SIE Exam (Chapter 1 , Section 1.4)

The SEC does not approve or endorse any offering for sale, they simply clear, or release the offering for sale. The standard SEC disclaimer reads as follows:

"These securities have not been approved or disapproved by the SEC nor have any representations been made about the accuracy or the adequacy of the information."

Restricted persons, those not allowed to purchase shares at the public offering price (POP) are defined as follows:

1. Member firms 2. Employees of member firms 3. Finders and fiduciaries acting on behalf of the managing underwriter, including attorneys, accountants, financial consultants, and so on 4. Portfolio managers, including any person who has the authority to buy or sell securities for a bank, savings and loan association, insurance company, or investment company 5. Any person owning 10% or more of a member firm (Furthermore, any immediate family member of any person in items 2-5 above is also restricted. Immediate family includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support.)

Mr. Smith is a restricted person. He is a member of an investment club and has a 5% interest in the investment club account. Because his interest in the club account does not exceed ______, the investment club account is not considered to be a restricted account.

10%

After the issuer files a registration statement with the SEC, a ________ cooling-off period begins. The registration can become effective as early as ___________________

20-day / 20 calendar days after the date the SEC has received it. (the SEC usually takes longer to clear registration statements)

Qualification

If registration cannot be accomplished by coordination or filing, it must be registered by qualification. In this situation, the issuer must respond to any requirement the state specifies. This type of registration is effective only when so ordered by the state securities administrator. It is the most difficult way of registering securities in a state.

De minimis exemption

If the benefcial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue. In other words, restricted persons will be able to have an interest in an account that purchases new equity issues as long as no more than 10% of the account's beneficial owners are restricted persons.

All-or-None (AON)

In an all-or-none (AON) underwriting, the issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all of the shares or cancel the underwriting. Because of the uncertainty over the outcome of an AON offering, any funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting.

______________ are not included in the definition of security; however, __________________ are funded by separate accounts investing in securities, therefore these products must be registered as securities with the SEC.

Insurance policies / variable annuities, variable life insurance, and variable universal life insurance

Private placements are generally exempt from the registration requirements of the _____________.

Securities Act of 1933

Public offerings of securities are regulated under the ______________.

Securities Act of 1933

Prospectus

The Securities Exchange Commission under the Act of 1933 requires full and fair disclosure of all material information and facts regarding the issuance of securities. This disclosure is done via a prospectus, which is required to provide investors enough information to make fully informed buying decisions.

Coordination

The issuer files with the state at the same time it files with the SEC. Registration is effective at the time the federal filing becomes effective.

Preliminary Prospectus

The preliminary prospectus, or red herring, can be used as a prospecting tool, allowing issuers and underwriters to gauge investor interest and gather indications of interest. There is no final price included in the preliminary prospectus. The preliminary prospectus must be made available to any customer who expresses interest in the securities during the cooling-off period, that is, between the SEC registration filing date and when the SEC clears the issue for sale, the effective date. (indications of interest are neither binding on buyers nor sellers)

Unsolicited transactions

These are transactions initiated by the client not the agent or representative.

Isolated nonissuer transactions

These are transactions occurring in the secondary mar- ket (nonissuer) that occur infrequently (very few transactions per agent/representative per year; the exact number varies by state). These transactions generally do not involve securities professionals.

All tombstone advertisements must contain the following advisory:

This announcement is neither an offer to sell nor a solicitation of an offer for any of these securi- ties. This offer is made only by prospectus.

Shelf Offering Registration

Through a shelf offering registration, an issuer who is already a publically traded company can register new securities without selling any of the shares until later or some of the shares initially, and waiting to sell the remaining portion of the shares. Once filed, the registration is good for two years and allows the issuer to sell portions of a registered shelf offering over a three-year period without having to reregister the security. This provision under the Securities Act of 1933 allows issuers to quickly raise capital when needed or when market conditions are favorable.

_________________ are the only form of advertising that is permitted from the time the registration statement is filed with the Securities Exchange Commission and the effective date of the offering.

Tombstone ads

Notice filing

Under the National Securities Markets Improvements Act of 1996, certain categories of securities, such as those listed on national exchanges and investment companies registered under the Investment Company Act of 1940, are deemed to be federal covered. The effect of this designation is that states do not have jurisdiction over the registration requirements of these securities. However, the Act did provide that states could require the filing of a notice to sell securities in that state along with the payment of a filing fee.

_______________ may assist the issuer in preparing and filing the registration statement and prospectus. However, the accuracy and adequacy of these documents is the responsibility of the issuer.

Underwriters (broker-dealers and investment bankers)

The _______________ provides a legal framework for the state registration of securities. It may be adopted by individual states and adapted to their needs.

Uniform Securities Act (USA)

Firm commitment underwriting

a widely used type of underwriting contract. Under its terms, the underwriters contract with the issuer to buy the securities. Here the underwriters are acting as principals rather than agents. They are committing to purchase any unsold shares for the syndicate account. In this type of underwriting it is the underwriters who are at risk for any shares they cannot sell to the public, not the issuer. The issuer knows that ultimately all of the securities will be sold and all of the capital needed will be raised.

In a Regulation A+ offering, the issuer files an _______________ or ______________, with the SEC. Investors are provided with this rather than a full prospectus.

abbreviated notice of sale or offering circular

The securities industry has adopted an ___________________ model for meeting prospectus delivery obligations. A prospectus will be deemed to precede or accompany a security for sale if the final prospectus has been filed with the SEC. In other words, an investor can see a copy of the final prospectus by logging on to the SEC's website. This rule applies to the final prospectus and aftermarket prospectus delivery obligations. It does not apply to preliminary prospectuses, which still must be printed, nor does it apply to mutual funds, which must provide investors with a paper prospectus.

access equals delivery

Registered representatives must register in a state if they are residents or if they solicit business in a state. Registrations must be renewed ______________.

annually

In addition to federal securities regulations, each state has laws that pertain to the issuance and trading of securities. These state securities laws are known as _____________

blue sky laws (because of a statement made by a Kansas Supreme Court justice who referred to "speculative schemes that have no more basis than so many feet of blue sky)

State registration requirements apply to _______________, ________________, ________________, and ________________.

broker-dealers, investment advisers, investment adviser representatives, and registered representatives.

Best efforts underwriting

calls for the underwriters (syndicate) to buy securities from the issuer acting simply as an agent, not as the principal. This means that the underwriter is not committed to purchase the shares themselves, and is therefore not at risk. The underwriter is acting as an agent contingent on the underwriter's ability to sell shares in either a public offering or a private placement. The underwriter is not at risk for the shares, but the issuer is. If all of the shares cannot be sold, the issuer will not raise the needed capital.

FPOs are popular methods for companies to raise additional equity capital in the ___________ markets through a stock issue.

capital

The period between the registration filing with the SEC and the effective date is known as the ______________.

cooling-off period

States have two ways to register (or blue sky) securities: __________________. There is also a third provision used solely for those securities that are referred to as federal covered. The third provision is known as _____________.

coordination and qualification / notice filing

If it SEC finds that the registration statement needs revision or expansion, the SEC may suspend the review and issue a ____________ to the issuer of the securities.

deficiency letter (The 20-day cooling- off period would resume when the issuer submits a corrected registration statement. Note that it resumes where it had left off and does not begin anew.)

While tombstone ads may run to announce a new issue during the cooling-off period, they are not required and ______________

do not need to be filed with the SEC.

The ____________ is the time the securities may then be sold to the public.

effective date

The Securities Act of 1933 mains purpose is to

ensure that the investing public is fully informed about a security and its issuing company when the security is first sold in the primary market.

In the same manner that individuals placing a "for sale by owner" sign on their front lawns do not need a real estate license, one individual selling stock to another in a one-on-one transaction is engaging in a transaction __________ from oversight of the state Administrator because the issuer is not receiving any of the proceeds, and the parties involved are not trading as part of a regular practice.

exempt

When the registration statement becomes effective, the issuer amends the preliminary prospectus and adds information, including the final offering price for the _______________.

final prospectus

Underwriters are...

groups of broker-dealers or investment bankers who will work with an issuer through the registration process and ultimately bring the securities to the market and sell them to the investing public.

The first time an issuer distributes securities to the public, it is called an _________________.

initial public offering (IPO)

Although private placement buyers tend to be _____________, securities may be sold to small groups of wealthy individuals who meet certain ______________ criteria. Those who meet the criteria are known as _____________.

institutional investors / net worth and income / accredited investors

primary offering

is one in which the proceeds raised go to the issuing corporation. Primary offerings are done in the primary (new issues) market. The corporation increases its capitalization by selling stock (either a new issue or previously authorized but unissued stock). It may do this at any time and in any amount, provided the total stock outstanding never exceeds the amount authorized in the corporation's bylaws.

There are exemptions to state registration. The two most common are ________________ and ________________.

isolated nonissuer transactions / unsolicited transactions

Those offering the securities are known as the _________ of the securities and those who assist them in the endeavor are known as ________________.

issuers / underwriters

An SPO or APO can also be known as a follow-on public offering (FPO). An FPO is an...

issuing of shares by a public company that is already listed on an exchange and therefore has already gone through the IPO process.

When securities are required to be registered in order to be sold to the public they are known as __________ securities

non-exempt (not exempt from registration and must be registered).

Exempt securities also have disclosure documents, though they are not called a prospectus. For example, the _____________ serves as a disclosure document and contains any material information an investor might need about a municipal bond issue.

official statement (The offcial statement, which must be signed by an officer of the issuer, is the municipal securities industry's equivalent of the corporate prospectus)

A secondary offering is...

one in which one or more stockholders in the corporation are selling all or a major portion of their holdings to the public.

Aunts and uncles as well as grandparents are not considered immediate family. If, however...

one of these individuals lives in the same household as a restricted person, that individual would be a restricted person.

Because the issuer (the company) receives the proceeds from the investors who are investing in the company, all IPOs are __________________.

primary issuer transactions

A final prospectus must be delivered to all buyers in the secondary market for a specified time following the effective date. This is termed the _______________.

prospectus delivery requirement period

Corporate securities, those offered by corporations for sale to the investing public are sold to investors through either __________________

public or private securities offerings.

During the cooling-off period, no one can solicit sales of the securities. However, indications of interest may be taken and solicited with a preliminary prospectus known as a "__________________".

red herring

The Act of 1933 requires that a new issue, unless specifically exempted from the Act, must be _____________ before public sale. All investors must receive a detailed disclosure document known as a _____________ prior to purchase.

registered with the Securities Exchange Commission (SEC) / prospectus

An issuer must file with the SEC a ________________ disclosing material information about the issue. Part of the registration statement is a ______________, which must be provided to all purchasers of the new issue.

registration statement / prospectus

The primary purpose of the Securities Act of 1933 is to _____________.

require full and fair disclosure in connection with the sale of securities to the public

The rules prohibit member firms from selling a new issue to any account where...

restricted persons are beneficial owners.

State securities administrators have the power to ___________ any of these registrations if a violation of the state's law has occurred.

revoke

In a public offering...

securities are offered and sold to the investing public. To facilitate this, companies will utilize the services of investment bankers and broker-dealers known as underwriters of the securities. The offerings can be advertised to the public, raise relatively large amounts of capital via the sale of stocks or bonds, and may attract investors with smaller budgets and less investment sophistication. Typically, they are more tightly regulated under the Securities Act of 1933 and are subject to the more stringent federal registration and prospectus requirements than private securities offerings. Registration of securities to be offered to the public will be discussed later in this unit.

Much like securities to be sold require issuers to register them at the federal level with the SEC, securities to be sold within a state require registration at the ___________.

state level

Any subsequent issuance of new shares to the public is called a _____________ or _____________.

subsequent public offering (SPO) / additional public offering (APO)

For securities offered via a shelf registration, a _____________ must be filed with the SEC before each sale.

supplemental prospectus

An offering can be a combination of a primary and secondary offering. These are known as split offerings. In a split offering...

the corporation issues a portion of the shares offered to the public and existing shareholders offer the balance.

Certain securities are exempt from the registration statement and prospectus requirements of the 1933 Act, either because of ___________________ or because _________________.

the issuer's level of creditworthiness / another government regulatory agency has jurisdiction over the issuer

A private securities offering, sometimes referred to as a private placement, occurs when...

the issuing company, usually with the assistance of an investment bank, sells securities to private investors as opposed to the general investing public

The bank exemption applies only to the securities of banks, not to __________________.

the securities of bank holding companies

Typically, secondary offerings occur in situations in which the founder of a business and perhaps some of the original financial backers determine...

there is more to be gained by selling their shares to the public rather than holding them.

Certain types of advertisements relating to a new issue are allowed to be run prior to the effective date. These are known as _______________

tombstone ads

These underwriting groups are often referred to as _______________, and often the members of these groups specialize in different types of underwritings.

underwriting syndicates (those who specialize in underwriting municipal bonds are municipal advisors.)

If a client calls a registered agent and requests that the agent buy or sell a security, the transaction is an __________ brokerage transaction exempt from state registration. But, the state Administrator may, by rule, require that the customer acknowledge on a specified form noting the sale was unsolicited and that a signed copy of the form be kept by the broker-dealer for a specified period.

unsolicited

State laws require that broker-dealers __________________, or those that ___________________, be registered in that state.

with an office in the state / direct calls into the state or receive calls from the state

Before selling an IPO to any account, representatives are required to obtain a _____________________ that the account is eligible to purchase a new common stock issue at the public offering price.

written representation from the account owner(s)

Prospectus delivery requirement period for initial public offerings (IPOs), this period is:

■ 90 days if the security is to be quoted on the OTC Pink or over the OTCBB (non-Nasdaq); or ■ 25 days if the security is to be listed on an exchange or quoted over Nasdaq.

Prospectus delivery requirement period for additional issue offerings, the following apply:

■ If the security is listed or quoted over Nasdaq, a prospectus must be delivered only in con- nection with purchases at the public offering price. Once the distribution is complete, there is no obligation to deliver a prospectus in secondary market transactions. ■ If the security is non-Nasdaq, the prospectus delivery requirement period is 40 days.

The Three Phases of Underwriting

■ Issuer files registration statement with the SEC - Prior to the filing of the registration statement, no sales can be solicited and no prospectus can circulate. ■ Cooling-off period- No one can solicit sales during the cooling-off period, but indications of interest can be solicited with a red herring. ■ Effective date (offering period may begin) - Sales can now be solicited, but the firm must use a final prospectus.

Tombstone ads may be placed by the issuer directly or with the assistance of the underwriters. They are limited to the following information:

■ Name of the issuer ■ Type of security being offered ■ Number of shares to be sold ■ Public offering price (or a range) ■ Names of the underwriting members (when placed by the underwriters instead of the issuer)

Securities offered by industrial, financial, and other corporations may qualify for exemption from the registration statement and prospectus requirements of the 1933 Act under one of the following exclusionary provisions:

■ Regulation A+: small and medium corporate offerings ■ Regulation D: private placements ■ Rule 147: securities offered and sold exclusively intrastate ■ Regulation S: offers and sales made outside the United States by U.S. issuers

These exempt securities include:

■ U.S. government securities; ■ municipal bonds; ■ commercial paper and banker's acceptances that have maturities of less than 270 days; ■ insurance policies and xed annuity contracts (but not variable annuities); ■ national and state bank (not bank holding company) securities; ■ building and loan (S&L) securities; ■ charitable, religious, educational, and nonpro t association issues; ■ interests in railroad equipment certi cates; and ■ banks

A registration statement must contain:

■ a description of the issuer's business; ■ the names and addresses of company of cers and directors, their salaries, and a ve-year business history of each; ■ the amount of corporate securities company of cers and directors own and identi cation of investors who own 10% or more of the company; ■ the company's capitalization, including its equity and debt; ■ a description of how the proceeds will be used; and ■ whether the company is involved in any legal proceedings.

A copy of the final prospectus must precede or accompany all sales confirmations. The prospectus must include the:

■ description of the offering; ■ offering price; ■ selling discounts; ■ offering date; ■ use of the proceeds; ■ description of the underwriting, but not the actual contract; ■ statement of the possibility that the issue's price may be stabilized; ■ history of the business; ■ risks to the purchasers; ■ description of management; ■ material nancial information; ■ legal opinion concerning the formation of the corporation; and ■ SEC disclaimer.

During the cooling-off period, underwriters may not:

■ make offers to sell the securities; ■ take orders; or ■ distribute sales literature or advertising material. However, they may: ■ take indications of interest; ■ distribute preliminary prospectuses; or ■ publish tombstone advertisements to provide information about the potential availability of the securities.

Designed to protect the integrity of the public offering process and public investors, the rules ensure that:

■ members make a bona fide public offering of securities at the public offering price; ■ members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to the member; and ■ industry insiders, such as members and their associated persons, do not take advantage of their insider status to gain access to new issues for their own benefit at the expense of public customers. (rules apply to IPOs of common stock)

The 1933 Act protects investors who buy new issues by:

■ requiring registration of new issues that are to be distributed interstate; ■ requiring an issuer to provide full and fair disclosure about itself and the offering; ■ requiring an issuer to make available all material information necessary for an investor to judge the issue's merit; ■ regulating the underwriting and distribution of primary and secondary issues; and ■ providing criminal penalties for fraud in the issuance of new securities.

Tombstone ads

An announcement and description of the securities to be offered. Provides bare bone, minimum information.

Mini-Max

A mini-max offering is a best efforts underwriting, setting a floor or minimum, which is the least amount the issuer needs to raise in order to move forward with the underwriting, and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell. The underwriter must locate enough interested buyers to support the minimum (floor) issuance requirement. Once the minimum is met, the underwriter can expand the offering up to the maximum (ceiling) amount of shares the issuer specified.

Know chart on page 30

Offerings and Markets chart

The Securities Act of 1933 is also referred to as the__________, _______________, _____________, _____________, and _____________.

Paper Act, Full Disclosure Act, New Issues Act, Truth in Securities Act, and Prospectus Act