Chapter 3

Question 1

What should S-1 contain?

Answer 1

BS 90 days, P&L 3y, >10% shareholders

Question 2

What is the cooling off period? How long is it? What can be released?

Answer 2

restriction on activity and communication during the period just before issuances are offered for sale to the public
20 days. No sales can take place.
Can be released:
-Red herring (a preliminary prospectus) with a price range can be used to collect indications of interest
-Tombstone ads (underwriters, link to prospectus, disclaimer + amount, date, business description & price + contact, no-commitment)

Question 3

What happens if price deviates from range released in red herring?

Answer 3

Amendment needs to be filed if final price deviates >20% from range.

Question 4

What is Free Writing Prospectus? What must it contain? Who can use one and when?

Answer 4

Free writing prospectus: written com about securities offering that isn’t a prospectus.
Needs to contain a legend recommending that the statutory prospectus be viewed.
(1) WKSIs, (2) SIs and (3) UIs may use FWP (1) before or after SEC filing, (2) after, (3) after and accompanied/following prospectus

Question 5

When must a Prospectus be provided to a secondary buyer?

Answer 5

Prospectus must be provided to secondary buyers if:
-IPO 90 days OTC, 25 days NASDAQ
-Add offering 40 days OTC

Question 6

What does the SEC disclaimer say?

Answer 6

“not approved or disapproved, no representations regarding accuracy of info”

Question 7

Rule 5130 / Free riding / withholding

Answer 7

Rule 5130 prohibits a broker-dealer from selling New Issues to accounts in which “Restricted Persons” have a beneficial interest

a BD can’t withhold any securities for associated entities and individuals with financial ties. Only covers stock IPOs.

Question 8

In what cases can a hot issue be purchased by employees or family members?

Answer 8

respectively unable to direct businesss to the BD and aren’t supported financially

Question 9

Types of Underwriting commitments?

Answer 9

-Firm commitment (can have a Market Out Clause)
-Best efforts
-Mini-Maxi (best effort with escrow. Once mini reached, BD can sell until maxi)
-All or None (escrow until all sold)
-Standby (agreement to purchase shares not purchased by current shareholders during a preemptive rights offering. Firm commitment)

Question 10

Types of offerings?

Answer 10

IPO
Subsequent primary
Combined primary & secondary

Question 11

Green shoe provision

Answer 11

syndicate can purchase additional 15% of shares

Question 12

Employees of the issuer may sell securities (not ones that they own) when?

Answer 12

if not paid on sales, not RR, not disqualified RR and with permission of managing underwriter.

Question 13

What kind of compensation does underwriter get?

Answer 13

Only lead can earn entire underwriting spread
Mgmt fee => lead
Underwriter fee => syndicate
Selling concession => successful seller

Question 14

Underwriting agreements must be sent to FINRA when? What are exemptions?

Answer 14

< 3 days after filing
If no filing (PP) => 15 days prior to anticipated offering date.
Exempt: muni, gov bonds, redeemable IC shares, variables contracts

Question 15

What are requirements if FINRA member wants to offer securities?

Answer 15

Offering by FINRA member: 10:1, 120%

Question 16

FINRA member securities offering: when is there a conflict of interest? what needs to happen in that case?

Answer 16

10% ownership, affiliate, 5% of proceeds used to repay loan made by BD
=> qualified independent underwriter + disclosures

Question 17

Exempt issuers?

Answer 17

govs + insurance & banks (but not their holding co.)

Question 18

Exempt transactions?

Answer 18

Reg D
Rule 144
Reg S
Reg A
Reg CF
Rule 145
Rule 147
Rule 415

Question 19

Reg D non-accredited investor limit? Lock up?

Answer 19

Reg D
up to 35 non accredited if PPM
6m lock up

Question 20

Rule 144 lock ups, restrictions, trading vol limitations, exemptions?

Answer 20

Rule 144
Control: 10% => can’t earn short swing profit
Restricted stock of reporting co.: 6m lock up
Restricted stock of non-reporting co.: 12m lock up
Restricted & control stock trading volume limitations per 3m period: greater of avg. of last 4 weeks or 1% of total stock
144A permits sale of restricted stock to QIBs (>$100M)

Question 21

Reg A requirements

Answer 21

2y audited statements
Cooling off period

Question 22

Reg CF investment limits

Answer 22

If net worth <$100k => greater of limit of $2k or 5% of NI or NW
If >$100k => lesser of 10% or $100k

Question 23

Rule 145

Answer 23

M&A, reorganization. Not splits & par value changes.
S-4 filed

Question 24

Rule 147

Answer 24

unlimited capital intra-State
80% of income, proceeds, assets need to be in State

Question 25

Rule 415: how long can shelf registration last?

Answer 25

Shelf registration
2y. WKSI: 3y

Question 26

Rule 405: what is a Streamlined registration process? Who can benefit?

Answer 26

Streamlined registration process: S-3 / F-3
WKSI: $700M float
SI: $75M float

Question 27

Research analyst communication restrictions

Answer 27

Research analysts can’t speak to customer’s of the issuer in the presence of the issuer / individuals representing the issuer

Question 28

Can issuer issue common stock before issuing pref stock?

Answer 28

No