Issuing Securities (3rd)

Under Regulation D, the SEC defines an accredited investor as an individual who either has a net worth of at least _____________ million (excluding net equity in a primary residence), or has had annual income of at least ____________ (__________ joint return) in the last two years with the same or more expected this year.

$1; $200,000; $300,000 Also accredited: officers or directors of the issuer, and institutions.

Stabilizing bids

- May be entered at a price no higher than the public offering price. - Stabilizing bids cannot be used to raise the market price of an issue. Stabilization may only be used to support a new issue security at or below the public offering price. - If selling-group members liquidate into the stabilizing bid, they may be required to return the concession they were originally paid.

Under FINRA rules, if a member firm receives an order to buy a new equity issue on behalf of an undisclosed principal from a bank, the member must:

- Obtain a representation from the bank that the purchaser is not restricted. - It is not necessary to determine the identity and business affiliations of the purchaser.

Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does NOT exceed what amount?

10%

Securities offered under Regulation S in an exempt transaction (US issuers offering securities offshore to non-US residents) must be held for _____________ before they can be resold in the United States.

12 months (1 year)

For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is _____ days. For non-listed and non-Nasdaq securities the period is _____ days. If the new issue will be specifically quoted on the OTCBB or the electronic OTC Pink, the period is _____ days.

25; 40; 90

An affiliate or insider holding unregistered shares can sell under Rule 144 how many times a year.

4 times a year

Under Rule 144, Form 144 need not be filed if ______________ or fewer shares are sold and the dollar amount is _______________ or less. This de minimis rule applies to sales in any 90-day period.

5,000; $50,000

If corporate insiders sell their stock at a profit, they must do so after having held the stock for at least _______ months. This is termed the short swing profit rule. If they sell at a profit without having met the holding period requirement, any profit earned must be disgorged to the company.

6

An affiliate of an issuer sells shares using a Form 144. This form is valid for how many days?

90

Which of the following actions of XYZ Corporation would raise additional capital? A) Issue callable preferred stock. B) Declare a stock dividend. C) Make a rights offering. D) Encourage convertible bondholders to convert to common stock.

A) Issue callable preferred stock and C) Make a rights offering. Issuing new stock either through an underwriting or a rights offering allows a corporation to raise capital. Stock dividends represent more shares given to existing shareholders, but no money is raised. Conversion results in the exchange of one security for another and no money is raised.

A company is offering a private placement with the intent of selling shares to nonaccredited investors up to the 35 allowed for in Regulation D. Which of the following is TRUE? A) The offering may not be advertised B) Anyone may be solicited C) While the offering can be advertised to anyone, only accredited investors could be solicited to purchase shares D) The offering can be advertised to all except the 35 nonaccredited investors

A) The offering may not be advertised Advertising private placements is considered a solicitation to sell. If the securities are advertised, all purchasers must be accredited or the company must reasonably believe they are. In this instance, the intent is to sell to up to 35 allowable nonaccredited investors and with that intent clearly stated the offering could not be advertised to anyone.

All of the following are nonexempt securities EXCEPT a: A) fixed annuity. B) U.S. government bond mutual fund share. C) variable annuity unit. D) municipal unit investment trust share.

A) fixed annuity. A fixed annuity is an insurance product exempt from registration with the SEC. Variable annuities, which carry investment risk, are nonexempt securities under the Securities Act of 1933 and must be registered before public sale. Similarly, unit trusts and mutual funds are nonexempt even though the underlying securities may be exempt, such as municipals and U.S. government securities.

Under SEC Rule 134, a tombstone advertisement includes all of the following EXCEPT: A) net proceeds to the issuer. B) number of shares to be sold. C) the public offering price. D) names of the syndicate members.

A) net proceeds to the issuer. Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.

Before the filing of a registration statement for a new issue, an investment representative may NOT: 1) solicit indications of interest for the security. 2) solicit orders. 3) confirm the sale of the security to a customer.

All of the above Before the registration statement is filed, no sale, solicitations, or indications of interest in the issue may occur.

Alpha is the managing underwriter for a new issue of 1 million shares of ABC common. While Alpha has agreed to sell as much stock as possible in the market, ABC will cancel the offering if any portion of the stock remains unsold. This arrangement is known as what type of underwriting?

All-or-none

What are exempt from the registration provisions of the 1933 Act?

Government securities, money-market instruments, and intrastate offerings are exempt from the registration provisions of the 1933 Act. - Any interest in a railroad equipment trust certificate. - State and Municipal bonds. - U.S. government securities. - Commercial paper maturing in 270 days or less. - Fixed annuities However, Corporate bonds and UITs are non-exempt securities and are subject to prospectus delivery requirements.

Regarding the sale of a new issue, a customer becomes a restricted person if he is: A) a private investigator collecting information on one of the issuing firm's officers. B) a salesperson who works for the issuing firm's underwriter. C) the grandfather of an associated person of a member firm. D) a salesperson who works for a supplier of the issuing corporation.

B) a salesperson who works for the issuing firm's underwriter. Restricted persons include FINRA member firms and their associated persons, plus immediate family members.

A customer must present a signed representation letter stating that he is not a restricted purchaser prior to buying a new issue of: A) municipal bonds. B) U.S. government bonds. C) common stock. D) corporate bonds.

C) common stock. New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Prior to buying an IPO, a customer must present a representation letter stating they are not a restricted person.

An issuer may direct sales of a new issue to all of the following EXCEPT: A) officers of the issuer. B) officers of its largest customer. C) officers of the managing underwriter. D) officers of its largest supplier.

C) officers of the managing underwriter. Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted.

_____________ are prohibited from buying a new equity issue at the public offering price.

Member firms and employees of members (registered and nonregistered)

A registered representative opens a new account for an investment club. His spouse is a member of the club and owns 15% of the club's assets. Can the registered representative sell shares of a common stock IPO to the investment club?

NO: Rules prohibit member firms from selling common stock IPOs to restricted persons. Under the rules the account would not be restricted if the assets owned by the spouse composed less than 10% of the club's assets. Because the registered representative's spouse is a member of the investment club and owns more than 10% of the club's assets, the registered representative cannot sell shares of the IPO to the club.

Are new issue of stock marked up or down?

No, only in secondary market.

Where must the SEC's no-approval clause appear in a prospectus?

On the cover.

Municipal securities underwriting

The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. "Cooling-off period", "registration period", and "effective date" are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. Municipal issues are exempt from these registration requirements.

A purchaser of newly issued securities must receive a prospectus no later than __________________________. However, any solicitation must be _________________________________.

by receipt of the purchase confirmation; preceded or accompanied by a prospectus

Rules regarding restricted persons generally prohibit member firms from selling new issue securities to employees of member firms including their own. However, when member firms sell their own securities, rules regarding restricted persons do not apply to the issuer's own employees but still apply to the employees of other full-service member firms.

merp.

As restricted persons officers of broker/dealer firms or other institutional investors are prohibited from purchasing a ______________.

new issue

In an intrastate offering, a purchaser of the issue may not sell the securities to a resident of another state for at least _______ months from the end of the distribution.

nine

Indications of interest may be taken when the issue is in registration. During the registration period, only the ________________ may be sent to clients.

preliminary prospectus

During the cooling-off period, the SEC reviews registration statements and can issue ____________ if the registration is not complete or was not filed properly.

stop orders

The letter of intent initiates the underwriting process and is signed by ____________ and ________________.

the issuer and managing underwriter

Regulation S Rule 144A Regulation D Rule 145 Rule 147

- Regulation S: a type of exempt transaction allowed by the SEC, permits US issuers to offer securities offshore to non-US residents only, without being registered with the SEC. - Rule 144A: Regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs). - Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued nor the number of accredited investors who may purchase the shares. - Rule 145 exempts (from registration) additional shares resulting from stock splits or stock dividends. Stock issued in connection with an acquisition must be registered, as must stock in an IPO. - Rule 147: One of the provisions of Rule 147 states that at least 80% of an issuer's revenues must be derived from the company's home state. - Rule 147 stock cannot be sold to a nonresident of the state for a period of nine months from the last date of sale by the issuer.

Rule 144

- Rule 144: does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities. - Stock sold through a 144 sale is considered registered stock after the sale. When required to be filed by affiliates or insiders, Form 144 must be filed with the SEC on or before the date of sale. After holding the stock fully paid for 6 months, nonaffiliates may sell unrestricted but affiliates are subject to the volume restrictions of Rule 144. - Rule 144 (sale of restricted or control stock) allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume (whichever is greater), every 90 days.

Reg. A+

- Under Reg. A+ intended to facilitate small to medium size companies raise investment capital, venture capital firms, private equity funds and hedge funds are specifically excluded. -Tier 1 of Regulation A+ allows small to medium sized companies to raise up to a maximum of $20 million in a 12-month period - While both tiers under Regulation A+ are open to the public with general solicitation permitted, investors wanting to invest in Tier 2 securities offerings must be "qualified" not accredited. Tier 1 offerings have no investment limits for investors but tier 2 offerings do. The maximum investment allowed for a Tier 2 offering is the greater of 10% of the investors net worth or 10% of their net income per offering. - Under Reg. A+ a Tier 2 securities offering allows small to medium sized companies raise up to $50 million.

SEC Rule 145 requires a corporation to receive approval of its stockholders for which events?

- the offer of securities in one company for the surrender of securities in another. - the exchange of one company's assets for another company's securities. SEC Rule 145 protects shareholders by requiring their approval for a merger, consolidation, acquisition, reclassification of securities, or the transfer of corporate assets. The rule does not pertain to a stock split or stock dividends.

To which of the following firms could a member grant concessions or other allowances?

1) Another member firm. 2) A foreign nonmember broker/dealer ineligible for FINRA membership.

What must be part of a registration statement?

1) a prospectus. 2) the signatures of CEO, CFO, CAO, and majority of the board. 3) a statement as to whether the company is involved in any legal proceedings. 4) identification of investors who own 10% or more of the company.

The Act of 1934

1) secondary market trading. 2) registration of broker/dealers. 3) the extension of credit on purchase of securities.

Shelf Registration

A shelf registration with the SEC allows an issuer to sell the registered securities for up to 3 years from the effective date. Allows an issuer whose stock is already publicly traded to structure the timing of sales for an additional issue.

Which of the following investors would be exempt from filing form 144 when selling securities they own? A) An affiliated person selling unregistered shares. B) An investor selling shares acquired in a Regulation D private placement. C) An employee of the company selling registered shares purchased in the open market. D) An employee of the company selling unregistered shares.

C) An employee of the company selling registered shares purchased in the open market. Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply.

A customer owns 1,000 shares of ABC corporation. Which of the following actions on the part of ABC would dilute her equity? A) Registered secondary offering of shares. B) Payment of a 10% stock dividend. C) Registered primary offering of shares. D) 2-1 stock split.

C) Registered primary offering of shares. An additional primary issue of shares would dilute a present shareholder's ownership, unless she personally purchases a portion of the new shares (as in a rights offering). In a secondary offering, ownership of existing outstanding shares is simply changing hands. With a stock dividend or stock split, percent equity does not change.

If an officer of a bank wants to purchase new issues, which of the following statements is TRUE? A) He may purchase a new issue because anyone is allowed to purchase new issues. B) He may purchase a new issue because no banking rules prohibit it. C) He may not purchase a new issue unless the amount he wishes to purchase is considered small in relation to the total offering. D) He may not purchase a new issue because he is considered a restricted person.

D) He may not purchase a new issue because he is considered a restricted person. Under the rules regarding the purchase of new issues bank officers would be characterized as restricted persons. They may not, therefore, purchase new issues.

Private placements A) can only be advertised when 35 or fewer of the investors are nonaccredited B) may never be advertised under any circumstance C) may be advertised under all circumstances D) may be advertised if all of those solicited are accredited investors

D) may be advertised if all of those solicited are accredited investors

All of the following statements regarding corporate insiders are true EXCEPT A) only public information may be used to make transactions B) short selling of the company's stock is prohibited C) reports of changes in holdings must be filed with the SEC D) purchases may not be made through the exercise of options

D) purchases may not be made through the exercise of options

All of the following may occur during the mandatory 20-day cooling-off period EXCEPT: A) forwarding a preliminary prospectus to a customer. B) the performance of due diligence by the underwriters. C) publishing a tombstone ad. D) soliciting transactions for the security.

D) soliciting transactions for the security. During the 20-day cooling-off period, only unsolicited requests for information may be honored. Soliciting sales is prohibited.

Who is a control person?

If there is a 10% or more ownership interest among members of an immediate family, then all members are considered control persons (affiliates) subject to Rule 144.

Which act requires corporate public issuers to send annual reports to their shareholders?

Securities Exchange Act of 1934 The Securities Exchange Act of 1934 requires public issuers to inform the shareholders of their operations at least on an annual basis. Said reports should include a statement of the company's financial condition (i.e., balance sheet and income statements). The act further requires public companies to provide proxies to all shareholders regarding any action that requires a vote of the shares outstanding.

Underwriters and selling group members violate rules regarding sales of new equity issues to restricted persons when they do what?

Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their supported family members. Firms selling only investment company products and/or direct participation programs, and their employees, are exempt from these rules. Cannot sell to brokers and dealers outside the selling group who position the securities for later resale at higher prices.

What makes up the spread?

The spread is the sum of the manager's fee, the underwriting fee, and the selling concession.

An affiliate holding restricted stock wishes to sell shares under Rule 144. He has held the shares, fully paid, for 6 months, and the issuer has 2.4 million outstanding shares. Form 144 is filed on Monday, April 10, and the average weekly trading volume for the last four weeks is 24,500 shares per week. The maximum number of shares the customer can sell with this filing is what?

Under Rule 144, after holding the fully paid restricted shares for 6 months, the affiliate can begin selling. For affiliates, volume restrictions always apply. They can sell the greater of 1% of the total shares outstanding or the weekly average of the prior 4 weeks' trading volume (the 4 weeks preceding the Form 144 filing). In this case, 1% of the total shares outstanding is 24,000 (1% × 2.4 million). The weekly average of the prior 4 weeks' trading volume is 24,500. Therefore, the most the affiliate can sell during the 90 days following the Form 144 filing is 24,500 shares.

Who are considered restricted persons?

While immediate family members are restricted, aunts, uncles and grandparents are not considered to be immediate family members under the FINRA rule.