Underwriting Securities

Rule 145

An SEC rule allowing the sale of certain securities without first registering the securities with the SEC. Specifically, stocks an investor has acquired as the result of a merger, acquisition, or reclassification do not need to be registered prior to sale. Rule 145 allows investors more flexibility following the uncertainty of, say, a merger. However, transactions must be registered if security holders vote on such transactions

Items in the registration form

-Issuers name and description of business - names and addresses of co. officers, directors, and those owning > 10%of its securities - what proceeds will be use for -company's capitalization -complete financial statements -any legal proceedings that may have an impact

Spread

Difference between amount syndicate pays the issuer for new shares or bonds and the public offering price Spread = public offering price - price paid to issuer

Intrastate offerings (Rule 147)

Do not need registration - issued by company incorporated in state, 80 of business in state, only sell to states' residents - must register with state

Negotiated underwriting

offering municipal bonds or securities in which the issuing entity and a selected underwriter negotiate the terms of the issue, as opposed to having multiple underwriting groups competitively bid, the underwriter, selected by the issuer before the sale date, will finance the issue. Lower quality issues generally reap the greatest benefit from this technique as the underwriter works with the company to sell the issue to the market. When they work together to clearly explain the issue, they will often receive a better rate in the market. Negotiated sales allow for greater flexibility to when the issue is released so that it can be better timed in the market to get the best rate. Most common

Firm commitment underwriting

Firm Commitment, all or none, mini-max, and best efforts

Primary offering

offering of new securities from issuer that has previously issued securities, company can have several of these after the IPO if it wants, proceeds also go to issuer and underwriter

managing underwriter

or syndicate manager - head firm responsible for putting together a syndicate and dealing with issuer - paid for each share sold

reallowance

portion of takedown for firms not part of syndicate or selling group - random stockbroker that buys shares at a discount from syndicate manager to sell to a customer - for a profit

final prospectus -

prepared toward end of cooling off period, is a legal document issuer prepares, has to be available to all potential purchasers, includes final offering price, underwriters spread (profit per share), delivery date

takedown

profit each syndicate member makes when selling its shares

additional takedown

profit made by syndicate members on shars sold by the selling group

concession -

profit the selling group makes when selling shares - paid out of the takedown

Registering to sell securities - Coordination

register with SEC and states at same time - SEC notifies all states for you

Secondary offering

sale of a large block of outstanding securities (by a major stockholder or company itself who may have bought back shares - treasury stock), new investors buy used shares so total number of shares do not change sales don't go to issuer (except for treasury stock) but to selling stockholders

Registering to sell securities- Notification by filing

simplest form - just renew app if company already sold in state

syndicate managers fee

smallest fee -profit syndicate manager makes shares sold by anyone.

syndicate

when one underwriter is not enough - put together a group to each sell a portion of the stock issued

Market-out Clause

Underwriter on a firm commitment basis will have a market out clause in the underwriting agreement. The clause frees the underwrite fro their obligation to purchase securities in the event of a development that impairs the quality of the securities or adversely affects that issue. Poor market conditions do not quality but something more major- like FDA not approving issuers new drug.

Final prospectus dates based on offerings

available for IPO for 90 days after effective date, primary - 25 days for all issuers whose securities are already listed on an exchange or NASDAQ, if issuer has issued securities but not on an exchange - 40 days.

Investment Banking firm

broker dealer that helps issuers raise money - may become underwriter or managing underwriter

Underwriter

broker-dealer purchases the securities from issuer and sells to public

split (Combined) offering

combo of primary and secondary offering with both new and outstanding securities, portion of proceeds go to issuer and portion to selling stockholders

Syndicate agreement or agreement among underwriters

contract among syndicate members - includes fee structure, how many shares each one will sell

Western (divided) underwriting agreement

each member is only responsible for selling shares originally allocated to it - wild wild west -each man for himself

Eastern (undivided account)

each syndicate member responsible for their originally allocated shares but also for a portion of shares left unsold by other members - same proportion applies - if you are responsible for 10% of shares then you are responsible for 10% of unsold shares

Blue sky law

every state has its own set of securities laws—known as "Blue Sky Laws"— designed to protect investors against fraudulent sales practices and activities. most state laws typically require companies making offerings of securities to register their offerings before they can be sold in a particular state, unless a specific state exemption is available. The laws also license brokerage firms, their brokers, and investment adviser representatives.

Effective date

first date the security starts trading

Initial Public Offering (IPO)

first time issuer sells stock, issuers usually hold back some stock for future primary offerings, most of the capital raised goes to issuer and rest to underwriters

Registering to sell securities - Qualification

for securities exempt from registering with SEC but require state registration

Securities exempt from registration

from us government or federal agencies, municipal bonds, public utilities, charities, schools and religious, banks - credit unions-savings institutions, Notes, bills of exchange bankers acceptances, and commercial paper with in initial maturity of 270 days or less (9 months)

selling group

if syndicate still not enough, they can add selling group members - brokerage firms not part of syndicate - don't buy shares first so they make less profit from sales

Registrar

independent entity that maintains a record of a company's stock and bond owners, - main function is to ensure outstanding shares do not exceed amount of stock allowed in issuers corporate charter or bylaws - Counts things

Transfer agent

maintains a record of a corporations stock and bond owners (like a registrar) but also mails and cancels stock certificates as necessary - transfers or sells things

preliminary prospectus

must be made available to all interested customers in the cooling off period, prepared by issuer, sent in with registration statement, it is abbreviated, but includes all essential info except final (public) offering price and effective date - date issue will first be sold, called red herring as it has statement on front in red saying it is not final and may change

variable annuities

must be registered, but fixed do not

Mutual fund prospectus and statement of additional info (SAI)

mutual funds must always have a prospectus available as investors can always buy shares - also have a SAI which provides more details about fund operations - SAI also known as a Part B of a registration statement

Registration statement

name and description of business, company control persons including anyone owning more than 10%, capitalization, financial statements, purpose of money, any legal proceedings

due diligence meeting

near end of cooling off period - underwriter holds meeting - provides info on the issue and what the proceeds will be used for - meeting includes syndicate members, selling groups, brokers, analysts, institutions, etc. - around the time of this meeting at end of cooling off period is the last time syndicate members can back out

accredited investor

net worth of $1 mill or more or has had a yearly income of at least $200,000 (individual or $300,000 for joint or married) income for previous two years and should do it again next year

tombstone ad

newspaper ad - contains a simple statement of facts about the new issue (issuer, type of security, # of shares, underwriters), also often provides info on how to get a prospectus, these are only ads allowed during cooling off period and they are optional

Regulation A offerings

offering $5 million or less , must file simplified registration or abbreviated registration statement

Qualified Institutional Buyer (QIB)

A QIB is a corporation that is deemed to be an accredited investor as defined in Rule 501 of Regulation D, acting for its own account or the accounts of other QIBs, A QIB owns and invests on a discretionary basis at least $100 million in securities of issuers not affiliated with the entity ($10 million for a broker-dealer). QIBs include savings and loans associations (which must have a [net worth of $25 million) and banks, investment and insurance companies, employee benefit plans, and entities completely owned by accredited investors. A QIB must be an institution, either domestic or foreign; and not individuals, Under Rule 144A, QIBs are allowed to trade securities on the market. This rule provides a safe harbor exemption against the SEC's registration requirements for securities.

Competitive underwriting

A competitive bid is a step in the initial public offering process whereby an underwriter submits a sealed bid to a company that is making its first issue of stock. After collecting competitive bids from several underwriters, the issuer awards the contract to the underwriter with the best price and contract terms. Competitive bidding is considerably less common than negotiated bidding, Competitive bidding is more common with municipal bonds issued by utility companies. Underwriters are usually investment banks, and they are responsible for selling the stock of the company that is going public. A firm is more likely to use a negotiated bidding process in selecting an underwriter because it wants to work with a familiar firm or a firm that has an excellent reputation.

Penalty Bid

A fee charged by some brokerage firms when a client sells Initial Public Offering (IPO) shares immediately after purchasing them. The penalty bid is the obligation of the client's broker and is intended to discourage them from making shares available to investors whose only interest is to make a quick profit on the IPO A bid, or offer to purchase securities, provided by a lead underwriter or other member of a syndicate as part of early IPO trading. The bid comes with the restrictions; if it is used, a penalty will be assessed to the broker offering the shares back to the underwriter. The penalty bid is created to deter investors from "flipping" IPO shares shortly after trading begins. This penalty may be passed on from the broker to the client selling the IPO shares, but typically involves the broker returning some or all of the internal commission income back to the underwriting syndicate.

Deficiency Letter

A letter, issued by the Securities and Exchange Commission (SEC) indicating a significant deficiency or omission in a registered statement or prospectus. A letter from the SEC stating that there is a problem with a particular filing, especially a prospectus. A deficiency letter is submitted to the filer if the SEC determines that there is a major omission or error in the filing. The company making the filing is expected to deal with the deficiency immediately and make an amended filing. Generally speaking, the submission of a deficiency letter delays a new issue and may be accompanied by a stop order, forbidding a new issue until the matter is resolved.

Stabilizing Price

A practice used by underwriters to stabilize the secondary market price of a security after an initial public offering (IPO). The bid is made on behalf of the IPO's underwriters to repurchase shares at the offer price. Stabilizing bids are one of many methods used by underwriters to support the price of the IPO. Stabilizing bids may be used to support a stock that has high selling pressure from investors looking to "flip" their purchased shares for a quick profit. Any attempt to use a stabilizing bid by an underwriter must be made known to the regulatory body of the market.

Shelf offering Rule 415

A procedure that allows firms to file one registration statement covering several issues of the same security. SEC Rule 415, adopted in the 1980s, allows a corporation to comply with registration requirements up to two years prior to a public offering of securities. Shelf registration is a method for publicly traded companies to register new stock offerings without having to issue them immediately. Instead, the securities can be issued within a two-year period, allowing a company to adjust the timing of the sales to take advantage of more favorable market conditions. By using shelf registration, the firm can fulfill all registration-related procedures beforehand and go public quickly when conditions become more favorable.

Green Shoe Clause

A provision in some underwriting contracts allowing the underwriter to sell more shares to investors than were originally agreed. In an underwriting agreement, the underwriter agrees with the issuer of a security to place a certain amount with investors. If demand for the security exceeds the underwriter's supply, the greenshoe option allows the underwriter to avoid a sudden jump in price by increasing supply. Normally, the greenshoe option allows the underwriter to increase supply up to 15%. a greenshoe option is an over-allotment option. In the context of an initial public offering (IPO), it is a provision that gives the underwriter the right to sell investors more shares than originally planned if the demand for a security issue proves higher than expected. It can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations.

Shell companies

A shell company, as defined in Rule 405 of the Securities Act, is a registrant with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets.

Seasoned issuer

An issuer classified as a WKSI, enjoys significant advantages in offering its securities Generally, a WKSI is an issuer that is eligible to use Form S-3 for registration of a primary offering of securities. An issuer that meets all of the following requirements at some point during a 60-day period preceding the date the issuer satisfies its obligation to update its shelf registration statement (generally the date of filing) It must be eligible to register a primary offering of its securities on Form S-3 or Form F-3. As of some date within 60 days of its eligibility determination date, it must have had an outstanding minimum $700 million in worldwide market value of voting and non-voting equity held by non-affiliates or have issued in the last three years at least $1 billion aggregate amount of non-convertible securities other than common equity, in primary offerings for cash, not exchange. It must not be an ineligible issuer.

Company's capitalization

Capitalization ratios include the debt-equity ratio, long-term debt to capitalization ratio, and total debt to capitalization ratio.

Chinese wall doctrine

Chinese wall refers to an ethical barrier between different divisions of a financial or other institution to avoid conflicts of interest. Rather than forcing companies to participate in either the business of providing research or providing investment banking services, the Chinese wall attempted to create an environment in which a single company could engage in both endeavors. The "wall" is thrown up to prevent leaks of corporate inside information, which could influence the advice given to clients making investments, or allow staff to take advantage of facts not yet known to the general public. When firms are providing a wide range of services, clients must be able to trust that information about themselves will not be exploited for the benefit of other clients with different interests, ergo trust in Chinese walls.

Commercial paper

Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates.

FINRA Rule 5130

FINRA Rule 5130 has replaced the freeriding and withholding rule. It requires that a broker dealer obtain an eligibility statement from all account owners who purchase a new issue of stock within 12 months prior to the purchase. A broker dealer underwriting a new issue must make a complete and bona fide offering of all securities being issued to the public and may not withhold any of the securities for underwriters accounts, another broker dealer accounts, firm employee accounts, or the account of those who are financially dependent upon the employee, and employees of other FINRA members accounts. Rules are in effect for all new issues, but are most important for a "hot issue" - one that trades at an immediate premium to its offering price in the secondary market. A broker dealer may not free ride by withholding securities for its own account or for the accounts of those listed above.

Allocation of orders

MSRB requires the syndicate to establish the order priority allocation provisions and submit them to all syndicate members in writing. Its a definite sequence that the orders will be accepted. Members must accept these rules in writing. Normal priority is as follows: 1. Presale Orders- orders before the winning bid is awarded. 2. Group Net Orders-order placed for the benefit of the entire underwriting syndicate. 3. Designated Orders 4. Member Orders * Remember the phrase "Pro Golfers Don't Miss"

Pegging

Making transactions in a security, currency, or commodity in order to stabilize or target its value through market intervention. . The act of buying a security in a large quantity to drive up the price. Writers of put options (and holders of short positions) practice pegging when the expiration date is approaching and it appears that the option will be exercised such that it puts the writer at a disadvantage. The idea behind pegging is to cause the price to rise so the option is not exercised and the writer can profit from the premium. This term also refers to the practice of an investor buying large amounts of an underlying commodity or security close to the expiration date of a derivative held by that investor. This is done to encourage a favorable move in market price of the underlying security or commodity, which may increase the value of the derivative.

Regulation D offerings

Private placement, offering to no more than 35 unaccredited investor per year, can raise unlimited funds, subject to sales limitations fo Rule 144

Regulation S

Regulation S provides an exclusion from the Section 5 registration requirements of the Securities Act of 1933, for offerings made outside the United States by both U.S. and foreign issuers. Regulation S is available only for "offers and sales of securities outside the United States" made in good faith and not as a means of circumventing the registration provisions The availability of the issuer (Rule 903) and the resale (Rule 904) safe harbors is contingent on two conditions: 1) the offer or sale must be made in an offshore transaction; and 2) no "directed selling efforts" may be made by the issuer, a distributor, any of their respective affiliates, or any person acting on their behalf

SEA Rule 144A

Rule 144A is a safe harbor exemption from the registration requirements of Section 5 of the Securities Act for certain offers and sales of qualifying securities by certain persons other than the issuer of the securities. The exemption applies to resales of securities to qualified institutional buyers, QIBs" QIBs must be institutions, and cannot be individuals. Rule 144A equity offering is an unregistered offer and sale of equity securities issued by a U.S. or foreign company, the equity securities of which are neither listed on a U.S. securities exchange nor quoted on a U.S. automated inter-dealer quotation system. Under Rule 144A, QIBs are allowed to trade securities on the market. This rule provides a safe harbor exemption against the SEC's registration requirements for securities. Typically, transactions conducted under Rule 144A include offerings by foreign investors looking to avoid U.S. reporting requirements, private placements of debt, and preferred securities of public issuers and common stock offerings from issuers that do not report.

Rule 144

Selling restricted or control securities can be complicated because the sales are so close to the interests of the issuing company that the law might require them to be registered. All offers and sales of securities must be registered with the SEC or qualify for some exemption from the registration requirements. If you have restricted or control securities and want to publicly sell them, you may need to to show that your public sales are exempt from registration. Rule 144 provides an exemption and permits the public resale of restricted or control securities if a number of conditions are met, including how long the securities are held (sellers must wait between 6 months and a year depending on whether issuer company is subject to SEC requirements) . the way in which they are sold, and the amount that can be sold at any one time (The most an investor may sell at one time is 1% of outstanding shares or average weekly trading volume for the previous 4 weeks -whichever is greater) may also require issuer company to have current public info available, only ordinary brokerage transaction transaction and fees, and filing notice of proposed sale with SEC. Need transfer agent to remove the legend.

Going public

Selling stock to public investors - needs to file a registration statement and prospectus with SEC and and states.

Corporate charter

a corporation must file a charter in their home state that includes founders, type of business, location, # of shares, etc.

Prospectus -

a detailed analysis of a company's financial history, its products or services, managements background and experience, and assesses risks company faces.

Cooling off period

after filing a registration statement (filing date) with SEC, company waits 20 days (or more) while SEC reviews statement. When SEC clears it for sale it is the effective date of registration underwriters can find interested buyers during this time also refers to when the issue is in registration