Series 57 - Chapter 9

What must purchasers of the public offering be provided with?

*The final prospectus,* no later than the time the sale is confirmed.

What are the holding period restrictions under rule 144? Restricted stock? Control stock?

- *Restricted stock must be held for six months after the securities were fully paid for by the issuer.* For the deceased, the restriction goes away. - *For control stock, there is no mandatory holding period!*

What is the difference between an affiliate, control, and common control?

- Affiliate controls/is controlled by member - Control has 10%+ ownership of equity - Common control has 2 or more entities

What are the exemptions to Rule 105?

- Bona fide purchase: a buyer who wasn't aware of the offering or changes their mind can close out the security - An allocation can be acceptable under the separate accounts exemption, in which they're acting on another account with other decisions. There cannot be sharing of balances on the accounts.

What are the two other rules that apply to enable the exemptions of Rule 144?

- Information must be publicly available - The transaction can be a brokers' transaction or one directly with market makers. - A broker can make an inquiry, if: - The customer had an unsolicited interest in the securities within the last 10 business days - Another broker indicated interest in the last 60 days

Who can equity IPOs be sold to?

- Investment companies - General/separate accounts of insurance companies - Trust fund - Account with minimal beneficial interest - Publicly traded entities - Foreign investment companies - ERISA accounts, state plans, tax-exempt plans. Generally, *those without beneficial interest. *

What information must a registration statement on a new issue contain?

- The character of an issuer's business - A balance sheet created within 90 days prior to the filing - Financial statements showing profits and losses for the 3 fiscal years - Capitalization used on the proceeds of the sales - Monies paid to the affiliated persons or businesses of the issuer - Shareholdings of senior officers, directors and underwriters and identification of individuals holding at least 10% of the company's securities

What are the requirements for a private placement to be exempt from registration?

- The issuer must believe the client was a sophisticated investor - The buyer must have access to the same financial information normally included in a prospectus - The issuer must be assured that the buyer does not intend to make a quick sale of securities - The securities may not be sold to more than 35 nonaccredited investors

What securities are exempt from registration and prospectus requirements of the 1933 act?

- US Government securities - Municipal securities - Securities issued by non-profits - Short-term corporate debt instruments with a maturity less than 270 days - Securities issued by domestic bank and trust companies - Securities issued by small business investment companies They are *not exempt from antifraud provisions of the 1933 act*.

What must occur to allow stabilizing outside the US?

- no stabilizing in the Us - Stabilizing is kept at the US offering price - The foreign stabilization occurs in a country with regulation like the US - must be in the market's currency - can fluctuate with exchange rates

What is the maximum amount of shares that may be sold on over the counter (non-listed equities)?

1% of total shares outstanding

When is the effective date typically, which marks the end of the cooling off period?

20 days after the filing.

How many days must a dealer issue a prospectus for a security that is not a reporting company prior to filing but becomes one with the offering, and will list on an exchange? Basically, a listed IPO.

25 days.

What defines a QIB?

3 part test: - Buying for their own account - Must own and invest at least $100 million in nonaffiliated securities - Is a large institution like an insurance company, investment company, small business development company, pension plan, bank trust fund, corporation, registered investment adviser, etc.

How many days after must a dealer issue a prospectus for a *follow-on* offering of a *non-listed* security?

40 days.

What are the size and dollar amount notification minimums at which a seller must notify the SEC?

5,000 shares or $50,000.

How long must Rule 147 stock be held until it can be sold to non-residents?

9 months, a 3 month bonus to the 6 month hold on Reg D shares of any kind.

How many days must a dealer issue a prospectus for a security *that doesn't trade on the exchange?*

90 days after the the offering.

What is the cooling off period?

A 20-day period in which the SEC reviews an issuer's registration statement to determine if it is complete. The cover of the prospectus contains the SEC's no-approval clause to indicate their approval/no-approval stance.

What is a selling group?

A BD may recruit other broker-dealers to assist in the sale of an offering. These firms, then, are *selling group members* that *do not* assume financial liability for the offering. Any shares not sold by the selling group are retained by the syndicate. Joining a selling group requires a selling group agreement.

A broker dealer is underwriting itself or an affiliate. What may be required in the transaction?

A QIU - qualified independent underwriter. Additionally, if a BD sells the stock, they have to disclose it, with written permission.

What are the basic provisions of Regulation S?

A US company may efficiently issue an unlimited number of securities outside of the country without filing with he SEC. To qualify, *the transaction must be executed offshore*, so buyers and transaction must be outside the US, and there cannot be selling efforts in the US.

What is an underwriter?

A broker-dealer that helps corporations or municipalities that are interested in raising capital through the distribution of stocks and bonds.

What is a market-out clause?

A clause enabling the syndicate to cancel the agreement, based on certain events that make marketing the issue impossible. Examples include material adverse circumstance that affects the issuer or a general disruption in financial markets.

What is the name of the process of selling additional shares of an already public company?

A follow-on offering.

What can a member firm not accept from a customer regarding an IPO prior to the beginning of trading on the secondary market?

A market order, since it may be locked in at a completely alternate price. They can accept limit and not-held orders. Applies to NMS and OTC securities.

What is a private placement? Are these securities transactions exempt?

A private placement is a placement in which there is no transaction involving any public offering and *does not* require registration.

What is a POP?

A public offering price, found by assessing demand for an issue.

To whom can a member firm and its associates never sell new issues to?

A restricted person with a *beneficial interest*, even if its by an association. - Member firms and all associated persons - Immediate family of member firms if there is a support relationship, the employee can control the allocation, or... - finders and fiduciaries involved in the offering - portfolio managers buying for their own accounts - persons owning a B/D

What are the basic provisions of Rule 147?

A security sold only in one state without using interstate commerce is exempt from registration. 80% of their revenues, assets, and proceeds must be in the state and 100% of the purchasers must be principal residents of the state.

What is a syndicate? What does a syndicate's role in a public offering imply?

A syndicate is a group of broker-dealers involved in underwriting. *A syndicate implies that a financial commitment has been made by the underwriters.*

What can issuers never bid for?

Actively traded securities of the issuer or affiliate Basket transactions involving a covered security Inadvertent transactions

Who do volume restrictions always apply to?

Affiliates.

What is a prospectus?

An abbreviated registration statement which is filed with the SEC to prevent fraud.

What is a lock-up agreement?

An agreement dictating the amount of time that pre-IPO investors must wait to sell their shares once the company has gone public. Although it generally expires six months following the closing of the IPO, there is no real time limit. Shares sold under this agreement have a restrictive legend printed across the face of the certificate indicating that the shares haven't been registered and cannot be sold.

What is a penalty bid?

An arrangement permitting the managing underwriter to reclaim a selling concession from a syndicate member when the securities originally sold by the syndicate member are purchased in syndicate covering transactions. Penalty bids are identified PBID.

In what kind of offering is stabilizing prohibited?

An at-the-market offering.

Under regulation A, what is an exempt offering?

An issuing of securities valued at $50 million or less over 12 months. This exemption is not complete, since the issuer must still file an offering statement with the SEC and provide an offering circular to prospective purchasers. There must always be a prospectus.

What is a combined, or split offering?

An offering in which some shares are offered by the issuer, while others are offered by selling shareholders. The shares sold by the company are new and constitute a primary offering. The company issuing the securities receives the proceeds of that portion of the sale.

What is a mini-maxi offering? What role does an escrow account play?

An underwriting in which *there is a minimum threshold of shares that must be sold in order for the offering to avoid cancellation.* An escrow account, therefore, holds any client funds being used to purchase the securities. Escrow means it is third-party.

What is a firm-commitment underwriting?

An underwriting in which a syndicate is acting for its own account and risk by agreeing to purchase the entire issue and *absorb any securities that are not sold.*

What securities are inelgible for Rule 144A transactions?

Certain convertibles and warrants and securities issued by registered investment companies.

What are the basic provisions of Rule 145?

Certain types of securities reclassifications are subject to the SEC Act of 1933. Including: - An issuer substituting one security for another - A merger in which securities of one corporation are exchanged for another - A transfer of assets from one corporation to another. (tender offers, LBOs) Stock splits, reverse stock splits, and changes in par value are not subject to the rule. *The rule primarily concerns mergers and acquisitions.*

What *can* broker-dealers do during the cooling-off period?

Discuss the issue, provide the red-herring, and record indications of interest. Cannot accept payment or sell the issue.

What can an issuer do with the proceeds of their new offering?

Either use them or refinance their current structure.

How often must firms re-verify their eligibility for the new issue rule?

Every 12 months.

What due diligence must the broker-dealer contemplating the possibility of issuing on a distribution perform?

Examine the issuer's history, the quality of their management, labor relations, financial and operational data, legal matters, and comparable companies in the same field.

Someone wants to sell restricted or control stock under Rule 144. What must they do first?

File Form 144 with the SEC.

Someone who owns restricted or control stock files form 144, but doesn't sell their shares within 90 days. What do they have to do?

File an amendment notice.

What is the calendar restriction for research reports for IPOs? For follow on transactions?

For IPOs, 10 calendar day cooling off restriction. For follow-ons, 3 calendar day restriction.

An overseas investor wants to sell their securities pursuant to Regulation S, do they have to wait if its debt? What about equity?

For debt, 40 days. For equity, one year.

Are there volume restrictions for private placement stock held for more than 1 year?

For private placement stock that has been held for more than one year, there are no volume restrictions for non-affiliates of the issuer.

What is a passive market maker's daily purchase limit?

Greater of 30% of its ADTV in the stock or 200 shares.

What is the one restriction to the quiet period?

Hot news! Only if there is unexpected news may a BD publish during the quiet period.

What is the only rule in which a PSMM can outbid the highest independent bid?

If a customer's limit price is higher than the highest independent bid.

What is the Green Shoe Clause?

If an issue is oversubscribed, underwriters may buy additional shares (limited to 15%) from the issuer.

Who does Rule 144A allow sales after issuance to?

Immediately to a qualified institutional buyer.

What is an accredited investor?

In a private placement, there is no restriction on the number of accredited investors, which includes any of the following: - financial institutions, large tax-exempt plans, private business development companies - Directors, executive officers, general partners of the issuers - individuals who either: - have a net worth of at least 1 million dollars - Have a gross income of at least $200K, $300K combined with a spouse, for each of the last 2 years with the anticipation that this level of income will continue.

Why does a PIPE transaction result in a stock declining?

Increase in shares outstanding, reflects company need for capital with limited means to raise, and is done at a lower price.

For how long can a security be stabilized?

Indefinitely.

What does Rule 102 concern?

Issuers and selling security holders, since they are interested in the security's success, may not support or raise the price of the security. The only exceptions are if the security: - is an unsolicited purchase - is a convertible exercise - is odd-lot

What proves a private placement?

It is a gray area, so the burden of proof is in the issuer and clarified by Reg D.

What is the primary provision of Rule 105?

It is a violation for anyone to short the security that is subject of an offering and then buy it from an underwriter if the short was executed during the period 5 business days prior to pricing. This is designed to prevent large institutions from shorting securities during pricing and then cover with positions from underwriters.

What are the advantages of a private placement? Disadvantages?

It is faster and less costly to do a private placement. However, there are limits related to whom the offering may be directed to and the number of investors that can participate.

What is the clear intent of a new issue rule?

Keep selling of equity IPOs from broker-dealers and those with beneficial interest.

What are the advantages of a public offering? Disadvantages?

Large numbers of retail and institutional investors can participate. Requires significant time and costs.

What are the components of the underwriting spread?

Manager's fee - portion paid to the *managing underwriter* for each share Underwriter's/Member's fee - portion paid *to the syndicate member* assuming risk/liability for shares Concession - Portion paid to the *firm that sells the shares.*

What is passive market making?

Market makers involved in a distribution may not enter a bid or effect a purchase at a price above the independent bid. When the market goes down, the market maker may maintain its bid until its purchases have reached or exceeded the lesser of two times the minimum quotation size for that security (200 shares) or the passive market maker's daily limit.

What is the basic provision of Rule 103?

Nasdaq market makers can continue making markets in Nasdaq stocks if they are the subject of an offering during the restricted period, *but only passively*.

When must a syndicate manager provide each syndicate member with an itemized statement of syndicate expenses?

No later than 90 days after syndicate settlement.

Does the SEC review information contained in the prospectus?

No, *it simply attests to its accuracy.*

Can the prospectus be altered?

No, not at all, unless filed with the SEC.

A charity is given stock by a restricted person who held the security for six months. Does the charity have to hold the stock for a specific amount of time?

No, the seller completed the holding period restriction.

Can offering orders be rescinded?

No, they are binding.

Can a broker-dealer distributing securities (primary or secondary) pay any third party or unregistered person to solicit another person to buy a security?

No.

Can an individual be a QIB?

No.

Does a syndicate members have to review trades effected by a selling group?

No.

Can an underwriter induce someone to purchase a security covered by Rule 101?

No. But, the issuer can release research reports on the security if it meets the conditions of Rules 138 and 139.

How many market makers can stabilize a security?

One.

What are the volume limitations of SEC Rule 144?

Over 90 days, a NYSE or Nasdaq listed stock is limited to selling the greater of 1% of total shares outstanding or the average weekly trading volume of the last *4* weeks. However, there is one exception - there are no volume restrictions for *non-affiliates* of the issuer if they have held *restricted* stock for *more than one year.* - non-affiliate - restricted stock - held for one year

What is stabilizing?

Placing bids for the purpose of maintaining the price of a security.

What 3 parts does the registration process for securities entail?

Pre-registration Cooling-off (waiting) Post-effective period

What is a PIPE?

Private Investment in Public Equity. A private placement of securities in which a BD assists an issuer by distributing restricted, unregistered securities to a small group of accredited investors, like hedge funds.

How is restricted stock typically acquired?

Private placement.

What is shelf-registration?

Registration that positions sales for the most favorable market conditions by *remaining active for three years after the initial date. *

What are the provisions of Rule 144A?

Rule 144A is designed to permit sales of restricted securities to sophisticated investors without being subject to the conditions of Rule 144. It makes the private placement market more liquid.

What are some examples of securities that are not considered new issues and may be sold to a restricted person?

Secondary offerings, debt offerings, private offerings, preferred sock and rights offerings, investment company offerings, exempt securities, REITS and DPPs. Beforehand, however, the firm must obtain verification that the firm is elgible to buy these new issues under exemption.

What is the issuer directed provision?

Securities that are specifically directed by the issuer to persons restricted under the rule are not prohibited, but are still prohibited from being sold to BDs or those with beneficial interest. The provision allows *otherwise restricted people to buy the security if their immediate family is an employee or director of the issuer*.

What does the SEC do if it believes the registration statement is incomplete or misleading?

Sends a deficiency letter to the issuer.

How do state blue-sky laws apply to public offerings under the Uniform Securities Act?

Standard blue-sky laws apply and an issuer's RRs must be registered in each state they plan on doing business in. Additionally: An issuer must either: - apply for *notification*, which is submitting an application to the state administrator asking for approval to offer the securities in the state - apply for *coordination*, which is a form completed together with federal registration - qualification, which involves meeting specific requirements of one state and becoming effective at the discretion of the state administrator.

A market maker wants to stabilize a Nasdaq security. What must they do first?

Submit a request to Nasdaq market operations for a one-sided bid, which will be identified under SYND. - there may only be one stabilizer - there must be 1 independent market maker

What must a company disclose in a split offering?

That a portion of the offering's proceeds will be paid to the selling shareholders, including investors looking to cash out of scale back their holdings.

What is the underwriting spread?

The *difference between the amount paid by the investing public and the amount received by the issuing corporation. *

What limitations are there on the investment bank issuing research on something they underwrote?

The broker-dealer may not publish research reports regarding the subject security and its analysts will not be permitted to make public appearances regarding the issuer of the security.

When does the due diligence meeting occur between the underwriters, syndicate members, issuer, attorneys, and accountants?

The cooling off period. The *purpose is to review the different aspects of the planned underwriting, including certifying that the issuer and its underwriters have satisfied state and federal laws.*

What is the maximum price at which a security can be stabilized?

The higher of: - *last independent sale* - *highest bid i nthe market* - *no higher than the POP in an IPO*

Who is responsible for inaccuracies in the documents provided to shareholders?

The managing underwriter and the issuer, *thus, the managing underwriter must review it as a due diligence obligation.*

A syndicate decides to stabilize. Who must it notify?

The market in which the stabilization will occur.

What is a syndicate covering transaction?

The placing of any bid or effecting of any purchase on behalf of the distributor to reduce a short position.

What is the post-effective period?

The point at which sales of the offering may begin! The price is set by the underwriter at this point and purchasers are provided with a copy of the final prospectus.

At what price can syndicate members sell the issue at?

The public offering price, no less.

What *can* broker-dealers send to potential buyers during the cooling-off period?

The red-herring, a *preliminary prospectus* with a cover page stating that the SEC is currently reviewing the filing but it is not yet effective. *Will include a price range, but not the POP.*

What is flipping?

The sale of a new issue within 30 days of the IPO. Underwriters use penalty bids to recoup these costs. FINRA prohibits a member or an associate of a member from directly or indirectly recouping any portion of commission awarded to a person for selling shares of a customer subsequently flipped, unless the managing underwriter assesses a penalty bid on the entire syndicate.

What is a standby arrangement?

The syndicate will, for a fee, purchase any unsubscribed shares from a rights offering for current shareholders. The firm does so on a firm-commitment basis.

What is a best-efforts all or none offering?

The underwriter acts as an agent and tries to sell as much as possible, but *if the entire issue isn't sold, all sales that were made must be cancelled and money returned to the subscribers*.

What is the general rule for something qualifying as a reference security?

They must be able to alter the price of the subject security. Thus, derivatives are not reference securities.

What is the responsibility of an underwriter?

To ensure that an issuer is able to raise capital under the most advantageous terms.

What is the primary restriction of Regulation M?

To prevent those interested in a distribution from manipulating the secondary market for their benefit. *They may not buy or bid for the subject security within the restricted period.* The restricted period begins 5 days prior to pricing or whenever the broker dealer begins participating and ends when the BD stops. If the security has an ADTV of $100,000 or the issuer has a public float of $25 million or more, the five day restriction *drops to one day.* Applies also to reference securities, which the subject security can be converted into!

What is the basic principle of Rule 144?

To restrict the sale of restricted and control stock.

At what price is a PIPE transaction?

Under the current price of the common stock, thus, when a PIPE is announced a stock usually declines.

What is a best-efforts underwriting?

Underwriters agree to *sell as much of the new offering as they are able to*, with the stipulation that *they can return any unsold securities to the issuer.* In this arrangement the underwriter is acting in the capacity of an *agent for the issuer*. Sometimes a corporation may require a specific minimum amount of capital to be raised, and that a lesser amount would not permit it to accomplish its objectives. So if a minimum contingency is not met the offering would be cancelled.

What is a spin-off?

When a parent company distributes shares of a subsidiary company to the parent company's shareholders. Each shareholder retains their original shares. Used by sellers in hopes that the combined valuation will be greater than the single entity.

When does the preregistration period begin?

When the issuer files the registration statement with the SEC. The due diligence obligation begins here.

Can a broker-dealer be a QIB?

Yes, if they invest $10 million of securities of issuers not affiliated with the dealer or act in riskless principal capacity for other QIBS.

Must the aftermarket activities of short-covering purchases and penalty bids be notified to the principal market?

Yes, via the SRO.

A client has already received a preliminary prospectus. Does he need to receive the final prospectus if he makes a purchase decision?

Yes.

A control stock stake is acquired via the open market. Must it be sold according to rule 144?

Yes.

Are tombstone advertisements allowed?

Yes.

Can a registered salesperson solicit/accept indications from investors for purchases of PIPE before the public offering?

Yes.

Can stabilizing bids carry over borders into other markets?

Yes.