Chapter 5 Flashcards
How long are Representations (eligibility for New Issue purchase - ie. I am not a Restricted Person) Valid for?
And how long must they be retained
all Representations must be obtained within the 12-Month period prior to the sale of the new issue
All records must be retained for 3 years.
How Long does a NonAffiliate need to hold their securities under Rule 144 Offering?
at least 6 Months
Who is an Affiliate?
Director, Officer or Shareholder holding 10% or more of the stock,
What form is generally Filed under Reg FD for fair disclosure of non-public material information
Form 8-K with SEC
What does a Deficiency Letter issued by the SEC Mean?
SEC has issues with the Preliminary Prospectus
If a registration statement, which is the base document for preparing a preliminary prospectus, is found by the SEC to be deficient, the SEC will issue a deficiency letter to the issuer.
At a social gathering, an officer of a publicly traded company confides to his neighbor, a registered representative, that his company will announce a major acquisition in the coming week. Who is at Fault when it comes to insider trading rules?
Neither person is at fault:
Simply giving someone material, nonpublic information (while imprudent) is not a violation. However, if the information is used to trade for profit or to avoid a loss, both the tipper and the tippee would have violated the law.
Which of the following acts requires parties to a pending business combination to provide premerger notification information to the FTC?
the Hart-Scott-Rodino Act
is an amendment to the antitrust laws and requires both parties to an intended merger or acquisition to file information on the proposed transaction with the FTC.
Upon filing, a 30-day waiting period begins during which the FTC will make a determination as to whether the proposed transaction violates antitrust laws.
If a Market Maker is subject to a restriction, what are their options?
a) Operate as a Passive Market Maker (no higher than the highest current independent bid)
b) Temporarily Withdraw as a market maker.
What are the Restrictions around Trading REG M Stock?
1 day: if ADTV 100,000 and public float of 25 Mill
5 days: all other securities
In a Tender Offer, what is the impact for an investor who is Long 1000 shares and has written 5 call contracts with a strike below the offering price?
The options will likely be called in, and the short contracts will reduce the investors long position
Thus 1000 share - 5x100 = 500 shares to tender
Can passive market making activity take place in a Best Efforts Underwriting?
NO
Can only take place in a Firm Commitment Underwriting.
Your firm is the managing underwriter for a new issue of ABC common stock. Certain information relating to the terms of the offering must be filed with FINRA within
1 business day of filing a registration statement,
the syndicate manager, within 1 business day of filing a registration statement with the SEC, must file information on the terms of the offering with FINRA.
Tom owns 5% of a member Firm, is he considered a Restricted Person?
NO
any person owning 10% or more of a member firm is a Restricted Person
In Addition to the Green Shoe Clause being disclosed in the prospectus and registration statement - how much does it allow the Underwriter to over sell?
It allows the syndicate to sell up to 15% more shares than initially registered
In what circumstances is the filing of a Form 13D Required?
Once an unaffiliated investor accumulates more than a 5% interest in an issuer, a Schedule 13D filing is required.
The submission is made to:
- the issuer,
- the SEC, and
- the market where the security primarily trades.
What is Gun Jumping
soliciting orders or conditioning the market for an upcoming offering before the effective date of the offering.
Is an Oral Road Show considered a Written Communication?
No
if transmitted live, a road show is considered a form of Oral Communication. Recorded road shows are considered to be a written communication.
Regulation FD covers
the selective disclosure of material nonpublic information by issuers
Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors.
Can a customer purchase 144 Restricted Stock?
Yes, only if unsolicited and expression of interest was given by the customer in the previous 10 days
Dealers can purchase if unsolicited expression of interest in the last 60 days.
A resident of a state who acquires stock pursuant to Rule 147 (intrastate offerings) is prohibited from selling the stock to a nonresident of that state for how many months?
6 Months
Rule 147 stock cannot be sold to a nonresident of the state for a period of 6 months.
What is a Free Writing Prospectus?
A free writing prospectus (FWP) is any written communication defined in the 1933 Act that constitutes an offer to sell (or a solicitation of an offer to buy) securities of a registered offering that is used generally after the registration statement of the offering is filed; however, in the case of a well-known seasoned issuer, whether or not a registration statement is filed.
What is REG - D
Regulation around Private Securities / Legend stock or lettered stock
Allows for Accredited Investors / 35 Non-Accredited Investors
Stock issued cannot be immediately traded.
What is the Prospectus Delivery Requirement for IPO’s that are to be quoted on the Pink Open Market?
90 Days
Are the employees of a member engaged solely in the sale of Mutual Fund shares allowed to buy new equity issues at the IPO?
YES
Exemption applies to employees of members engaged in the sale of investment company securities and DPPs
The letter of intent in a corporate underwriting is typically signed by which of the following parties?
Issuer and Managing Underwriter
the letter of intent initiates the underwriting process and is signed by the issuer and managing underwriter.
What is the difference between 13G and 13D
Schedule 13D is considered the long-form beneficial ownership report….for those who may seek control …
Schedule 13G is a beneficial ownership disclosure statement intended for passive investors “Investment Companies who can’t take control” who own less than 20% of a public company’s outstanding shares. A passive investor does not intend to exert control over or seek any changes in the company
How many market makers are required to have an “Independent Market” for a stock?
only need 1 that is not involved in the Underwriting
Are statements required to be sent to a DVP/COD Account holder?
It may not be necessary to send quarterly statements IF all trades are done on a COD/DVP basis and the account is carried solely for this purpose.
Confirmation are Required T+1
What is the only exception to the minimum holding period under a rule 144 restriction?
only exception to the holding period rule is for sales made by a deceased person’s estate
What is the blackout period for a Reaseach Analyst (or their direct family members) from buying a stock upon which the analyst is about to release a rated report?
30 days before the report is issued and
5 days After issuance of the report.
When an individual owns %5 or more common stock of an issuer, with whom do they file a 13D report?
Filing with the SEC, and must provide intentions in seeking control. Also filed with issuer & exchange where security principally trades
List Exempt Transactions?
Reg A+ (Small & Med Offerings 20M/50M) Reg 147 - Intrastate Reg D Offerings (Private Placements) Reg 145 - Corporate reclassifications Reg S - Off Shore Transactions
Frank is an employee of a Limited Business Broker-Dealer, can he purchase a New Issue from ZYS Capital Corp?
YES, employees of Limited Business Broker-Dealers are exempted from Restricted Persons, but the FIRM is not.
When does form 144 need to be filed? and how long is a valid for?
Must be filed at or before execution of transaction and it is valid for 90 days.
What is Rule 5130?
Prohibits member firms from selling New Issues to Restricted Persons.
Where an issuer is purchasing its own securities, what is the daily max volume allowed to buy back?
Can not exceed 25% of the daily volume for repurchase.
- block trades are allowed
- trades cannot affect the opening or closing
- trades on any day, can only be effected through 1 market maker
What is Form 8K and when must it be used to SEC
Form 8-K is used to report newsworthy events to the SEC. The reporting time limit is 4 business days.
Under what terms is Flipping an IPO Prohibited by 5130
reselling a new issue within 30 Days following the offering date is prohibited by members or AP’s trying to recoup a commission or credit paid or awarded.
A foreign issuer wishes to pay a member firm to follow its stock and issue research reports. This action is
acceptable if disclosure of the payment is made
As long as any research discloses the nature of the relationship, payment for the preparation of research is acceptable. When a conflict of interest arises, as is the case here, FINRA may prohibit or greatly restrict particularly acute potential conflicts of interest such as participation in a public offering of that company’s stock.
Your firm is the managing underwriter for a new issue of ABC common stock. Certain information relating to the terms of the offering must be filed with FINRA within
1 business day of filing a registration statement
In order to allow FINRA to determine the fairness and reasonableness of the compensation to be received by the underwriters, the syndicate manager, within 1 business day of filing a registration statement with the SEC, must file information on the terms of the offering with FINRA.
How does rule 147a differ from Rule 147
147a is almost identical to the 147 intrastate rule, but 147a allows offers to be accessible to out-of-state residents, so long as sales are only made to in-state residents and
permits a company to be incorporated or organized out of state, so long as the company has it ‘principle place of business’ in state and satisfies at least one ‘doing business’ requirement that demonstrates the in-state nature of the company’s business.
What are Restricted Securities?
They are securities sold as part of an Unregistered Offering:
Often called Legened or Lettered Securities
a REG-D Private Placement
If there is a significant news event affecting a company which has just completed an equity IPO, can a research analyst make a public appearance and can a Managing Underwriter issue a research report (all during the quiet period?)
The managing underwriter may publish a research report on the subject company during the quiet period
If there is a significant news event affecting the subject company, the manager may issue a research report and analysts may make a public appearance during the 10-day quiet period provided they are authorized to do so by a legal or compliance department official.
What is the minimum equity to be held in a Prime Brokerage Account?
$500,000
PB requires names of all executing brokers, PB enters into agreement with each executing to receive statements and confirmations.
What are the 2 Conditions that allow an issuer to sell Unregistered Securities under the REG S distribution
- The Offer and Sale must be made in an Offshore Transactions
- There can be no directed Selling Efforts in the United States in connection with the offering.
If a 147 Offering is sold to an investor that is not a resident of the state - what is the impact to the Issuer?
Causes the company to lose its exempt status under 1933 Securities Act.
any portion sold to: corporations, trusts, or partnerships will cause the offering to lose its exemption.
What are the trading restrictions around a TIER-2 REG M requirement?
1 day before the Effective Date
- Cannot Bid for or Purchase the Security
Applies to Securities with ADTV fo at least $100,000 and public flat value of $25Million or more
Does a research report have to disclose if the member or its officers have a financial interest in any of the recommended issuers securities and the nature of the interest?
YES
Must disclose any interest of 1% or more of any class of common equity
Standby Purchasers who have taken part of a poorly selling IPO - how long are the shares restricted from sale?
3 Months
All representations relating to whether an account is eligible to purchase new equity issues at the public offering price must be retained for how many years?
3 Years
Representations obtained to determine the eligibility of an account to purchase a new equity issue must be retained for 3 years.
According to Regulation M, a syndicate manager may reserve the right to reclaim a selling concession from a syndicate member when securities originally sold by the syndicate member are purchased in a stabilizing bid transaction. This is known as
A Penalty Bid
A penalty bid is used to minimize sellbacks of public offering stock at the stabilizing bid. The penalty is a return of the concession earned.
Under the Sarbanes-Oxley Act of 2002, the officers signing the financial statements of a reporting company must certify that they have evaluated their internal controls within the previous:
90 days
signing officers must certify that they have reviewed all periodic financial reports, that they do not contain any material untrue statements or omissions of material facts and that they have evaluated their internal controls within the previous 90 days and have reported on their findings.
Under what circumstances can a Broker Dealer be considered a QIB: Qualified Institutional Buyer?
Broker-dealers are considered QIBs if they have a securities portfolio valued at $10 million or more.
An individual is not considered an institution despite the size of his/her portfolio.
A QIB is generally defined as a pension fund, bank, insurance company, investment company, etc, with a securities portfolio of $100 million or more.
A single offer to a nonresident would void the exemption provided by what rule?
Rule 147
Rule 147 offerings (intrastate offerings) may only be made to residents of the state where the issuer resides.
Securities acquired in a standby purchase arrangement must be locked up for a period of at least:
3 Months
Securities purchased in a standby arrangement are not subject to FINRA Rule 5130 as long as the arrangement is disclosed in the final prospectus, the arrangement is in writing, and the managing underwriter represents in writing that it was unable to find other purchasers for the securities. These securities may not be resold for a period of at least 3 months.
The SEC Rule 10b-18 safe harbor is available to issuers involved in stock repurchase programs provided there are no purchases during which times on the Open and Close
The opening transaction. and
The last 30 minutes of trading.
Provided an issuer is not involved in the first transaction of the day or in any transaction during the last 30 minutes of trading, a safe harbor exists. The issuer must be in compliance with the rule prohibiting issuers from unduly influencing the price of their own stock. For issuers whose stock is actively traded, a safe harbor is available until ten minutes before market close.
A booster shot is a research report issued
on or around the expiration of the lockup period for insider stock
A booster shot research report is one issued around the time the lockup period for insider stock expires
Under Uniform Practice Code of FINRA, requires that final settlement of corporate syndicates accounts be made within how many days?
90 Days following the ate the issuer delivers the securities tot he syndicate - it must be disbanded.
Under SEC rules, a seasoned issuer must have a public float value of at least
$75 Million
The minimum threshold is $75 million for a seasoned issuer.
When must a Dealer apply to FINRA to be a Passive Market Maker?
at least 1 Business Day before the Restricted Period
When an issuer purchases its own securities, SEC Rule 10b-18 requires that the price paid be no more than the
no higher than the greater of the current highest independent bid or the last reported sale price.
For a Passive Market Maker, what is the avg daily trading Limit imposed, where the market maker is involved in the Underwriting?
30% - once they hit 30% of their avg daily trading volume as established by FINRA - they must withdraw for the remainder of the day.
What 2 Lists must be filed with FINRA by the Managing Book Runner of the Underwriter?
a) Initial list of Syndicate Members - On or Before the Offering Date
b) final list of Distribution Participants and their underwriting commitment - no later than 3 Business Days after the offering date.
What is the Holding Period on REG-S issues?
holding period is to prevent the back flow into the US
6 months for reporting issuers
1 year for non reporting issuers
What is a Control Security?
a Security held by an Affiliate
What are the qualifications for an “Actively traded Security?
ADTV of at least $1 Million and
A public float value of $150Million or more
Tier 2 restriction is 1 Day (where ADTV is 100,000 and a public float of 25$Million)
What is a PIPE (Private Investment in Public Equity) transaction?
In a PIPE, investors purchase securities directly from a publicly traded issuer in a private placement. The securities purchased are restricted and cannot be immediately resold. After the closing of the transaction, the issuer immediately prepares and files a registration statement with the SEC for the securities issued in the PIPE. Once the registration is effective, public resale of the PIPE securities may begin.
What is REG - M
Deals with the Additional Issuance of Securities; governs activities of those that have an interest in the outcome of the offering.
Under Rule 504 of Regulation D, issuers of unregistered securities must file Form D with the SEC within
Form D is part of a private issuers $5million or less offering.
It must be filed with FINRA within 15 days of the first Sale of the securities.
What is the trading restriction on a TIER-3 REG M ruling
5 Days before the effective Date
- Cannot Bid for or Purchase the Security
securities not meeting the criteria of tier 1 or 2, fall into this category.
An analyst is about to issue a bullish research report on Vox Cloud common stock. Under FINRA rules, the analyst and household members are prohibited from purchasing the stock for:
30 DAYS before, 5 DAYS after
FINRA rules prohibit analysts and members of their households from investing in a company’s securities for 30 days before and 5 days after the analyst issues a research report on the company.
What is Rule 144
Governs the sale of Restricted & Control Securities
Fro an additional issue offering, where the security is quoted on OTCBB, the prospectus delivery requirement period is;
40 days.
IPO’s = 90 / 25
Additional Issue Offering:
- NYSE - no requirement
- OTCBB = 40 days
In a DVP/COD account, if the trade can’t settle T+2 (not because the client can’t pay), how long can the ‘Failed Trade’ sit?
35 Days. In a DVP/COD, the member has up to 35 days to obtain payment.
For 5130 - Can a restricted person purchase an IPO for a group account? or Hedge Fund?
Yes - if the ownership interest in the account is less than 10%,
or if there is a carve out provision to restrict ownership of the new Issue to 10% of the accounts portion of the new issue
Under SEC rules, a well-known, seasoned issuer is one which has a common equity market capitalization of at least
$700 million
A well-known, seasoned issuer must have a market capitalization of at least $700 million held by nonaffiliates. Alternatively, an issuer may qualify if, during the preceding 3 years, it issued, in the aggregate, $1 billion or more of nonconvertible securities other than common equity.
Can Issuers Direct Sales to Restricted Persons?
Yes
however, can not be directed to members, or to an account in which finders or fiduciaries have an interest.
What kind of Reg D offering can be done with unlimited A/I and Unlimited non-accredited investors?
504 Offering that is $5 Million or less
Can I sell 144A Restricted Stock?
Yes - only to QIB
100million in securities qualifies
A Tier 1 securities offering under Regulation A+ facilitates smaller companies access to capital to dollar value of?
A maximum of $20 million in a 12-month period
Tier 2 offerings of securities go up to $50 million.
What is the Prospectus Delivery Requirement for IPO’s that are to be listed on NYSE/NASDAQ
25 Days
The prospectus delivery requirement for IPS that are to be listed or quoted on NASDAQ is 25 Days.
what are the volume limitations on Reg 144
Greater fo 1% of the outstanding securities or
Avg Daily Trading Volume for the the last 4 weeks.
Fairness Opinion Disclosures must include:
- if member will receive comp continent on transaction
- Any material relationship existed during past 2 years
- If any information forming the opinion was supplied by the party requesting the opinion
The SEC defines a research report as a client communication that analyzes individual securities distributed to at least how many persons?
15
Under Regulation AC, an analysis of individual securities prepared for a specific person or a limited group of fewer than 15 persons is not considered a research report.
If the beneficial interests of restricted persons do not exceed 10% of an account, can they purchase a new equity issue?
YES
5.7.3
For an Additional Issue offering that is priced ‘at the market’, when is the ‘pricing’ set?
It is not FIXED - it will change more than once during the day.
An offering at the market occurs when the offering price is not fixed, meaning that it can change many times daily.
For Short Interest Reports (due to FINRA) on the 15th and end of the Month - what is used:
15/30 Settlement or
15/30 trade day?
Settlement day of the 15th
short positions held by members on the settlement date of the 15th of each month. The end-of- month report is based on short positions held on the last business day of the month on which transactions settle.
What types of offerings are exempt from filing with the Corporate Finance Department of FINRA
Reg D offerings Non-Convertible debt / preferred (if investment grade) US Government & Agency Securities Municipals Mutual Funds Unit Trusts
Can a member firm may sell a new equity issue of its own securities Employees, Directors, Officers and family members?
YES,
FINRA 5130 does not apply to the issuer’s employees -but does apply to the employees of other full service member firms.
Forms 13D and 13G, beneficial ownership, must be filed for trading activity over 5% - when are these forms required to be filed?
Withing 10 days of the trade (post filing)
Form 144 is required to be filed concurrently with the trade.
Under Reg AC - where a research analyst conducts public appearances, what is the firms supervisory requirements?
The firm must maintain a quarterly report with all public appearances by the R.A. and the RA must provide an attestation that the views were personal and not tied to any compensation. This must be recived within 30 days of the quarter.
Research Reports must disclose what types of activity conducted by the Broker Dealer?
(there are 3 key points)
- if they are a market maker
- if there is a control relationship
- if the BD was a manager or co-manager of any offering of the issuer in the last 12 months.
One of the brokers in your office opens an account for an investment club and notes on the new account form that his spouse has a 15% interest in the club. Under which of the following circumstances may your firm sell shares of a new equity issue to this account?
Under No Circumstances
FINRA Rule 5130 prohibits firms from selling a new issue of equity securities to members of the immediate family of employees.
A syndicate manager or co-manager may NOT publish a research report on the subject issuer for how many days following an IPO?
10 Day Quiet Period for IPO’s / 3 day for Additional issue offerings.
FINRA Rule 2241 imposes a quiet period of 10 calendar days for IPOs and 3 calendar days for additional issue offerings. This rule is subject to change. The effective date has not been determined.
For what kind of companies/investments does the electronic delivery of a final prospectus not be allowed?
mutual fund shares must provide investors with a paper prospectus
Investment companies are not permitted to use the access-equals-delivery model.
Can a Preliminary Prospectus be delivered electronically under the Access equals Delivery?
Preliminary Prospectus must be Printed
How long is a shelf registration good for?
2 years generally
3 years for Well Known Seasoned Issuers
Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does NOT exceed
10%
If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.
Registration of securities by those whose business is primarily that of acquiring and holding investment real estate is accomplished by
filing the SEC Form S-11
SEC Form S-11 is used for registration under the Securities Act of 1933 of securities issued by a REIT or securities issued by other issuers whose business is primarily that of acquiring and holding for investment real estate.
Following the submission of a registration statement for an initial public offering, events unfolded that created a risky underwriting environment. If provided for in the underwriting agreement, the syndicate may claim the right to withdraw from a firm commitment underwriting without penalty by invoking the
A market-out clause contained in the letter of intent executed by both the lead syndicate manager and the issuer allows the syndicate to withdraw without penalty from a firm commitment should an event or events suddenly arise that places the offering at greater risk.
Which of the following is typically the largest component of a corporate underwriting spread?
- concession
- reallowance
- underwriting fee
- manager’s fee
The concession tends to be the largest component of a corporate underwriting spread; the manager’s fee is generally the smallest component.
