Series 7 - 2.2 New Issues

Final prospectus delivery

-1st registered offering of the company - the Final Prospectus to all initial purchasers for the 90-day period following the effective date. -Company already has registered shares outstanding and is meeting SEC reporting and disclosure requirement - the Final Prospectus must be sent for the 40-day period following the effective date for issuers whose securities are not traded on a stock exchange and which are not listed on NASDAQ. -Companies that have obtained either an exchange or NASDAQ listing - the Final Prospectus must be sent for the 25 days for issuers whose securities are traded on a stock exchange or are listed on NASDAQ.

Federal Agency Security Underwritings

-These agencies sell their debt through negotiated offerings. -Agencies include: Federal National Mortgage Association Government National Mortgage Association Federal Home Loan Bank Federal Home Mortgage Corporation Federal Farm Credit Banks -Selling syndicate is same firms for each issue. -The coupon rate is set based on the pre-sale orders and the issue is priced very close to par. -Any unsold portion is purchased by the selling group.

US Government Auctions

-Weekly - 4, 13, and 26 week T-Bills -Every 4 weeks - 52 week T-Bill -Monthly - T-Notes, Bonds, TIPS Settlement is on Thursday for T-Bill auctions and the 15th of the month for the other auctions.

Persons restricted from buying IPOs

1. FINRA member firms, officers, employees, and immediate family. 2. Fiduciaries (lawyers, accountants, financial consultants) to FINRA member firms. 3. Portfolio managers who wish to buy for their personal accounts. 4. Passive owners of broker dealers. A new account that wants to buy an IPO of equity securities must sign a statement that the customer does not fall into the restricted categories. This is required during the 12 month window of time preceding the 1st IPO purchase. Thereafter, the member firm must have the customer affirm, annually, that he or she is not restricted under the rule where the customer signature is not required.

Selling concession

1. In a negotiated underwriting, that portion of the underwriting spread which the managing underwriter, with the agreement of syndicate members, concedes or gives to the selling group members for each new issue security they sell directly to the public. 2. In a competitive bid municipal bond underwriting, that portion of the total takedown on a new issue municipal bond that a selling group member receives for each bond it sells to the public.

Priority of accepting Muni orders

1. Pre-Sale Net 2. Group Net 3. Designated 4. Member Takedown

Non-competitive bid

A bid that can be placed by individuals and secondary dealers at the weekly Treasury auctions, this type of bid does not specify a bid yield. The non-competitive bids are reserved out of the auction and are filled at the average yield of the winning competitive bids. Thus, non-competitive bids are assured to being filled.

Syndicate member

A broker-dealer who signs a syndicate agreement with the syndicate manager, and by doing so, agrees to share in the selling responsibility and liability for a new issue offering being underwritten by the syndicate.

Spin off

A corporation that has a subsidiary that it feels will perform better as in independent company, may spin-off that business by giving its existing shareholders the subsidiary as a new independent company in a separate stock offering. For example, in 2006, American Express spun off its brokerage operation (Ameriprise Financial Services) to its shareholders as a separate operating company.

Syndicate

A group of investment banking firms that, with the lead underwriters, shares in the financial responsibility and liability of offering and selling new issues to the public. Each syndicate member firm signs a document in which it agrees to share in the profit and the financial liability associated with the underwriting.

Sticky issue

A new issue security that is not selling well in the primary market. As of the effective date of the underwriting, trading starts in the secondary market and the market price falls below the Public Offering Price. This, this issue is stuck on the hands of the underwriters.

Green shoe clause

A provision in the underwriting agreement between a corporate issuer and the underwriter that permits the underwriter to request up to 15% additional shares over the original size of an issue in response to strong investor demand for the new issue. It is named after the first company to use such a clause, the Green Shoe Company.

Reallowance

A small portion of the underwriting spread which the managing underwriter allocates to a non-syndicate, non-selling group broker-dealer who sells part of a new issue.

All or None Commitment

A type of best efforts underwriting commitment in which the investment banker agrees to complete the terms of the underwriting agreement if, and only if, the entire new issue sells out. if it is not entirely sold, then the underwriting is cancelled and all monies are returned to any investor who bought the issue.

Mini-Maxi Commitment

A type of best efforts underwriting commitment in which the investment banker makes an all or none commitment on a minimum amount of the new issue and a best efforts commitment to continue selling more of the issue until a maximum specified amount is sold.

Firm Commitment Underwriting

A type of underwriting commitment in which the underwriter, acting as a principal, agrees to buy all of an issuer's new securities and then resell them to the public. The issuer is, therefore, guaranteed its funds and the underwriter assumes full financial liability if the security cannot be sold to the public.

Best Efforts Commitment

A type of underwriting commitment in which the underwriter, acting as an agent, agrees to sell an issuer's new securities to the public on demand. Any amount of the securities that remain unsold is returned to the issuer. The underwriter, therefore, assumes no financial liability if the security cannot be sold to the public.

Syndicate Agreement

Also called the agreement among underwriters, a formal, legal agreement between the syndicate manager and each syndicate member that details the selling responsibility (including allocation of securities) and liability of each syndicate member in the underwriting of a new issue security. Such agreements can either be established as "Eastern" syndicate accounts (undivided as to selling responsibility and liability) or Western syndicate accounts (divided as to selling responsibility and liability).

Syndicate manager

Also called the lead or managing underwriter, the investment banking firm that has the business relationship with the issuer of the securities. The managing underwriter forms the syndicate, drafts the syndicate agreement, acts on the syndicate's behalf, allocates the securities to each syndicate member and charges a management fee for its services.

Underwriter

Also known as an investment banker, a brokerage firm that assists an issuer of a new security in setting the offering price and in marketing the securities to the public.

Tombstone

An announcement of a public offering of securities published in financial newspapers and periodicals by the underwriters. So-called, because the announcement looks like a tombstone, the content is legally limited by the SEC for non-exempt securities offerings so that the announcement is not considered to be overly promotional.

Total interest paid by municipality

Bond Years x Interest Rate

Selling group

Brokerage firms who participate in a new issue underwriting totally in an agency capacity - i.e., they are responsible for selling the new issue only and share none of the financial liability. The selling group receives a selling concession on each security sold.

Bond year

For a serial bond issue that matures over a sequence of years, each one-year period that a $1,000 par value bond is outstanding. The total bond years of a particular maturity is computed by multiplying the number of $1,000 par value bonds in that maturity by the number of years from the bonds dated date to its maturity.

Average life

For serial bonds, which mature over a sequence of years, the number of years to the point at which half of the principal on the outstanding bonds has been paid off. The formula for computing the average life of an issue is the total bond years divided by the total number of bonds issued, assuming each bond has a $1,000 par value.

Pre-sale order

In a competitive bid underwriting of a new issue municipal bond, an order (more accurately an indication of intention to buy) that the underwriter solicits before the municipality announces the winning bid. The collection of the Pre-Sale orders aids the underwriter in determining the interest rates to bid. Pre-sale orders are filled only if the underwriter wins the bid. These are the first orders to be filled in new issue municipal bond offering.

True interest cost

In a competitive bid underwriting where the lowest interest rate bid wins, the computation of the real interest cost to the issuer considering the time value of money. This is expressed as a single yield over the bond issue's life.

Net interest cost

In a competitive bid underwriting where the lowest interest rate bid wins, the computation of the weighted average interest cost to the issuer without considering the time value of money.

Acquisition

In investment banking, the purchase of a smaller company by a larger company. Investment bankers advise both the buyer and seller in such transactions. Usually, the acquisition is made at a premium to that company's current market price - which serves as in inducement for the Board of Directors of the targeted company to approve the acquisition. Payment can be made in either cash, or in the stock of the acquiring company.

Syndicate Letter

In the municipal bond market, the name for the syndicate agreement or the agreement among underwriters. Sent to an signed by each syndicate member, this letter designates the lead underwriter to manager the syndicate , allocates securities to the syndicate members, and specifies the priority in which orders will be filled.

Group net order

In the underwriting of a competitively bid new issue municipal bond, an order that is placed for the benefit of the syndicate account (group account). Also known as a syndicate group orders, these are filled after pre-sale orders.

Designated order

In the underwriting of a new issue municipal bond, an order for the new issue where the buyer designates the specific syndicate member(s) that will receive the takedown. Designated orders are filled after pre-sale and group net orders.

Member (takedown) order

In the underwriting of a new issue municipal bond, an order from a syndicate member to buy the bonds for that member's own account or a related portfolio. Also called member takedown orders, these are the last orders to be filled under the priority provisions.

Red herring

Jargon for the preliminary prospectus because of the disclaimer printed in red on the cover, this is the preliminary prospectus which may be sent to potential purchasers of a new non-exempt securities issue during the 20-day cooling off period under the Securities Act of 1933. Legally, the preliminary prospectus does not offer the securities, since this is prohibited during the cooling off period. The red herring is used to get an indication of the public's interest in a security before the final price is set and the security issued.

Rule 415

Known as the shelf registration rule, this is a streamlined registration process under the Securities Act of 1933 for large, established companies. Rather than having to file a registration statement and complete a 20 day cooling off period for each new securities offering, the issuer files a blanket registration statement with the SEC that goes on the SEC's shelf for 3 years. Once the shelf filing is made, by giving 2 days notice to the SEC, the issuer can sell new securities in the market. This procedure is much faster and cheaper.

Municipal Syndicate Disclosure

MSRB Rules require: -Every dealer who submits an order to the syndicate must disclose whether the securities are being purchased for the dealer's own account, for an account controlled by the dealer, or for an accumulation account established by a municipal unit investment trust -Confirmations of sale to related portfolios and accumulation accounts must be sent directly to that account - not to the dealer placing the order -Group orders submitted to the syndicate must disclose the name of the person for whom the order is submitted -Every syndicate must establish priority provisions for handling orders. They are established by the manager. -Identity of group net customer is disclosed to the manager -No later than 2 days after the date of sale, the manager must disclose in writing to the syndicate members all allocations of securities which were given priority over member takedown orders. -When the syndicate is settled, the manager must disclose in writing to the syndicate members each syndicate expense -The identity and size of each related portfolio or unit investment trust order -The identity and size of each group order -The aggregate value and price of all securities sold from the syndicate account.

Munifacts wire

Owned by the Bond Buyer, a wire service that primarily disseminates market information about the price and allocation of new municipal bond offerings. Current events affecting the secondary market for municipal bonds are also distributed over Munifacts.

Bond Buyer Index

Published by the Bond Buyer, the index is the yield of 20 selected general obligation bonds with 20 years to maturity, all rated "A" or better.

Bond Buyer

Sometimes called The Daily Bond Buyer, the daily newspaper of the municipal bond market which contains articles primarily about the new-issue marketplace and its participants, official notices of sale, bond redemption notices, and statics about interest rates and trading activity.

Underwriter's concession

That portion of the underwriting spread which the managing underwriter concedes or gives to the syndicate members in a corporate securities underwriting for each new issue security they sell directly to the public.

Official statement

The disclosure document for a new municipal bond offering which details the material information necessary for the investor to judge the creditworthiness of an issue and to determine whether or not to invest. Note that there is no prospectus requirement for municipals because they are exempt issues under the Securities Act of 1933. The MSRB does not regulate municipal issuers, so it cannot force municipal issuers to provide an Official Statement. However, municipal underwriters are obligated to obtain a copy of the of the Official Statement and perform due diligence on it prior to engaging in a municipal underwriting; and if an Official Statement has been prepared (which it will be because of the due diligence requirement), then the MSRB obligates the underwriter to give it to purchasers no later than settlement.

Registration statement

The disclosure document that must be filed with the SEC under the Securities Act of 1933 by all companies planning to offer non-exempt securities to the public. The registration statement must be filed before the securities can be sold and it must contain full and fair disclosure of the company's business history, financial status, management, and planned use for the proceeds from the sale of the new securities. Most of the registration statement is a copy of the prospectus to be given to investors.

Underwriting agreement

The formal written agreement between the issuer and the underwriter, that is signed just prior to the commitment of sale of the issue. In this document, the final public offering price, spread, and net proceeds to the issuer are established; and the underwriter agrees to sell the issuer's securities to the public; either on a firm commitment or best efforts basis.

Primary offering

The issuance of new securities by a company to the public under a prospectus as required under the Securities Act of 1933, unless an exemption from registration is available. The net proceeds from the offering go to the issuer.

Merger

The joining of two companies either under friendly or hostile terms. Investment bankers advise companies on the terms of such merger agreements. A horizontal merger is where 2 companies in the same business merge; a vertical merger is where 2 companies in different businesses merge.

Total takedown

The largest part of the spread on a new municipal bond issue, the compensation each syndicate member receives for each bond that it sells to the public. The total takedown is the sum of the additional takedown and the selling concession. The total takedown can simply be referred to as the takedown.

Stabilizing bid

The price at or just below a new issue's public offering price, at which the lead underwriter will repurchase the issue in the secondary market while he or she is stabilizing the price of the new issue.

Writing the Scale

The process of formulating a competitive bid on a proposed municipal bond issue offering where the lead underwriter and the syndicate set the yield and price on each maturity of a serial bond issue.

Leveraged buy out (LBO)

The purchase of all of the outstanding shares of a publicly traded company with the monies used to purchase the shares coming from a bank loan; or the sale of long term bonds (hence the term Leveraged Buy Out). Once the company has been bought out, new management will reduce costs, and sell assets, to generate funds to pay down the debt incurred in the LBO.

Secondary offering

The sale (or more accurately resale) to the general public in a prospectus offering under the provisions of the Securities Act of 1933 of securities previously issued to large investors, such as institutions and insiders. The net proceeds of the offering go to the selling shareholders.

Quite Period

The time period starting with the filing of a registration statement for a new issue with the SEC (the start of the 20-day cooling off period) through the date when the prospectus is no longer required to be delivered (25 days after the effective date for an exchange listed issue. During this window of time, the underwriters and ht issuer must be quiet about the issue. It can only be promoted or sold via a red herring preliminary prospectus during the 20-day cooling off period; or through delivery of the final prospectus after the effective (first sale) date.

Underwriting spread

The total compensation received by the brokerage firm participating in the underwriting and sales of a new issue security, this is the difference between the Public Offering Price and the price paid to the issuer. The spread is broken down into components earned by each participant in the underwriting. For a corporate new issue, the spread components typically consist of the management fee, the underwriter's concession, the selling concession, and (perhaps) re-allowance. For a municipal new issue, the spread components typically consist of the management fee, the additional takedown, and the selling concession.

Legal Opinion

The written opinion of the municipal bond attorney attesting to the fact that a municipal bond issue is valid, legal under the terms of the municipality's charter and that the interest on the bond is federally tax exempt. An unqualified legal opinion means that the bond counsel has found no potential problems with the issue. A qualified legal opinion means that contingencies exist that could affect the bond's legal or tax status.

Negotiated Underwriting

Used for virtually all new issues of corporate securities and municipal revenue bonds, a type of underwriting in which the issuer and the underwriting negotiate all of the terms of the letter of intent and subsequent underwriting. The spread is disclosed on the Official Statement.

Stand-by Commitment

Used in a rights offering, an underwriting commitment in which an investment banker makes a firm commitment to stand by, ready to buy any of the unsold shares after the issuer attempts to sell its new shares to existing shareholders who have been granted subscription rights. In this manner, the corporation is assured of raising the full amount of money needed.

Competitive Bid Underwriting

Used primarily for initial offerings of most municipal general obligation bonds and all US Government debt securities, a type of underwriting in which investment banking firms submit bids in accordance with specifically advertised criteria to the issuer, who then chooses those bids that will result in the lowest interest cost. The spread is not disclosed on the Official Statement.

Divestiture

When a company has a line of business or a subsidiary that no longer fits into its long range business plans, it may divest itself of this business by selling it to an interested buyer.