Underwriting

Research Analyst PROHIBITED

A research analyst is prohibited from: 1. Attending any road show relating to an IBD transaction 2. Communicating with investors concerning an investment banking services transaction in the presence of investment banking or issuer management personnel IBD may NOT direct a research analyst to engage in sales, marketing, or other communication with an investor concerning an IBD transaction

NYSE Listin Requirements

1. 400 US round-lot shareholder 2. 1,100,000 outstanding shares 3. A total market value of all public shares of: -$40MM for IPOs and spin-offs -$100MM for all other companies 4. A stock price of at least $4 at the time of listing 5. At least one of several alternative financial tests 6. Majority of BOD must be independent

Syndicate and Selling Groups

1. A FINRA member may not join a syndicate or selling group with a nonmember for the distribution of securities and may not allow any selling concession to a bank or trust company 2. Suspended members must be treated as nonmembers 3. A member of a selling group that is subsequently suspended would be allowed to purchase the securities, but only at the full public offering price (POP) 4. Selling concessions and discounts for public offerings may only be granted to BD that are engaged in the IBD or securities business

Exempt Accounts - Equity IPO Rule

1. Account where combined ownership of all restricted persons represents 10% or less (de minimis) 2. Issuer-directed sales, but only if: The association person's immediate family is an employee or director of the issuer

During the restricted period, distribution participants may bid for, or purchase, the security being offered if....

1. Actively traded - ADTV of at least $1MM and public float of $150MM 2. IG nonconvertible or asset backed debt

Restricted Period - Reg M

1. Begins 1 business day prior to pricing - ADTV of at least $100,000 and market value of public float at least $25MM 2. Begins 5 days prior to pricing - All other securities End when distribution is completed

Research Analyst PERMITTED

1. Discuss an IBD transaction service with an investor or potential investor 2. Discuss an IBD transaction with internal personnel The communication should be for the purpose of educating clients and internal personnel about the transaction 1. Must be fair and balanced 2. IBD and company management cannot be present

Restricted Persons - Equity IPO Rule

1. FINRA member firms and any member firm employees 2. A member firms employees immediate family if any three conditions apply: material support or sharing of a household, purchase is made through the associated person's firm, associated person controls the allocation of shares 3. Finders and fiduciaries 4. Portfolio managers purchasing for themselves 5. Owners of a BD

Types of Underwriting

1. Firm Commitment - Syndicate purchases entire issue and will absorb any securities remaining unsold (No Escrow Account) 2. Stand-by - Syndicate commits to purchasing any shares remaining after a rights offering (No escrow) 3. Best Efforts - Syndicate attempts to sell what it can. If using all-or-none or mini-maxi, offering is cancelled if the contingency is not met -Client funds placed in bank escrow account -Bank (escrow agent) will release funds only when offer is cancelled or contingency is met (Yes escrow)

Precondition of Sale

1. Firms have written verification as to eligibility of purchasers (updated annually) -Is client associated with a BD? -is their immediate family associated with a BD?

Exemptions from Filing (Underwriting)

1. IG securities 2. Shelf registration offerings (or S3 or F3) 3. listed on NYSE, AMEX, or Nasdaq 4. Foreign or private issuers available to use SEC form F-10 (ie Canadian Corp)

Short Sales in Connection with an Offering

1. If a short sale is effected within the 5 business day period prior to the pricing of a new issue, shares of the new may not be purchase by the short seller. 2. Prevent the short seller from benefitting from an impending issuance of shares at an anticipated price, and use those shares to cover the short position

Filing requirements for Managing Underwriter

1. If registered with SEC, the filing must be done no later than one business day following the SEC filing 2. If not filed with a regulatory authority, the filing must be done at least 15 days prior to anticipated offering 3. Documents - registration statement, underwriting agreement, letter of intent, offering circular or offering memorandum 4. Information to be filed - estimate of the maximum offering price and underwriting discounts, finders fee or other types of compensation, and a statement detailing compensation during the 180 period prior to filing

Reg M and IPO Allocations

1. Prevents UW and BDs from influencing the price prior to the completion of distribution 2. During the distribution, its a violation to allocate IPO shares based on prearranged orders in the aftermarket at specified prices 3. Tie-in arrangement is a manipulative act 4. During distribution, may not ask clients for the price they would be willing to pay in the aftermarket

According to FINRA, compensation does NOT include...

1. Registration fees 2. Accounting fees 3. FINRA filing fees 4. Prospectus printing costs 5. Cash compensation for acting as a placement agent 6. Providing a loan for M&A related services 7. Nonconvertible securities and derivatives acquired at a fair price, in the ordinary course of business and unrelated to the public offering (looking back 180 days)

Offering's Exempt (Underwriting)

1. Regulation D 2. Mutual Funds 3. Municipal securities offerings 4. Tender offerings 5. M&A in which no securities are being issued

Syndicate Covering Transaction

1. Syndicate short positions may arise from overallotments, in which syndicate members sell more than the number of shares being offered 2. Instead of having losses in a rising market, the managing underwriter may exercise the Green Shoe Clause

Free Retention

1. The amount that an underwriter is allotted for placement to its own clients 2. Sales to the firm's retail clients are often filled from this amount

FINRA Restriction on Securities Received

1. The sale of securities acquired in connection with an offering is restricted for a period of six months following the effective date of registration 2. Options or warrants acquired in connection with the offering may be exercised at any time, but are still subject to the remainder of the six months

Jump Ball

1. This process sets aside shares for institutional clients and allows all members to compete for orders 2. The profit is allocated based on each member's sales

UAR (Underwriting Activity Report)

1. This report wil identify whether the restricted period is one day or five 2. The managing UW -May use other source -Must disclose if there will be a penalty or bid or stabilizing bid

According to FINRA, compensation includes...

1. UW spread or commission, reimbursement of expenses to the UW, UW's counsel fee, finder's fee, wholesaler's fee, financial consulting or advisory fee, special incentive items 2. Equity securities receive for acting as a private placement agent or arranging loans for the issuer at the time of the public offering 3. Compensation expected to be received as a result of exercising or converting, within one year following the effective date of the offering, any warrant or convertible security 4. Fees for a qualified independent UW

Prohibited Arrangements

1. reimbursement for miscellaneous expenses 2. reimbursement for salaris of IBD personnel 3. Commissions paid by an issuer to a member firm prior to the commencement of the public sale of the securities being offered 4. The payment of any compensation by the issuer to a member firm in connection with an offering that was not completed 5. The receipt of a security, warrant, or option that has a duration exceeding five years or with more favorable terms than those that were offered to the public 6. any unaccountable expense allowance exceeding 3% of the offering price

Daily Purchasing Limit (DPL)

A PSMM DPL is the greater of: 1. 30% of its ADTV in the stock or 2. 200 shares Once reached, must withdraw for the day However, can exceed its DPL to execute any single order

Public Offerings of Securities with Conflicts of Interest

A member conducts a public offering of its own securities or securities of an affiliate 1. An affiliate is defined as an entity that controls, or is controlled by the member (10% of more ownership) 2. Also included is if at least 5% of the net offering proceeds are intended to reduce or retire debt extended by the member

Market-out Clause

Allows a firm commitment writing underwriter to be released from liability if events occur making the sale of the issue difficult or impossible

Bona Fide Purchase Exception

Allows a person who was not aware of the offering, or changes her mind, to close out the short sale at least one business day prior to pricing and still purchase the offered securities

Penalty Bid

Arrangement that permits the managing UW to reclaim selling concession from a syndicate member

Nasdaq and OTC Equity Trading

Details: -Nonphysical phone and computer network -Negotiated market -Unlimited number of "market makers" continuously willing to buy or sell at their quoted price OTC Equity or Non-Exchange listed: 1. Pink Sheets -Electronic -Often low priced, thinly traded -No SEC reporting 2. OTCBB -Electronic, real-time firm quotes -Require SEC reporting

Reg M - Passive Market Making

During the restricted period, passive market making is permitted if there is at least one independent market maker 1. A passive market maker (PSMM) may not bid higher than highest independent bid 2. If independent MM lowers its bid, the PSMM may maintain the bid (as highest) until purchasing small amount

FINRA Corporate Finance Review

Evaluates fairness of underwriter's compensation 1. Managing underwriter is responsible for filing the underwriter agreement 2. Factors considered: offering proceeds, amount of risk assumed by underwriter, type of security being offered

PO with Conflicts of Interest Compliance

FINRA requires the member to comply with either one of the following two conditions: 1. Disclosure of any conflict of interest and: -Member responsible for managing the offering does not have a conflict of interest or -the securities offered have a bonafide market or -the securities offered are Investment Grade 2. A qualified independent underwriter (QIU) must participate in the preparation of the offering documents

Quiet Period

IBD client may not be the subject of research report during the quiet period 1. For an IPO -40 calendar days from the offering for manager or co-manager -25 calendar days from the offering for all other participants 2. For secondary offering -10 calendar days for manager or co-manager -Does not apply to reports distributed under Rule 139 regarding actively traded securities (defined by regulation M) Manager and Co manager may not issue research reports 15 days before or after the expiration of a lock-up agreement (booster shot) Does not apply to reports distributed under 1. Rule 139 2. Rule 144A - Private Placements 3. Regulation S Offerings

Communication with Research Department

IBD may not exercise control over research department Reports may not be subject to review by investment banking Research may consult IBD or nonresearch personnel only to verify factual information or avoid potential conflicts of interest, and in those limited cases 1. Written communication must be routed through legal or compliance 2. Oral communication myst be made in the presence of legal or compliance

Underwriter Spread

Look at slide 249

QIU

Must have served as a manger or co manager in at least three public offerings of a similar size and type during the three-year period preceding filing of the registration statement 1. The name of the QIU and any conflicts of interest must be disclosed in the prospectus 2. Written client consent is required to place in discretionary accounts

Nasdaq Listing Requirements

NASDAQ -Global Select, Global, and Capital Market listings Of the seven requirements, only three must be satisfied under all three standards in order to be listed: 1. A $4 minimum bid price 2. 3 or 4 market makers 3. Subject to corporate governance Other requirements that could apply depend on which of the three standards is being used and included: 1. Pretax earnings 2. Cash flow 3. Market cap 4. Revenue

Regulation M

Objective: to limit secondary market activities that may be deemed manipulative during the restricted period The issuer and seller are generally prohibited from bidding for, or purchasing, the security during the applicable restricted period

Public Appearance

Participation in a public speaking activity, radio, TV, and other electronic forums if the analyst: 1. Makes a recommendation 2. Offers an opinion concerning an equity security A small group gathering (fewer than 15 separate investors) does NOT defined as public appearance

Reg M - Stabilizing Bids

Permits the syndicate to purchase shares in the secondary market to prevent a price decline 1. Only form of price manipulation allowed by SEC 2. May not exceed public offering price 3. Only one syndicate member allowed to stabilize 4. Notification to principal market where bid is to be entered 5. No limit on how long a stabilizing bid may remain open

Equity IPO Rule

Prohibit member firms form selling equity IPOs to account in which a restricted person has a beneficial interest

Soliciting

Research analysts are prohibited from soliciting IBD services - IBD services include: underwriting, M&A, venture capital, placement agent, and PIPES Prohibition includes: - Participating in pitch meetings with prospective clients - having communication with companies for the purpose of soliciting IBD business Communication between analysts and companies for the purpose of due diligence is NOT prohibited

Green Shoe Clause

Situation in an underwriting agreement that allows for the expansion of the offering by a maximum of 15%

Hot News Exception

This is an exception to the prohibition on the manager and co manager issuing reports or conducting public appearances during the quiet period *Reports are permitted dude to significant news or events - Earnings Release is NOT significant **Must be approved by legal or compliance

Underwriting Concepts

Unless released by the manager, syndicate members must sell new issues at the public offering price Final settlement of a syndicate must occur within 90 days of syndicate closing; anticipated delays are reported to FINRA

FINRA Suitability Rules

When dealing with retail clients, an RR is required to make suitable recommendations based on the information obtained from the client When dealing with institutional clients, there are two important considerations: 1. Customer's ability to independently evaluate the investment risk 2. The extent to which the customer is exercising that ability NEw or riskier investments may require additional risk disclosures