CHAPTER 13 – OFFERINGS

Question 1

refers to a Securities and Exchange Commission (SEC) regulation in the United States that governs private placements of securities offerings. It is not specific to primary market offerings but is often used by companies to raise capital without going through the process of registering with the SEC.

Regulation _ provides a set of rules that create exemptions from the registration requirements under the Securities Act of 1933, allowing companies to raise capital through the sale of securities to accredited investors and a limited number of non-accredited investors.

Answer 1

Regulation D

Question 2

is a legal document provided to investors in a private placement that includes the same information often provided in a prospectus.

Answer 2

private placement memorandum

Question 3

A ________ agreement dictates the amount of time that pre-IPO investors, such as private placement buyers, management, venture capitalists, and other insiders, must wait to sell their shares once the company has gone public

• designed to prohibit management and venture capitalists that initially funded the company from immediately liquidating their shares once the issue goes public

Answer 3

Lock-Up Agreement

Question 4

Securities acquired in unregistered, private sales from the issuer or an affiliate

• Must be held for at least 6 months if the issuer is a reporting company, otherwise it’s 1 year.
• Can be resold if they meet the conditions set by Rule 144.

Answer 4

Restricted Securities

Question 5

Securities owned by an affiliate of the issuer.

• Held by affiliates (directors, officers, major shareholders, etc.).
• Held by affiliates (directors, officers, major shareholders, etc.).
• Can be resold under Rule 144, subject to volume limits and public information requirements.
• do not bear a restrictive legend.

Answer 5

Control Securities

Question 6

To qualify as a ________, a person must not be an affiliate of the issuer at the time of
sale and must not have been an affiliate during the preceding three months.

Answer 6

non-affiliates

Question 7

True or False. A key part of The Securities Exchange Act of 1934 is the requirement for periodic reporting by publicly traded companies.

Answer 7

True

This is designed to ensure that investors have access to essential facts about a company’s financial health and operations.

The periodic reporting requirements apply to companies that have securities listed on U.S. exchanges, or companies with a certain number of shareholders and a certain amount of assets. The requirements also apply to companies that have made a registered initial public offering of their securities.

Question 8

established the legal framework for regulating secondary trading of securities in the United States.

Answer 8

The Securities Exchange Act of 1934

Question 9

The six-month ________ starts from the time the securities were fully paid for (no margin) by the original purchaser. The __________ doesn’t apply to
control securities.

Answer 9

Holding Period

Question 10

What is a Notice of Sale?

Answer 10

Under Rule 144, a person that intends to sell either restricted or control securities must
notify the SEC by filing Form 144 at the time the sell order is placed with the broker-dealer. If the securities being sold under the provisions of Rule 144 have not been sold within 90 days of the date the notice was filed with the SEC, an amended notice must be filed

Question 11

An exemption from the notice of sale requirement is available if the amount of the sale doesn’t exceed 5,000 shares and the aggregate dollar value of the sale doesn’t exceed $______

Answer 11

An exemption from the notice of sale requirement is available if the amount of the sale doesn’t exceed 5,000 shares and the aggregate dollar value of the sale doesn’t exceed $50,000.

EX: ▪ An investor sells 3,000 shares of restricted ABC stock when they’re trading at $15 per share
— No filing required. Only 3,000 shares; aggregate value of less than $50,000.

  ▪ An investor sells 3,000 shares of restricted XYZ stock when they're trading at $20 per 
     share  — Filing is required. Only 3,000 shares; but aggregate value exceeds $50,000.

Question 12

Under Rule 144, the maximum amount of securities of an exchange-listed
company that may be sold over any 90-day period is the greater of _% of the total shares outstanding or the average weekly trading volume during the __ weeks preceding the filing.

Answer 12

Under Rule 144, the maximum amount of securities of an exchange-listed
company that may be sold over any 90-day period is the greater of 1% of the total shares outstanding or the average weekly trading volume during the four weeks preceding the filing.

For over-the-counter (non-listed) equities, the maximum that may be sold is 1% of the total shares
outstanding

Question 13

The broker-dealer that handles Rule 144 sales may do so through _____er ______’s or through transactions that are made directly with market makers. ______er ______’s are defined as transactions being made on an agency basis only and don’t involve solicitations.

Answer 13

The broker-dealer that handles Rule 144 sales may do so through brokers’
transactions or through transactions that are made directly with market makers. Brokers’ transactions are defined as transactions being made on an agency basis only and don’t involve solicitations.

However, a broker may make inquiry in the following two cases:

1. If a customer has indicated an unsolicited interest in the securities within the preceding 10 business days
2. If another broker has indicated an interest in the security within the preceding 60 days

Question 14

Under Rule _____, sales of restricted securities are permitted to sophisticated investors without being subject to the conditions imposed by Rule 144

Answer 14

Under Rule 144A, sales of restricted securities are permitted to sophisticated investors without being subject to the conditions imposed by Rule 144

The securities offered under Rule 144A may be equity or debt securities and may
be offered by either a domestic or foreign issuer. After the issuance, the securities may be immediately
resold to a qualified institutional buyer.

Question 15

1. First, only certain types of investors are eligible, including:
   - Insurance companies
   - Registered investment companies
   - Small business development companies
   - Private and public pension plans
   - Certain bank trust funds
   - Corporations, partnerships, business trusts, and certain non-profit organizations
   - Registered investment advisers
2. The buyer must be purchasing for its own account or for the account of another QIB.
3. The buyer must own and invest at least $100 million of securities of issuers that are not affiliated with the buyer.

Answer 15

3 Part Test for Qualified Institutional Buyers (QIBs)

Question 16

True or False. Under no circumstances is an individual (even one who meets the standard of being an accredited individual investor) considered to be a QIB.

Answer 16

True

Question 17

Rule ____ defines certain corporate restructuring transactions (like mergers, consolidations, or asset transfers) as sales of securities, rather than simply changes in corporate structure. This is significant because securities sales are subject to the registration and disclosure requirements of the Securities Act of 1933.

Answer 17

Rule 145

However, stock splits, reverse stock splits, or changes in par value are not considered reclassifications and are therefore not subject to the rule. Rule 145 is most often relevant in the case of an acquisition or merger.

Question 18

is a “safe harbor” that outlines the conditions under which offers and sales of securities conducted outside the United States are exempt from the registration requirements of Section 5 of the U.S. Securities Act of 1933.

Answer 18

Regulation S (Reg S)

Question 19

True or False. According to Regulation S, a U.S. company may efficiently issue an unlimited number of securities outside of the country without filing any documentation with the SEC. Also, there are no restrictions as to the type of non-U.S. investors who may purchase the security

Answer 19

True

Question 20

To qualify for a Regulation S exemption, the transaction must be executed ______. An _______
transaction is one in which no offer is made to a person in the U.S. and either (1) at the time the buy order is originated, the buyer is outside the United States, or (2) the transaction is executed through the facilities of a designated offshore securities market.

Answer 20

Offshore

Additionally, there may not be a directed selling
effort in the U.S. which therefore precludes activities such as the sending of printed materials to
investors in the U.S., conducting promotional seminars in the U.S., or advertising the offering in the U.S.
(e.g., using radio, TV, or print media)

Question 21

An overseas investor who acquires securities pursuant to Regulation S may immediately sell the securities overseas through a designated offshore securities market. However, if a purchaser intends to resell the securities in the U.S., the following distribution compliance period (holding period) is imposed by Regulation S:
■ 40 days for debt securities
■ One-year for equity securities

Answer 21

Note

Question 22

is any entity that controls, is controlled by, or is under common control with the member

Answer 22

Affiliate

Question 23

is considered having ownership of 10% or more of the common or preferred
equity or subordinated debt of another entity or having a right to 10% or more of the
profits or losses of a partnership.

Answer 23

Control

Question 24

refers to a situation in which the same person or entity controls two or more entities.

Answer 24

Common control

Question 25

A member firm is not permitted to participate in a public offering in which it has a conflict of interest unless a qualified independent underwriter participates or at least one of the following three conditions are met:
1. The member firm that’s primarily responsible for managing the offering may not have a conflict
of interest and may not be an affiliate of any member that does have a conflict, or
2. The securities offered must have a bona fide public market, or
3. If they’re fixed-income securities, they must be investment-grade

Answer 25

Note

Question 26

To be considered a QIU, the firm must have served as a manager or co-manager for at least three public offerings of a similar size and type during the three-year period preceding the filing of the registration statement. If a QIU is used, there must be a prominent disclosure in the prospectus or offering document to explain the conflicts of interest and a statement indicating the name and the role of the qualified independent underwriter.

What does QIU stand for by the way?

Answer 26

Qualified Independent Underwriter.

Question 27

If a new issue is underpriced and in great demand because of its growth prospects, the offering is considered

Answer 27

Oversubscribed

In these instances, there may be more investors wanting to acquire the
stock than originally projected by the underwriters. Underwriters typically have a period of 30 days to
request the use of the provision that’s referred to as the Green Shoe Clause. This clause allows the
underwriters to purchase additional shares (a maximum of 15%) from the issuer or selling
shareholders so that they can be sold in order to meet the demand

Question 28

Under Regulation ___, the SEC restricts distribution participants (such as underwriters and issuers) from bidding for or making secondary market purchases of a stock that’s currently being offered in a distribution. This restriction is in effect for a limited period that revolves around the effective date.

Answer 28

Regulation M

Question 29

is considered a form of price manipulation since the managing underwriter intervenes in the
secondary market by placing a bid for the securities at or below the public offering price.

Answer 29

Stabilization

Some issues lack the level of investor interest to cause the price of a new stock offering to rise. To prevent
an immediate decline in the price of the stock during its distribution period, the SEC permits stabilization.

It’s important to note that stabilization is the only form of price manipulation permitted by the SEC

Question 30

a deterrent that underwriters use to discourage flipping. Under a ________, the underwriter can reclaim the selling concession from the syndicate members if the clients they allocated shares to flip those shares soon after the IPO.

Answer 30

Penalty Bid

Prior to imposing a penalty bid, the syndicate manager must provide FINRA with written notice that includes:
■ The identity of the security and its Nasdaq symbol, and
■ The date the member firm intends to impose the penalty bid

Question 31

The _______ (bond resolution) for a general obligation bond will usually include the statutes which permit the issuer to levy taxes.

Answer 31

Indenture

Question 32

A municipality is not permitted to issue bonds in excess of its debt
limitation since doing so will exceed its _______.

Answer 32

debt ceiling

Question 33

With a _______ sale, an issuer brings its issue to market by selecting the lead
underwriter or senior manager that will sell the issue to the public. The size of the issue, the coupon rate, possible call provisions, and other details are generally decided during this negotiation process. Typically, the lead underwriter forms an underwriting syndicate with other broker-dealers to facilitate the placement of the securities. Many revenue issues are sold on a ________ basis.

Answer 33

Negotiated

Question 34

Rather than selecting its underwriter, an issuer may invite interested underwriters to
compete against one another by submitting bids for the issue. The syndicate that submits the best bid is awarded the bonds. The best bid is typically the one that presents the issuer with the lowest interest cost over the life of the issue. GO issues are often sold on a ________ basis.

Answer 34

Competitive Basis

Question 35

is essentially a group of underwriters that share the responsibility for selling a certain percentage of the new bonds.

• usually comprised of firms that have worked together in the past
• Due to the liability assumed in this type of distribution, underwriters are acting in a principal capacity

Answer 35

Syndicate

the responsibility of selling the entire issue and the liability for any unsold bonds is dispersed
with the risk being reduced for each individual underwriter

Question 36

The ________ letter will identify the specific obligations
and participation level of the members.

Answer 36

Syndicate Letter

For example, the syndicate letter may indicate the preliminary
amount of bonds to be underwritten by each member, how long the syndicate will last, an
acknowledgment that the bid and offering terms will be set by a majority of the members, the type of
syndicate to be formed, and the priority of orders.

Each member must sign and return a copy of the
syndicate letter to the manager to indicate its acceptance of the specific obligations

Question 37

This agreement is typically used when several underwriters, collectively known as an underwriting syndicate, work together to underwrite a large offering.

Answer 37

agreement among underwriters

Question 38

The syndicate may be formed as either a ______ or _______ account. The
difference between the two types relates to a member’s level of liability for any bonds left unsold.

Answer 38

Divided/Undivided

Question 39

In a ______ or Western account, each member is responsible for a specific
percentage of the issue. If the member sells its portion of the issue, it will not be responsible for any part of the unsold balance

Answer 39

Divided

For example, if a member assumes liability for 10% of a $10,000,000 issue, its
responsibility will end once it had sold $1,000,000 of the issue. On the other hand,
if the member sold only $750,000, it’s still responsible for the remaining $250,000

Question 40

In an _______ or Eastern account, each member is responsible for a specific
percentage of the unsold balance, regardless of how much it actually sold

Answer 40

Undivided

For example, if a member assumes liability for 10% of a $10,000,000 issue and sold
$1,000,000 of the issue, it’s still responsible for 10% of any remaining unsold balance.
Therefore, if the syndicate had $2,000,000 of unsold securities at the time it dissolved,
a 10% participant will receive $200,000 (10%) of these unsold securities.

Question 41

Determining the Bid Once the syndicate is formed, it must determine the bid that it will submit to the issuer. The bid represents the dollar amount that the syndicate is willing to pay per bond to the issuer. After the preliminary scale or pricing schedule is set, syndicate members will distribute the scale to their traders and salespeople in an effort to gauge investor interest. As orders are being solicited, it’s possible that some orders will be received before the actual bid is submitted to the issuer.

Answer 41

Selling Group Members At times, the lead underwriter will invite additional firms into a deal as agents that will simply assist in placing the securities. These broker-dealers, referred to as selling group members, don’t assume liability for any unsold bonds since they’re not members of the syndicate. Selling group members are able to purchase bonds from the syndicate at the offering price minus the concession, but will then sell the bonds to the public at the offering price.

Question 42

A small portion of the spread will be used to cover syndicate expenses and the syndicate manager’s fee. The remainder (the spread minus the manager’s fee and expenses) is referred to as the ____ ________.

However, the total
takedown is divided into two parts—the _______ ________ and the _________

Answer 42

total takedown.

However, the total
takedown is divided into two parts—the additional takedown and concession.

Question 43

Assume: 1/8 point + 3/8 point + 1/2 point = 1 point ($10) Spread
Let’s consider the different possibilities of how bonds may be sold to a customer:

1. The syndicate manager sells bonds to a customer—In this case, the manager handled the administration of the syndicate, assumed the liability for the bonds, and ultimately sold the bonds. Therefore, the manager earns the entire spread of 1 point ($10 per bond).
2. A syndicate member sells bonds to a customer—In this case, the manager handled the administration of the syndicate and earns its fee of1/8 of a point ($1.25 per bond), while the member assumed liability and sold the bonds and earns the total takedown of/8 of a point ($8.75 per bond).
3. A broker-dealer that’s part of the selling group sells bonds to a customer—In this case, the manager handled the administration of the syndicate and earns its fee of1/8 of a point ($1.25 per bond), the member assumed liability and earns the additional takedown of3/8 of a point ($3.75 per bond), and the broker-dealer that sold the bonds earns the concession of1/1⁄2 of a point ($5 per bond).

Answer 43

Note

Question 44



The priority of orders is normally:

Answer 44

1. Presale orders: Orders placed prior to the actual awarding of the issue to the syndicate are given the highest priority since they’re the most beneficial to the syndicate. Knowing that it has commitments for a part of the offering allows the syndicate to enter a more aggressive bid.
2. Group net orders: These are orders in which the profit is shared by all members of the syndicate.
3. Designated orders: These are orders in which the profit is directed to the dealers that were designated by the customer.
4. Member orders: These are orders in which only one member earns the total takedown.

Question 45

When an issuer intends to sell bonds through a competitive sale, it will advertise by
publishing a ________.

• will usually contain essential information that an underwriter will need in order to submit a bid such as the size of the offering, its maturity date, the coupon rate, and the details related to the bidding process.

Answer 45

Notice of Sale

Remember, this is for the issuance of municipal bonds in the primary market

Question 46

The disclosure document that’s used in municipal offerings (both negotiated and
competitive) is referred to as the __________.

This document essentially takes the place of a prospectus; however, it’s not required to be filed with the SEC since municipal issuers are exempt from the Act of 1933.

• contains detailed information about both the issuer and the offering and, if produced, must be distributed to investors
• there’s both a preliminary and final version

Answer 46

The disclosure document that’s used in municipal offerings (both negotiated and
competitive) is referred to as the official statement.

Question 47

In a __________ underwriting arrangement, the syndicate (in return for a fee) agrees to purchase any unsubscribed shares from the rights offering. In other words, if the current shareholders fail to subscribe to the stock available through the rights offering, the investment banker will purchase the residual shares on a firm-commitment basis.

Answer 47

standby underwriting arrangement

Question 48

When a broker-dealer agrees to underwrite securities and raise capital for an issuer, an ______________ is signed by the two parties.

Answer 48

Underwriting Agreement

Question 49

True or False. Syndicate members are required to maintain the public offering price and, unless they’re released from this commitment by the managing underwriter, they may not sell the issue at a lower price.

Answer 49

True

Question 50

The ___________________ is the difference between the amount paid by the
investing public and the amount received by the issuing corporation.

Answer 50

Underwriting Spread

Question 51



The spread consists of the following components:
- Manager’s Fee—the portion that’s paid to the managing underwriter for each share of the offering
▪ Member’s/Underwriter’s Fee the portion paid to the syndicate member that’s assuming the risk or liability for the shares
▪ Concession the portion that’s paid to the firm selling the shares
▪ Reallowance - a portion of the concession paid to selling broker-dealers that are not syndicate members

Answer 51

Note

Question 52

Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:

Answer 52

• private offerings to a limited number of persons or institutions;
• offerings of limited size;
• intrastate offerings; and
• securities of municipal, state, and federal governments.

By exempting many small offerings from the registration process, the SEC
seeks to foster capital formation by lowering the cost of offering securities to the public.

Question 53

is considered a “safe harbor” under Section 3(a)(11), providing objective standards that a company can rely on to meet the requirements of that exemption. Rule _ , as amended, has the following requirements:

• the company must be organized in the state where it offers and sells securities
• the company must have its “principal place of business” in-state and satisfy at least one “doing business” requirement that demonstrates the in-state nature of the company’s business
• offers and sales of securities can only be made to in-state residents or persons who the company reasonably believes are in-state residents and
• the company obtains a written representation from each purchaser providing the residency of that purchaser

Answer 53

Rule 147

Question 54

Note

Answer 54

Access equals delivery does not apply to registered investment companies. Physical delivery must be made before or concurrent with the sales presentation

Question 55

If requested, the statutory/ full prospectus must be sent within _ days of receipt of the written request

Answer 55

3 days.

Must be available online as of the purchase date.

Question 56

What is the de minimis rule?

Answer 56

Form 144 need not be filed if 5,000 or fewer Shares are sold and the dollar amount is $50,000 or less. rule applies to sales in any 90 day period

Think restricted stock

Question 57

True or false. Control stock, unless it is restricted, can be sold immediately, but volume limits always apply

Answer 57

True