Chapter 3 - Primary/Secondary Markets Flashcards
True or False
The Securities Act of 1934 was passed regulating the primary market -issuance of new issues.
False.
The Securities Act of 1933 was passed regulating the primary market -issuance of new issues.
True or False
The Securities Act of 1933 was passed regulating the primary market -issuance of new issues.
True
Which Securities Act was passed to regulate the primary market?
The Securities Act of 1933
Included in the ___________ is the general character of the business:
the uses of the proceeds of the offering;
historical audited financial statements;
biographical data on officers and directors as well as their percentage holdings;
legal issues;
the proposed price of the issue;
underwriting spread;
a copy of the proposed prospectus;
and any other relevant information.
Registration Statement - Form S-1
Once the registration statement is filed, the issue enters into the “____________” period.
During this time, the SEC reviews the filing for “full and fair disclosure.”
20-Day Cooling Off period
True or False
During the 20-day Cooling-off period, the issue may not be sold, but it may be advertised.
False.
During the “20-day cooling off” period, the issue cannot be sold or advertised; recommendations of the issue are prohibited; soliciting orders to buy are prohibited. If any of these occur, this is a violation called “gun jumping.”
During this period, lists of interested customers may be drawn, but no orders can be taken and no sales can be made. This is termed “taking indications of interest.”
True or False
During the 20-day cooling off period, underwriters are allowed to distribute preliminary prospectuses.
True.
the underwriters are allowed to distribute a “preliminary prospectus” to interested parties. This is called a “red herring.”
The “red herring” is not considered to be “offering” the securities to investors, so it is allowed.
If the SEC finds that there is an untrue statement of material fact in the registration statement at any time during the “20-day cooling off”, it can issue a “stop” order suspending effectiveness. What two conditions must be met for a stop order to be issued?
The stop order can only be issued after 15 days’ notice is given to the issuer and underwriters and an opportunity for a hearing is given.
True or False
The final prospectus must be given to purchasers during the 30-day period following the effective date.
False.
The final prospectus must be given to purchasers during the 90-day period following the effective date.
What is required of firms who wish to send prospectuses to clients by email?
The firm has to confirm that the client has internet access.
True or False
During the prospectus delivery period, dealers effecting purchases of the security for customers must be “quiet” about the issue - they cannot “hype” the issue.
True
True or False
Under the Act of 1933, an omission or misstatement of material fact in a registration statement or prospectus is fraud. It is fraud for the underwriter only, because it is the underwriters responsibility to check for these types of errors.
False
It is fraud for all those individuals involved in the offering: the issuer, the underwriters, the accountants, and the lawyers.
What do the following have in common?
Direct obligations of the U.S. Government and Agency issues.
Municipal obligations.
Foreign government obligations.
Banker’s Acceptances and Commercial Paper as long as the maturity does not exceed 270 days.
Insurance company offerings such as life insurance policies and fixed annuities, EXCEPT for variable annuities (covered under state insurance laws which predate the Act of ‘33).
Bank issues (covered under state banking laws which predate the Act of ‘33).
Common carrier issues such as railroads, trucking companies (covered under Interstate Commerce Commission - I.C.C. - laws that predate the Act of ‘33).
-and-
Issues of Benevolent organizations (non-profit corporations such as farmer’s cooperatives).
These are the primary “exempt” securities that will be tested on the exam.
What do the following transactions have in common?
Intrastate offerings under Rule 147
Private placements under Regulation D
Certain trades of securities that would otherwise require the use of a prospectus defined under Rule 144
Private placements that can only be sold to large institutional investors under Rule 144A
Transactions between private parties
Transactions outside the U.S. to non-U.S. residents under Regulation S
These are exempt transactions that do not require registration.
if new issues of non-exempt securities are offered through an exempt transaction, no prospectus is required. For example, if a new issue of common stock (a non-exempt security) is sold in a private placement (an exempt transaction), no registration is required.
True or False
The Act of 1933 defines an intrastate transaction as one that takes place:
between 2 states;
between the United States and a territory such as Puerto Rico;
between the United States and the District of Columbia;
and between the United States and any foreign country.
False.
This describes interstate transactions, not intrastate.
For an intrastate offering to be exempt from federal registration under Rule 147, the requirements are:
(4 answers)
- 100% of the issue must be offered and sold to residents of that state. The issue cannot be sold to a non-resident; all purchasers must submit written verification of residency.
- The issuer must be a “resident” of that state. To determine residency, the SEC applies the “80%” tests. The issuer must meet all of the following to be considered a “resident” of that state. 80% of the:
A. issuer’s assets must be located m the state.
B. issuer’s sales revenue must be derived in that state.
C. proceeds of the offering must be used within that state .
- In addition, the issuer must be incorporated in that state, if it is a corporation; or the issuer’s principal office must be located in that state, if it is a partnership.
- For a 9-month period after the sale is completed, resale is only permitted to residents of that state. The issue cannot be resold “interstate” until after the 9-month waiting period. To enforce this, a legend is printed on the certificates with the restriction .
True or False
Under a Regulation D private placement, the issue can be sold to a maximum of 25 “non-accredited” investors and an unlimited number of accredited investors.
False.
The issue can be sold to a maximum of 35 “non-accredited” investors and an unlimited number of accredited investors.
True or False
The issue can be sold to a maximum of 35 “non-accredited” investors and an unlimited number of accredited investors.
True
True or False
Under rule 501, an accredited investor is a purchaser who meets all of the following tests;
- Individual with a net worth of $1,000,000, exclusive of home.
- Individual with annual income of $200,000 a year for the past 2 years; or couple with a joint income of $300,000; and the expectation of continuing to earn that level of income in the future.
- Individual who is an officer or director of the issuer.
- Financial Institutions (banks, insurance companies, . mutual funds), and non-profit institutional investors (pension plans and college endowment funds), with assets in excess of $5,000,000.
False.
To be an accredited investor, the entity must only meet one of the above tests.
True or False
Under Regulation D for private placements, there is no limit on the dollar amount sold, the number of units sold, or the number of states in which the offering is made.
True
Under Regulation D for private placements, even though the issue is exempt from registration and prospectus requirements, full disclosure to investors must be given to investors through an “______________”.
Offering Circular
All non-accredited purchasers of private placements under Reg D must be “sophisticated” investors.
What is a “sophisticated investor”?
This means that the investor is able to evaluate the merits of the issue.
This does not mean that the purchaser cannot bear the investment’s economic risk.
True or False
Registered representatives must act as purchaser representatives in offerings that they are selling.
False
Registered representatives are prohibited from acting as purchaser representatives in offerings that they are selling.
The only exception is given to purchasers who are related by blood to the registered representative.
True or False
A Rule 506 private placement offering that includes non-accredited investors (up to the 35 maximum), cannot be advertised, but if it excludes non-accredited investors, it can be advertised.
True
Until September 2013, private placements could not be advertised to potential investors. To promote small business formation, this was changed for Rule 506 (unlimited dollar amount) offerings made only to accredited investors.
Typically, private placements are sold in “private transactions” which are exempt from the Act.
Alternatively, the issue can be sold in the public markets under the exemption provided by Rule 144.
True or False:
To claim the exemption, a Form D must filed with the SEC 15 calendar days prior to the first sale.
False.
To claim the exemption, a Form D must filed with the SEC 15 calendar days after first sale.
Typically, private placements are sold in “private transactions” which are exempt from the Act.
Alternatively, the issue can be sold in the public markets under the exemption provided by Rule 144.
True or False:
To claim the exemption, a Form D must filed with the SEC 15 calendar days after the first sale.
True
In a PIPE (Private Investment in Public Equity) transaction, a publicly held company raises funds quickly by doing what?
Selling unregistered private placement common stock to institutional investors (usually hedge funds).
True or False
In a PIPE (Private Investment in Public Equity) transaction, a publicly held company raises funds quickly by selling unregistered private placement common stock to institutional investors at a discount to the market price.
True
True or False
In a PIPE (Private Investment in Public Equity) transaction, a publicly held company raises funds quickly by selling unregistered private placement common stock to institutional investors at a premium to the market price.
False
In a PIPE (Private Investment in Public Equity) transaction, a publicly held company raises funds quickly by selling unregistered private placement common stock to institutional investors at a discount to the market price.
What does Rule 144 allow?
Rule 144 allows small amounts of restricted stock to be sold periodically without formal registration.
True or False
Rule 144 allows the holder of “restricted” (never registered) shares to sell them publicly if:
The seller files a Form 144 - Notice of Intention To Sell - with the SEC at or prior to the sale date.
True
True or False
Rule 144 allows the holder of “restricted” (never registered) shares to sell them publicly if:
The issuer has no registered shares outstanding,
False
The issuer has to have registered shares outstanding and be current with its SEC filings.
True or False
Rule 144 allows the holder of “restricted” (never registered) shares to sell them publicly if:
The seller has held the securities, fully paid, for 3 months.
False.
The seller has held the securities, fully paid, for 6 months
If the securities are used as collateral for a loan, or a put option is purchased on the securities, the holding period is “tolled” - that is, does not count for that period.
How frequently may a holder of restricted securities file a Form 144 to sell shares of the restricted stock?
The seller may file a Form 144 no more than 4 times per year (every 3 months).
The maximum sale under each Form 144 filing is the Greater of what?
The maximum sale under each Form 144 filing is the Greater of:
1 % of the outstanding shares of the company;
or
Weekly average of the 4 weeks trading volume preceding the filing of the Form 144
Rule 144 is extended to include __________ stock, defined as stock held by an officer, director, 10% shareholder or “affiliated person” (such as an officer’s wife).
Control
True or False
To prevent severely depressing the market price of the stock, control stock is subject to the “dribble” rule, but there is no 6-month holding period required.
True
The filing requirements of Rule 144 are waived for transactions that are below a certain number of shares and market value.
True or False
A person may sell up to 5,000 shares, with a value of no more than $25,000, of that security every 90 days without filing.
False.
A person may sell up to 5,000 shares, with a value of no more than $50,000, of that security every 90 days without filing.
For what two reasons is a firm prohibited from acting as a dealer in “144” transactions?
(may only act as an agent)
Because the SEC does not want a firm to be known as the place for officers to unload their “144” shares; and it wants to make sure that the price at which the shares are sold reflects the prevailing market.
Exception: if a firm is a bona fide market maker in that security.
When is a firm considered a bona fide market maker?
A firm is a bona fide market maker if it has published bid and ask quotes in that stock on at least 12 of the preceding 30 calendar days with no more than 4 successive days elapsing without a quote.
If a customer has contacted a firm about buying 144 shares without any action at that point, the customer may be recontacted in the next __a__ business days without that action being considered a “solicitation” to buy.
If a brokerage firm has contacted another firm about buying 144 shares without any action at that point, the other firm may be recontacted within the next __b__ calendar days.
A. 10
B. 60
True or False
Gifts of restricted securities to a charity do not eliminate the holding period requirement.
If the 6 month holding rule has not been met, the charity must wait out the balance of the holding period.
True.
However, securities that have not met the 6 month holding period that are part of the estate of a person since deceased can be disposed of without dollar limit under Rule 144.
Rule 144A - This rule was enacted in 1992 to allow large institutional purchasers to trade what?
Rule 144A - This rule was enacted in 1992 to allow large institutional purchasers to trade private placement securities in the United States. Do not confuse this rule with Rule 144 - it is totally different!
The rule permits any “qualified institutional buyer” -known as a “QIB” that owns, and invests on a discretionary basis, at least $100,000,000 of securities as an investment (e.g. , insurance companies, investment companies, employee retirement plans, trusts) to purchase “unregistered” securities either directly from issuers or from broker-dealers. These are typically sold in minimum block sizes of $500,000.
The marketplace for the trading of 144A issues is called what?
“PORTAL”
A separate electronic market owned by NASDAQ and a number of FINRA-member firms.
Regulation S details what?
The requirements necessary for an issue offered overseas to non-U.S. resident to be exempt from registration.
Note that U.S. citizens living outside the United States can purchase these securities. All sales made under Regulation S are reported to the SEC on Form 8K.
All sales made under Regulation S are reported to the SEC on which form?
All sales made under Regulation S are reported to the SEC on Form 8K.
True or False
“Eurodollar” bonds are denominated in US dollars.
True.
Therefore, there is no currency exchange rate risk with Eurodollar bonds.
What are “WKSIs”?
Well Known Seasoned Issuers
In 2005, the SEC enhanced and streamlined the existing shelf registration rule for the largest, most active issuers (known as “WKSis - Well-Known Seasoned Issuers”) with a new rule - Rule 405.
What is the intent of Regulation A?
The intent of Regulation A is to make it easier and less costly for smaller start-up companies to raise capital through a securities offering registered with the SEC.
It provides for 2 “tiers” of capital raising.
Under Regulation A, are audited financial statements required under Tier 1 offerings, Tier 2 offerings, or both?
Only Tier 2 offerings
Under Regulation A:
A. Tier 1 is good for offerings up to $________ raised within a 12 month period.
B. Tier 2 is good for offerings up to $________ raised within a 12 month period.
A. $20,000,000 (20 million)
B. $50,000,000 (50 million)
Note: No more than 30% of the proceeds may go to the selling shareholder in Tier 1 or Tier 2.
Under Regulation A, are audited financial statements required under Tier 1 offerings, Tier 2 offerings, or both?
Only Tier 2 offerings
Under Regulation A:
A. Tier 1 is good for offerings up to $________ raised within a 12 month period.
B. Tier 2 is good for offerings up to $________ raised within a 12 month period.
A. $20,000,000 (20 million)
B. $50,000,000 (50 million)
Note: No more than 30% of the proceeds may go to the selling shareholder in Tier 1 or Tier 2.
True or False
Under Regulation A, Tier 2 securities are subject to State “Blue Sky” registration and review, whereas Tier 1 securities are “federal covered,” meaning that the States cannot subject them to State registration and review requirements.
False.
Tier 1 securities are subject to State “Blue Sky” registration and review, whereas Tier 2 securities are “federal covered,” meaning that the States cannot subject them to State registration and review requirements
In 2005, the SEC enhanced and streamlined the existing shelf registration rule (Rule 415) for the largest, most active issuers, known as “WKSis - Well-Known Seasoned Issuers” with a new rule.
Rule ____.
Rule 405
We call these the SECs “E-Z Registration Rules” since the intent is to ease the regulatory burden on issuers.
Under Regulation A, for both tiers, a simplified registration statement (Form S 1-A) is filed with the SEC and a 20-day cooling off period must be completed.
True or False:
At the end of 20 days, if the SEC has no “problems,” the issue is “effective” and the issue may be sold.
False
At the end of 20 days, if the SEC has no “problems,” the issue is “qualified” (a legally simpler version of a registration becoming “effective”) and the issue may be sold.
For a Regulation A offering, there is no prospectus. The disclosure document is called an offering circular. During the 20-day cooling off period, must the preliminary offering circular must be delivered to any customer at least _______ prior to the sale.
48 hours.
The preliminary offering circular and the final offering circular may be delivered electronically.
The “test the waters” provision is unique to which Regulation?
Regulation A
What is the “test the waters” provision?
Under Regulation A, issuers can distribute promotional materials to prospective purchasers prior to filing the registration statement with the SEC and all through the 20-day SEC review period.
Any solicitation materials being used must be filed with the SEC at the time that the Form Sl-A is filed. Any solicitation materials distributed once the Form S 1-A is filed must be accompanied or preceded by a copy of the Preliminary Offering Circular.
Under Regulation A. non-accredited investors cannot purchase an amount of a Tier 2 offering that is the greater of ___% of their annual income or net worth.
10%
Note that this purchase limitation does not apply to Tier 1 offerings.
True or False
Like a Regulation D private placement, there are restrictions on the resale of Regulation A securities.
False.
Unlike a Regulation D private placement, there is no restriction on the resale of Regulation A securities because they are registered with the SEC, can be sold to any investor and can be freely traded in the market.
True or False
Regulation A offerings cannot be used for “bad actors” such as bankrupt companies, asset backed securities, investment company issues, business development companies, foreign companies (other than Canadian companies) or blank check companies.
True
How long are Rule 415 shelf registrations effective?
3 years
True or False
For Rule 415 shelf registrations, there is no cooling off period and once registration is effective, the securities may be sold at any time during the 3-year period.
True
To sell shelf registered securities, how much advance notice must be given to the SEC?
the issuer gives 2 days’ advance notice to the SEC.
To qualify for a “shelf’’ registration, the issuer must have been public for at least 1 year; must be current in its SEC filings; and must have a “public float” of at least ____ million.
$75,000,000
75 million.
What are 3 benefits of shelf registration?
- It is cheaper than filing an S1
- It is faster than filing an S1
- There is no cooling-off period
“The benefit of shelf registration is that it is cheaper and faster than filing an S-1 and there is no “20 day cooling off period” - so that issuers can “time” the market when making add-on offerings to sell the issue at the optimal moment to achieve the lowest financing cost.”
True or False
A new company may file shelf registration under Rule 415, if they have a public float of at least $75 million.
False.
New companies and IPOs may not do shelf registration because the company has to exist for at least 1 year.
What does SEC Rule 127 allow with regard regard to prospectuses?
It states that the prospectus or prospectus supplement, in use for more than 9 months, can omit any dated information such as financial statements previously required - as long as current information is substituted. No matter what, any prospectus information cannot be older than 16 months.
What is the minimum market cap for a “Well-known Seasoned Issuer”?
700 million
or has at least $1 billion in non-convertible senior securities registered with the SEC in the past 3 years.
A “Well-known Seasoned Issuer” must have a minimum market cap of 700 million or has at least how much in non-convertible senior securities registered with the SEC in the last 3 years?
1 billion
True or False
Under Rule 405, “free writing prospectuses” which are written offers of securities - are prohibited.
False.
Under Rule 405, “free writing prospectuses” which are written offers of securities - are permitted.
Free writing prospectuses include offers to sell securities in the form of:
a. Email
b. Fax
c. Term sheets
d. Websites w/ offering information
e. Recorded electronic road shows
Free writing prospectuses (FWPs) must be filed with the SEC by when?
On or before the date of first use.
Under the Act of 1933, what is the difference between Rule 134 and Rule 135?
Rule 135 relates to issuer’s announcements
Rule 134 relates to underwriter’s announcements
Under which rule does the Act of 1933 prohibit the recommendation of the purchase of the issue or the recommendation of the purchase of a security convertible into the issue being underwritten by any member of the underwriting group during the cooling off period?
Rule 137
Rule 137 allows firms that are not members of the underwriting group to disseminate research reports or opinions during the underwriting period.
True or False
Rule 137 of the Act of 1933 permits any firm in the syndicate or selling group to compensate another firm to disseminate research reports or opinions during the underwriting period.
False.
The rule PROHIBITS this action. (P.18 - Chap 3). Bribery is prohibited.
Please note that it is allowed for a firm that is part of the underwriting group to compensate another firm for regular business activities.
True or False
Rule 138 of the Act of 1933 allows firms in the underwriting group to recommend the purchase of a non-convertible securities of the issuer in a common stock offering.
True
Similarly, if the firm is underwriting the non-convertible securities of an issuer, it can recommend the common stock - since there is no equivalency between the 2 securities.
True or False
Under Rule 139 of the Act of 1933, members of the syndicate can recommend the purchase of an issue during the cooling off period if all of the following conditions are met:
recommendation has been distributed with reasonable regularity in the normal course of business;
publication includes similar information, opinions or recommendations with respect to a substantial number of companies in the registrant’s industry, or sub-industry, or contains a comprehensive list of securities currently recommended by such broker or dealer;
recommendation is given no more space or prominence than other recommendations;
recommendation is no more favorable than previous opinions.
True
Which SEC rule states that certain corporate reorganizations will require the filing of a registration statement, while some others are exempt from registration.
Rule 145
What do the following three reorg scenarios have in common in relation to SEC Rule 145?
A reorganization involving the substitution of one security for another security.
A merger or consolidation in which securities of existing holders will be exchanged for securities in the· new entity.
A transfer of assets from one person to another in consideration for the issuance of new securities.
These reorg scenarios require the filing of a registration statement.
The SEC requires on Form S-4 that the prospectus must be sent to security holders at least ____ business days prior to the special meeting when the vote will be taken.
20
What do the following reorg scenarios have in common in relation to Rule 145?
A stock split or reverse split;
A par value change;
A stock dividend.
These reorg situations do not require the filing of a registration statement.
Under the Act of1933, if there is willful omissions or misstatements, criminal penalties apply.
What are the criminal penalties for fraud?
If there is willful omission or misstatement, criminal penalties apply under the Act.
Criminal penalties consist of a $10,000 fine and up to 5 years in prison for each offense.
True or False
Before a new issue can legally be sold in a state, it must be registered in that state (or must be exempt from registration), under each state’s “Blue Sky” laws.
True
True or False
Sending a preliminary prospectus or accepting an indication of interest does not constitute an “offer” under the Act of 1933.
True
Accepting an order, confirming a certain amount of the issue, or accepting a check from a customer are all considered to be “sales” and are prohibited until registration is effective.
True or False
Form 144 does not have to be filed to sell restricted or control stock if 5,000 shares or less, worth $50,000 or less, are sold every 6 months.
False.
Form 144 does not have to be filed to sell restricted or control stock if 5,000 shares or less, worth $50,000 or less, are sold every 3 months.
Under Rule 144, how long must a holder of restricted securities hold the fully paid for shares prior to selling?
The seller has to hold the securities, fully paid, for 6 months
If the securities are used as collateral for a loan, or a put option is purchased on the securities, the holding period is “tolled” - that is, does not count for that period.
Which, if any of the following activities are allowed prior to the filing of the registration statement?
I Sending a customer a “red herring” preliminary prospectus
II Accepting an indication of interest from the customer
III Accepting a deposit from the customer
IV Accepting a firm order from the customer
None!
Prior to the filing of the registration statement, nothing can be done. Once the registration statement is filed, a preliminary prospectus may be used to obtain indications of interest. Once the registration is effective, the final prospectus can be used to offer and sell the issue.
True or False
Restricted shares are normally acquired through ESOPs.
False.
Restricted shares are normally acquired through private placements.
The prospectus delivery rule requires that any dealer (not only the firms in the underwriting group) that sells the security during the specified delivery period following the effective date must provide a copy of the prospectus to the purchaser.
For primary distributions of companies that never had registered shares outstanding, the delivery period is ___ days following the effective date.
90 days
The prospectus delivery rule requires that any dealer (not only the firms in the underwriting group) that sells the security during the specified delivery period following the effective date must provide a copy of the prospectus to the purchaser.
For established companies that are not listed on a stock exchange or traded on NASDAQ, the delivery period is ___ days.
40 days
The prospectus delivery rule requires that any dealer (not only the firms in the underwriting group) that sells the security during the specified delivery period following the effective date must provide a copy of the prospectus to the purchaser.
For companies that have obtained either a listing on a stock exchange or on NASDAQ, the delivery period is __ days.
25 days
True or False
The Securities Act of 1933 requires that all non-exempt new issues must be registered, if the mails or other means of interstate commerce are used to offer the security.
True
Access equal delivery permits delivery of an electronic prospectus (as opposed to paper) if the underwriter knows that the customer has internet access. However, this is not permitted for ___________ offerings.
____________ purchasers get a paper “Profile prospectus.” If they want the full, detailed prospectus, this can be delivered either on paper or electronically.
Mutual Fund
True or False
FINRA Rule 5130, which is designed to ensure that new issue securities that are “in demand” are not withheld from sale to the public by member firms, does not apply to secondary offerings, preferred stock, or bonds.
True
Which rule prohibits member firms or their associated persons from selling a new common issue to any account owned by a “restricted person” or to any account in which a “restricted person” has a beneficial interest
FINRA Rule 5130
The “restricted persons” who are prohibited from buying IPOs of common stock are broadly defined into what 4 groups?
- Member firms for their own accounts, officers of member firms, associated persons, or any other employee of a member firm are restricted. Also prohibited are “agents” of broker-dealers; and immediate family members of the officers and employees ofbroker-dealers.
- Fiduciaries to member firms are restricted, such as lawyers, accountants and financial consultants who provide services to member firms.
- Portfolio managers who have authority to buy or sell securities for institutional investors are restricted from purchasing the issue for their personal accounts
Also restricted are the immediate family members of these individuals. Note, however, that officers of investment clubs are NOT restricted.
- Passive owners of broker-dealers that are not included in Category 1 are restricted as well
4.
FINRA prohibits underwriters from placing the securities being underwritten in the accounts of “related persons” - defined as any account where the underwriter has more than __% interest or control.
25%
A bona fide public offering must be made. Once the offering is complete, these persons may buy the issue in the aftermarket.
NASDAQ has instituted a process to establish an opening price for each IPO that provides for fair execution at a single opening price.
It is called the NASDAQ IPO Cross
Which rule prohibits member firms from executing trades in a security that is subject to an IPO (Initial Public Offering) until the security first opens for trading on the national exchange that is listing the stock?
FINRA Rule 5110
The rule applies to NASDAQ-listed securities (since NASDAQ is now a registered stock exchange) as well as traditional exchanges such as the NYSE and AMEX.
True or False
Any manipulation of the price of a stock is prohibited.
False.
The only allowed form of manipulation is stabilization, which is covered in detail under Regulation M.
True or False
A sale is considered to be long if the customer owns:
the stock and will deliver on settlement;
owns a convertible security, has given orders to convert, and will deliver on settlement; or
owns rights, warrants, or call options and has exercised and will deliver on settlement.
True
FINRA Rule 10b-2 prohibits underwriters, issuers, and participants in a new issue from doing what?
Placing buy orders for the issue in the secondary mkt
Buying the issue in the secondary mkt
Or taking options positions on the issue.
It also prohibits them from from paying another person to effect this transactions.
True or False
FINRA Rule 10b-9 prohibits misrepresentation in “all-or-none” offerings.
True.
A customer cannot be told that an offering is “all or none” and that money paid by the customer in the underwriting will be promptly refunded unless:
all of the securities are sold at the Public Offering Price within a specified time limit; and
the total amount due the issuer is received within a specified time limit.
True or False
FINRA Rule 10b-9 establishes that once the tender offer is publicly announced, and until its expiration, the shares cannot be purchased on an exchange or privately by “prohibited persons.” They can only be purchased through the offer.
False.
This is rule 10b-13.
Rule 10b-18 - Sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market.
What are the trading rules established through this rule?
5 answers
Purchases:
- must be effected through I broker/dealer on any given day;
- cannot be the opening transaction;
- cannot be executed within 10 minutes of market close if the security is “actively traded” as designated by Rule 101 of Regulation M (covered next); otherwise, the purchase cannot be executed within 30 minutes of market close;
- must be effected at prices no higher than the current highest independent bid for that security or last reported sale price (whichever is higher);
- cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).
In essence, the rule says that if an issuer buys in its stock during market “quiet” hours; does not bid up the price of the stock; and does not buy too aggressively; then it will not be considered to be manipulating the price.
In additional issue offerings, market makers who are also syndicate members, could manipulate the price of underwritten security upwards prior to the effective date.
The SEC deals with this potential market manipulation through which regulation?
Regulation M
True or False
All securities offerings are subject to Regulation M.
False.
Only securities that can be readily manipulated are subject to Regulation M - that is, securities that are not actively traded or have a small number of shares outstanding. Actively traded securities are not subject to the regulation.
What is an “actively traded stock” under Regulation M?
If it has an average daily trading volume of $1,000,000 or more AND has a public float of at least $150,000,000.
Rule 101 under Regulation M indicates 3 tiers for secondary offerings.
Tier 1 - actively traded stock.
Tier 2 - moderately traded
Tier 3 - inactively traded
What are the minimum daily trading volume and public float amounts for each tier?
Tier 1 - volume of $1,000,000 and public float of $150,000,000.
Tier 2 - volume of $100,000 and public float of at least $25,000,000.
Tier 3 - anything less than tier 2.
Rule 101 under Regulation M indicates 3 tiers for secondary offerings. Syndicate members who are not market makers are subject to different trading restrictions in each tier.
How long is the “restricted period” for each tier?
Tier 1 - no restriction
Tier 2 - the business day prior to effective date
Tier 3 - 5 business days prior to the effective date
Under Rule 103 (Reg M) - syndicate members who are also market makers may either seek an excused withdrawal from making a market in that security -that is, get permission of FINRA/NASDAQ to stop making a market during this period; or…?
may elect to operate as a “passive” market maker - that is, they may bid for that security at no higher than the highest current independent bid. Thus, they cannot push the price up in the market.
Passive market makers are limited as to the amount of “net purchases” of that security (orders from all sources) that can be made on any day during the restricted period.
The limit is ___% of that market maker’s average daily trading volume over the preceding month. Once this limit is reached for the day, it must obtain an excused withdrawal from FINRA/NASDAQ from making a market.
30%
Where does a “notice of stabilization” occur?
On the inside front cover of the prospectus.
A stabilizing bid can only be placed at or _________ the Public Offering Price.
Below
If a current independent market exists for the security at the time that the stabilizing bid is placed, the rules for stabilizing bids change.
The bid cannot be entered any higher than the _____________, as long as the current ask price is equal to, or higher than, the ______________.
Last reported trade
True or False
A stabilizing bid may be placed on or before the effective date of the offering.
False.
The stabilizing bid can only be entered on the effective date of the offering, not before (for an IPO).
Stabilization is not allowed for which type of offerings?
“At the market” offerings - meaning shelf offerings under rule 415.
Although there is no time limit or numerical limit is placed on stabilization activities, stabilization must stop when the manager disbands what?
Stabilization must stop when the manager disbands the syndicate
(FINRA has a rule requiring that syndicates be disbanded no later than 90 days from the effective date).
Rule 105 prohibits broker-dealers from purchasing shares of stock either from the underwriters at the offering price, or in the market, to cover short positions established within ___ business days of the effective date.
5
3 types of transactions are exempted from the provisions of Regulation M because they are unlikely to impact the market price. What are those 3 transaction types?
- Odd-lot trades
- Unsolicited customer orders to buy that are not effected through another broker-dealer
- Exercises of options, rights, warrants, or conversion privileges (since these don’t go through the market)
Rule 15c2-4 - Prohibits an underwriter from collecting funds in an “all or none” underwriting without the use of what?
An escrow agent.
this rule does not apply to firm commitment underwritings since the issuer is paid and the title to the securities is transferred upon signing the underwriting agreement (signed by the issuer and underwriters)
True or False
Rule 15c2-8 - Requires that any person who gives a dealer a written, or verbal request for a prospectus (or preliminary prospectus) must be sent the document within a reasonable time period.
False.
This is only required for written requests, not verbal.
Furthermore, sufficient copies of the prospectus (or prelimillary prospectus) must be made available to all persons participating in the distribution.
Rule 13d-l - Requires that persons who acquire a a% ownership interest in the outstanding equity shares of a company report to the SEC under a 13D filing within b days of the acquisition.
a. 5%
b. 10 days
The intent of the rule is to make takeover attempts public information.
Copies of filings under Rule 13d-1 must be sent to who?
3 answers
Copies of filings under Rule 13d-1 must be sent to the Securities and Exchange Commission, the issuer, and the self-regulatory organization.
