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Series 24 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Competitive Bidding & Negotiation

A

How the issuer chooses the syndicate manager.

Competitive bidding = debt/bond deal
issuer will award underwriting to the firm w the lowest cost

negotiated underwriting = equity offerings. Spread on new issue is determined through negotiations between issuer and managing UW

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2
Q

Primary functions of investment bankers

A

1) raise capital through issuance of securities and give advice on what security to issue
2) handle distributions of new issues. Investment banking firm will serve as the: underwriter, sponsor, distributor, and or syndicate members.
3) secondary distributions
4) advise corporations on mergers and acquisitions

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3
Q

Letter of intent

A

signed once the issuer selects the managing underwriter. It’s an understanding between an issuer and the underwriter that includes the terms prior to the time underwriting commences

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4
Q

Responsibilities of the syndicate manager (ALSO REFERRED TO AS MANAGING UNDERWRITER OR ACCOUNT MANAGER) (7)

A
  • forms underwriting syndicate
  • leads the stabilization in after market if necessary
  • appoints the selling group
  • allocates the issue among selling syndicate members
  • may release underwriting syndicate from its obligation to offer stock at a fixed price and then the selling group could sell shares at whatever price can be realized
  • receives management fee, part of gross spread
  • acts as agent for syndicate
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5
Q

Types of underwriting agreements (5)

A

Firm commitment: syndicate buys entire issue, puts it into own inventory, sells to public acting as the dealer. risky.

Best efforts: syndicate acts as agent in trying to distribute a new issue, does not have to put into own inventory. will put best effort forward to sell all. if we don’t, we dont.

All or none: offering is cancelled unless it can be completely sold by closing date of offering. Syndicate acts in an agency capacity.

Standby underwriting: syndicate agrees to purchase and distribute any part of an issue note purchased by stockholders who have received preemptive rights. used only with a rights offering, syndicate acts in a dealer capacity.

Mini-maxi agreement: best efforts agreement where if a minimum (mini) % is distributed, the issue is not cancelled even if the entire issue isnt distributed.

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6
Q

Expenses normally paid by ISSUER in an underwriting include:

A
  • blue sky costs (state registration costs)
  • printing costs
  • registration fees
  • accountant fees
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7
Q

Expenses normally paid by the UNDERWRITING SYNDICATE in an underwriting include:

A
  • Underwriter’s counsel’s fees/expenses
  • due diligence expenses
  • advertising costs
  • stabilization costs
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8
Q

Underwriters compensation includes:

A
  • finders fees
  • commissions and discounts
  • wholesaler fees
  • would NOT include expenses relating to due diligence meeting.
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9
Q

When would underwriter’s comp be deemed unreasonable?

A

When there are long term waiting periods (5 or more years) on derivatives such as warrants and options

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10
Q

What does fair and reasonable underwriter’s compensation take into consideration?

A
  • the type of underwriting commitment (firm commitment, etc)
  • the size of the issue or offering
  • the underwriter’s risk in the offering
  • the offering proceeds.

how the issuer uses the proceeds=not a factor.

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11
Q

If a syndicate member receives shares of an issue as comp, how long must they hold the securities for?

A

180 days.

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12
Q

What factors affect pricing of a new issue?

A
  • comaprison to similar issues
  • outlook/attractiveness of new issue’s industry class
  • estimate of the issuer’s EPS for next year
  • estimate of dividends per share / track record of company paying dividends
  • P-E ratio of similar companies .

(only consider estimates during pricing)

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13
Q

Spread components

A
  • spread = public offering price - issuers proceeds.
  • managers fee
  • underwriter’s comp
  • selling concession
  • reallowance
  • a syndicate member will receive largest percentage of underwriting spread as comp. ( larger percentage)
  • biggest part of spread is paid out as selling group concession. (more dollars paid)
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14
Q

Cooling-off/quiet period

A

Once prelim prospectus has been filed with the SEC, 20-day minimum time period required before the issue becomes effective. (then the offering is free to proceed assuming no contact from SEC. they never say yes, they never say no)

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15
Q

What activities are allowed during the cooling-off period?

A
  • selling group members brought in to enhance the sale of the distribution
  • blue sky the issue, file in each state it’s sold
  • due diligence meeting - attended by issuer, investment bankers, their attorneys. attendance by syndicate members is normally required

other activities permitted is: publishing tombstone ads, roadshows, distributing the prelim prospectus, red herring

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16
Q

Indications of Interest:

A
  • used determining marketability of new issue
  • called circled shares
  • not binding commitments
  • RRs cannot take subscription payments or deposits
  • red herring /prelim prospect must be distributing when soliciting indications
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17
Q

Green shoe agreement

A

Managing underwriter may over-allot issues up to 15%. syndicate manager may be given options to purchase additional shares from the issuer at the public offering price less the spread if high demand.
SRO Notification required when initiating a green shoe agreement.

ex. if manager does not have to stabilize or buy in secondary market, they can go back to issuer to buy 15% @ IPO price minus the spread.

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18
Q

Tombstone announcements - meaning and key points

A

published notice of a securities offering placed in financial media by syndicate manager.

  • syndicate manager / selling syn members are listed. (selling group members are NOT listed- salesmen)
  • must state that it is not a solicitation, that a prospectus is available
  • not a sales oriented ad. not considered offer to sell. simply an announcement
  • may be published during cooling-off period, during distribution, and after offering. could never be filed prior to registration
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19
Q

The final settlement of the syndicate account by the syndicate manager is required within how many days of the syndicate settlement date?

A

90 calendar days

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20
Q

When can a syndicate member’s participation in an underwriting be terminated?

A

When all the shares have been sold, or when the underwriting is terminated by the managing underwriter

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21
Q

Restricted persons (6)

A
  • member firms or other broker-dealers
  • broker dealer personnel- anyone who works for firm
  • any officer, director, general partner, associated person or employee of a member, or any other broker-dealer and their immediate family members
  • any agent of a member or any other broker dealer and immediate families
  • finders and fiduciaries and immediate families
  • portfolio managers and immediate families.
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22
Q

Preconditions for sale

A

member fir may NOT sell a new issue of common stock to ANY account unless it has verified it’s not restricted within the last 12 months

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23
Q

Accounts/Persons allowed to purchase new issue of stock without being considered restricted (4)

A
  • investment company registered under act of 1940
  • trust fund with 1000 or more accts, not primarily made up of restricted persons
  • insurance company that received premiums from 1,000 or more policyholders, not made up of restricted persons
  • account if beneficial interest of restricted persons does not exceed 10% of the account
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24
Q

Restricted persons may purchase shares if such a purchase is done to maintain a:

A

proportionate share of ownership in a company in which the restricted personal already has ownership

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25
Q

Stand by purchasers can purchase shares when

A
  • the standby agreement is disclosed in prospectus
  • is a written agreement
  • managing underwriter says in writing it was unable to find any other purchasers
  • securities sold in agreement are subject to 3-month “locked up” period. cant be sold for 3 months after
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26
Q

If a member firm or a control entity of firm in a private placement offers securities, it raises a conflict of interest. FINRA Requires what from a firm or person that engages in this?

A
  • intended use of offering proceeds and offering expenses
  • file documents with FINRA at or prior to the time documents are provided to investor
  • commit at least 85 PERCENT of offering proceeds will be used for business proceeds.
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27
Q

Extension of credit on New Issues

A

after closing date of the syndicate, a broker dealer must wait 30 DAYS before extending credit (margin) to customers on a new issue if BD participated in distribution. cant buy new issue on margin for 30 days after closing date.

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28
Q

FINRA Rule 5131

A

prohibits firms participating in the distribution of a new issue from accepting any market orders for purchase of shares of new issue in the secondary market prior to commencement of trading in secondary market. rule does NOT apply to limit orders.

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29
Q

Flipping prohibits the sale of new issue shares that were purchased in an offering for how many days following?

A

30 days

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30
Q

What offerings does the FINRA committee of corporate financing examine copies of registration statements, the preliminary and final prospectus, and other data for? (7)

A
  • interstate offerings
  • intrastate offerings
  • reg A offerings
  • partnership interests
  • oil and gas participation plans
  • mortgage and real estate investment trusts
  • rights offerings
  • IIRPOMR
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31
Q

The FINRA committee of corporate financing does NOT examine documents relating to which offerings? (4)

A
  • us govt. or municipal securities
  • securities of open end investment companies (mutual funds)
  • variable annuity contracts (same category as mutual funds)
  • straight debt issues rated B or higher
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32
Q

What is the FINRA Committee of corporate financing most concerned with?

A

what are member firms being paid, and is it fair. does not evaluate the merits of any security or pass upon fairness of its price.

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33
Q

For how long prior to the filing of a registration statement does the committee on corporate financing closely examine circumstances surrounding a purchase?

A
  • during the 12 months period prior
  • factors to be considered are: number of shares purchased by underwriter, date of the purchase of the shares, and difference between price paid by the underwriter and public offering price
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34
Q

When does the committee on corporate financing require documents to be filed with them on interstate offerings?

A

not later than ONE business day after they are filed with the SEC

35
Q

When does the committee on corporate financing require documents to be filed with them on intrastate offerings?

A

at the time of filing with the state securities commission, but at least fifteen business days prior to anticipated offering date

36
Q

Info that must be filed with the Committee on corporate financing includes what?

A
  • exact or estimated max or min public offering price
  • exact or estimated max underwriting discount
  • exact or estimated max reimbursement for underwriting expenses (finders fees, counsel fees)
37
Q

When must a person filing documents with FINRA disclose beneficial ownership of the issuer?

A
  • if it’s 5% or more of any class of the issuer’s secruities.
  • any beneficial ownership of issuer’s unregistered equity securities acquired during the 180 day period immediately preceding the required filing date of public offering
38
Q

A conflict of interest would exist if any of the following apply to a member firm participating in a public offering:

A
  • securities issued are to be issued by member firm
  • issuer controls, is controlled by, or under common control w the member
  • ## at least 5% of net offering proceeds are meant to reduce or pay off a loan extended by member or affiliates
39
Q

Control is defined as:

A

beneficial ownership of 10% or more of the:

  • outstanding common equity of entity
  • distributable profits/losses entity
  • subordinated debt of entity
  • outstanding preferred equity of entity
  • would also be in control if within 60 days of offering it receives equity, subordinated debt, or distributable profits/losses from the issuer.
40
Q

What would be included on the prospectus when disclosing a conflict of interest?

A
  • nature of the conflict of interest
  • name of member acting as qualified independent underwriter
  • brief statement regarding role and responsibilities of qualified independent underwriter
  • NOTE: If conflict exists, member may participate IF a qualified independent underwriter has participated in the prep of registration statement and prospectus.
41
Q

Qualified independent underwriter means a member:

A
  • does not have a conflict of interest, not an affiliate of member that does
  • does not own more than 5% of class of securities, including any right to receive any within 60 days
  • has agreed to legal responsibilities and liabilities of the act of 33
  • served as underwriter in at least 3 IPOs of similar size during 3 year period before registration statement
  • with public offering of debt securities, has acted as sole underwriter or book running lead or co manager of at least 3 with gross proceeds NOT LESS than 25% of anticipated gross proceeds. with public offering of equity securities, it’s 50%.
  • associated persons in a supervisory capacity have been clean with the SEC/FINRA the past 10 years

QIU Would NOT be responsible for pricing issue

42
Q

Discretionary accounts under conflicts

A

member firm that has a conflict can NOT sell offering to discretionary acct unless member firm has received specific written approval.

43
Q

Rights of first refusal

A
  • agreement specifies that issuer has right of termination for cause. eliminates any obligations with respect to payment of any termination fee or provision of any rights of first refusal.
  • may not be for more than 3 years from the date of commencement of sales of public offering
  • issuer shall not be responsible for paying termination fee unless offering or other type of transaction is consummated within 2 years of date of engagement
44
Q

FINRA Rule 5110 filing requirement exemptions

A

securities of pooled investment vehicles, such as investment companies, mutual funds and ETFs, are exempt from filing requirements

45
Q

Primary provisions of the securities act of 1933

A
  • issuers must file registration statement with SEC
  • offerings must be sold based on delivery of prospectus
  • prohibits fraud in sale of new issues
  • requires full and fair disclosure of pertinent info ab issuer’s financials and other data

does NOT authorize the SEC to approve or disapprove securities to be offered to public

46
Q

Affiliated person is defined as

A

someone who can influence management decisions in that corporation (insiders) officers, directors, principal stockholders (own more than 10%), members of their immediate families

47
Q

Master limited partnership

A

limited partnership which can be registered with the SEC, sold to the public, and traded in the secondary market generally formed when a private limited partnership has used up tax benefits and rolls up into a public company

48
Q

Securities exempt from registration requirements of the SEC before sold to the public under the 33 act: (9)

A
  • us govt securities
  • munis
  • securities issued by non profits
  • reg D offerings (private placement)
  • intrastate offerings
  • reg A offerings (total offered 50m or less)
  • commercial paper w maturity of 9 months (270 days) or less
  • securities issued by SBIC
  • banks and savings and loans
49
Q

Exempt transactions under the securities act of 1933

A
  • transactions by anyone other than an issuer, dealer, or underwriter: individual to individual trade
  • broker trnasactions executed on unsolicited request of customers
50
Q

What’s included in the registration statement?

A
  • company’s financial structure, nature of company’s business, brief description of business experience in past 5 years of each director, executive officer, persons nominated or chosen to become one
  • balance sheet audited (2 years) income statement audited (3 years)
  • companys history and management, comp to officers/salaries of employees INVOLVED
  • purpose of offering, class of securities offered, use of proceeds
  • copies of undewriting contracts, opinions of counsel
  • any other material info the investor must know
51
Q

Only forms of written communication permitted between member firm and potential purchaser while reg statement is pending SEC approval

A
  • red herring

- tombstone ad

52
Q

Notice of proposed registered offering

A

Issuer or holder publishes a notice of a proposed offering. Not an offer, just talking about MAYBE coming out with a new issue.

53
Q

Notice of proposed registered offering INCLUDES (7):

A
  • name of issuer
  • title, amount, basic terms of securities
  • amount of offering made by selling holders
  • anticipated timing of offering
  • brief statement of manner, purpose, without naming underwriters
  • whether the issuer is directing its offering only to a particular class of purchasers
  • statements or legends
54
Q

The prospectus delivery requirements continue to apply to broker dealers that participated in the distribution of a new issue and then became market makers for how long?

A
  • 90 days from the closing date of the syndicate.
55
Q

What is the prospectus requirement time for follow on offerings and companys listed on an exchange/nasdaq?

A

10 days for follow on offerings

3 days if company is listed on exchange or nasdaq

56
Q

Regulation M

A

Adopted by SEC to ensure securities should not be distributed in a market manipulated by the activities of persons having an interest in the distribution.

57
Q

Reg M Rule 101

A

Applies trading restrictions to underwriters, prospective underwriters, and syndicate members in ADDITIONAL ISSUE OFFERINGS (still primary shares)

58
Q

Reg M rule 102

A

Puts restrictions on the issuer and selling shareholders of additional distribution. It restricts the issuer, its affiliates, and selling shareholders from bidding for or purchasing restricted security during 1 or 5 day restricted period.

59
Q

Reg M Rule 103

A
  • permits broker/dealaers to engage in market making transactions in covered securities on the NASDAQ.
  • NASDAQ must receive notice 1 day in advance of 1 or 5 day restricted period.
  • passive MMs bid is limited to bids and purchases equal to highest current independent bid but may not exceed highest bid in security.
  • Passive MMs daily purchases cannot exceed 30% of ADTV.
  • If it exceeds 30%, must withdrawal its quotes within 30 seconds. may not reenter for remainder of that day.
  • passive MMing only allowed for fixed price offerings underwritten on firm commitment basis.
  • Passive allowed on NMW and small cap nasdaq, but NOT OTCBB and pink sheets
60
Q

What’s a Tier 1 restriction in Reg M Rule 101?

A

Securities with at least 2 months of worldwide ADTV of $1,000,000 and public float of $150,000,000. Market Makers are not restricted from trading at all

61
Q

What’s a Tier 2 restriction in Reg M rule 101?

A

securities with an ADTV of at least $100,000 and $25 M public floar, subject to a restricted period beginning ONE business day prior to the issues effective date.

62
Q

What’s a Tier 3 restriction in Reg M rule 101?

A

Any securities that don’t meet the criteria of 1 or 2 (recite those) are subject to a restricted period beginning FIVE business days prior to the issues effective date.

63
Q

During the restricted period, underwriters (syndicate members) may perform which actions regarding the restricted security? (5)

A
  • publish approved research on issuer
  • trade odd lots
  • exercise options and rights
  • execute unsolicited transactions
  • trade basket transactions - if it’s one component in a basket of 20, but does not take up more than 5% of the basket
64
Q

Covered / Reference Security

A

Cover: any security subject of distribution or any reference security.
Reference: security that is subject of a distribution (covered security) may be converted, exchanged, or exercised

65
Q

Passive market making is only allowed for:

A

fixed priced offerings underwritten on a firm commitment basis

66
Q

Reg M Rule 104

A

Stabilization or pegging the price is prohibited except for purpose of preventing or retarding a decline in the market price of a security during an offering.

67
Q

Penalty syndicate bid provision

A

(don’t want to get stuck w stock inventory, sell it to friend to sell) contained in agreement among underwriters. If customers of firms participating in underwriting sell shares to managing underwriter (flip the stock), at the stabilizing bid, the firm:

  1. loses comp related to shares
  2. penalized a certain amount per share.
68
Q

Reg M Rule 105

A
  • issuer already been through IPO, have stock out there.
  • short selling of covered security within 5 biz days prior to pricing of offering is prohibited.
  • persons who do short the security during restricted time, may not purchase during the offering
69
Q

Shelf registration & form S-3

A

Can register the max amount of securities it intends to issue in the upcoming 3-year period through form S-3.

Shelf registered securities can also be used for the purpose of the exercising of warrants or conversion of outstanding shares.

70
Q

Well known seasoned issuer (WKSI)

A
  • SEC reporting company
  • eligible to file form S-3
  • Public float of at least 700m of common equity or issued at least 1 billion in non convertible debt in past 3 years.

WKSI cant be bankrupt in past 3 years

71
Q

Placement agents

A
  • broker dealer that agrees to use its best efforts to distribute the issue to investors who are generally institutional and or accredited investors. placement agents:
  • can not stabilize
  • only do best efforts
  • can be passive market makers
72
Q

Regulation S-X

A
  • Sets forth the form, content, requirements for financial statements filed with or as part of registration statements filed with the SEC for new issues and mutual funds.
  • audited balance sheets for 2 most recent fiscal years
  • audited income and cash flow statements for each of 3 fiscal years preceding most recent audited balance sheet
    must report changes in stockholder equity on balance sheet
  • audit and revenue records must be kept for 7 years.
73
Q

Regulation S-K

A

Regulates requirements of content of non-financial portions of registration statements filed with the SEC

74
Q

Form S1
Form F1
Form S3
Form F3

A

IPO full reg. statement for domestic issuers
IPO full reg. statement for foreign-based issuers
Follow On Reg for domestic issuers
Follow On Reg for Foreign based issuers

75
Q

What rule regulates companies that are publicly traded that want to return to being a private company?

A

SEC Rule 13e-3

76
Q

Under SEC Rule 13e-3, a publicly held company may deregister its equity securities when they are held by:

A
  • less than 300 shareholders of recod or less than 500 shareholders of record where the company doesnt have significant assets.
77
Q

Under rule 13e-3, transactions which can result in a company going private include:

A
  • another company makes tender offer to buy all or most of companys shares
  • company merges with or sells substantially all of company’s assets to another company
  • company declares a reverse stock split that reduces the number of shareholders on record.
78
Q

Free writing prospectus

A

written communication including email, that constitutes an offer to sell or solicitation to buy securities in a registered offering by means other than a statutory prospectus.
- may include info that is not in registration statement but cannot conflict w info in registration statement or prospectus.

79
Q

Shares in a shelf registration:

A
  • fully registered, can be publicly traded
  • not considered to be restricted shares
  • restricted shares generally result from private placement offerings
80
Q

A WKSI using form S-3 related to offering of equity securities may at any time either orally or in writing communicate with the public. What offerings are ineligible?

A
  • communications relating to business combinations transactions
  • communications by a registered investment company
  • communications by a registered business development company.
81
Q

Form S3 as it pertains to shelf registrations:

A
  • simplified registration, can only be used by an issuer who has been reporting to SEC for minimum of 12 months.
82
Q

Automatic shelf registration statement means:

A
  • registration statement is filed on form S-3 by a WKSI
83
Q

Sales by associated persons of an ISSUER (NOT THE SAME AS ASSOCIATED PERSONS OF THE BD WITH RESTRICTIONS):

A
  • issuer can use its own personnel to sell securities to the public and associated person will not be deemed a broker if following conditions are met:

1) associated person not subject to statutory disqual
2) associated person is not compensated in connection w participation
3) not associated of the broker or dealer - they’re only associated w the issuer

84
Q

Underwriting compensation & underwriting concession usually goes to:

A
  • comp goes to selling syndicate members

- concession goes to selling group members.

Series 24 (13 decks)

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