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Series 7 > Ch 5: Underwriting Securities > Flashcards

Ch 5: Underwriting Securities Flashcards

1
Q

To become a corporation, an entity must do what?

A

File a Corporate Charter (Bylaws) in the home state of their business

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2
Q

A Corporate Charter must include what?

A
  1. Names of founders
  2. Type of Business
  3. Place of business
  4. Number of shares that can be issued
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3
Q

If a corporation wants to sell securities, what does it have to do?

A
  1. Register w/ States were it will sell it’s securities
  2. Register with the SEC
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4
Q

If a company wants to go public and sell stock to public investors, what does it have to file w/ the SEC?

A
  1. Registration Statement (Schedule A)
  2. Prospectus
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5
Q

Registration Statements (Schedule A) filed w/ the SEC includes

A
  1. Issuer’s name, address & biz description
  2. Articles of incorporation
  3. Underwriters & commissions / discounts they will receive
  4. Expected price of security
  5. Control persons
  6. Estimated proceeds and what proceds will be used for
  7. Company’s capitalization
  8. Complete financial statements (balance sheets & Income statements)
  9. Legal proceedings against the corp
  10. Proceeds from other securities in the past two years
  11. Counsel and their legal opinion
  12. Any agreements or indentures that impact the securities offered
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6
Q

Registration Statements: What is the difference between Schedule A and Schedule B?

A

Schedule A typically applies to corporations issuing new securities

Schedule B typically applies to government issues (typically municipal bonds)

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7
Q

Registration Statements: Schedule B: What do you need to submit to the SEC?

A
  1. Name of borrowing govt
  2. Purpose for raising $
  3. Amount of funded debt after new issue
  4. Amount of floating debt after new issue
  5. Previous debt default in the last 20 years
  6. People involved
  7. Commission to be paid to UW
  8. Copy of the Agreement w/ UWs
  9. Counsel’s legal opinion
  10. Any tax-free nature of the issue
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8
Q

What is the purpose of a shelf registration? (SEC Rule 415)

A

Allows the issuer or insiders to sell securities on a delayed or continuous basis that were previously registered w/ the SEC w/o needing additional permission.

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9
Q

How long can shelf registrations last?

A

2 - 3 years, depending on their status, to sell previously registered shares

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10
Q

What is the Cooling Off Period?

A

The 20 day + period of time after filing with the SEC and before the effective date of registration.

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11
Q

What happens during the 20 day cooling off period?

A
  1. SEC reviews the registration
  2. Company can do a Road Show to obtain indications of interest
  3. Tombstone ads
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12
Q

Deficiency Letter (From SEC)

A

During registration. SEC finds that the registration statement requires amending or needs additional information.

Halts the registration process until it receives the information required

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13
Q

Stop Order (From SEC)

A

During registration. Issued by the SEC. Finds that the registration statement includes false or misleading statements due to untruth or omitting truths.

Suspends the effectiveness of the registration statement

Issuer required to amend and answer any questions posed by the Commission in order to continue the registration process

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14
Q

The SEC _______ the issue for sale.

The SEC does NOT ______ the issue

A

clears

approve

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15
Q

It is _________ to represent that the SEC approved of an issue or an issuer

A

against the law

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16
Q

What is a tombstone ad?

A

An announcement (but NOT an offer) of a new security for sale

Provide potential investors w/ information about how to obtain a prospectus.
- may NOT include the price of the security
- only form of advertising allowed prior to the effective date
- must contain a disclaimer

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17
Q

Preliminary Prospectus

A

Used by UWs to obtain indications of interest from prospective customers

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18
Q

When is the Preliminary Prospectus made available to all customers who are interested in the new issue during the cooling off period?

A

During the cooling off period

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19
Q

What is the Due Diligence Meeting?

A

A meeting w/ the lead UW that is required by law and provides info about the issue and what the issuer will use the proceeds of the sale for.

Allows selling, research, and larger buyers to ask questions about the issue.

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20
Q

What are Blue Sky Laws?

A

State laws the apply to securities offerings and sales

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21
Q

Who / What needs to be registered in their home state in order to sell a security

A

Broker Dealer, registered representative and the security

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22
Q

State Securities laws are covered under what act?

A

Uniform Securities Act

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23
Q

What are the three methods of State Registration?

A

Notification (Registration by filing)
Coordination
Qualification

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24
Q

What is the Notification method of state registration?

A

Notification is the simples form for established companies.

Companies who have previously sold securities in a state can just RENEW their previous application

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25
Q

What is the Coordination method of state registration?

A

Coordination involves registering w/ the SEC and states at the same time.

SEC helps companies meet Blue Sky Law requirements by notifying all states in which the securities are to be sold

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26
Q

What is the Qualification method of state registration?

A

Qualification is for securities that are exempt from registration w/ the SEC but require registration w/ the state through the State Administrator

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27
Q

What is the Effective Date?

A

At the end of the Cooling-off period.

The first day that the security can be sold to the public

SEC has Cleared the securities for sale and public offering.

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28
Q

When is the offering price determined?

A

Just prior to the effective date

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29
Q

When MUST a final prospectus be delivered?

A

No later than the time the sale is confirmed

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30
Q

Who are the Players in the security registration and selling process?

A
  1. Investment Bank
  2. Underwriter
  3. Syndicate
  4. Managing (Lead) Underwriter
  5. Selling Group
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31
Q

Security Registration & Selling Process: What does the Investment banking firm do?

A

Investment Banking Firm
- Helps issuer raise money and abide by securities laws

Help and Advise Issuers
–decide what securities to issue
–decide how much to issue
–decide on a suggested selling price

Usually Underwrite the issue

May become the managing underwriter

32
Q

Security Registration & Selling Process:
What does the Underwriter do?

A

The Underwriter
-Helps the issuer bring new securities o the public

Purchases the securities from the issuer and sells them to the public

33
Q

Security Registration & Selling Process:
What does the Syndicate do?

A

The Syndicate is a group of BDs that help sell the securities and relieve some of the financial burden from the managing underwriter.

Each syndicate member is responsible for selling a portion of the securities to the public

34
Q

Security Registration & Selling Process:
What does the Managing (Lead) Underwriter do?

A

The head firm

Responsible for
- Assembling a syndicate
- dealing w/ issuer

Receives financial compensation for each and every share old

35
Q

Security Registration & Selling Process:
What does the Selling Group do?

A

Brokerage Firms outside of the Syndicate

Help distribute shares to the public WITHOUT financial commitment

36
Q

What is a negotiated offering?

A

Most frequently selected by corporations

Choose the UW directly

37
Q

What is a Competitive Offering?

A

Most frequently selected by Municipal GO Bonds that are backed by the taxes.

Bidding process via syndicate bids to ensure obtaining the best deal (highest bond price and/or lowest coupon payment) for taxpayers

38
Q

What are the Methods of Distribution?

A

Firm commitment
Best Efforts
- All or None (AON)
- Mini-Max
Standby

39
Q

What is the FIRM COMMITMENT Method of Distribution?

A

The UW and syndicates purchase all of the securities that remain unsold after the offering

UWs assume ALL financial risk

40
Q

What is the STANDBY COMMITMENT Method of Distribution?

A

UW signs an agreement with the issuer to purchase any stock not purchased by the public if or when an issuer has a rights offering

41
Q

What is the Best Effort Method of Distribution?

A

UW will make their best effort to sell all of the securities.

However, if not, the issuer has the right to either cancel the offering or take back some of the usold securities.

Two types:
All or None
Mini Max

Purchasers $$$ is held in escrow until the terms are met or the deal is cancelled.

42
Q

What is an ALL or NONE type of distribution?

A

All or None is a Best Efforts type of distribution where all securities must be sold by the deadline or the deal is cancelled and the money is returned to the investors

43
Q

What is a MINI-MAX type of distribution?

A

A Mini-Max is a Best Efforts type of distribution where a specified minimum number of securities must be sold in order for the deal not to be cancelled.

If the minimum is reached, more securities may be sold up until the maximum amount is reached

The issuer will take back any securities that remain unsold.

44
Q

What is involved in the Selling Group Agreement?

A

The Selling Group Agreement provides…
1. A likely offering price
2. # of securities allotted
3. How much SG members will be paid

Must include the price at which the securities are to be sold to the public

45
Q

Can a firm save some shares for itself?

A

No.

Firms cannot hold back securities for themselves, associated persons and their immediate family, industry insiders, portfolio managers, etc.

46
Q

What is a stabilizing bid?

A

The only LEGAL form of market manipulation

Done by an UW to prevent a security’s price from plummeting too quickly.

Done only at or slightly below the OP

47
Q

What is the Spread?

A

Spread = POP - Price paid to issuer

Initial profit from selling the security

Amount kept and then divided between UWs, Syndicate Members, and selling group members

48
Q

What does the spread get divided into?

A

Spread = Syndicate Manager’s Fee + Takedown

49
Q

What is the TOTAL TAKEDOWN?

A

The profit each syndicate member makes when selling shares or bonds to the public

Takedown = Spread - Syndicate Mgrs Fee

OR

Takedown = Additional Takedown + Concession

50
Q

The Total Takedown can be broken into…?

A

Selling Group Concession
Additional Takedown
Reallowance

51
Q

What is the Selling Group Concession?

A

The Concession is the profit that the selling group makes when selling shares or bonds to the public.

Paid out of the Takedown

B/c Selling Group Members are NOT taking financial risk, they don’t receive as much of the sale’s proceeds as syndicate members do

52
Q

What is the Additional Takedown?

A

The profit made by syndicate members on shares or bonds sold by the selling group

additional takedown = takedown - concession

53
Q

What is the Reallowance?

A

The portion of the takedown that’s available for firms that aren’t part of the syndicate or selling group

Brokers in this situation contact the syndicate manager, who gives you a discount off the POP

54
Q

Syndicate Manager’s Fee

A

The profit the Syndicate Manager makes on shares or bonds sold by anyone

  • Usually the smallest
55
Q

What does FINRA Rule 5141 say?

A

During the sale of securities in a fixed offering, no single underwriter syndicate nor selling group members may sell the securities being offered at a price lower than the stated public offering price (reduced price)

If there are still securities remaining after a BONA FIDE PUBLIC OFFERING and the members are unable to sell at the POP, the securities may be sold at a lower price.

56
Q

What is the Syndicate Agreement?

A

The Agreement / Contract among sydicate members.

Defines
- amount of $ / how they get paid
- amount of commitment (how much they will sell) —– TWO TYPES - EASTERN AND WESTERN

57
Q

What is an Eastern Commitment?

A

Eastern is an UNDIVIDED Account

Syndicate agreement states
- responsible for your allocation
- AND a proportional amount of the shares or bonds left unsold by other members

ie. originally responsible for 10% of total, you are also responsible for 10% of amount unsold.

58
Q

What is a Western Commitment?

A

Wild Wild West (Every Man for Himself)

Western is a DIVIDED account

Syndicate agreement states
- ONLY responsible for YOUR originally allocated shares

59
Q

What is the Preliminary Prospectus?

A

Used to help determine the level of interest in a security.

Sent w/ Registration Statement to SEC

MUST be available for potential purchasers during the cooling-off period

Contains material facts about the security

Missing:
- Final offering price (POP)
- Effective Date

May not be altered in any way

60
Q

What is a RED HERRING and why is it called that?

A

A Red Herring is a Preliminary Prospectus

Red lettering on the cover of the preliminary prospectus

61
Q

What is a FINAL PROSPECTUS

A

A final prospectus is a legal document prepared by the issuer w/ material information about the issuer and new issue of securities.

Must be available to all potential purchasers of the issue.

Includes updated info on the final POP, the underwriter’s spread and the delivery date (when securities will be available.

Includes SEC Disclaimer saying the issue is not “approved”.

May not be altered in any way

62
Q

For IPOs, the final prospectus needs to be available to all purchasers of the IPO for how long after the effective date?

A

90 days

63
Q

What is the “Effective Date”?

A

The first date the security starts trading

64
Q

For Primary, secondary, or combined offerings, a final prospectus has to be available for how long after the effective date?

A

For Primary Offerings:

25 days for all issuers whose securities are already listed on an exchange or NASDAQ.

40 days for issuers who have previously issued securities but NOT on an exchange or the NASDAQ.

65
Q

If more shares of common stock are being issued to the public in a primary offering, will that increase or decrease the number of outstanding shares and will the EPS increase or decrease?

A

Outstanding shares will increase

EPS will decrease

66
Q

If insiders of a company are selling a portion of their shares in a secondary offering, will that increase or decrease the number of outstanding shares and will EPS increase or decrease?

A

Outstanding shares will stay the same

EPS will stay the same

67
Q

What securities are exempt from registering with the SEC?

A

US Government Securities
Municipal Securities
Securities issued by..
- Banks
- Savings Institutions
- Credit Unions
Public Utility Stocks or Bonds
Securities from religious, educational or nonprofit orgs
Money Market Instruments (Notes, bills of exchange, bankers’ acceptances, and commercial paper of 270 days or less)
Insurance Policies
Fixed Annuities

68
Q

Exempt Transactions:
Intrastate Offerings (Rule 147)

A

Offerings of securites within one state are exept from SEC Registration, IF…

  • The Company is incorporated in the state
  • 80% of the company’s business is within the state
  • 80% of the proceeds raised are used w/in the state
  • Sells securities only to that state’s residents
69
Q

Exempt Transactions
Regulation A+ Offerings

A

An offering of securities worth…

  • Tier 1: $20 million or less (<$6 mill can be sold on behalf of existing stock holders)
  • Tier 2: $75 million or less (<$22.5 mill can be sold on behalf of existing stock holders) OR Limited to a maximum of 10% of the investors net income or 10% of the investors net worth, whichever is higher)
    WITHIN A 12 MONTH PERIOD

Must file
- A simplified registration (abbreviated reg)
- An offering circular & give to potential investors

70
Q

Exempt Transactions:
Regulation S

A

An offering of securities y US ssuers made outside of the US

71
Q

Exempt Transactions:
Regulation D
Private Placements

A

Reg D = No more than 35 unaccredited investors per year

Letter or Legend Stock

Reg D investors sign an investment letter and agree:
- that they will hold the stock for investment purposes only

72
Q

What does it mean to be a Sophisticated or Accredited Investor?

A
  • QIBs
  • Individual w/ >$1 mill net worth excludes primary residence
  • Individual w/ income of >$200,000 or >$300,000 for a couple and expectation to continue

SEC Rule 501 Adds…
- Corporations w/ net worth >$5mill
- Reps resgistered and in good standing
- Knowledgeable employees of private funds that have the ability to raise money privately
- Rural business investment companies

73
Q

What is a QIB?
Qualified Investment Bank

A

financial entity that owns and invests on a discretionary basis at least $100 million in securities

74
Q

SEC Rule 506

A

Companies can refrain from advertising and soliciation and limit the number of accredited investors to 35

OR

Company solicits or advertises and sells only to accredited investors

75
Q

SEC Rule 144
Sale of restricted, unregistered and control securities

A

Stock owned by directors, officers, or persons owning 10% or more of the issuer’s voting stock.

Sellers must wait 6 months to a year prior to selling the securities to the public

The most an investor can sell…
The greater of…
-1% of the outstanding shares
OR
-The average weekly trading volume for the previous four weeks

76
Q

Rule 144 A

A

Allows unregistered domestic and foreign securities to be sold to Qualified Institutional Buyers in the US without a holding period.

77
Q

What are both exempt and nonexempt securities subject to by the SEC?

A

Antifraud provisions of the Securities Act of 1933

Requires issuers to provide accurate information regarding any securities offered to the public

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