C10 Issuing Corporate Securities

Question 1

Securities Act of 1933

Answer 1

Regulates new issues of corporate securities sold to the public and requires securities issuers to provide enough information (Prospectus) for investors to make fully informed buying decisions. Also called: paper act, full disclosure act, new issues act, truth in securities act, and prospectus act.

Question 2

Securities Exchange Act of 1934

Answer 2

Addresses secondary trading activity, personnel involved in secondary trading, and fraudulent trading practices.

Question 3

Registration of Securities

Answer 3

Required by Securities Act of 1933. Requires:

1. Registration of new issues (there are exceptions)
2. Issuers to provide full and fair disclosure (prospectus)
3. Make all information fully available
4. Regulating the underwriting and distributions of primary and secondary issues
5. Provides criminal penalties for fraud for new issues

Question 4

Equity Security Registration Steps

Answer 4

1. Registration Statement
2. Cooling off Period (Preliminary Prospectus/Tombstone Ads/Due Dilligence Meeting)
3. Initial Public Offering (IPO)

Question 5

Registration Statement

Answer 5

Registration statement must contain:

1. Description about issuer’s business.
2. Names, addresses of company officers and directors, and their salaries, along with a five year business history of each.
3. Amount of corporate stock that business officers own, and which investors own more than 10%.
4. The company’s capitalization including its equity and debt.
5. A description of how the proceeds will be used.
6. Whether the company is involved in any legal proceedings.

Question 6

Cooling off Period

Answer 6

Begins after the issuer files regiatration statement with the SEC.

20 day cooling off period occurs before the registration becomes effective.

SEC usually takes longer than the 20 days, however the minimum is 20 calendar days. SEC extends the period via a Deficiency Letter

No one can solicit sales during the cooling off period, but indications of interest can be solicited with a Prelimianry Prospectus/Tombstone ads.

SEC may issue a stop order if the registration has not met requirements, or if fraud is suspected.

Question 7

Preliminary Prospectus

Answer 7

Also called a Red Herring

Can be used as a prospecting tool (allows people to gauge investor’s interest)

Two items missing from the preliminary prospectus are the public offering price and the effective date.

Question 8

Tombstone Advertisement

Answer 8

Only form of advertising allowed during the cooling off period.

Contains:

• The Issuer
• Number of shares being sold
• The Underwriters
• Type of Secuirty

Does Not Contain:

• Price
• Sale date

Question 9

Due Diligence Meeting

Answer 9

The underwriter must conduct a formal due diligence meeting to provide information about the issue, the financial background, and the intended use of the proceeds.

Question 10

SEC Review and Disclaimer

Answer 10

Examines the prospectus for completeness.

The front of every prospectus must contain a clearly printed SEC Disclaimer specifying the limits of the SEC’s review procedures.

Disclaimer Statement -SEC does not guarentee accuracy of information.

Question 11

Prospectus Delivery Requirement

Answer 11

For IPOs:

• 90 days if the security is to be quoted on the Over the Counter (OTC) Pink Sheets or over the OTCBB (non-NASDAQ)
• 25 days if the security is to be listed on an exchange or quoted over NASDAQ.

Non - IPOs (additoinal offerings)

• 40 days if the security is to be quoted on the Over the Counter (OTC) Pink Sheets or over the OTCBB (non-NASDAQ)
• Not Required if the security is to be listed on an exchange or quoted over NASDAQ.

Question 12

Fraud (Misrepresentations)

Answer 12

The people below can be sued by the purchasers of the stock for fraud:

• The Issuer (Company that issued shares)
• The Underwriter
• Officers and Directors
• All parties that signed the registration document
• Acountants and attorneys who helped prepare the registration document

The SEC cannot be sued.

Question 13

Final Prospectus

Answer 13

Prepared once the registration statement becomes effective.

If the final prospectus can be viewed on the SEC’s website. the prospectus will be deemed to have been delivered to the investor through the “access equals delivery rule”

Adds the following information to the Prelimianry Prospectus:

• Final offering price
• Underwriting spread
• Effective Date

Question 14

Underwriting Syndicate

Answer 14

A group of other broker/dealers to assist in the distribution of the new issue. Occurs when the issue is too large for one company. One comapny is the lead underwriter called Managing Underwriter or Lead Underwriter.

Question 15

FINRA Rule 5130

Answer 15

Replaced “Free-Riding and Witholding Rule.

A broker dealer must the whole issue available to the public and cannot withhold shares to sell to “restricted persons”

• *a)** designed to protect the integrity of the public offering process by ensuring that insider trading does not occur
• *b)** applies to new issues only
• *c)** prohibits firms from selling a new issue to any account where restricted persons are beneficial owners, or immediate family members

*immediate family members include parents, in laws, spouses, children, or any other individual to whom the person provides material support
*if they live with a restricted individual, then they are one as well.

Question 16

Roles and Responsibilities - Issuer (The Company)

Answer 16

• Responsible for filing the registration statement with the SEC
• Filing a registration statement with the states in which it intends to sell securities (also known as blue skying the issue)
• Negotiating the security’s price and the amount of the spread with the underwriter.

Question 17

Roles and Responsibilities - Underwriter

Answer 17

Requiremnts to be an Underwriter:

• Underwriters of nonexempt corporate securities are required to be FINRA member firms.
• US nonmember firms, like banks, cannot participate as investment bankers in corporate issues.
• Banks may participate in municipal underwriting.

Responsibilites of the Underwriter:

• Market the issue to investors
• Assist in the determination of the terms of the offering
• Purchase the securities directly from teh issuer to resll to investors
• Publish Prospectuses
• Publish Tombstone Ads

Question 18

Roles and Responsibilities - Selling Group

Answer 18

Act as sales agents. Selling group members have no financial liability and act as agents because they have no commitment to buy securities from the issuer.

Question 19

Types of Markets

Answer 19

New issue market (IPO) - composed of companies going public by selling common stock to the public for the first time.

Additional issue market - is made up of new securities issued by companies that are already publically owned.

Question 20

Types of Offerings

Answer 20

Primary offering - is one in which the proceeds of the underwriting go to the issuing corporation.

Secondary offering - is one in which one or more major stockholders in the corporation are selling all or a major portion of their holdings and proceeds are paid to the stockholders rather than to the corporation.

Combined (Split) offering - combination of both primary and secondary offering.

Shelf offering - -an issuer who is already a publicly traded company can register new securities without selling the entire issue at once. Once registered it is good for two years, and allows the issuer to sell portions of a shelf offering over a three year period.

Question 21

Types of Underwriting Commitments

Answer 21

Firm Commitment - Underwriter guarantees to purchase all of the shares being offered regardless of if they can sell them to investors. The UNderwriter will usually have a “market out clause” that would free the underwriter from its obligation to purchase al the shares in teh advent of a developemnt the impairs the quality of the securities.

Best Efforts - Underwriter will do its best to sell all the shares, but not committed to purchase them all if they don’t sell.

All or None (AON)- Issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all of the shares, or cancel the underwriting. Funds collected held in escrow in case money has to be returned.

Mini-Max - a Best Efforts underwriting with a floor (min) and a ceiling (max) on a dollar amount of securities that the issuer is willing to sell.

Standby Commitment - A Firm Commitment underwriting done with preemptive rights offering. Underwriter guarentees to purchase all shares not sold to people with preemptive rights.

Question 22

Underwriting Financials

Answer 22

Public offering price - Price investors pay

Underwriting proceeds - The amount the issuer (company) receives

Underwriter’s Spread - Difference between the underwriting proceeds and the public offering price. How much he underwriter’s make.

(Public Offering Price) - (Underwriter’s Spread) = (Underwriting Proceeds)

Question 23

Underwriting Fees

Answer 23

Manager’s Fee - Paid only to Lead Underwriter for negotiating the deal and managing the underwriting and distribution process. Usually the smallest of the three fees.

Underwriting Fee - Paid to all Underwriters for assuming the risk of buying securities from the issuer without assurance that securities can be resold.

Selling Concession - Paid to all the underwrtiters and brokers who sell the security to the public. Usually the largest of the three fees

Question 24

Factors that determine the Size of the Underwriting Spread

Answer 24

• The type of securities to be offered
• The size of the issue
• The quality of the securities to be issued
• The perceived demand for the securities
• The type of underwriting agreement
• The quality of the issuer’s business

Question 25

Awarding (Picking) the Underwriter

Answer 25

**_Negotiated Underwriting_** - The issuer and a selected investment banker negotiate the offering terms, including the amount of securities to be offered, offering price or yield, and the underwriting fees. The most common type of underwriting for corporate securities because of the close business relationships between issuing corporations and investment banking firms. **_Competitive bids_** - Underwriters place sealed bids and the issuer awards the underwriters whose bid results in the lowest net cost to the issuer. Most common with municipal securities

Question 26

Green Shoe Option - (Over allotment)

Answer 26

Used for "HOT" issues. This option, found in the underwriting agreement, gives the underwriter the right to sell up to 15% more shares than originally planned for.

Question 27

Exempt **securities** from the Securities act of 1933

Answer 27

* US government securities * Municipal bonds * Commercial paper and banker's acceptances that have maturities of less than 270 days * Insurance policies and fixed annuity contract (but not variable annuities) * National and state bank (not bank holding company) securities * Building and loan securities * Charitable, religious, educational, and non profit association issues

Question 28

Exempt **Transactions** from the Securities act of 1933

Answer 28

* **_Regulation A:_** Less than $5 Million * **_Regulation D_**: Private placements * **_Rule 147_**- Securities offered and sold exclusively intrastate * **_Regulation S_**: offers and sales made outside of the US by US issuers * **_Rule 144:_** Control or Restricted shares * **_Rule 145_**: Reorganization of the the company

Question 29

Regulation A

Answer 29

For deals **less than $5 Million**. **No Registration Necessary** a) permits issuers to raise up to $5 million in a 12 month period without registering b) 20 day cooling off period c) individuals buying securities must receive a final offering circular at least 48 hours before confirmation of sale

Question 30

Regulation D

Answer 30

**_Private Placement_** - Registration not Necessary It is sold to : a) **accredited investors** that do not need SEC protection b) a maximum of 35 individual (nonaccredited investors)

Question 31

Accredited investor

Answer 31

**_Accredited investor_** - a) has a **_net worth of $1 Million or more,_** not including net equity in a primary residence **_or_** has had an **_annual income of $200,000_** or more in each of the two most recent years and is expected to have it in the future **_or_** has had an **_annual income of $300,000_** (jointly with a spouse) or more in each of the two most recent years and is expected to have it in the future b) officer and directors of the issuer are also accredited.

Question 32

Online Private Offering Memoranda for “Accredited Investor”

Answer 32

A member firm may allow **online access** to private placement offering memoranda if it requires visitors to fill out and **submit a questionnaire**. Once the firm has qualified the investor as an accredited investor, the member may then issue the investor a **password to gain access** to offering materials. **Access to the material must be protected via a password.**

Question 33

Alternate names for Private Placement Stock

Answer 33

Alternate names for Private Placement Stock * *_Restricted Stock_** - must be held for a six month period * *_Unregistered Stock_** - no registration statement on file with SEC * *_Letter Stock_**: investor agreed to terms by signing an investment letter * *_Legend Stock:_** a special inscription on the stock certificate indicates restricted transfer

Question 34

Rule 147

Answer 34

For deals that take palce entirely in **_One State_** - **No Regsitration Necessary** **a)** the issuer has its principal office in the state * *b)** 80% (at least) of its income in the state * *c)** 80% (at least) of the issuer's assests are located within the state * *d)** 80% (at least) of the offering's proceeds (the money raised) are used in the state * *e)** 100% of purchasers are residents of the state **f)** Purchasers **may not resell the stock to any resident of another state for at least nine months** after the last sale. **g)** If using an underwriter they must have an office in the state.

Question 35

Rule 144

Answer 35

Regulates the sale of **_Restricted Stock_** (Sold through **Regulation D**) and **_Control Stock_** (officers and large (10%+ holders)) Designates: a) The Holding period b) The Amount that can be sold c) Filing Procedures (Form 144) {Not needed for sales of 5\<00 or less shares worth less than $50,000}. d) The method of sale **_IMPORTANT NOTE_** Securites can be sold under Rule 144 **four times** per year. The seller receives the proceeds not the issuer.

Question 36

Private Investment in a Public Equity (PIPE)

Answer 36

Public companies that wish to obtain financing without selling securities to the general public may sell securities to a group of **accredited investors** who wish to invest a large amount of capital. Subject to Rule 144. * Benefits to Issuer: * Reduced transaction Cost * Term disclosure only completion of the transaction * Increased Institutional ownership * Quick Closing

Question 37

Control Stock

Answer 37

**a)** owned by directors, officers **b)** owned by people who own or control 10% or more of the voting stock

Question 38

Rule 144 **Holding** Requirements

Answer 38

* *Restricted Stock** (unregistered) and held by a **non affiliate non-insider** 1. six month hold 2. sell freely thereafter * *Restricted Stock** (unregistered) and held by an **affiliate insider** 1. six month hold 2. volume limits thereafter * *Control Stock** (registered) and held by an **affiliate insider** 1. No hold 2. volume limits always apply

Question 39

Rule 144 **Volume** Requirements

Answer 39

Seller must complete form 144 and is limited to selling the **_greater_** of: a) The average weekly trading volume for the **preceeding four weeks** **_or_** b) 1% of the issuer's total outstanding stock

Question 40

Rule 145

Answer 40

**Disclosure of Reorganization** - intended to protect stockholders of any company that proposes to reorganize its ownership structure, acquire another company, or merge with another company. Stockowners get to vote. Covers: a) Mergers invvoling a stock swap b) Reclasifcation invovling the exchange of one class of shares for another c) Assett transfers invovling the dissolution of the comapony or sale of a major part of the assets.

Question 41

Regulation S

Answer 41

Sales made **outside the USA** by US companies - Registration not Necessary * *a)** these are unregistered securities offered by US based issuers to **non-US residents** * *b)** Securities sold outside the US **cannot be resold in the US for 12 months** * *c)** All sales under Regulation S must be reported to the SEC

Question 42

Spinning

Answer 42

Like **Kickbacks** - The practice of allocating highly sought after IPO shares to individuals who are in a position to direct securities business to the firm..

Question 43

IPO Selling Documetation Requirements

Answer 43

**a)** before selling an IPO, Sales agents are required to obtain written representation from the account owners that the account is eligible to purchase new common stock issue at the POP price. b) Must be obtained within the 12-month period before the sale of the new issue. **c)** Must be retained for 3 years on record

Question 44

Regulations - Cheat Sheet

Answer 44

**Regulation A** - Less than $ 5 Million **Regulation D** - Private Placement **Regualtion S** - Outside US **Rule 144** - Restricted and Control Stock **Rule 145** - Reorganization **Rule 147** - One State **FINRA Rule 5130** - Insider Trading

Question 45

Crowdfunding

Answer 45

* Popular way to raise capital from small investors. Through a broker dealer or a registered crowdfundng portal. The portal must be registered and must be a FINRA member firm. * Issuers who sell shares through crowdfunding must register with SEC using Form C. * Crowdfunding issues are speculative, and broker dealer s must offer educational material to investors. * Investors who purchase crowdfunding shares may not sell the shares for 12 months (some conditions are allowed). * There are limits on how much crowdfunding shares can be bought in a 12 month period.

Question 46

Regulation A - JOBS Act of 2012

Answer 46

The JOBS act of 2012 raised the amount that can be raised under regulation A to $50 Million. The exemption for full registration allows smaller companies to raise money without going through the full registration expense. The issuer will file an abbreviated notice of sale, of “Offering Circular” known as **Form 1-A with the SEC.** Two Tiers exist: * **Tier 1** – Up to **$20 Million**, of which no more than **$6 Million offered by selling shareholders** * **Tier 2** - Up to **$50 Million**, of which no more than **$15 Million offered by selling shareholders**

Question 47

Hot Issue Securities

Answer 47

A hot issue is one that trades at an immediate premium to its offering price in eh secondary market. A broker dealer may not free ride by withholding securities for its own account There are some conditionally approved people who may purchase hot issues so long as: a) The **amount is not substantial** * **And** b) Has a **history of purchasing new issues.** The conditionally approved people are: * Officers and employees of financial institutions * Non- supported family members * Accountants, attorneys and finders associated with the underwriting * Accounts where the restricted persons interest is limited to 10% or less or where a maximum of 10% of the allocation of new is for the benefit of such persons. This is known as the carve out procedure.