SIE - New Issues Pt. 1
A new issue of common stock has a Public Offering Price of $30 per share. The proceeds to the issuer are $29 per share. The management fee is $.10 per share and the selling concession is $.40 per share. The spread is:
$1.00 This one is pretty simple. The "spread" is the gross compensation to the underwriters. It is the difference between the POP (Public Offering Price) and the amount per share that was received by the issuer. In this case, the POP is $30, and the issuer received $29 per share, so the spread is $1.
The managing underwriter has set the POP for a new issue offering at $50 per share. After negotiating, the proceeds to be received by the issuer upon closing are set at $48 per share. The managing underwriter will retain a management fee of $.25 per share and the selling concession has been set at $.75 per share. The spread is:
$2.00 This one is pretty simple. The "spread" is the gross compensation to the underwriters. It is the difference between the POP (Public Offering Price) and the amount per share that was received by the issuer. In this case, the POP is $50, and the issuer received $48 per share, so the spread is $2.
A new issue has a Public Offering Price of $21 per share. Which of the following is the most likely stabilizing bid?
$20.88 Stabilizing bids are permitted at, or below the Public Offering Price - never above. When placing the bid, the manager will not drop the price by much below the Public Offering Price, so the most likely stabilizing bid is $20.88. Bids of $22 and 21.01 are prohibited because each is higher than the $21 Public Offering Price; a bid of $20 is too far below the $21 Public Offering Price.
A managing underwriter has been negotiating with ACME Corporation to underwrite a new issue of ACME common stock. The company wants to raise $100,000,000 and the underwriter intends to offer 1,000,000 shares. The underwriter has negotiated that the issuer will received proceeds of $96,000,000. The selling concession is set at $2 per share and the management fee is $1 per share. The spread per share is:
$4.00 This one is pretty simple. The "spread" is the gross compensation to the underwriters. It is the difference between the POP (Public Offering Price) and the amount per share that was received by the issuer. In this case, the POP is $100 per share, and the issuer received $96 per share, so the spread is $4 per share.
Investment bankers perform all of the following functions EXCEPT:
A Purchase securities from issuers on a principal basis B Sell securities for issuers on an agency basis C Advise issuers on potential mergers and acquisitions Correct answer D Manage mutual funds Investment banks underwrite securities on a firm commitment (principal) basis; and on a best efforts (agency) basis. Investment banks also advise companies on mergers, acquisitions, divestitures and spin-offs. Investment Advisers manage mutual funds.
Which statement is NOT TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering?
A The indication is not binding on the customer Correct answer B The indication is binding on the underwriter C The indication may be changed or canceled by the customer D The indication may be changed or canceled by the underwriter 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 indications are not binding on either party because the issue cannot be legally "offered or sold" until the effective date.
In a registered secondary distribution, which statement is FALSE?
A The offering is made at the POP B The purchaser must receive a prospectus Correct answer C The proceeds from the sale go to the issuer D The issue cannot be purchased on margin Underwritten offerings can be primary or secondary offerings (or both at the same time!). Assume that a privately held company wants to go public. The company wants to raise $300,000,000. To do this, the company will be issuing $150,000,000 of new shares (this is the primary portion of the distribution, where the proceeds of the sale go to the issuer) and another $150,000,000 consists of shares being sold by officers and directors of the company (who now want to cash out some or all of their investment in the company). The proceeds from the secondary portion go to the selling shareholders. This is a combined primary and secondary offering. All shares are sold with a prospectus at the POP and full payment is required (which is the case for any prospectus offering).
In a new corporate bond offering, the lead underwriter selects syndicate members based upon:
A geographic location only B track record only C financial capability only Correct answer D all of the above 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. Geographic location is important because the manager wants to reach as many potential investors as possible.
Which of the following is prohibited from buying an IPO directly from an underwriter?
An officer of an insurance company 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), fiduciaries to member firms (such as accountants and lawyers that are retained by FINRA member firms); and investment managers for investment companies, insurance companies, pension plans, who are buying personally, etc. Note that investment companies, insurance companies and pension plans may buy IPOs - it is only their investment managers that are restricted from buying IPOs for their personal accounts.
All of the following are types of underwriting commitments EXCEPT:
Correct answer A Fill or Kill B Best Efforts C Firm D Stand-by 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.
All of the following information would be found in a new issue "tombstone" announcement EXCEPT:
Correct answer A The net proceeds to the issuer B Type of security offered C Names of the underwriters D Aggregate offering price A tombstone announcement is published once a new issue's registration is effective. Under SEC rules, the announcement is very limited in scope, since it cannot be considered to be an "offer or advertisement," since these can only be made through the prospectus. 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. Any additional information is not allowed. Therefore, the net proceeds received by the issuer after the underwriter's discount (spread) is paid, is not found in the Tombstone. Please note, however, that this information is found on the front cover of the prospectus.
All of the following activities are prohibited during the "cooling off" period EXCEPT:
Correct answer A accepting an indication of interest from the customer for part of the issue B confirming a certain amount of the issue to a customer C accepting a check from a customer for the part of the issue D accepting an order for the issue in registration During the cooling off period, an offer or sale of the issue is prohibited. Sending a preliminary prospectus or accepting an indication of interest does not constitute an "offer" under the Act of 1933. Accepting an order, confirming a certain amount of the issue, or accepting a check from a customer are all considered to be "sales" and are prohibited until registration is effective.
Most of the registration statement filed with the SEC is information that is found in the:
Preliminary Prospectus Most of the registration statement filed with the SEC for a new issue is found in a copy of the prospectus; much of which is financial information about the issuer.
What can be given to a client during the 20-day cooling off period for a new securities offering?
Red Herring When a new issue is "in registration" during the 20-day cooling off period, the SEC reviews the filing for full and fair disclosure. This is the "quiet period" during which the issue cannot be advertised, recommended or sold. The only permitted communication is a preliminary prospectus, also called a red herring (because it has a red disclaimer stating that it is not an advertisement). The red herring does not include the final POP, but it can have an estimated price range. The final POP is not set until the very end of the 20-day cooling off period.
What is permitted during the 20-day cooling off period for an Initial Public Offering?
Road show During the quiet period for an IPO, the issuer very often runs a "road show" in major cities to invite interested institutional investors to learn about the company, its officers and business, and the securities being offered. The officers of the company who make presentations must make sure that the keep the road show informational and not promotional - because the issue cannot be "promoted" during the quiet period. Remember, the during the 20-day cooling off period, the issue cannot be sold, advertised or promoted, and sale of the issue is prohibited.
An underwriting agreement where the syndicate members are not liable for any unsold securities is a(n):
all or none underwriting 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. In a best efforts underwriting, the underwriter acts as agent, promising to use his best efforts to sell the issue, but takes no financial liability. In a best efforts - all or none underwriting, the underwriter acts as agent, using his best efforts to sell the issue, but takes no financial liability. However, if the entire amount is not sold, then the offering is canceled. In a stand-by underwriting, the underwriter agrees to purchase any unsubscribed shares in a new issue rights offering on a firm commitment basis. All underwritings that use broker-dealers to distribute the securities are "managed" offerings - they are managed by the syndicate manager.
When a corporation decides to spin off a subsidiary to its shareholders, after completion, the shareholders will own shares of:
both the parent and subsidiary company This company is "spinning off" a subsidiary to its shareholders as a separate stock company. Larger companies do this when they feel that the subsidiary will be better managed; and have better business opportunities; as a legally separate operating company. For example, in 1997, Pepsico "spun off" its restaurant subsidiary (Pizza Hut, Taco Bell, KFC) to its shareholders as Yum! Brands. Thus, the shareholders now own shares of both Pepsico and the restaurant company Yum! Brands.
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:
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
An underwriting commitment in which an investment banking firm commits to buy and sell an entire issue of stock and assumes all financial responsibility for any unsold shares is a(n):
firm commitment underwriting In a firm commitment underwriting, the investment banking firm agrees to buy the issue outright from the issuer, so the issuer is assured of getting its financing. The firm is acting as a principal. The underwriter turns around and sells that issue to the public, and if any shares remain unsold, they belong to the underwriter(s). Thus, the underwriter assumes full financial liability. In contrast, in a best efforts underwriting, the investment bank acts as agent only, using its best efforts to sell to the public, but does not take responsibility for the unsold shares. A variation is an "all or none" underwriting where the deal does not go through unless the entire issue is sold - but, again, the underwriter takes no liability. A shelf underwriting is not an underwriting commitment type - rather it is a type of securities registration with simpler rules for seasoned issuers.
Stand-by underwritings are a type of:
firm commitment underwriting used in rights offerings 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.
The management of a publicly held company wishes to take the company "private" by making a tender offer for all of the company's outstanding shares; with financing for the purchase to be provided by a commercial bank. This 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.
To satisfy MSRB disclosure requirements for new municipal issues, a customer would be provided with a copy of the:
official statement The Official Statement is the disclosure document for new issue municipal bonds. If it is prepared by the issuer, it must be distributed to all purchasers by the underwriters at, or prior, to settlement.
A preliminary prospectus may first be sent to a customer:
once the registration statement has been filed with the SEC A "red herring" preliminary prospectus may be sent to any prospective purchaser of that new issue once the issue has entered into the "20-day cooling off" period that commences upon filing of the registration statement with the SEC.
New IssueDated: 3/1/15 This is neither an offer to sell nor a solicitation to purchase the securities. The securities may lawfully be offered only through Prospectus. $35,000,000 Mega-tronics CompanySubordinated ConvertibleDebentures 4 3/4 % Certificates Non-Callable To mature on 3/1/35 $ 25,000,000 Offered In The United States $ 10,000,000 Offered Outside The United States These certificates are offered, subject to prior sale, when, as, and if issued and received by us.Preston, Tucker, Inc. This offering is a:
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.
An automobile manufacturer buys a tire manufacturer. 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 automobile manufacturer believes that if it owns its own tire company, it can make the tires used in automobile production more cheaply than it can purchase them.
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.
