S7-5: Investment Banking
Under the ______ Act, Research Analysts are able to publish research reports immediately before and after the IPO "quiet period" without the research reports being considered "offers by the SEC"
Jobs Act
Under the _________ Act, the issuer or a BD representing an issuer may contact potential investors before a registration statement is filed with the SEC and engage in oral or written communications with Qualified Institutional Buyers (QIBs) and Accredited Investors (AIs) to ascertain investor interest.
Jobs Act
Do Selling Group members have a financial commitment to a new issue?
No (If they do not sell the shares then they would just give the shares back to the Selling Syndicate member who recruited them)
Do Tombstone ads need to be filed with FINRA or the SEC prior to publication?
No (SEC and Finra does have guidelines for these though)
Can primary distribution shares be purchased on margin?
No (the company wants their money)
Do syndicate members need to abide by the "Quiet Period" if it is the IPO of an Emerging Growth Company?
No, no quiet period needed as per the JOBS Act
Does the SEC ever approve or disapprove the registration of a new issue?
No, they can only reject the registration
What is the primary purpose of an Investment Banker?
Raise Capital for the Corporations that hire the ( Can also assist with mergers and acquisitions )
Investors receive a ______________ once the registration with the SEC is effective.
prospectus
The final prospectus must be receive by all customers who purchase the new issue not later than with their purchase _________________ .
purchase confirmation
What document must include the date of the prospectus, a statement as to possible stabilizing transactions, any penalty clauses, and a statement that the SEC neither approves nor disapproves of the securities?
the Final Prospectus
When talking about new issues, who is responsible for running the books and keeping the syndicate records?
the Managing Underwriter
Who files the registration statement with the SEC for a new issue?
the Managing Underwriter
Who is responsible for stabilizing the new issue if needed?
the Managing Underwriter
The _____________ Statement must contain a full and fair disclosure of all relevant facts of the company and the offering. It describes the issuers business and the use of the proceeds.
the Registration Statement
Who allocates the new issue of stock to each syndicate group member?
the Syndicate Manager
Who would make a stabilizing purchase in the secondary market?
the Syndicate Manager (Stabilization can also be called Pegging the Price)
Who gets paid a "Reallowance" during a new issue?
the outside BD's (Not Selling Syndicate or Syndicate Group Members)
What are the two times a restricted person may may purchase new issue shares?
to maintain there proportional ownership and if they are making "Stand-by purchases" due to a lack of interest in the new issue (the Stand-by agreement must be disclosed in the prospectus and there is an agreement about this in writing)
What is the imaginary barrier called that separates the investment banking department, research department, and trading/market making departments? The purpose of which is to prevent material, non-public information from being shared between departments within a B-D.
"Chinese Wall"
The "Quiet Period" is when a member may not publish research reports regarding a subject company for which the member acted as manager or co-manager of an IPO for _____ calendar days following the date of the offering or _____ calendar days following the date of a secondary offering
10 days - 3 days
Under FINRA Rule 5130, a member firm may not sell a new issue of common stock to any account unless within the last _____ months it has in good faith obtained verification that the account is eligible to purchase the new issue.
12 months (need to verify that this is not a restricted account or restricted person)
The ______ day cooling period is the minimum waiting period required by the SEC before the issue can become "effective".
20 day cooling period
How many days does an issuer and syndicate need to wait for the rejection of a new issue filing with the SEC?
20 days
If a restricted person obtains shares of a new issue through Stand-by purchases, how long do they need to wait before they are able to sell those securities?
3 months
A BD that is part of the distribution of a new issue cannot allow their customers to buy that stock on margin for _______ days
30 days
The prospectus deliver requirements continue to apply to BDs that participate in the distribution of a new issue and then become market-makers in the issue (acting as principals) for _____ days (for most offerings) from the closing date of the syndicate
90 days
What is it called when there is a Redistribution of a large block of securities held by a few owners? (Insider selling or Institutional selling)
A Secondary Distribution
What type of Underwriting Agreement causes the entire issue to be canceled unless it can be completely sold to the public?
All or None Underwriting Agreement
What type of Underwriting Agreement is the most common?
Best Efforts (when the underwriting group acts as an agent in trying to distribute the new issue to the public, they do not buy the shares from the issuer so they would not be held accountable if the shares are not sold and the un-sold shares would be sent back to the issuer)
What bidding style is used for Debt issues?
Competitive Bidding
The ________ _______________ meeting is held by the issuer during the 20 day cooling period with the investment banking team, and they review the offering, deficiency letters, and the final prospectus
Due Diligence Meeting
When talking about Agreement Among Underwriters, how is an Eastern Agreement signed?
Eastern Agreements are signed separately and jointly so these is undivided liability
What are the two styles of Agreement Among Underwriters that can be used for New Issues?
Eastern and Western
FINRA Rule ________ covers restrictions of the purchase and sale of Equity IPOs by "restricted persons" and their immediate family members
FINRA Rule 5130
A ________ Commitment Underwriting Agreement is when the syndicate bus the entire issue and resells it to the public.
Firm Commitment
What type of Underwriting Agreement is the most risky for the Underwriters?
Firm Commitment because the underwriters are buying the shares and putting them into their own inventory
A ____________________ clause is an escape clause that allows the underwriters to be released from their commitments if a material adverse development affects the securities markets .
Market-out
What bidding style is used for Equity issues?
Negotiated Bidding
The Managing Underwriter of a new issue is generally determined through ______________ Bidding (Equity Securities) or __________ Bidding (Bonds)
Negotiated Bidding or Competitive Bidding
When is the IPO price determined?
Night before or the morning of the distribution
Can Personal working in a BD's research department be supervised or compensated by the firm's investment banking department?
No
Do Selling Group members help set an IPO price?
No
During the "20-day cooling off" period can a RR send a research report along with a Red Herring?
No
Is the IPO price determined at the Due Diligence Meeting?
No
Under FINRA Rule 5130, does immediate Family Members include Aunts, Uncles, and Grandparents?
No
What is the document called that is the initial version of the prospectus included with the registration statement filed with the SEC. It is used to solicit indications of buyer interest in the distribution during the 20-day cooling period prior to the security becoming "effective".
Red Herring or Preliminary Prospectus
During a New Issue, the Underwriter will use the size of the issue, type of security involved, financial strength of the issuer, and the type of commitment made by the investment banker to determine an appropriate _____________ .
Spread
A ________-___ Underwriting Agreement is when the underwriter agrees to purchase and distribute any part of an issue not purchased by stockholders who received preemptive rights.
Stand-by (only used when there is a rights offering involved)
Who maintains the order book for an IPO?
Syndicate Group / Syndicate Desk
What is the group of BDs called who agree to handle the distribution of new issue of common stock (equity issue) by the issuer (the company) to the investing public?
Syndicate Group / Syndicate Desk (They do research, advise on the required filing s with regulatory agencies, maintains a record of orders)
Who creates the Selling Syndicate for a new issue?
The Managing Underwriter
Who receives Underwriters Compensation or Retention during a new issue?
The Selling Syndicate Members
Who receives Selling Concession pay during a new issue?
The Syndicate Group members
Who would recruit Selling Group BDs for a new issue?
The Syndicate Members
How does the Syndicate Group get paid in during a new issue?
The Syndicate makes their money from the spread between the Public Offering Price and the issuer proceeds. ex. The shares are publicly sold at $20 and the issuer received $18 for the sale, the syndicate member would received a $2 profit
When talking about Agreement Among Underwriters, how is an Western Agreement signed?
Western Agreements are signed separately, not jointly so there is divided liability (everyman for themselves like in the old west)
Can secondary distribution shares be purchased on margin?
Yes
Do Selling Syndicate members have a financial commitment to a new issue?
Yes
During the 20 day cooling period is the selling group formed?
Yes
Will Tombstone ads show the IPO price?
Yes
During the 20 day cooling period will the the Syndicate Manager Blue Sky the issue?
Yes (the issue is qualified by the underwriters counsel in each state in which it will be sold)
If Morgan Stanley is going public and it is the 20 day cooling period, can they accept unsolicited orders of the new issue?
Yes, if the BD is going public then they can
How long must a customer wait after the closing of a syndicate before purchasing the bonds on margin? [A]30 days [B]60 days [C]90 days [D]120 days
[A]30 days
Which of the following is permissible under the Securities Act of 1933? [A]Disclosing the pricing formula for investment company shares in the preliminary prospectus. [B]Taking an order from a customer to buy a new issue of securities prior to the effective date of the registration statement. [C]Knowingly making a material misstatement in the final prospectus. [D]Giving a potential new client an out of date prospectus because it better indicates the funds long term performance record.
[A]Disclosing the pricing formula for investment company shares in the preliminary prospectus. EXPLANATION Choice "a" would be considered full and fair disclosure and would be acceptable. All other choices are either false or misleading and would not be appropriate.
A large cap company has filed a registration statement with the SEC for a new securities offering. The registration has not yet become effective. What can the RR do at this time? [A]Get indications of interest from potential buyers. [B]Take subscription payments from investors. [C]Send research reports to interested parties. [D]Send highlights taken from the preliminary prospectus to investors.
[A]Get indications of interest from potential buyers. EXPLANATION An RR may only take indications of interest and send red herrings to potential purchasers as the registration has been filed but not yet effective. No payments can be accepted. No research reports can be sent on the issuer Cannot take and send excerpts or highlights from the preliminary prospectus.
According to FINRA Rules, which of the following is NOT considered an "immediate family" member of a registered representative? [A]The RR's aunt on his mother's side [B]The RR's adopted son [C]The RR's mother and father [D]The RR's mother-in-law and father-in-law
[A]The RR's aunt on his mother's side EXPLANATION Aunts, uncles, and grandparents are not considered to be immediate family members under FINRA rules. The RR's parents are considered immediate family, and the immediate family of the spouse of the RR is also considered the RR's immediate family (mother and father-in-law, step-children, etc.). Also included in the definition of immediate family is any relative who is financially supported by the RR. This would include adopted children.
A preliminary prospectus would include which of the following? [A]The manner in which the proceeds of the issue will be used. [B]The stated offering price of the new issue. [C]The date on which securities will be available for sale. [D]A statement that confirms a copy of the prospectus has been provided to FINRA.
[A]The manner in which the proceeds of the issue will be used. EXPLANATION A preliminary prospectus will include a brief history of the management of the company as well as how the proceeds of the issue are expected to be used. A preliminary prospectus may NOT include the stated offering price of the security. It may include a price range, but may not have a stated price. The preliminary prospectus is "preliminary" because the issuer and underwriter do not yet know when the securities will be available, so disclosing the date on which securities will be available is not possible. Also, there is no requirement to include a statement that the prospectus has been provided to FINRA.
A preliminary prospectus must be sent to a client: [A]When the client indicates an interest in a new issue [B]When the client buys shares of a new issue [C]When a FINRA firm sends a "buy" recommendation to a client about a new issue [D]After the registration of a new issue is effective
[A]When the client indicates an interest in a new issue EXPLANATION A preliminary prospectus is the first document released by an underwriter of a new issue to prospective investors who indicate an interest in the issue.
An investment banker can engage in all of the following activities EXCEPT: [A]Underwrite a security issue [B]Accept time and demand deposits [C]Sell large blocks of stock to institutions [D]Assist the issuer in preparing the prospectus and in the public distribution of shares
[B]Accept time and demand deposits EXPLANATION Investment bankers handle the distribution of new issues to the public. Commercial banks accept time and demand deposits.
SEC regulations permit an underwriter to distribute shares of a new offering: [A]On the due diligence date. [B]On the effective date. [C]On the filing date. [D]During the cooling off period.
[B]On the effective date. EXPLANATION In an underwriting, the filing is made with the SEC, then there is a 20 day cooling off period during which time the SEC ascertains the company has made a complete filing. Before the issue is to become effective, a due diligence meeting is held by the syndicate. It is not until the effective date that any shares can be distributed.
All of the following are required to be included in a preliminary prospectus according to the 1933 Act EXCEPT: [A]The financial status and history of the company [B]The final offering price [C]The purpose for which the funds that are being raised will be used [D]A written statement in red on the left border of a preliminary prospectus (Red herring) that states that the prospectus may be subject to changes
[B]The final offering price EXPLANATION The Final Offering price will be in the final prospectus but would not be in the preliminary prospectus because it has not yet been determined at the time the preliminary prospectus is distributed.
An associated person at a member firm is [A]generally prohibited from participation in the stock market. [B]generally prohibited from participation in purchasing shares during an initial public offering. [C]permitted to use information that has not yet been made public to assist in the investment decisions for the benefit of clients. [D]permitted to use information about large upcoming customer trades in order to enter trades in their own account or the accounts of friends and family prior to the large order.
[B]generally prohibited from participation in purchasing shares during an initial public offering. EXPLANATION Associated persons are generally prohibited from participation in purchasing shares during an initial public offering (IPO). Associated persons are permitted to participate in the stock market. Associated persons are NOT permitted to use non-public information for investment decisions or trade ahead of large customer orders, regardless of who benefits.
An offering of a new issue of securities purchased from the issuer and offered to the public is a: [A]Refunding [B]Secondary distribution [C]Primary distribution [D]Auction
[C]Primary distribution EXPLANATION "Primary" always means NEW issue.
A company has already "gone public" with an IPO, but now has a need for additional capital and decides to offer additional shares to the public. For purposes of the issue of the new shares this is considered a: [A]violation of SEC regulations [B]private market offering [C]primary market offering [D]restricted market offering
[C]primary market offering EXPLANATION Any time that "new" shares are being sold to the public, it is considered a primary market offering. The first time the company offers shares it is called an "IPO - Initial Public Offering" but when they offer other "new" shares in the future it is still "primary" shares, just not "initial" primary shares. This scenario would not be a violation of SEC rules, as long as it is done according to regulations. It is not a private or restricted market offering, because shares are being sold to the public.
Which of the following factors affect the offering price of a new issue? I. The estimated dividend per share II. Comparing the new issue with comparable issues in the market III. The estimated earnings per share IV. The current appeal and outlook for the new issue's industry [A]I and II only [B]III and IV only [C]I, II, and III only [D]I, II, III, and IV
[D]I, II, III, and IV EXPLANATION All four choices are used in determining the public offering price on a new issue.
A Registered Representative thoroughly reads a preliminary prospectus and then writes a brief review of the prospectus which he wants to send to clients he believes are suitable. [A]This may only be done with the Branch Office manager's approval. [B]This may be done without restriction. [C]This may only be done with the approval of a supervisory analyst. [D]This may not be done under any circumstances.
[D]This may not be done under any circumstances. EXPLANATION Preliminary prospectus' must be sent to clients without any attachment, comment or review.
The SEC, in reviewing prospectuses and registration statements, [A]passes on the merits of the particular security covered by the registration statement. [B]guarantees the adequacy of the disclosures made in a prospectus. [C]guarantees the accuracy of the disclosures made in a prospectus. [D]does not approve securities registered with it and offered for sale.
[D]does not approve securities registered with it and offered for sale. EXPLANATION The SEC does not assume responsibility for any security issue in any way.
What is the only form of advertising allowed to announce a new issue?
a Tombstone add
What type of Underwriting Agreement always has an Escrow account associated with it?
an All or None Underwriting Agreement
Investment Bankers are firms hired by _________________ to help them with various financing and corporate related matters.
corporations
