Underwriting Securities (Ch. 5)

Items in the registration form

- The issuer's name and a description of its business - The names and addresses of all of the company's control persons, such as officers, directors, and anyone owning more than 10 percent of the corporation's securities - What the proceeds of the sale will be used for - The company's capitalization (i.e., the conversion of income or assets into capital) - Complete financial statements - Any legal proceedings against the corporation that may have an impact on it

Pegging

1. The act of buying a security in a large quantity to drive up the price. Writers of put options (and holders of short positions) practice _____ when the expiration date is approaching and it appears that the option will be exercised such that it puts the writer at a disadvantage. The idea behind _____ is to cause the price to rise so the option is not exercised and the writer can profit from the premium. 2. The practice of fixing the exchange rate of a currency to the value of another currency.

Securities Act Of 1933

Established as a result of the stock market crash of 1929, this landmark securities law intended to improve the flow of information to potential investors in new security issues and to prohibit certain selling practices relating to those issues. Issuing firms are required to register their securities with the federal government, and investment bankers must provide investors with a prospectus.

90 days after effective date (the first day the security starts trading)

How long a final prospectus must be available to all purchasers of IPOs

25 days after effective date (the first day the security starts trading)

How long a final prospectus must be available to all purchasers of primary, secondary, or combined offerings ALREADY listed on an exchange or NASDAQ

40 days after effective date (the first day the security starts trading)

How long a final prospectus must be available to all purchasers of primary, secondary, or combined offerings NOT ALREADY listed on an exchange or NASDAQ

Intrastate offerings

In the United States, a securities offering that can only be purchased in the state in which it is being issued. Because the offering does not include more than one state, it does not fall under the jurisdiction of the SEC and therefore does not need to be registered with the SEC. But the securities still require registration at the state level.

Life insurance policies, commodities and futures, CDs, currencies, real estate, and fixed annuities are examples of

Investments not considered securities. Note: Variable annuities require registration because the payout varies depending on the performance of the securities held in the separate account

Securities Exchange Act Of 1934

Legislation that created the SEC, outlawing dishonest practices in the trading of securities.

Split (combined) offering

A combination of a primary and secondary offering, with both new and outstanding securities. A portion of the sales proceeds goes to the issuer, and a portion goes to the selling stockholder.

Deficiency letter

A document, issued by the SEC, indicating a significant insufficiency or omission in a registered statement or prospectus. A _____ should be dealt with promptly, and the SEC should be alerted of any actions taken to remedy the situation.

Penalty bid

A financial sanction sometimes imposed by the underwriter of a new securities issue against a broker whose customer(s) sold shares of the issue immediately after purchase. _____ are imposed in order to keep the price of a newly issued security from declining. The sanction may be passed on from the broker to the client selling the IPO shares, but typically involves the broker returning some or all of the internal commission income back to the underwriting syndicate.

Preliminary prospectus (aka red herring)

A first draft registration statement filed by a firm prior to proceeding with an initial public offering of securities. The document, filed with the SEC, is intended to provide pertinent information to prospective shareholders about the company's business description, management, strategic initiatives, financial statements and ownership structure.

Stabilizing price

A practice used by underwriters to stabilize the secondary market price of a security after an initial public offering (IPO). The bid is made on behalf of the IPO's underwriters to repurchase shares at the offer price. _______ bids may be used to support a stock that has high selling pressure from investors looking to "flip" their purchased shares for a quick profit.

Negotiated underwriting

A process in which both the purchase price and the offering price for a new issue are negotiated between the issuer and a single underwriter. The underwriter pays the issuer a purchase price, and the public pays the offering price. The spread between the purchase price and the public offering price represents the proceeds to the underwriter.

Secondary offering

A sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds of this sale are paid to the stockholders that sell their shares.

Syndicate agreement (or underwriting agreement)

A written contract between a company planning a public securities issue and the managing underwriter of that issue. The agreement specifies the particulars of the issue such as dates, fees, offering price, and the responsibilities of the parties.

Selling group

All financial institutions involved in selling a new issue of debt or equity but not necessarily participating in the syndicate. The syndicate recruits the ____ when they feel they need more help selling a security.

Green Shoe Clause

Also called an overallotment option, this provision allows the group of investment banks that underwrite an initial public offering (IPO) to buy and offer for sale 15% more shares at the same offering price than the issuing company originally planned to sell. The provision is activated if demand for shares is more enthusiastic than anticipated and the stock is trading in the secondary market above the offering price. But if demand is weak, and the stock price falls below the offering price, the syndicate doesn't exercise its option for more shares. This contract provision, which may be acted on for up to 30 days after the IPO, gets its name from the Green Shoe Company, which was the first to agree to sell extra shares when it went public in 1960.

Tombstone ad

An advertisement (but not an offer) for a new securities issue. The ad lists the security, some of the security's specifics, and a bracketed list of the members of the syndicate selling the issue in the order of the members' importance. It's the only advertisement allowed during the cooling-off period.

Western (divided, Wild Wild West) account

An offering agreement in which each underwriter in a syndicate is responsible only for selling its alloted amount of the new issue. Once participants have met their previously agreed upon target allotment sale, their liability in the offering is completed.

Primary offering

An offering of new securities from an issuer that has previously issued securities. A company can have an initial public offering and several _____'s if it wants to. The issuer and underwriters receive an equal amount of the profits.

Firm commitment underwriting

An underwriter's agreement to buy and sell an entire issue of stock at the price specified and assume all financial responsibility for any unsold shares. The dealer profits from the spread between the purchase price and the public offering price.

Eastern (undivided) account

An underwriting system in which each underwriter in the group is responsible not only for selling its alloted amount of the new issue but also for selling any excess issue not sold by the underwriting group as a whole. For example, syndicate member originally responsible for 10% of the new issue must also sell 10% of the shares or bonds left unsold by other members.

Final prospectus

Prepared by the issuer toward the end of the cooling-off period, this legal document contains information about the issuer and new issues of securities. It includes the final offering price, the underwriter's spread, and the delivery date (when the securities will be available). Because open-end mutual funds are continuously offering shares to the public, a _____ is usually updated annually and made available to the public.

Initial public offering (IPO)

The first time an issuer sells stock to the public to raise capital. Issuers usually hold back some stock for future primary offerings. The issuer gets most of the profits, while the underwriters get the rest.

Trust Indenture Act of 1939

The legislation that established rights for security holders under written agreements (or indentures, necessary for bonds valued at over $5 million). The Act sets standards for trustees, requires financial reports by the issuers to the trustees, and mandates disclosure of owners' rights under the indenture agreements.

Cooling-off period

The required waiting period between the time a firm files a registration statement for a new security issue with the SEC and the time the securities actually can be issued. The cooling-off period is usually 20 days, although the SEC may alter it for individual issues.

Syndicate manager's fee

This part of the spread is the profit the syndicate manager makes on shares or bonds sold by anyone. This fee is usually the smallest of all the listed fees.

Rule 145

a SEC rule allowing the sale of certain securities without first registering the securities with the SEC. Specifically, stocks an investor has acquired as the result of a merger, acquisition, or reclassification do not need to be registered prior to sale. ______ allows investors more flexibility following the uncertainty of, say, a merger.

Underwriter

a broker-dealer that helps the issuer bring new securities to the public. They purchase the securities from the issuer and sell them to the public for a nice profit.

Investment banking firm (broker-dealer)

a financial institution that provides a variety of services for clients, including underwriting, facilitating transactions, assisting in mergers and acquisitions, and brokering. In general, an ________'s clients are institutional investors, but high net-worth individuals also use them. The name can be misleading since ______ rarely provide retail banking services

Due diligence meeting

a meeting hosted by the underwriter of a new security towards the end of the cooling off period that is meant to provide information about the security and what the issuer will use the proceeds of the sale for. The information is meant for syndicate members, selling groups, brokers, analysts, institutions, etc.

Shelf offering Rule 415

a method for publicly traded companies to register new stock offerings without having to issue them immediately. Instead, the securities can be issued at any time within a two-year period, allowing a company to adjust the timing of the sales to take advantage of more favorable market conditions should they arise.

Notification (registration by filing)

a method of state security registration where companies who have previously sold securities in a state can renew their application. It is the simplest form of registration for established companies.

Qualification

a method of state security registration whereby securities that are exempt from registration with the SEC but require registration with the state.

Coordination

a method of state security registration which involves registering with the SEC and states at the same time. The SEC helps companies meet the blue sky laws by notifying all states in which the securities are to be sold.

Qualified institutional buyer (QIB)

a purchaser of securities that is deemed financially sophisticated and is legally recognized by security market regulators to need less protection from issuers than most public investors. Typically, the qualifications for this designation are based on an investor's total assets under management and specific legal conditions in the country where the fund is located. Rule 144A requires an institution to manage at least $100 million in securities from issuers not affiliated with the institution to be considered a _____. Additionally, if the institution is a bank or savings and loans thrift they must have a net worth of at least $25 million.

FINRA Rule 5130

a rule outlawing freeriding (an action taken by a syndicate member to withhold a portion of a new security issue from sale because of a belief that a later reselling of the withheld security will yield a higher price) and withholding (the practice of a public offering participant keeping some shares in a private account or with a family member, employee, or dealer to profit from the higher market price of a hot issue).

Rule 147

a rule that can be used by a company to raise funds without actually registering with the SEC. This rule applies to Section 3(a)11 of the Securities Act of 1933, or the intrastate offering exemption.

Competitive underwriting

a step in the initial public offering process whereby an underwriter submits a sealed bid to a company that is making its first issue of stock. After collecting competitive bids from several underwriters, the issuer awards the contract to the underwriter with the best price and contract terms.

Market-out clause

a stipulation in an underwriting agreement that allows the underwriter to cancel the agreement without penalty. A _______ can be activated for specific reasons such as souring market conditions or simply because the underwriter is having difficulty in selling the company's stock. However, though the reasons can be varied, they must be noted in the _______.

Syndicate

a temporary group of broker-dealers formed for the purpose of handling a large issue of securities that would be hard or impossible for the entities involved to handle individually. This allows companies to pool their financial and marketing resources and share risks.

Mini-max underwriting

a type of best efforts underwriting that states that the offering will not become effective until a minimum amount is sold and sets a maximum amount that may be sold.

Corporate charter

a written document filed with a U.S. state by the founders of a corporation detailing the major components of a company such as its objectives, its structure and its planned operations.

Regulation S

an SEC regulation that permits companies to not register stock they sell outside the United States to foreign investors.

SEA Rule 144A

an administrative rule under the SEC allowing, under certain circumstances, for qualified institutional investors to trade certain securities with other institutional investors without registering the trade with the SEC. The rule requires that the private placement be for investment purposes and not for resale to the general public.

Best efforts underwriting

an agreement in which an underwriter promises to make a full-fledged attempt to sell as much of a securities offering (such as an initial public offering) as it can to the public. _____ agreements are used mainly for securities with higher risk, such as unseasoned offerings, or in less-than-ideal market conditions. _____ relieve underwriters from responsibility for any unsold inventory if they are unable to sell all the securities. The underwriter does not guarantee that it will sell the entire IPO issue in a ______ agreement.

Registrar

an independent entity that works along with a company's transfer agent to maintain a record of stock and bond owners. The main function of a ____ is to make sure that the outstanding shares don't exceed the amount of stock the issuer authorizes under its corporate charter (or bylaws).

Chinese wall doctrine

an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those decisions. This is a way of avoiding conflict of interest problems. Rather than prohibiting one company from engaging in both businesses (e.g., investment banks and brokerages), the government permitted the implementation of ______ procedures.

All or none underwriting

an instruction used on a buy or sell order that instructs the broker to fill the order completely or not at all. If there are not enough shares available to fill the order completely, the order is canceled when the market closes.

Seasoned issuer

an issue of a security that has been traded long enough to establish a positive reputation for liquidity and trade volume. Seasoned issues tend to have relatively stable prices and meet with success on the secondary market.

Regulation D

an offering to no more than 35 unaccredited investors per year that is exempt from SEC registration requirements. Also known as a private placement offering.

The last time syndicate members can back out of an underwriting agreement is...

around the time of the due diligence meeting, which is likely due to negative market conditions.

Regulation A

exemption from registration requirements instituted by the Securities Act of 1933 that apply to public offerings of securities that do not exceed $5 million in any one-year period. _____ offerings are exempt from the full registration requirements but the issuer still has to file a simplified registration or abbreviated registration statement.

When a company wants to go public (sell stock to public investors), it has to...

file a registration statement and a prospectus with the SEC.

Accredited investor

one with a net worth of $1 million or more, or an investor who has had a yearly income of at least $200,000 (for an individual investor) or $300,000 (for joint income with spouse) for the previous two years and is expected to earn at least that much in the current year.

Allocation of orders

refers to how a broker or advisor would inform a client who has shown interest in an IPO whether his or her requested portion of IPO shares is available in full, or if only a fraction of the requested total is available for purchase.

Blue sky laws

state regulations designed to protect investors against securities fraud by requiring sellers of new issues to register their offerings and provide financial details.

Managing (lead) underwriter

the head firm that's responsible for putting together a syndicate and dealing directly with the issuer. Also known as a syndicate manager, the ____ receives financial compensation for each and every share sold.

Spread

the initial profit from selling the security. Specifically, the difference between the amount the syndicate pays the issuer when purchasing new shares or bonds and the public offering price for each share or bond sold. For example, if the syndicate buys shares from the issuer at $8 per share and then sells them to the public for $9 per share, the ______ is $1 ($9 - $8) ______ = public offering price - price paid to the issuer Equation for divvying up profit among salespeople: ______ = syndicate manager's fee + takedown

Reallowance

the portion of the takedown that's available for firms that aren't part of the syndicate or selling group For example, if a customer calls me (as a stockbroker) wanting to buy a certain stock but I am not one of the official distributers of the stock, I contact the syndicate manager who gives me a discount off the public offering price (POP). The discount is the ____.

Additional takedown

the profit made by syndicate members on shares or bonds sold by the selling group takedown = ____ + concession

Takedown

the profit that each syndicate member makes when selling shares or bonds to the public ___ = spread - syndicate manager's fee

Concession

the profit that the selling group makes when selling shares or bonds to the public takedown = additional takedown + ____

Transfer agent

this entity maintains records of a corporations stock and bond owners but also mails and cancels stock certificates as necessary

Exempt securities

Securities not subject to registration requirements under the Securities Act of 1933 due to a high level of creditworthiness, being backed by or insured by a government or government institution, or being tax-exempt.