SIE 8
A Qualified Institutional Buyer (QIB), under Rule 144A, is an entity that manages at least
$100 million in assets A QIB manages at least $100 million in assets, under SEC Rule 144A
A partnership wishes to participate in a private placement as an accredited investor. To qualify, the partnership must have total assets of at least ____
$5M at a time
What are the steps of the registration process?
(Pre-filing / quiet period; no marketing or sales) 1. Filing of registration statement 2. cooling-off period (marketing is allowed; road show and distribution of preliminary prospectus) 3. Seek effectiveness from the SEC (shares can be sold on effective date once approved)
Wh0 are categorized as QIB's?
-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
Company N has 15,000,000 shares outstanding and the following trading data over the previous five weeks: Five weeks ago: 192,000 shares traded Four weeks ago: 200,000 shares traded Three weeks ago: 245,000 shares traded Two weeks ago: 187,000 shares traded Last week: 225,000 shares traded What is the maximum number of shares that could be sold by a corporate insider over the next three months?
214,250 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 = 150,000 while the average weekly trading volume over the previous four weeks = 214,250. Therefore, a corporate insider could sell 214,250 shares.
A preliminary prospectus must be delivered to a potential purchaser no later than____
48 hours prior to the mailing of the confirmation of sale
Under Rule 147, how long do state residents have to hold onto their securities for before they can sell to out of state investors?
6 months SEC Rule 147 permits a company to sell its securities exclusively to residents of its home state without going through the SEC registration process. These investors must hold the securities for six months prior to selling them to out of state residents.
What type of investor may participate in a securities offering marketed under Rule 144A of the Securities Act of 1933?
A QIB "Qualified institutional buyers" (QIBs) are defined under Rule 144A of the 33 Act. They include insurance companies, investment companies, employee benefit plans, investment advisers, investment companies or trust funds holding at least $100 million of securities.
During the post-effective period for an IPO, the main concern that may cause underwriters to engage in stabilization is
A falling stock price. Stabilization allows the underwriter to bid on a new issue in the secondary market to prevent a decline in price.
What is a selected dealer agreement? What does it specify?
A selected dealer agreement specifies the terms between the managing underwriter and the selling group members. Selling group members act as agents because they have no financial responsibility for unsold securities. Distributions subject to a selected dealer agreement include both registered and exempt securities (e.g. municipal bonds).
What is a a tender offer?
A tender offer is often a hostile takeover technique. It occurs when a company or individual offers to purchase the stock of the target company for a price usually higher than the current market price in an attempt to take control of the company without management approval. In other words, an offer by an issuer or shareholder to investors to purchase a certain number of their shares at a specific price, during a specified time period. The goal is for one party to gain additional control of the company's shares, and ultimately, of corporate decision making.
What is the duration of the stand-by period for a stand-by commitment?
A two to four-week period.
All the following are exempt from the registration requirements of the Securities Act of 1933 except A) US Treasury bonds B) A rated municipal bonds C) Domestic bank securities D) AAA rated corporate bonds
AAA rated corporate bonds Corporate bonds are not exempt from registration under the Securities Act of 1933. Also note that while domestic bank securities are exempt from registration, the securities of domestic bank holding companies are not exempt.
How are restricted and control securities under Rule 144 acquired?
Acquired in the open market or in a private placement Investors traditionally are granted or receive restricted securities through private placement offerings, Regulation D offerings, Employee Stock Ownership Plans (ESOPs), as compensation for professional services, or in exchange for providing venture capital funding. Control securities are owned by a corporate insider and can be acquired either via a private sale or in the open market.
Which of the following types of communications with the public are permitted during the cooling-off period? I. Red herring II. Road show presentation III. Tombstone ad
All 3 During the cooling-off period, communications generally are limited to the preliminary prospectus (red herring), tombstone ad, and a conforming road show presentation.
What types of people are considered as insiders in a company?
An insider is defined as an officer (e.g. CEO, CFO), boardmember, or greater than 10% shareholder of a company.
Which of the following provisions of the Securities Act of 1933 applies to municipal securities? A)Requirement to file a registration statement with SEC B) Antifraud provisions regarding disclosure to potential investors C) Inside information provisions D) Guarantees against loss in the sales of securities
Antifraud provisions regarding disclosure to potential investors Municipal securities issuers are exempt from filing registration statements with the SEC, but cannot withhold or intentionally mislead investors with regard to information that is essential to an investment decision. The antifraud provisions of the Act of 1933 apply to municipal issuers. Insider trading provisions are found in the Securities Exchange Act of 1934, along with prohibited practices in the sale of securities like guarantees against loss.
In which type of underwriting is a securities issuer most likely to get the best price with the least risk?
Competitive bid, firm commitment If issuers want the best price for shares with the least risk of unsold shares, they should elect a competitive bidding process with a firm commitment by the underwriter. Issuers may choose a negotiated process if underwriter-selection criteria other than price (comfort, relationship) are important. Firm commitment means the underwriter buys shares from the issuer, regardless whether these shares can be resold to the public.
When does the road show take place?
During the cooling-off period The cooling-off period begins once the issuer files the registration statement with the SEC. During the cooling-off period, the underwriters can market the securities to investors, including via road shows.
To be an accredited investor a person must meet what financial threshold(s)?
Either net worth or income For Regulation D, there are two financial thresholds for accredited investors. One is net worth and the other is annual income. An accredited investor can satisfy either.
A company may raise capital under Regulation S, which is a(n)
Exempt transaction allowing the issuer to raise capital outside the US. Regulation S is an exempt transaction allowing a company (which may be a US or foreign company) to raise capital outside the US and avoid having to register the offering in the US.
Stock that is restricted is defined as stock that _____
Has never been registered with the SEC Investors can receive restricted stock through various channels, but are unable to sell them unless 2 conditions are met 1.) the shares have been held for at least 6 months (for companies that file with the SEC) or 12 months (for companies that don't 2.) the company must be public "now" These conditions are referred to as a "legend", which must be removed in order to make the sale
A preliminary prospectus ("red herring") must contain what information?
Information about the underwriters, a description of securities offered and the issuer's financial statements The preliminary prospectus is published before the offering becomes effective, and it is used to inform prospective investors about terms of the offering. *It may not include timely details of the offering not yet established*
A free writing prospectus is used by a(n)
Issuer to provide additional information to investors beyond what appears in the registration statement. A free writing prospectus is used by an issuer to provide additional, updated information to investors beyond what the registration or prospects contains, with the goal being to provide investors with pertinent updates without having to amend their registration statement or prospectus.
Prior to the registration being filed, how much marketing of the securities may be done to the public? How about the cool off period?
None. There may be no marketing prior to registration In the cool off period, marketing is allowed, but no sales are allowed to be made
Which of the following parties is not permitted to purchase an IPO? A)Telemarketer for a bank website B)Portfolio manager of a mutual fund for his personal account C)Employee of an insurance company D)Bank holding company manager
Portfolio manager of a mutual fund for his personal account There are several parties who are not permitted to purchase an IPO, including the portfolio manager of a mutual fund for their personal account. All entities who cannot purchase IPOs are broadly characterized as restricted persons.
What is the allocation priority for syndicate letters?
Presale Group net Designated Member *Note* Only $2 million of the member orders can be filled.
A transaction involving the sale of new securities from an issuer to an investor is a(n)
Primary offering A primary offering takes place when new securities are sold by an issuer to investors. The first sale of new securities is an IPO (initial public offering). An IPO can be a primary offering (if the company is selling shares) or a secondary offering (if a shareholder is selling shares)
A primary purpose of the Securities Act of 1933 is to A) provide SEC approval of new securities offerings. B) provide full and fair disclosure to investors. C) require broker-dealer supervisory systems and controls. D) protect investors who trade securities in the secondary market.
Provide full and fair disclosure to investors The fundamental purpose of the Securities Act of 1933 is to provide full and fair disclosure to investors so that they have sufficient information to make investment decisions. The Securities Exchange Act of 1934 regulates trading markets, broker-dealers and their associated persons.
SEC Rule 145 is designed to protect shareholders of a company against
Reclassify of the company's ownership structure, perhaps via a merger with another company. SEC Rule 145 is designed to protect shareholders of a company that proposes to reclassify its ownership structure. This is to ensure that all necessary disclosures are made and provided to shareholders.
In regard to U.S. securities law, commercial paper is exempt from what?
Registration requirements, but not anti-fraud provisions Commercial paper is generally exempt from securities registration requirements under the 33 Act, as long as maturities do not exceed 270 days. However, it is not exempt from anti-fraud provisions of U.S. securities law.
How does Regulation D define "accredited investors"?
Regulation D defines "accredited investors" as individuals with a net worth of at least $1 million at the time of purchase; or individuals with single income of more than $200,000 or joint income (with a spouse) of more than $300,000, in each of the two most recent years. The individual may meet either the asset or income test.
What is Rule 147 / what does it state?
Rule 147 allows a company to sell securities within its home state and avoid SEC registration. It must have its principal place of business in the state and satisfy at least one of the following: - At least 80% of gross revenues come from doing business within the state - At least 80% of its assets are located in the state - At least 80% of the net proceeds from the offering are used in the state - a majority of the employees are located in the state *additionally, 100% of the securities must be sold to state residents*
A distribution of securities in which all of the proceeds are paid to one or more shareholders is a(n) _____
Secondary offering. In a secondary offering a shareholder sells all or part of shares held in the issuing corporation, and proceeds of the offering belong to that shareholder.
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.
The agreement that specifies rules for the group of financial institutions who assist an underwriter in the sale of a new securities issue but do not have responsibility for any unsold securities is a(n)
Selected dealer agreement A selected dealer agreement is used between the underwriter or syndicate and selling group members. The selling group assists in the selling of new securities without financial responsibility for any of the unsold issue.
The specific agreement governing a selling group's duties in a new issue is called the
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
What is the selling group?
Selling group members are additional securities firms that act as agents, assisting in selling the new issue. Unlike other syndicate members, the selling group has no liability for any unsold securities Therefore, because the selling group takes on no risk they are compensated least in the syndicate. The most they can earn is the selling concession for each bond that they sell
A commitment whereby the underwriter agrees to purchase any portion of an issue offered to existing shareholders under a rights offerings that is left unsubscribed is known as a ___
Stand-by commitment
A firm commitment underwriting in which shareholders with pre-emptive rights may maintain their proportionate ownership interest before the securities are purchased by the underwriting manager is a _____
Standby A standby commitment is a type of firm commitment underwriting that applies when additional shares are issued, and current shareholders have pre-emptive rights. In this arrangement, the securities are offered to the public for a 2- to 4- week standby period. The underwriter will purchase for resale any of the shares that are not subscribed to during the standby period.
When the SEC declares a registration statement effective, what may a registered representative tell a client?
That the registration statement has been announced as being effective. A registered representative may tell a client that the registration statement was declared effective by the SEC, and that this does not constitute an approval by the SEC.
In a public offering, the terms and conditions between the syndicate members are identified in a contract known as
The Agreement Among the Underwriters The Agreement Among the Underwriters defines the terms between the syndicate members in an underwriting of corporate securities. The Underwriting Agreement is between the issuer and the syndicate manager. The Selected Dealer Agreement is between the syndicate manager and the selling group.
On what date can the issuer of an Initial Public Offering first offer its shares to the public, for purchase at the public offering price?
The effective date On the "effective date," shares can first be offered to the public at the public offering price. Investors who purchase shares then are free to trade them in the secondary market - e.g., on securities exchanges or in the over-the-counter market.
What is the first day on which securities can be sold in a public securities offering?
The effective date Underwriters and broker-dealers may solicit indications of interest during the cooling-off period. But no securities may be sold until the SEC clears the registration, which is the effective date.
The responsibility of applying for a CUSIP number in a negotiated offering of GO bonds rests with
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.
In an underwriting of new securities, the parties to a selected dealer agreement are
The managing underwriter and the selling group members A selected dealer agreement is used between the managing underwriter and selling group members that assist in the sale of a new issue without financial responsibility for any of the unsold securities.
What do the rules of the MSRB apply to?
The rules of the MSRB cover standards of professional qualification, compliance examinations, confirmations, clearance, settlement and many other aspects of doing business in municipal securities. MSRB rules do not apply to registration of new issues. Municipal issues are exempt from registration requirements under the Securities Act of 1933.
The agreement among underwriters is signed by ____
The syndicate members The agreement among underwriters sets forth terms for and is signed by the syndicate members
Which of the following is not an example of a restricted person under FINRA rules? A) The brother-in-law of a restricted person B) The uncle of a restricted person C) The spouse of a restricted person D) The child of a restricted person
The uncle of a restricted person Restricted persons may include immediate family members of restricted persons. Under the IPO rule, immediate family does not include the grandparents or aunts/uncles of a restricted person.
What is underwriting spread?
The underwriting spread is the difference between the amount paid by the underwriting group in a new issue of securities and the price at which securities are offered for sale to the public To illustrate an underwriting spread, consider a company that receives $36 per share from the underwriter for its shares. If the underwriters turn around and sell the stock to the public at $38 per share, the underwriting spread would be $2 per share.
Which two of the following statements about CUSIP numbers are TRUE? I. They are issued by the MSRB II. They are not required on trade confirmations III. They are used primarily to identify securities in the clearance and settlement process IV. Issuers of new municipal securities are responsible for obtaining the CUSIP number
They are issued by the MSRB and They are used primarily to identify securities in the clearance and settlement process The CUSIP number facilitates the clearing and settlement process for securities. The underwriter of a new issue of municipal securities is responsible for requesting the CUSIP number from the MSRB. CUSIP numbers must appear on transaction confirmations to ensure that securities that are delivered match the securities that are purchased.
Which of the following best characterizes the role of the SEC with respect to an offering of securities by an issuer?
They 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.
How do calculate the price that underwriters buy shares at?
Underwriters buy shares from the issuing company at the public offering price minus the spread.
The purpose of FINRA's rule 5130 on restrictions of the purchase and sale of Initial Equity Public Offerings (IPOs) is to ensure that:
Underwriters make a bona fide public offering of all new issues The purpose of FINRA Rule 5130 is to ensure that underwriters make a bona fide public offering of all new issues by prohibiting them from selling new issues to the accounts of restricted persons.
Final settlement of a municipal syndicate account must be completed____
Within 30 calendar days Settlement of designated credits must be disclosed and paid within 10 business days.
The percentage underwriting spread on an IPO generally increases with A) the amount of risk that underwriters take on. B) the quantity of shares that underwriters buy. C) the experience of the underwriters. D) the size of the deal.
the amount of risk that underwriters take on. Underwriters buy shares from the issuer on the expectation that they can be sold to the public at a higher price. The riskier this proposition is, the greater the spread.
The price received by investors in a tender offer will
will be identical for all investors, regardless of the number of shares being tendered.
