SIE 7 The Securities Act of 1933 and Primary Markets

SEC Disclaimer

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

investors

- 3 groups (institutional, retail, accredited) - in primary markets - those who purchase the new issuer with the intent to hold the security for a period of time

preliminary prospectus (red herring)

- An abbreviated prospectus that is distributed while the SEC is reviewing an issuer's registration statement. - contains all of the essential facts about the forthcoming offering EXCEPT the underwriting spread, final POP, and date on which the shares will be delivered. - must be made available to any customer who expresses interest in the securities during cooling-off

Rule 147

- SEC rule: offerings that take place entirely in one state are exempt from registration - issuer has its principal office and receives at least 80% of its income in state - at least 80% of the offering proceeds are used in state - all purchasers are residents of the state - majority of company's employees must work in state

qualified institutional buyers (QIBs)

- a corporation that is an accredited investor (SEC - Rule 501 of Regulation D) - owns and invests a minimum of $100 million in securities on a discretionary basis - the broker-dealer threshold is $10 million.

green shoe option

- allows underwriter to increase the number of shares offered up to an additional 15% if there is sufficient demand - provision offering of an issues registration statement

full prospectus

- full and fair disclosure document - provides prospective investor w/ the material information needed to make fully informed decisions

underwriters

- groups of BDs or investment bankers who work with issuer to bring securities to the market and sell them to the investing public - her issuer to structure capital raises and (at times) form syndicates w/ other underwriters to facilitate money-raising process

retail investors

- invest their own assets - tend to be less knowledgable than institutional investors - sales to this group have higher communication and disclosure expectations

registration statement (S-1)

- issuer files this w/ the SEC - the statement discloses material info about the issue and part of this is a disclosure document (prospectus) must contain: 1. description of issuer's business 2. names and addresses of company officers and directors, their salaries, and 5-year business history of each 3. amount of corporate securities, company officers, and directors own and identification of investors who own > 10% of the company 4. company's capitalization + equity and debt 5. description of how the proceeds will be used 6. whether the company is involved in any legal proceedings

institutional investors

- large entities that pool money to purchase securities and other investment assets - banks, insurance companies, pensions, hedge funds, investment advisors, mutual funds

cooling-off period

- lasts a minimum of 20 days - during this time, no one can solicit sale of securities

tombstone advertisement

- may be placed by the issuer or w/ the help of underwriters - during cooling-off period - limited to: 1. name of issuer 2. type of security being offered 3. number of shares to be sold 4. POP or range if POP not determined yet 5. names of the underwriting members (when placed by underwriter and not issuer) - must say "this announcement is neither an offer to sell nor solicit securities; offer made only be prospectus"

final prospectus

- must precede/accompany all sales confirmations - must include: 1. description of offering 2. offering price 3. selling disclosures 4. offering date 5. use of proceeds 6. description of underwriting (not actual contract) 7. statemetn of possibility that the issue's price may be stabilized 8. history of business 9. risk to purchasers 10. description of management 11. material financial information 12. legal opinion concerning the formation of the corporation 13. SEC disclaimer

Registration A+ Tier 1

- offerings up to 20M in a 12 month period w/ no more than 6M being sold on behalf of existing selling shareholders

Registration A+ Tier 2

- offerings up to 50M in a 12 month period w/ no more than 15M sold on behalf of existing selling shareholders - qualified investors

omitting prospectus (SEC Rule 482)

- official name for an advertisement for a mutual fund - often take form of tombstone ad for a new fund - omits most of the info an investor would need to make decisions - not sufficient for soliciting sale

managing underwriter

- one of the members of the syndicate will take on a lead role and provide significant resources to the venture

official statement

- primary disclosure document for a municipal security - contains much of the same information found in a prospectus

All or None (AON)

- the issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all the shares or cancel the underwriting - any funds collected from investors must be held in escrow pending the final disposition of the underwritining - type of best efforts underwriting

restricted persons

- those not allowed to purchase shares at POP 1. member firms 2. employees of member firms 3. finders & fiduciaries acting on behalf of the managing underwriter 4. portfolio managers (any person who has the authority to buy/sell securities for a bank, savings & loan associations, insurance companies, or investment companies) 5. any persons owning 10%+ of a member firm 6. any immediate family of anyone in categories 2-5

municipal advisors

- type of investment banker that advises municipalities on the issuing of municipal debt and other types of municipal securities - work under contract and may help w/ some of the underwriting functions - may not be compassed as part of the underwriting of any issue they provide advice on

best efforts underwriting

-calls for the underwriters (syndicate) to buy securities from the issuer acting as an agent, not the principal - unsold shares returned to issuer

2 types of best efforts underwriting

1. all or none (AON) 2. mini max

what is allowed during cooling-off period

1. issuer may place tombstone ad 2. preliminary prospectus (red herring) 3. indications of interest may be gathered 4. due diligence takes palce 5. state registration requirements (blue sky filings) 6. release (effective) date 7. final prospectus 8. additional primary offering (subsequent primary offering, follow-on offering)

IPO Rules

1. members make bona-fide public offering of securities at public offering price (POP) 2. members do not withhold securities in a public offering for their own personal benefit or use such securities to reward persons who are in positions to direct future business to the member 3. industry insiders do not take advantage of their insider status to gain access to new issues for their own benefit at the expense of public customers

2 characteristics of APOs

1. primary offerings (proceeds go to issuer) 2. come after the IPO (class of shares already available to the public)

2 special offerings

1. shelf offering 2. green shoe option

Tier 2 qualified investor

2 ways to qualify: 1. be an accredited investor defined by Rule 501 of Regulatio D 2. limit investment to the maximum of the greater: - 10% investor's net worth - 10% investor's net income per offering

Which of these may be found in the final prospectus that is not in the preliminary prospectus? I. Next year's sales II. Public offer price (POP) III. Release date IV. Planned use of the proceeds A) II and III B) I and IV C) II and IV D) I and II

A) II and III final prospectus has everything that preliminary prospectus has PLUS - Public offering price (POP) -- may vary until release date - release date preliminary prospectus includes: - description of business - names & address - company officers and directors; investors who own 10% or more - company's capitalization - how proceeds will be used - whether involved in legal proceedings

Seacoast Securities is a syndicate member for the initial public offering of WeariTech, Inc., WeariTech is a hot new issue in the wearable technology space. The S-1 registration statement has been filed but the effective date has not yet been released. This is A) the cooling-off period. B) the pre-filing period. C) the mandated waiting period. D) the posteffective period.

A) the cooling-off period. - this is period between filing of offering and SEC release for sale

The Mod Family Foundation is a $500,000,000 charitable foundation headed by Clarence Mod. The foundation is seeking to purchase a large block of WeariTech, Inc., a Nasdaq listed company, for the foundation's portfolio. Seacoast Securities is assisting with this secondary market transaction. In this example, the Mod Family Foundation is A) an issuer. B) a venture capitalist. C) a retail investor. D) an institutional investor.

D) an institutional investor. - institutional investor: entity that pools money to purchase securities and other investment assets - banks, insurance companies, pensions, hedge funds, investment advisers, mutual funds - some called Qualified Institutional Buyers (QIBs) - owns and invests min of $100 million in securities

exempt securities

Securities that are exempt from registration and prospectus requirements with the SEC. 1. US gov't securities 2. municipal securities 3. commercial paper, bankers acceptance, other maturities of 270 days or less 4. fixed life insurance and annuities (not variable life policies) 5. national and state bank securities 6. building and loan savings and loan securities 7. charitable, religious, educational, and nonprofit securities 8. interests in common carriers (RR/ equipment certificates) 9. banks

mini max

a type of best efforts underwriting where the syndicate must sell a minimum amount and may sell up to a higher, maximum amount. - sets floor minimum and ceiling of securities the issuer is willing to sell - underwriter must locate enough interested buyers to support the minimum issuance required - once the minimum is met, the underwriter can expand the offering up to the maximum amount of shares the issuer specified

what federal law regulates initial sale of securities to public? a. Securities Act of 1933 b. Securities Exchange Act of 1934 c. Investment Company Act of 1940 d. Truth in Investing Act

a. Securities Act of 1933

an underwriter that assists a corporation on the sale of a new issue without taking the security into inventory is underwriting on what type of underwriting? a. best effort b. firm commitment c. partial commitment d. full or none

a. best effort - best efforts basis: underwriter who does not commit capital and take the issue into its inventory

during the cooling-off period, an underwriter may do all of the following EXCEPT: a. gather binding indications of interest b. distribute red herrings to interested parties c. perform due diligence d. file required forms for state registration

a. gather binding indications of interest - there are no BINDING indications of interest; they are nonbinding

a Regulation A+ exemption covers: a. offering of $50 million or less in 12 months b. offering of letter stock c. private offering d. offering of $50 million or more in 12 months

a. offering of $50 million or less in 12 months - Regulation A+ under Securities Act of 1933: exempt security from registration - limits offerings

an investor that purchases Big City 3.5% general obligation bonds of 2040 in the primary market should receive: a. official statement b. preliminary prospectus c. final prospectus d. statutory circular

a. official statement - most common disclosure document for municipal security is an official statement

follow-on offering

any subsequent money raised after the IPO - sometimes called additional public offerings (APOs)

in order to solicit the purchase of a mutual fund, a registered representative must provide the investor with: I. summary prospectus II. rule 482 prospectus III. statutory prospectus IV. statement of additional information a. I and II b. I OR III c. II or III d. II and IV

b. I OR III - disclosure requirement: either summary OR full prospectus (statutory prospectus)

capital markets

both primary and secondary markets

Your customer has purchased shares of Littleton Lumber Company (non listed stock) in secondary market. Littleton Lumber recently completed an APO. Your customer will receive a prospectus for the APO if the purchase is within how many days of the APO date? a. 5 days b. 25 days c. 40 days d. 90 days

c. 40 days - Non-NMS APO: 40 days

Which may purchase an IPO at the POP? a. Jim, registered representative for Seacoast Securities b. Jim's brother Robert, contractor c. Jim's niece Amber, chef d. Jim's father Roy, engineer

c. Jim's niece Amber, chef - aunts, uncles, nieces, nephews are not on the prohibited list

Seabird Airlines is selling shares to the public for the first time. the company intended to use the proceeds form the sale of its stock to purchase several new passenger aircrafts. this offering is an example of: a. secondary offering b. rights offering c. initial public offering d. subsequent primary offering

c. initial public offering

an investment banking firm that enters into a contract with a municipality to provide advice and direction on raising capital for the municipality is a: a. syndicate member b. muni dealer c. municipal advisor d. bond dealer

c. municipal advisor - the rest are investment bankers involved with actual sale of issue; secondary markets

issuer

corporation, government, other entity that is selling a security to raise capital for itself

which are considered nonexempt offerings according to Securities Act of 1933? I. Government securities II. private placements III. public offering of $60 million by brokerage firm IV. sales of corporation bonds of $52 million a. I and II b. I and III c. II and IV d. III and IV

d. III and IV - exempt: government bonds and private placements - public offerings <$50 million and sometimes $20 mill are also exempt

a corporation that seeks to sell its own stock to raise money for building new factory is an example of: a. selling group member b. underwriter c. market maker d. issuer

d. issuer - issuer: company selling its own securities to raise capital

The Hew Lumber Company's common stock is currently trading at $32 in market. Hew is preparing to sell additional shares to raise money for a new mill. this is an example of: a. secondary offering b. hybrid offering c. initial public offering d. subsequent primary offering

d. subsequent primary offering - trading in the market - IPO is in the past - sale of shares is an APO here (aka subsequent primary offering)

How many primary offerings can a corporation issue? a. 1 b. 2 c. 3 d. unlimited

d. unlimited - corporation can sell as many shares and have as many offerings as it can get people to buy stock

Initial Public Offering (IPO)

first time an issuer distributes securities to the public

de minimus exemption

if the beneficial interest of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue

primary offering

if the issuer is getting the money (can be IPO/ APO/ etc.)

shelf offering

issuer who is already publicly traded can register new securities w/o selling entire issue at once - good for 2 years w/o having to register the security - provision offering of an issues registration statement

national market system (NMS) securities

larger corporations' stock (after issued) that trade on a national exchange (listed) or the Nasdaq system

municipalities

municipal governments that issue municipal bonds and other types of debt

immediate family

parents, in-laws, spouses, siblings, children; any individual whom the person provides material support - restricted persons

lettered (legend) stock

private placement stock: 1. registered (must be held for 6 months) 2. unregistered (no registration w/ SEC) 3. letter stock (investor agreed to terms by signing investment letter) 4. legend stock (special inscription on the stock certificate indicates restricted transfer)

Securities Act of 1933 (Paper Act)

protects investors who buy new issues: 1. requiring registration of new issues (unless exempt) 2. requiring an issuer to provide full & fair disclosure about itself and the offering 3. requiring an issuer to make available all material information necessary for an investor to judge the issue's merit 4. regulating the underwriting and distribution of primary issues 5. providing criminal penalties for fraud in the issuance of new securities

accredited investors

retail investors who are: 1. insiders of security's issuer (officers, board members, major stock holders) OR 2. meet certain financial criteria (income of at least 200k in past 2 years; have net worth of $1 million+ - investor must meet one or the other

nonexempt securities

securities that are required to be registered in order to be sold to the public - according to Securities Act (1933)

firm commitment underwriting

the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares - buys at higher POP - earns price differential (spread) for its efforts

syndicate

type of joint venture where BDs form up to share both the risk and profits from the offering

primary market

where securities are sold to the investing public in issuer transactions - primary offer

secondary markets

where securities trade between investors - does not include issuers

Modulux, Inc., a NYSE listed manufacturing company, was founded by Clarence Mod. Clarence is now 82 years old and is looking to divest his significant interest in Modulux to capitalize the Mod Family Foundation, a charity. He has enlisted the help of Seacoast Securities, a FINRA member broker-dealer based in Seattle, to run the sale. Seacoast Securities is acting as A) an owner. B) an investment banker. C) an issuer. D) a dealer.

B) an investment banker. - investment banker is assisting a person in a secondary offering

Regulation D (exempt transactions - Private Placements)

SEC does NOT require registration of an offering under this regulation as long as there are no more than 35 non accredited investors

The Big Shoe Sneaker Company is a small manufacturer of athletic shoes. It is selling $100 million of its stock. This will be its first public offering. It will use the money to enhance both marketing and production with a plan to grow the business and obtain a Nasdaq listing in two or three years. After the initial sale of the new shares, buyers of the stock in the over-the-counter market should expect to receive the final prospectus for how many days? A) 90 B) 25 C) 40 D) Buyers in the secondary market are never entitled to the IPO prospectus

A) 90 - this is an IPO of an unlisted, non-Nasdaq security - requirement for an IPO non-NSM = 90 days - APO non-NSM = 40 days

The ABC Chemical Corporation wishes to advertise its upcoming offering of common stock in a tombstone advertisement that they, the issuer, will place. When placing the tombstone advertisement, which of the following would be least likely to appear? A) The names of the investment bankers underwriting the issue B) The total number of shares being offered C) The expected price range of the offering D) The name of the issuer

A) The names of the investment bankers underwriting the issue Tombstone Ad: - during cooling off period for nonexempt securities - allowed to run before effective date - include: name of issuer, type of security, number of shares, POP (or range), name of issuer

Cypress Care Nurseries, Inc., owns and operates a chain of nurseries and is headquartered in Cypress, California. The company is considering selling shares of the company to the public in California. In order to be exempt from registration with the SEC, under Rule 147 it would need to meet several criteria. Which of these is nota listed criterion under Rule 147? A) 80% of the issuer's assets are located in the state of California. B) 80% of the issuer's customers must be located in the state of California. C) 80% of the issuer's revenue must be generated from the state of California. D) 80% of the issuer's proceeds will be used in the state of California.

B) 80% of the issuer's customers must be located in the state of California. to be exempt under Rule 147 -- 80% rule: company must meet at least one of 3 rules - 80% revenue from state - 80% proceeds for state - 80% company assets in state - revenue in state, NOT customers in state

All of the following are exempt issuers except A) the City of Alta Loma. B) Modulux, Inc., a home manufacturer. C) Alta Loma Community Foundation. D) the Southwest Railroad Co.

B) Modulux, Inc., a home manufacturer. - common carriers (e.g., railroads), municipalities, and charities are all examples of exempt issuers under the Securities Act of 1933 - a for-profit corporation is not exempt

Modulux, Inc., a NYSE listed manufacturer, is offering 5,000,000 shares to the public, which will raise capital to build a new plant. The new technology and design should allow Modulux to increase market share significantly in the modular home business. This offer is A) an IPO. B) an APO. C) a venture offering. D) a secondary offering.

B) an APO. - this is an offering of stock to raise money for the issuer (primary transaction) - the company's stock is actively trading in the secondary markets so this be additional shares (APO)

During the cooling-off period the disclosure document that may be delivered to interested parties is called the A) final prospectus. B) preliminary prospectus. C) cool off period prospectus. D) summary prospectus.

B) preliminary prospectus. - also called Red Herring - document available during cooling-off period in preliminary prospectus

Modulux, Inc., a NYSE listed manufacturing company, was founded by Clarence Mod. Clarence is now 82 years old and is looking to divest his significant interest in Modulux to capitalize the Mod Family Foundation, a charity. He has enlisted the help of Seacoast Securities, a regional investment banker based in Seattle, to run the sale. This is an example of A) a CRUT. B) a secondary offering. C) an IPO. D) an APO.

B) a secondary offering. - shares belong sold belong to a person, not the issuer - an APO or IPO are both issuer transactions

The SEC has established rules regarding delivery of a prospectus when a secondary market transaction occurs after the effective date. Which of these comply with those rules for initial (IPO) and additional (APO) public offerings? I. An IPO of a stock to be listed on the NYSE requires delivery for a period of 25 days. II. An IPO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days. III. An APO of a stock listed on the NYSE requires delivery for a period of 25 days. IV. An APO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days. A) III and IV B) II and III C) I and IV D) I and II

C) I and IV I. An IPO of a stock to be listed on the NYSE requires delivery for a period of 25 days. IV. An APO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days. - IPOs of NMS: 20 days - APOs of NMS: no requirement - IPOs of non-NMS: 90 days - APOs of non-NMS: 40 days

(Under the intrastate offering rule (Rule 147), when may a resident purchaser of securities resell them to a nonresident? A) 3 months after first sale made in state B) Six months after the last sale made in that state. C) at least 6 months after date of purchase D) none

C) at least 6 months after date of purchase

A corporation seeking to raise funds in order to expand its manufacturing capacity would do so in A) the currency market. B) the secondary market. C) the funding market. D) the capital market.

D) the capital market. - raising new capital - through issuance of stock or bonds - in capital market

The preliminary prospectus for the IPO of the Big Shoes Sneaker Company indicates that the number of shares sold may be increased as much as 15% if market demand is sufficient. This is called a A) Secondary IPO offering B) Flex offering C) Shelf offering D) Green Shoe option

D) Green Shoe option

GEMCO Oil and Gas, a non-NMS stock, wishing to sell up to $100 million of convertible debt as market conditions permit, files a shelf registration statement with the SEC. Which of these statements are true? I. For securities offered via a shelf registration, a supplemental prospectus must be filed with the SEC before each sale. II. The registration statement is effective upon completion of the cooling-off period. III. Shelf registration allows the issuer to sell portions of a registered shelf offering over a 2-year period without having to reregister the security. IV. Shelf registration allows the issuer to sell portions of a registered shelf offering over a 4-year period without having to reregister the security. A) I and IV B) II and IV C) II and III D) I and III

D) I and III - type of APO - shelf offering registration: for issuer who is already listed; register new securities w/o re-registereing - once filed, good for 2 year period - well-known seasoned issuer (WKSI) may extend to 3 years - supplemental prospectus must be filed w/ SEC before each sale

Regulation A+

Exempts registration of small and medium sized companies - 2 tiers: - No more than 30% of aggregate offering may be sold by selling SH - Offering Circular must be filed with SEC - Testing the waters is allowed