirmation of sale of newly issued securities. D) only for sales of mutual funds or other continuous primary offering securities.

C) no later than with the confirmation of sale of newly issued securities The Securities Act of 1933 requires that a prospectus is given to all purchasers of new securities no later than with the confirmation of sale.

Joe Schmo recently acquired unregistered stock of a company as compensation for consulting services. Four months later, Joe queries his registered representative as to how he can subsequently sell the shares in the market. The rep could accurately reply that Joe can A) sell the shares to another investor, under either Rule 144 or Rule 144A. B) sell the shares to another investor under Rule 144. C) sell the shares to a Qualified Institutional Buyer (QIB) under Rule 144A. D) sell the shares to any other investor.

C) sell the shares to a Qualified Institutional Buyer (QIB) under Rule 144A. Rule 144 permits the sale of unregistered stock of an existing public company after a six-month holding period. In this case, the shares have only been held for four months, making them ineligible for sale under Rule 144. Rule 144A allows the sale of unregistered securities to Qualified Institutional Buyers (QIBs) with no holding period. A QIB is generally defined as an institutional investor with $100mm in assets.

Rule 144 - Control & Restricted Stock ('33 Exemption)

Control Stock: -Allows insiders to sell their holdings of company stock Who sells? -Holders of control stock (execs, board members, large shareholders > 10%) How much? The greater of : a) 1% of outstanding shares, or b.) the average weekly trading volume in the four weeks prior to the sale How often? -Once every 90 days RESTRICTED STOCK: allows holders of unregistered securities to sell to the public Who sells? -Holders of unregistered stock sell their shares How much? -unlimited How often? -after 6 month holding period Limitations? -there must be adequate current information about the issuing company (ie a public company) Can shares be both control and restricted? -YES, subject to volume limited & holding period (e.g., CEO earns restricted shares)

Grace owns 2,000 shares of ABC Corporation common stock long and she is short 800 shares of the same stock. She holds no "equivalent securities." What is the maximum number of shares she can tender, in response to a tender offer? A) 800 B) 2000 C) None D) 1200

D) 1200 Security holders are prohibited from tendering more shares in a tender offer than they hold net long. In this case, the holder is net long 1,200 shares (2,000 long - 800 short.)

Which provisions of the Securities Act of 1933 prohibit deceit and misrepresentations in the offering or sale of securities? A) Blue sky provisions B) Public registration provisions C) Continuous reporting provisions D) Antifraud provisions

D) Antifraud provisions

Which of the following best characterizes the role of the SEC with respect to an offering of securities by an issuer? A) They advise the issuer on the best time to conduct a public sale. B) They endorse the offering for public sale. C) They approve the offering for public sale. D) The clear the offering for public sale.

D) The clear the offering for public sale. The SEC does not approve or disapprove of the securities. Instead, they simply clear the offering for public sale.

The process through which an issuer chooses a team of underwriters to lead an offering is known as a(n) A) auction B) agreement C) clambake D) bakeoff

D) bakeoff During a bakeoff, the issuer accepts proposals from numerous investment banks. These proposals present the qualifications of underwriters as well as pricing and term sheets for the offering.

Syndicate Members

Financially committed to underwrite shares (will buy/own unsold shares) -Sign underwriting agreement

Securities Act of 1933

General rule: Securities must be registered for lawful public sale, unless exempt Register by filing a registration statement that provides DISCLOSURES TO INVESTORS What's disclosed? -the issuer's business description and details -the issuer's insiders - the officers, (e.g., CEO), board members, and > 10% shareholders -the underwriters and legal counsel -the amount and planned use of the proceeds -any legal proceedings against the issuer, and -audited financial statements What is the purpose of the registration statement? -Provide all material information about the offered securities

Selling Group

Help sell shares (as agent) -No financial commitment to deal

In an initial public offering, the underwriters I. receive lower fees than the selling group II. receive higher fees than the selling group III. are listed first on the tombstone IV. are listed last on the tombstone

II. receive higher fees than the selling group III. are listed first on the tombstone In an initial public offering, the institutions who help the issuer place a new issue without necessarily participating in the underwriting group are the selling group. They are not responsible for unsold securities, and therefore receive lower fees than the underwriters who do take risk. The selling group will never receive more than the selling concession, while an underwriter can potentially earn the selling concession and the underwriting fee. The underwriters are also listed first on the tombstone.

In an initial public offering, the selling group members I. receive lower fees than the underwriters II. receive higher fees than the underwriters III.are listed before the syndicate members on the tombstone ad, if at all IV. are listed after the syndicate members on the tombstone ad, if at all

IV. are listed after the syndicate members on the tombstone ad, if at all I. receive lower fees than the underwriters The selling group members assist the syndicate (underwriters) in selling new issues, but have no responsibility for unsold securities. Therefore, the selling group members receive lower fees than the syndicate members and are listed last on the tombstone.

Reverse Purchase Agreement

In reverse repurchase agreements, the Fed sells securities to primary dealer, thus taking money out of the system. This activity tightens credit.

Underwriting Syndicate

Lead Manager Manages deal -Directs/Leads entire underwriting process -DD on issuer -runs road show & marketing efforts -distribute & allocate shares -Sign underwriting agreement TOTAL TAKEDOWN COMPENSATES THE SYNDICATE MEMBERS Syndicate Members: Financially committed to underwrite shares (will buy/own unsold shares) -Sign underwriting agreement Selling Group: Help sell shares (as agent) -No financial commitment to deal

A married couple earns steady incomes of $225,000 and $50,000 annually. They have a net worth of $1,250,000 including a home valued at $350,000. Are they accredited?

NO

The immediate resale of securities offered under Rule 147 is permitted ONLY to

Other state residents

When does an underwriter allocate shares of common stock in an IPO?

Post-Effective Period (shares may be sold after effectiveness, which is typically after the market closes

What is the purpose of the registration statement?

Provide all material information about the offered securities

In firm-commitment public securities offerings, what is the main advantage of the syndication process to investment bankers? A) Risk-sharing B) Regulatory compliance C) Ability to sell securities across state lines D) Increased profit

Risk-Sharing Syndication helps to spread the risk of an offering among all investment banks participating in the syndicate. This is especially important in firm-commitment offerings, in which investment bankers bear the risk for any unsold securities.

Shares offered in a public equity offering that provide proceeds directly to selling shareholders refer to

Secondary Shares Secondary shares are sold by existing shareholders seeking to cash in their holdings. Issuing secondary shares does not have a dilutive effect on existing shareholders, nor do they increase the number of shares outstanding.

Underwriting Timeline

Step 1: Pre-Registration (pre-filing/quiet period) -ISSUER: Hire underwriting investment bank -UNDERWRITER: prepare registration statement -NO GUN-JUMPING (discussing/marketing of deal) Step 2: Cooling-Off / Waiting Period -SEC: Review Registration statement -Underwriter: Market Deal -No Sales (no orders, money, or sales) Step 3: Post-Effective -Underwriter: Sell Shares -Next Morning: Shares trade on exchange (NYSE/NASDAQ)

Selected Dealer Agreement

The specific agreement governing a selling group's duties in a new issue is called a selected dealer agreement. The underwriting agreement specifies terms between the issuer and the managing underwriter; the agreement among the underwriters addresses terms between all underwriting firms and the managing underwriter.

Underwriting Agreement

The terms and conditions of the public offering and the agreement between the issuer and the underwriting manager are formalized in a contract known as the

Rule 147 - Intrastate ('33 Exemption)

Who raises Capital: In-state businesses How much: unlimited How often: No limit Who can invest?: in-state residents Sell Across state lines? after six months Doing business in-state means..... -80% revenues are in state, or -80% of assets are in-state or -80% of net proceeds will be used-instate or Majority of employees are based in-state

Rule 144A - QIB ('33 Exemption)

Who raises capital? -Any business How much? -unlimited How often? -No limit Who can invest? Qualified Institutional Buyers (QIBs) Define a QIB: Institutions with over $100M in discretionary assets