SIE Ch 2: Types of Markets & Offerings

Exempt security example

U.S. government bond

quiet period which no research may be published for a corporation that is planning on an add-on offering.

3 days from the effective date.

Which is NOT true of restricted stock?

A broker/dealer cannot act as an agent, It must be held for 2 years before resale, Share are registered with the SEC.

Which of the following distributions is a registered secondary offering?

A family member selling founder's stock along with an add-on offering.

Which of the following IPO-related activities is prohibited because it is fraudulent and manipulative?

A firm that is participating in an IPO, that is trying to sell a substantial number of shares to its customers, makes an agreement to repurchase the shares at no less than the original sales price. (If a firm is a participant in an IPO, it is prohibited from making an agreement to repurchase the shares at no less than the original sales price.)

Tender offer

A formal offer made by the corporation to existing shareholders to buy stock/shares at a price above current market value.

All of the following are required to register under Rule 145 for mergers and acquisitions:

A leveraged buy-out, An acquisition in which the acquirer is using both cash and securities, and A merger involving a stock offering. Rule 145 does NOT require the filing of a registration statement when a company declares a stock dividend or engages in a stock split.

Third Market

A listed stock trading in the OTC market. These trades are reported to FINRA, and quotes can be found on the Consolidated Quote System (CQS).

When can a statutory prospectus be presented to an existing client of the brokerage firm?

After the cooling-off period and after the issue is designated as within compliance.

XYZ Corporation is a well-known seasoned issuer (WKSI) and is planning to expand operations. XYZ will need additional capital in stages for this expansion.

Up to 3 years from the effective date of the shelf offering.

spinoff

When a corporation separates one of its divisions into its own entity.

statutory prospectus

aka final prospectus. created after the cooling-off period and after the issue is determined to be in compliance. Issue date and issue price are added to the preliminary prospectus to make up the statutory prospectus.

Which of the following IPO-related activities is OK ?

Broker/dealers and registered persons refuse to buy the IPO from the syndicate, A restricted person owns 5% of an established portfolio and that portfolio purchases the IPO, IPO purchasers sign a positive affirmation that they are not restricted persons.

Accredited investor's income for the past 2 years must exceed

$200,000

If it is a joint account, the accredited investors for the past 2 years must exceed

$300,000

An issuer that currently has $150 million in outstanding capitalization and has an average daily trading volume of $1 million would have a restriction period for their add-on offering of

0 days. No restrictions prior to the effective date.

Restriction period for issuer that has $150M in outstanding capitalization and average daily trading volume of $1M.

0 days. No restrictions prior to the effective date.

Restriction period for issuer that has additional shares that have an average daily trading volume of at least $100,000.

1 day

Issuers offering additional shares that currently have an average daily trading volume of at least $100,000 are subject to a restricted period of

1 day before the effective date.

An issuer who has at least $100,000 in average daily trading volume is planning to bring additional shares to market. What would the restriction period be?

1 day prior to the effective date

quiet period

10 days from the effective date for a subsequent primary or add-on offering. This is the time period during which no research may be published on XYZ company to prevent influencing the market value of XYZ outstanding stock. 3 days if add on.

quiet period for a subsequent primary or add-on offering is

10 days from the effective date.

A restaurant chain is planning an IPO. They have already filed a registration statement with the SEC and the effective date is scheduled for tomorrow. According to the regulatory guidelines covering IPOs, no research may be released for what period of time?

10 days from the effective date. The quiet period of time during which market research may not be published on the issuer of a new offering. For an IPO, that period of time is 10 days. The quiet period for an APO is 3 days from the effective date.

NASDAQ Market Makers are required to report each trade within how many seconds of execution?

10. While many regulations also state immediately, the required deadline is stated as 10 seconds. It is reasonable time after the trade.

Unseasoned issuers (smaller companies) have a shelf offering period that would last

2 years

Restriction period for Tier 3 companies that do not qualify for Tier 1 or Tier 2

5 days

Tier 3 companies that do not qualify for Tier 1 or Tier 2 have a restricted period of

5 days

How long must a restricted stock be held?

6 months. If a selling company is subject to the SEC reporting requirements, the securities must be held for at least 6 months. Otherwise, they must be held for at least 1 year. The holding period begins when the securities are bought and fully paid for.

A Rule 144 filing for the sale of restricted securities by control persons is subject to which of the following time limitations?

90 Days. If the security is not sold within 90 days of filing the Form, the affiliate must file an amended notice.

OTC markets can be described as

A market where shares of the largest corporations are traded, A negotiated market, A decentralized market. They are competitive, involving dealers and traders processing orders and automatic quotes.

Which describes the OTC market?

A market where shares of the largest corporations are traded. A negotiated market. A decentralized market.

Exchange

A physical location where broker/dealers execute investor orders to buy and sell securities.

Which are exempt from the registration and prospectus requirements of the Securities Act of 1933 and which are NOT.

A security issued by a nonprofit. US government securities. Commercial paper that has a maturity not exceeding 270 days. A security offered for sale in only one state is NOT. Offering ALL the securities in one state IS exempt (Rule 147).

Spinoff

After a company has streamlined its operations, one of its peripheral operations no longer fits in this newer business mode, so the company plans to sell it. Selling or separating a portion of a corporation.

New stock underwriting types

All or None (AON), Standby, Firm, and Mini-max

Restricted associated persons

An associated person who works for a member firm not involved in the syndicate. An associated person who works for a member firm in the selling group. An associated person who works for a member of the syndicate, but does not plan on selling the IPO to customers. Whether an associated person plans to sell the IPO and whether the member firm is involved with the offering is irrelevant.

Exception to FINRA Rule 5130

An associated person whose limited registration permits selling only investment company products. An associated person with a limited registration is not a restricted person.

Which does NOT describe the OTC market?

An auction market.

Which is NOT an exempt transaction?

An issue of 5-year Treasury notes. Treasuries are an exempt security, although TRADING treasuries is a Non-exempt transaction, or not exempt.

Which are exempt transactions?

An issue sold in one state. An issue sold to 800 accredited investors. An issue of $3.5 million over 1 year.

Public Securities Offerings

An issuer offers for sale to the general public with the assistance of an investment banking firm (broker/dealer). Based on Securities Act of 1933, issuer is required to register with SEC and disclose important financial info about company.

If a market maker posts a quote of 12.00 - 12.10 [25X10], he is willing to

Buy 2,500 shares at $12.00 and sell 1,000 shares at $12.10. A market maker publishes a bid and ask and stands ready to buy or sell 100 shares at those prices. A quote of 12.00-12.10 [25x10] means that the market maker is willing to buy 2.500 shares (or 25x100) at $12.00 and sell 1,000 shares (or 10x100) at $12.10.

Private Securities Offerings (Regulation D)

Have an exemption from registering with the Securities and Exchange Commission (SEC). It is a direct private offering of securities to a limited number of sophisticated investors. This is a Regulation D exemption and is covered in greater detail in the section of exemptions.

Shelf offering

Best option for someone who needs money in stages over the next 2 years. It is also a small issuer, so only qualifies for a 2-year offering period.

What must the registered representative never do at any time?

Circle material facts in a prospectus. Making any marks on a prospectus or altering it in any way is considered an amendment to the prospectus and is an SEC violation.

ABC Corp has issued a tender offer to the shareholders of XYZ Corp. Which of the following is a permissible way for a shareholder to sell into the offer?

Deliver one round lot of the stock.

ABC Corporation has issued a tender offer to the shareholders of XYZ Corp. Which of the following is a permissible way for a shareholder to sell into the offer?

Deliver one round lot of the stock.

ABC Corp has issued a tender offer to the shareholders of XYZ Corp. Which of the following is a permissible way for a shareholder to sell into offer.

Deliver one round lot of the stock.A shareholder who sells tender offer must be delivered.

Once a red herring (preliminary prospectus) has been issued to a customer, each of the following activities is permissible

Discussing the information in the preliminary prospectus with the customer, Sending the final prospectus to the customer once the registration is effective, Obtaining an indication of interest in the issue from the customer.

An analyst publishes a quarterly newsletter on technology stocks. The analyst regularly follows 15 young tech companies in this report. One of these companies is issuing stock through an APO. Which of the following is true?

During the offering period, the analyst may include this company but give it no special recognition. It can be highlighted or if past recommendations about the company are not changed.

All of the following are true regarding Electronic Communications Networks (ECNs) EXCEPT

ECNs cannot execute mutual fund trades

Fourth Market

Electronic Trading of large blocks between institutional investors (Instinet).

NASDAQ

Electronic quotation system. This is where shares of the largest corporations trade OTC. Stocks quoted and traded here must meet the listing requirements, including asset size and # of outstanding shares. These kind of companies are the biggest and most actively traded OTC securities. Listed trades report within 10 seconds of their execution. Open to all firms that are members of FINRA, and they are allowed to register as a market maker for a particular security if minimum requirements are met.

Which would be a restricted person associated with an IPO?

Father-in-law of a registered representative. FINRA Rule 5130 states that broker/dealers and associated persons are not allowed to purchase IPOs from a syndicate. This restriction extends to a registered representative's in-laws, siblings, children, parents and spouses. Aunts, uncles, cousins, and grandparents are excluded.

tender offer

Formal offer to the existing shareholders to purchase their stock at a price above current market value (CMV). They are often hostile takeovers.

NYSE

Formed in 1792. Oldest and largest exchange market in the US. Many NYSE trades have transitioned to electronic systems, but floor trades still set pricing and deal in high-volume institutional trading.

Activity that is NOT permissible once a red herring has been issued.

Guaranteeing the offering price of the issue to the customer. Since the offering price has not been determined, it cannot be guaranteed. The word "guarantee" should always be treated cautiously on the exam.

Once a red herring (preliminary prospectus) has been issued to a customer, each of the following activities is permissible EXCEPT

Guaranteeing the offering price of the issue to the customer. Since the price has not yet been determined, it cannot be guaranteed. The word "guarantee" should always be treated cautiously on the exam.

A ZZZ Corp analyst includes ABC's 6% debenture in the analyst's newsletter. ZZZ Corp is currently underwriting an ABC stock offering. This is permissible

If the bonds are not convertible

Not an exempt security

Mutual fund, Common Stock, Corporate Stock

Combined offering

Issuer's subsequent primary offering is combined with the executive's registered secondary offering. The primary proceeds go to XYZ and the secondary proceeds go to the executive.

SEC Rule 10b-18

Issuers may purchase their own shares in the open market and be protected from liability for manipulation. Compliance is voluntary - Issuer's repurchases must satisfy 4 conditions on a daily bases. 1) Purchases must be done through only one broker/dealer on any single day 2,3,4) Remaining 3 conditions involve timing, price and volume.

Which of the following is associated with a trade in the Fourth Market?

Istinet. Trades executed directly between institutions are known as the Fourth Market. These trades are executed through the Instinet electronic system.

Third Market

Listed Securities Trading OTC. Negotiated.

OTC and NASDAQ

NO physical location for OTC market. Decentralized, global, 24-hr market that takes place over telephone lines and the internet. OTC world's largest market and largest debt market, as well. Most corporate debt, all government debt, government agency, and municipal debt trade here. This is not auction, but it is a negotiated market. Each trade is a negotiation between two parties, either online or on the telephone. Shares of the largest corporations trade OTC and are on an electronic quotation system called NASDAQ.

3 methods to register a security at the state level

Notification - issuer files a notice at the state level Coordination - done at the same time as and in coordination with the issuer's SEC registration Qualification - issuer submits a full registration statement to the state and is qualified by the state.

OTCBB

OTC bulletin board. In order to display on the board, corporations must be reporting companies and file reports with the SEC, such as 10ks (annual reports). Almots any trade can be found on the bulletin board, including bids wanted, offers wanted, and firm quotes.

Where do municipals trade?

OTC, a negotiated market.

When does the cooling-off period end?

On the effective date when the SEC releases the securities for sale to the public.

ICE (Intercontinental Exchange)

Parent company to NYSE. Operates seven liquid markets. Provides investors with access to stocks, bonds, exchange-traded funds (ETFs) and options.

Which of the following is a feature of an exchange?

Physical location. A stock exchange is a physical location where broker/dealers execute investor orders to buy and sell securities.

Red herring

Preliminary prospectus.

Most common method of acquiring a restricted stock?

Private placement. Less common are rights offerings (registered offerings), Employee Stock Ownership Plans (ESOP), and mergers.

FINRA Rule 5130

Prohibits purchase of IPOs by member firms and associated persons. Prohibits broker/dealers and their employees from buying the IPO from the syndicate. Restricted people include fiduciaries for managing underwriter, such as accountants and attorneys, immediate family members of associated persons employed by the broker/dealer, including spouses, siblings, children, parents and in-laws. Does NOT include aunts, uncles, grandparents, or cousins.

What kind of transaction uses an offering circular instead of a prospectus?

Reg A

If a company offers a new issue of $5 million or less during a 12-month period, files an offering statement with the SEC, and gives an offering circular to prospective buyers, the company can take advantage of

Regulation A - name of the small issue exemption under the act.

In a public offering, officers of the corporation are selling their personal shares along with the IPO of the corporation itself. The sale of shares by corporate officers is called

Secondary

In a public offering, officers of the corporation are selling their personal shares along with the IPO of the corporation itself. The sale of shares of by corporate officers is called

Secondary - meaning that the proceeds go to an entity other than the issuer; in this case, that's the officers.

Activities that are permissible once a red herring (preliminary prospectus) has been issued to a customer.

Sending the final prospectus to the customer once the registration is effective. Obtaining an indication of interest in the issue from the customer. Discussing the information in the preliminary prospectus with the customer.

Second Market

Trading of Unlisted Securities over the counter (OTC). Negotiated.

Which of the following terms would be used to describe a pre-offering solicitation under Reg A+?

Testing the waters

Why are securities traded in the Third Market?

The NYSE's specialist must maintain a fair and orderly market, so a trade large enough to create an order imbalance in a particular listed stock will be done OTC. Trades can be done after hours when the exchange is closed.

Syndicate letter

The agreement among underwriters that is between participating broker/dealers who assume liability for any unsold shares and specifies the underwriters' responsibilities and participation percentages. It is different than the underwriting agreement. The agreement among underwriters is between syndicate members. The underwriting agreement is between the managing underwriter and the issuer.

An offering memorandum.

The announcement that must be filed in connection with a Regulation D offering is

Which is a restricted person associated with an IPO?

The father-in-law of a registered representative. FINRA Rule 5130 states broker/dealers and associated persons are not allowed to purchase IPOs from a syndicate. The broker/dealer's involvement in the syndicate is irrelevant. The restriction extends to a registered rep's in-laws, siblings, children, parents, and spouses. Aunts, uncles, cousins and grandparents are excluded.

The underwriting agreement is between whom?

The issuer and the managing underwriter. It is the document that spells out the duties and responsibilities of each party, including who has liability for any unsold shares.

Non-NASDAQ

The majority of OTC traded stocks are small companies., some of which are not very actively traded. OTC stocks that are too small to meet the listing requirements of NASDAQ. Quoted by market makers via publication called the "pink sheets" (accessed electronically). Pink sheets list the stock, market makers, sometimes mm's phone number, and their quotes. Companies that quote on pink sheets not necessarily SEC-reporting companies. Penny stocks (low-priced stocks) are typically quoted on the pink sheets.

Which is true of restricted stock?

The purchase must be paid for in its entirety.

What is an example of an auction market?

The stock exchange, like the NYSE

All of the following are true regarding Electronic Communications Networks (ECNs)

They facilitate trades between institutions, Transactions are executed without the broker, They are used for Fourth Market trades.

secondary market

Trading of Previously Issued Securities. Aftermarket. Consists of Exchanges and Over-The-Counter (OTC) market. Exchanges represent an auction market with competitive buyers and competitive sellers. OTC is a negotiated market where one buyer negotiates with one seller. Included are: First Market - Trading of Securities listed on an Exchange. Second Market - Trading of Unlisted Securities OTC Third Market - Listed securities trading OTC Fourth Market - Electronic trading of large blocks between institutional investors (Instinet). 2nd and 3rd Markets are negotiated . Exchange is an auction market, using a central tape to record real-time trades or last sales.

First Market

Trading of Securities listed on an Exchange. Auction market.

Additional Primary Offerings

When a publicly traded issuer offers more shares to the public. Also referred to as a "follow-on" offering. Like an initial public offering (IPO), it is done in the primary market. Primary market is typically used for corporate underwriting (stocks, and bonds), with the terms of the issue negotiated b/w the issuer and the underwriter. "Primary" means issuing corporation receives the proceeds.

Initial Public Offerings (IPOs)

When an issuer sells newly issued shares to the public for the first time. This process begins when the issuer files an S-1 registration statement with the SEC. Filing this statement starts the cooling-off period. Subject to FINRA 5130.

A "Chinese Wall" is

a separation between investment banking (underwriting department), which handles inside information, from the other functions inside a broker/dealer.

syndicate letter

agreement between participating broker/dealers who assume liability for any unsold shares and specifies the underwriters' responsibilities and participation percentages.

NYSE member

an individual who has a seat on the exchange.

market maker

broker/dealer that publishes a bid and ask on NASDAQ and stands ready to buy or sell 100 shares at the quoted prices. Ex. A market maker posts a quote of 10.00 - 10.10 [15x10]. This means the market maker is willing to buy 1,500 shares at $10.00 and sell 1,0000 shares at $10.10. Note: A market maker's posted quote shows both his bid and ask prices as well as the number of shares he is willing to buy and sell in round lots of 100 shares.

Guaranteed bond

one that is guaranteed by another company or entity and is typically used in a Spinoff. A spinoff occurs when a division of the company is separated into a new entity. Often this new entity will issue bonds that are guaranteed by the company it was formerly associated with to reduce interest costs.

Electronic Communication Network (ECN) Fourth Market

consists of institutional investors, such as mutual funds and pension funds, electronically trading big blocks of securities with one another. Facilitate cross services, taking shares from the seller and delivering them to the buyer electronically, and provide confirmation records to each institution. Less costly way of trading b/c w/o a middleman there are no commissions.

New York Stock Exchange (NYSE)

formed in 1972, oldest and largest stock exchange market in the US. Many NYSE trades have transitioned to electronic systems, but floor traders still set pricing and deal in high-volume institutional trading.

Seller's option

gives the seller the option to deliver the security during any time period ranging from 6-60 business days. This is called a negotiated settlement. It also locks in the right to buy and sell the security at a specific price.

Allied member

individual employee who owns a seat on the exchange

"Not held"

market order in the secondary market

blue-skied

must be registered under state securities laws that govern the registration of securities and securities personnel. originated in Kansas, which was the first state to require sellers of investments to register their securities with the state.

A research analyst has a meeting with an employee from investment banking. This is

permissible if the meeting is attended by a compliance officer.

Secondary

proceeds go to an entity other than the issuer; in this case, that's the officers.

Broker/dealers

provide liquidity for all OTC stocks, both NASDAQ and non-NASDAQ (those that don't meet NASDAQ listing requirements). All market makers are broker/dealers; however not all broker/dealers are market makers. Many brokerage firms either don not have the capital or choose not to risk their capital to make a market in a security.

OTC market maker role

provide market liquidity and to ensure that a market exists in a given security. They are broker/dealers that "make a market" in a security by trading with customers from their own inventory. Ex. a broker/dealer who makes a market in ABC stock will publish a quote indicating the prices at which they are willing to buy and sell ABC stock. Let's say the market maker quotes ABC stock as $21.25 bid and $21.50 ask. This means the market maker is willing to purchase ABC at $21.25 and sell it at $21.50. Market makers act as principals or dealers on a trade; therefore they do not charge commissions; they profit on the "spread" between the bid and the ask prices of securities they trade. If market maker for ABC purchases 100 shares of ABC stock at the bid price of $21.25 and sells it at ask price of $21.50, market maker would make $25 on the trade (.25x100 =$25).

Restricted securities

purchased in unregistered, private sales from the issuer. Usually acquired through private placement offerings, Regulation D offerings, employee stock benefit plans, or in exchange for providing start-up capital to a company.

Testing the waters

term that is used when the issuer is gauging marketability of their offering.

Secondary offering/distribution

sale of already issued and outstanding shares. Trading of Previously Issued Securities.

Preliminary offering circular

sent to prospective investors to determine the viability of the offering. This is done prior to the offering statement being filed.

Insider quote

the highest price a buyer will pay for a security and the lowest price a seller will accept). in order to display this, there must be at least two active market makers on the bulletin board showing firm quotes for both the bid and the ask.

first market

the trading of listed securities on an exchange. it is an auction market.

Quiet period

time period during which no research may be published on XYZ to prevent influencing the market value of XYZ outstanding stock.

Consolidated Quote System (CQS) Third market

trading of exchange-listed securities in the over-the-counter (OTC) market. Where financial instruments are negotiated rather than traded through a formal centralized exchange like NYSE or NASDAQ. No physical location. All trading is done electronically. Ex. If institutional investor contacts a broker/dealer and wants to buy shares of IBM, the first place the broker/dealer would look for the security would be in their own inventory, then IBM, which is a NYSE listed security, would trade in an OTC transaction. This is a third market trade. These type of securities include any exchange-traded stocks, American Depository Receipts (ADRs), rights or warrants.

OTC

unlisted market. called the second market. it is the negotiated market.

Prospectus

used for a public offering and omitting a prospectus and statement of additional information are both used for an open-end investment company.

stock dividend

when a corporation gives stock to shareholders.

add-on offering (APO)

when a corporation issues additional authorized stock

registered secondary offering

when an officer of a corporation sells unregistered stock