SIE Chapter 8
Private Investment in Public Equity (PIPE)
A PIPE deal is when a public company raises capital through a private placement. A company might do this in order to raise capital quickly and avoid the SEC registration process.
Best Efforts
A best-efforts is a type of underwriting where the underwriters act as agents and have no financial responsibility for any unsold securities.
Split offering
A combination of primary and secondary offerings. This is very common, as large shareholders may choose to sell shares alongside the company in a registered offering.
Securities Act of 1933
A federal law designed to prohibit fraud and ensure that investors receive all material information relating to new issues by requiring new securities to be SEC-registered, unless the security is exempt or sold in an exempt transaction Objectives: ◆To require that investors receive significant and material information concerning securities being offered for public sale ◆To prohibit deceit, misrepresentations, and other fraud in the sale of securities to the public
Follow-On Offering
A follow-on is a public offering by an existing public company that has already had its IPO.
Syndicate
A group of investment banks that work together to help an issuer market and sell securities to the public by sharing in the risk of the offering
Registration statement
A legal document companies file with the SEC to register their securities for legal sale to the public During the pre-filing period or quiet period, there typically can be no marketing of the securities and no offers or sales to the public Gives name/basic info for company, list of insiders, underwriter info, amount and planned use of proceeds and financial statements
Primary offering
A new issue in which the issuer sells shares and receives all the proceeds. In this situation, the company is creating brand new shares to sell.
Preliminary Prospectus
A preliminary prospectus can be used to market to investors during the cooling-off period. The preliminary prospectus will generally not include the timely details of the transaction, such as the offer price or number of shares being registered. Instead, buyers must still receive a final prospectus no later than the settlement date of the transaction, which includes this information.
Prospectus Delivery
A prospectus or notice of its availability must be delivered to investors for any sales for the first 25 days following an IPO.
When must a prospectus or notice of availability be sent to IPO shareholders?
A prospectus or notice of its availability must be delivered with sales of shares for 25 days following an IPO.
What does it mean for a security to be exempt?
A registration statement and prospectus is not required in an exempt transaction. However, investors will still receive some disclosure documents that provide information about the offering. These are sometimes referred to as an offering memorandum.
Secondary Offering
A secondary offering is a new issue (could be an IPO or follow-on) where shares are being sold by existing investors, not the company. For example, if a private equity firm liquidates a position in a company, this is a secondary offering.
Selling group
A selling group is comprised of broker-dealers that sell an allotment of the newly issued securities on behalf of an underwriter or syndicate members. These firms differ from syndicate managers because they do not have liability for any unsold securities. Instead, the selling group acts as agents on the deal.
Shelf Registration
A shelf registration allows an issuer to preregister securities today and sell them at a later date when market conditions are favorable. A shelf is good for up to three years and can be used for both debt and equity follow-on offerings, but never for an IPO.
Standby commitment
A standby commitment is a type of firm commitment that is used in conjunction with a rights offering. As discussed in a previous chapter, a rights offering allows current shareholders to maintain their proportionate ownership in the company if additional shares are issued. If current shareholders decide not to subscribe to this rights offering and purchase the additional shares, the underwriter standing by will purchase them and then look to resell them to the public. This arrangement ensures that all the shares will be sold either to existing shareholders or the underwriters.
Tender Offer Minimum Threshold
A tender offer is an offer by a company or an outside investor to purchase at least 5% of the c om pany's shares directly from the company's shareholders. The purchaser making the offer might qualify a tender with a minimum number of acceptable shares. This means that unless shareholders agree to sell a certain number of shares, the investor making the offer will not go through with any purchases. Example: lnvestorCo is looking to purchase up to 10 million shares of Company ABC at a price of $25 per share. lnvestorCo sets a minimum threshold of 8 million shares. If the shareholders of Company ABC only agree to tender 6 million shares collectively, lnvestorCo will not go through with any purchases since the minimum threshold was not met.
Restricted person
A type of individual or entity, including FINRA member firms, their employees, attorneys and accountants of the lead underwriter, and immediate family members of these individuals, that is prohibited from purchasing an IPO of common stock
AII Holders Best Price
All shareholders receive the exact same price in a tender offer. This is sometimes referred to as "all holders best price".
IPO
An IPO is the first public offering of a company's securities. It allows the issuer to publicly raise capital and might give private shareholders—founders, early employees, etc.—a pub-lic market for valuing and selling their stock. Investment bankers help private companies assess the best timing for IPOs along with the initial offering price that will attract sufficient investor enthusiasm.
All or none
An all-or-none is one type of best efforts where if the underwriter is unable to sell all the shares within a certain period, the entire deal will be cancelled.
Private placement
An exempt transaction that allows a company to raise new capital privately, without public sale, and avoid SEC registration
Retired Individuals Accredited Status
An individual who consistently made at least $200,000 during his or her career but has since retired would not be accredited because once he or she retires there is not a reasonable expectation for a similar income to continue.
How does the underwriting process work?
An investment bank is hired to do the deal (managing underwriter), other firms join the syndicate (syndicate members are co-managers of the deal, usually banks), syndicate or managing underwriter tries selling shares (type of commitment), and then underwriters sell shares
Secondary offering
An offering in which a shareholder sells shares held in the issuing corporation, and proceeds of the offering belong to that shareholder. For example, a company's founder, an angel investor, or a venture capital firm liquidates a sizable position in the company. If a transaction is a secondary offering, the company's net worth will be unchanged, as all proceeds will be received by existing shareholders. No new shares are created in this scenario.
Offering Memorandum
An offering memorandum is provided to investors for disclosure like a prospectus, except it is used for offerings that are exempt from SEC registration like private placements. Audited financial statements are not required in an offering memorandum.
Control stock
Control stock are shares held by an affiliate of the issuing company. An affiliate, also referred to as a corporate insider, is commonly defined as being either: ◆An officer of the company (e.g., CEO or CFO) ◆A member of the board of directors, or ◆An individual owning more than 10% of the voting shares Same as non affiliate rules except there are volume limits (amount can be calculated and then sold once every 90 days)
Cooling off period
During this period, which typically lasts for at least 20 days, two events are simultaneously taking place: the SEC is reviewing the filings for adequate disclosures as required under securities law, and separately, the investment bankers are determining market interest and a potential price for the new shares. Road show occurs: he issuer and lead underwriter meet with prospective investors to present the offering. Road shows are designed to provide potential investors with additional information about the issuer and business and give them a more personal opportunity to evaluate the offering. Preliminary prospectus distributed
Restricted Persons
FINRA rules prohibit restricted persons from investing in an IPO of common stock. Restricted persons include - broker-dealers - portfolio managers for their own personal accounts, employees of broker dealers, as well as their immediate family members. - Under this rule immediate family members include the spouse, parents, siblings, children, and in-laws of the employee of a broker-dealer. Note who is not immediate family and therefore not restricted: grandparents, aunts and uncles, cousins, nieces and nephews, and ex-spouses.
Types of underwritings
Firm commitment -> standby commitment Best efforts All-or-none Minimum-maximum
What is not allowed during the pre registration period?
Gun jumping, or discussion of deal
What does the issuer do?
Hire the underwriting bank and sell shares post effective date
Oversubscribed Tender Offers
If a tender offer is oversubscribed, the shares are accepted proportionally from those shareholders who tendered. Exampie: If an investor seeks to purchase 10 million shares in a tender offer, but shareholders collectively tender 100 million shares, only 10% of each shareholders' shares will be accepted. Therefore, if a shareholder tendered 1,000 shares, only 100 of their shares (10%) will actually be accepted.
What is a tender offer?
Not covered by Rule 145 A tender offer is an offer by the issuer or an outside investor to purchase at least 5% of the company's shares directly from company shareholders. The purchaser making the offer, whether it be the issuer itself or an outside investor, can attempt to purchase the shares using cash or securities. When securities are used, it is referred to as an exchange offer. A purchaser in a tender offer can qualify the tender with a minimum number of acceptable shares Note that all shareholders receive the exact same price in a tender offer. This is sometimes referred to as all holders best price.
What happens on the effective date?
On the effective date, the shares can be lawfully sold to the public. All investors in the new issue must receive a copy of the final prospectus no later than the settlement date of the transaction (T + 2). All buyers of a new issue must receive a final prospectus no later than the settlement date. Post effective date, shares can be traded on the secondary market
What does the underwriter do?
Prepare registration statement and disclosures, send out preliminary prospectus, market the offering, sell shares at IPO
Regulation M
Reg M is an SEC rule that aims to prevent market manipulation of IPOs and follow-on offerings by broker-dealers.
Regulation S
Reg Sis an exempt transaction which allows an issuer to raise money outside the U.S. and avoid SEC registration.
Regulation D
Regulation Dis an exemption from SEC registration for private placements. In a Reg D transaction, there are two types of investors - accredited and non-accredited. Accredited investors include: - Officers and directors of the issuer, institutions with at least $5 million in assets - Individuals with a net worth of at least $1 million, excluding the value of their primary residence - Individuals who earned at least $200,000 in each of the past two years ($300,000 for married couples). - Officers, partners, and directors of the issuer Anyone who is not defined as accredited is considered a non-accredited investor. Although different types of private placement transactions exist, generally there can be an unlimited number of accredited investors and a maximum of 35 non-accredited participating in the deal.
Restricted stock
Restricted stock is stock that has never been SEC-registered. Investors can receive restricted stock through private placements, employee stock benefit plans, compensation for professional services, or in exchange for providing seed money or start-up capital to the company. Holding period of at least 6 months to a year, no volume limit
Rule 144
Rule 144 defines the conditions under which securities acquired through an exempt trans-action, or restricted from resale for other reasons, can be sold. It defines both restricted and control securities.
Qualified Institutional Buyer (QIB)
Rule 144A allows QIBs to freely trade unregistered securities (e.g. private placements) among themselves. A QIB is defined as an institution that manages at least $100 million of discretionary assets.
Rule 145
Rule 145 is designed to protect the shareholders of a company that proposes to reclas-sify its ownership structure, acquire another business, or merge with another company. The premise of Rule 145 is that investors are essentially being offered a new security in the joint company, so they are entitled to the same disclosures and protections as if it were a new securities offering, including that the securities be SEC-registered and the receipt of a prospectus.
What is Rule 147?
Rule 147 allows a company to sell securities within its home state and avoid SEC registration. In order to use this intrastate offering exemption, the company must have its principal place of business in the state and satisfy at least one of the following requirements: ◆At least 80% of the gross revenues come from doing business within the state ◆At least 80% of its assets are located in that state ◆At least 80% of the net proceeds from the offering are used in the state, ◆A majority of the employees are located in the state
Rule 147
Rule 147 allows an in-state business to raise capital in their home state and avoid SEC registration. Under 147, 100% of the securities must be sold to state residents who cannot resell outside the state for six months.
SEC Rule 15c2-12
SEC Rule 15c2-12 aims to deter fraud and manipulation in the municipal securities market by prohibiting the underwriting of and subsequent recommendation of securities for which adequate information is not available Requirements are also imposed on broker-dealers to ensure that municipal issuer infor-mation is kept current after the underwriting is complete. Specifically, the rule bars bro-ker-dealers from engaging in a municipal securities underwriting unless the issuer has agreed in writing to provide continuing disclosure, such as annual financial information and material event notices.
Exempt securities
Securities, including US government and agency securities, municipal bonds, nonprofit securities, commercial bank securities, and short-term corporate debt, that are exempt from SEC-registration requirements
Stabilization
Stabilization allows an underwriter to bid on securities in the open market to prevent the price from declining following an IPO. The underwriters are allowed to stabilize at or below the POP (public offering price). For example, if XYZ stock went public at $30 per share, the underwriters could stabilize at or below $30.
Underwriting spread
The compensation that the syndicate receives in an underwriting, calculated as the difference between what the underwriters pay the issuer compared to the public offering price that investors pay for the shares
What is the goal of marketing during the cool-off period?
The goal of these marketing tools is to collect indications of interest (IOIs)—non-binding indications that an investor might be interested in purchasing the shares. These IOIs help the underwriters ascertain demand and ultimately the public offering price for the issuance. NO sales can be made during the cool-off period
Firm commitment
The most common type of underwriting, in which the syndicate buys the shares from the issuer and resells them to the public, taking on financial liability for whatever cannot be resold. If part of the new issue goes unsold, those shares are distributed among the members of the syndicate. Put differently, the underwriters are taking on risk, as they are liable for any unsold shares.
What info does the preliminary prospectus not include?
The preliminary prospectus will generally not include the timely details of the transaction—for example, the number of shares being registered and the offer price—as these details are determined during the cooling-off period. This information would be found in the final prospectus.
Underwriting syndicate
The underwriting syndicate is led by a lead underwriter, or managing underwriter, who is the primary liaison for the issuer. In forming a syndicate, the lead underwriter invites other investment banks to participate in a joint distribution of the offering. These other syndicate members usually commit to distributing a certain percentage of the entire offering. The members share the risks of underwriting the issue with the managing underwriter and are held financially responsible for any unsold portions. The syndicate is a temporary group that dissolves after completion of the sale
Exempt transactions
Transactions, including private placements, and intrastate offerings, that are exempt from SEC-registration requirements due to the manner of sale
What are the exempt securities?
US government securities and US government agency securities ◆Securities issued by nonprofits ◆Municipal bonds ◆Commercial paper and other short-term corporate debt with a maximum maturity of no more than 270 days ◆Commercial bank securities
SEC Effectiveness
When the SEC declares a new issue effective, it clears the securities for public sale. At this time a registered rep could say the issue has been deemed effective, but could not say that it has been approved by the SEC.
MSRB Rule G-1
addresses practices that municipal firms must follow when involved in primary offerings of municipal securities. 1. A key aspect of Rule G-11 relates to the priority provisions that must be established within each municipal bond syndicate. These provisions detail that the syndicate must allocate the bonds to investors in a certain order, regardless of the sequence in which orders were received from customers. This priority is relevant if there are more orders from investors than there are bonds to be sold The standard order priority is: 1. Presale orders 2. Group orders 3. Designated orders 4. Member orders 2. ll investors in a new issue of municipal bonds must receive the official statement no later than the settlement date of the transaction.
Types of offerings
initial public offering (IPO) or a follow-on offering
Minimum maximum
is a type of best efforts where the deal will be cancelled unless a minimum amount is raised. Once the minimum threshold has been reached, it becomes a traditional best efforts underwriting.
CUSIP Rules
◆In a negotiated sale, the underwriter is responsible for requesting the CUSIP number by pricing. ◆In a competitive sale, the municipal advisor should apply no later than one business day after sending out the notice of sale, which is a document that invites bids in a competitive deal. If there is no advisor, then the underwriter must apply immediately after receiving notification of the award from the issuer
Other classifications of offerings
◆Primary offering—A new issue in which the issuer sells shares and receives all the proceeds. In this situation, the company is creating brand new shares to sell. ◆Secondary offering—An offering in which a shareholder sells shares held in the issuing corporation, and proceeds of the offering belong to that shareholder. For example, a company's founder, an angel investor, or a venture capital firm liquidates a sizable position in the company. If a transaction is a secondary offering, the company's net worth will be unchanged, as all proceeds will be received by existing shareholders. No new shares are created in this scenario. ◆Split offering—A combination of primary and secondary offerings. This is very common, as large shareholders may choose to sell shares alongside the company in a registered offering.
Transactions covered by Rule 145
◆Reclassifications—A change that involves the substitution of one security for another, except for a stock split, reverse stock split, or change in par value. For example, an offer to swap one class of debt security for another may be a reclassification. ◆Mergers and acquisitions (M&A)—Securities, generally the stock of one company (the purchaser), are exchanged for those of another (the target), usually to facilitate a combination of the two issuers, for reasons other than a change in the issuer's location of domicile.For example, Amazon purchases Whole Foods, or Microsoft purchases LinkedIn, to combine the businesses. Take note that instead of the purchaser buying the target in stock, it could alternatively buy the target in a cash purchase or with a mix of both stock and cash. ◆Transfers of assets—Securities are issued to investors as compensation for assets transferred from one company to another in a transaction other than a full dissolution or pro-rata distribution to all shareholders.