New Issues - Corporate Underwritings Practice Questions

All of the following statements are true regarding the use of a "red herring" prior to the effective date of a securities registration EXCEPT: A. it includes the issue's final Public Offering Price B. it is used to help publicize the issue, without legally being considered an "advertisement" C. it is used to solicit indications of interest D. its use ends when the Final Prospectus is available

A: it includes the issue's final Public Offering Price (The "red herring" is used during the 20- day cooling off period to solicit indications of interest in the issue. This helps the underwriters gauge public interest in the issue; and helps the underwriters to set the final Public Offering Price. The "red herring" is not legally considered to be an offer or advertisement of the issue - these are prohibited activities under the Securities Act of 1933. However, it does help publicize the issue without running afoul of the law. The red herring typically does not contain the Public Offering Price, since this is not set until just prior to the effective date. Once registration is effective, the use of the red herring stops. Now, the issue is offered and publicized through the Final Prospectus that is now available.)

In a best efforts underwriting, the underwriter is acting as a(n):

Agent (In a best efforts underwriting, the underwriter promises to use his or her best efforts to sell the issue but takes no financial liability. Thus, this is an agency relationship. In contrast, firm commitment underwritings are principal relationships.)

Once registration is effective for a non-exempt new issue, customers that previously received a preliminary prospectus during the 20-day cooling off period are: A. automatically confirmed with a purchase of the issue B. contacted by the underwriter to see if they wish to purchase the issue C. obligated to buy an amount of the issue determined by the underwriter D. permitted to make a competitive bid for the issue

B: Contacted by the underwriter to see if they wish to purchase the issue (Once registration is effective, customers, who previously received a preliminary prospectus during the 20-day cooling off period, may be contacted by the underwriter to see if they wish to purchase the issue)

The U.S. Government orders a company that has 80% of the computer software market to split itself into 4 separate operating companies, that have the right to compete with each other. This is a:

Break up (A "break up" is a government ordered splitting up of a company; usually as a result of the company engaging in monopolistic practices. For example, in 1983, the ATT was "broken up" into ATT and the 7 "Baby Bells" under pressure from the U.S. Government.)

All of the following information would be found in a new issue "tombstone" announcement EXCEPT the: A. names of the underwriters B. aggregate offering price C. net proceeds to the issuer D. type of security offered

C: Net proceeds to the issuer (The information in the Tombstone is limited to: Name of issuer; names of underwriters; type of security; public offering price of security; aggregate public offering price of issue; nature of the issuer's business.)

Which of the following CANNOT be a stabilizing bid for a new issue that has a Public Offering Price of $20 per share? A. $19.00 B. $19.88 C. $20.00 D. $20.15

D: $20.15 (Stabilizing bids can only be entered at or below the public offering price, never above.)

During the period when a new issue is "in registration," which of the following are permitted? I Obtaining an indication of interest from a customer II Accepting payment for the issue III Distributing a preliminary prospectus IV Soliciting an order for the issue

I and III ( When an issue is "in registration," it is in the 20-day cooling off period. Registration is not yet "effective." During the cooling off period, a red herring preliminary prospectus may be distributed to obtain indications of interest from customers. These are not orders for the issue. Taking orders, soliciting orders to buy, accepting a check for the issue and recommending the purchase of the issue are all prohibited. Once the registration is effective, these items are allowed as long as the customer is making his decision from the final prospectus now available.)

Immediate family members of employees of member firms that are prohibited from buying new issue offerings under FINRA's IPO rules include: I Spouses of member firm employees II Siblings of member firm employees III Parents of member firm employees IV Children of member firm employees

I, II, III, and IV (FINRA prohibits the purchase of equity IPOs (Initial Public Offerings) by industry "insiders." The list of prohibited purchasers includes FINRA member firms for their own accounts, officers and employees of member firms (and their immediate family members). An immediate family member is anyone that is 1-step removed from the officer or employee of the member firm. This includes parents, children, spouses and siblings. It does not include grandchildren, grandparents, uncles, aunts, cousins, etc. - but note that anyone who is under the financial control of an employee of a FINRA member firm is also restricted)

When selecting syndicate members for a new corporate bond offering, the managing underwriter will consider the potential member's: I financial capability to handle its portion of the offering II track record in past underwritings III geographic location IV back-office capability

I, II, and III (When selecting underwriters in a corporate offering, the manager will consider the track record of that firm in previous underwritings; whether the firm has sufficient capital to handle its portion of the offering; whether the firm has participated in underwritings with that manager in the past and; the geographic location of the syndicate members, so that the broadest customer base can be reached.)

Which of the following are types of underwriting commitments? I Firm II Stand-By III Fill or Kill IV Best Efforts

I, II, and IV (The types of underwriting commitments are: Firm commitment (underwriter acts as principal), Best Efforts, Best Efforts-All or None (underwriter acts as agent in both), and Stand-By (underwriter acts as principal to buy unsubscribed shares in a rights offering from the issuer). Fill or Kill is a type of order accepted by various exchanges.)

A preliminary prospectus: I contains the public offering price of the issue II does not contain the public offering price of the issue III contains the financial statements of the issuer IV does not contain the financial statements of the issuer

II and III (The preliminary prospectus contains the financial statements of the issuer. It does not contain the Public Offering Price - this is not set by the underwriters until just before the offering is made. Thus, it is found only in the Final Prospectus.)

Which of the following statements are TRUE about the activities of an investment banker? I The investment banker can accept time deposits from customers who buy new issue offerings II The investment banker can either act as an agent or principal in an underwriting III The investment banker analyzes the prospects for the industry in which the issuer operates before handling the offering IV The investment banker helps the issuer structure the offering, advising on the type and amount of securities to be sold

II, III, and IV (Investment bankers help structure new securities offerings; decide the pricing on the issue based on market conditions; and act as either principals (firm commitment) or agents (best efforts), handling the offering.)

Which of the following statements are TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering? I The indication is binding on the customer II The indication is binding on the underwriter III The indication may be changed or canceled by the customer IV The indication may be changed or canceled by the underwriter

III and IV ( An indication of interest is taken during the 20 day cooling off period before a new issue's registration is effective. The issue may never "go effective" and the indication can be canceled by the underwriter. Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or change his indication. These are not binding because the issue cannot be legally "offered or sold" until the effective date.)

The issuance of junk bonds, with the proceeds used to make a tender offer for a publicly held company, is known as a:

Leveraged buy out (In a leveraged buy out, an investor group identifies a publicly held company whose shares are underpriced; or one that it believes can be managed more effectively; and arranges for financing (usually from a commercial bank or by issuing junk bonds) to make a tender offer for all of the company's outstanding shares. Given that the existing shareholders tender their shares, the company now is owned by the investor group; who installs a management team that will run the company more efficiently; and who will sell off underperforming corporate assets; using the proceeds to pay off the loan. At a later date, after the company is "cleaned up," the company may be resold to the public in a managed underwriting.)

An offering that is a first issue is what kind of distribution?

Primary distribution (For companies in which there is worldwide interest, it is common for underwriters to sell the issue in both the U.S. market and foreign markets. Since this is the first issue of these securities, this is a primary distribution. Secondary distributions are "managed offerings" of shares that are already issued and outstanding - such as the offer through underwriters of a large block of shares held by a founding stockholder. This cannot be a private placement, since the offering has been registered and is being sold under a prospectus.)

In a firm commitment underwriting, the underwriter is acting as a(n):

Principal (In a firm commitment underwriting, the underwriter buys the issue outright from the issuer, with the intention of reselling the issue to the public at a profit. Thus, the underwriter is a principal in the transaction, and is taking full financial liability.)

Which is a type of firm commitment underwriting?: A. all or none B. stand-by C. fill or kill D. best efforts

Stand-by (Stand-by underwritings are used in connection with rights offerings. If all of the new shares are not subscribed by the existing shareholders, the issuer has an underwriter stand-by on a firm commitment basis to purchase any unsubscribed shares. Thus, the issuer is assured of selling all of the new shares. Best efforts and all or none are types of underwritings where the underwriter is not liable for any unsold shares. Fill or kill is a type of order that is submitted to exchange floors.)

An ice cream manufacturer buys a dairy farm. This is a:

Vertical merger (A vertical merger is where companies in 2 different (but usually related) industries merge, for some business benefit. In this case, the ice cream manufacturer believes that if it owns its own dairy farm, it can make the milk used in ice cream production more cheaply than it can purchase it.)