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Series 7 > Chapter 5- Investment Banking > Flashcards

Chapter 5- Investment Banking Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Investment Bankers

A

firms hired by corporations to help them with various financing and corporate related manners

Raise Capital
Advise corporation on mergers and acquisitions

Serve as underwriter, sponsor, distributor, and/or a syndicate member

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2
Q

Issuers

A

Companies that sell securities (stocks and bonds) to the general public for the purpose of financing its new ventures or operations
Includes: Domestic and foreign corporations
US government
State and local government

Corporations distributing new issues are considered to be issuer not customer

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3
Q

Primary vs secondary distribution

A

Primary is stock that has not been issued previously and the proceeds from the sale of the security goes to the issuer (can not be purchased on margin)

Secondary is a large block of securities that are sold by a few owners. Proceeds are paid to the seller (can be purchased on margin)

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4
Q

Chinese Wall

A

Imaginary barrier between investment banking, research, and trading departments.

Prevents material that is not public knowledge from being shared between departments

Personnel working in the broker-dealers research department can not be supervised or compensated by the investment banking department

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5
Q

Syndicate Group or Syndicate desk

A

group of broker dealers who agree to be distributors for a new issue of common stock by an issuer to the general public

Does research, advise about required filings, maintains records, and allocates new issues to sell

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6
Q

Managing Underwriter

A

Brokerage Firm chosen by the corporation to issue their securities
Choose by negotiated or competitive bids

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7
Q

Negotiated vs. Competitive bids

A

Negotiated are typically used for selling stocks
Competitive bidding is typically done for bonds

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8
Q

Who helps Managing underwriter selling securities

A

Selling Syndicate, They can either selling directly to the public or they can bring on smaller groups to help with sales refereed to as selling groups

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9
Q

Broker/Dealer purchasing New Issues

A

The broker dealer can go to any level, managing underwriter, Selling syndicate or the selling group to purchase shares for their customers

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10
Q

Selling Syndicate VS selling group

A

Selling Syndicate- has made a financial commitment and share in the financial liability

Selling group has not put any money upfront and do not carry any financial risk

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11
Q

IPO: what is the spread

A

The spread is the difference between what the issuer receives for each security and how much the public pays for them

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12
Q

Fee for issuing securities

A

Issuer proceeds- goes to issues
Manger’s Fees- goes to managing underwriter
Underwriter compensations (AKA retention) - goes to selling syndicate
Selling concession- goes to selling group
Reallowance- goes to the broker dealer

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13
Q

Factors that determine the amount of the spread

A

size of the issue
Type of security involved
Financial strength of the issuer
Type of commitment made by the investment bank

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14
Q

Agreement between underwriters

A

Agreement between Managing underwriters and all syndicate members

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15
Q

Managing Underwriters responsibilities

A

Forming syndicate and selling groups
Running the books
Establishing underwriter retention
allocate issues to syndicate members
Stabilize the issue if needed

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16
Q

Agreement between underwriters can be either

A

Easter- signed severally and jointly (undivided liability)

western - signed severally but not jointly (divided liability)

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17
Q

Types of underwriting agreements

A

Firm commitment
Stand-by agreement
Best efforts agreement
All or none agreement

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18
Q

Firm Commitment

A

The syndicate buys the entire issue and resells it to the public

greatest risk to underwriter

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19
Q

Stand-by agreement

A

The underwriter agrees to purchase and distribute any part of an issue not purchased by stockholders who received preemptive rights (rights offering)

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20
Q

Best efforts Agreement

A

Underwriter acts as an agent, does not buy the shares themselves
The issues is the owner of any unsold shares

Most Common used

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21
Q

All or None agreement

A

The issue is canceled unless the entire issue is sold to the public

Always has an escrow account established

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22
Q

A market-out clause

A

AN escape clause for the underwriter if a material adverse development affects the securities market
Used with all types of agreements

23
Q

Registration Statements

A

Files with the SEC by the underwriter on behalf of the issuing corporation
Full and fair disclosure of all relevant facts about the issuing company
Describes issuers business as well and the use of the proceeds

24
Q

Registration and the prospectus

A

Investors get a prospectus once the registration becomes effective

25
Q

Registration and the SEC

A

SEC does not approve or disapprove of a registration
they may reject a registration if they feel there is missing information

26
Q

Types of registration Statement filings

A

S-1 IPO- full registration for domestic issues

F-1 IPO- full registration for foreign based issuers

S-3 - Follow-on Short-form registration for domestic issuers

F-3 - Follow on - short-form registration for foreign issuers

27
Q

Cooling off Period

A

20 days- Minimum waiting period before the issue can become effective. No sales before issue date.
The selling group is formed
Blue sky the issue -qualified in each state in which it will be sold
The due diligence meetings is held by the issuer and investment bank to review the offering deficiency letters, and the final prospectus

28
Q

New issue is priced…

A

either the night before or the morning of the issue

29
Q

Red Herring or Preliminary Prospectus

A

It is used to solicit indications of buyers interest

30
Q

Following a red herring

A

a RR can not confirm a sale or accept funds
indication of interest is not binding on anyone
red herring can not be altered in anyway
Can not be accompanied by a research report
will not include or declare a final offering price (potential price range is allowed but is also not binding)
Must be sent to people that have given rep indication of interest in the offering
brief history of issue, its management and the use of the proceeds

31
Q

Pricing of a new issue

A

Once the price is set, all new issues must be sold at that price. Selling group does not have any say over the price of the new issue

32
Q

If price begins to drop during offering…

A

The managing underwriter will step in and purchase shares under the initial offering price to help stabilize the market by becoming a buyer

33
Q

Selling shares purchased during stabilization

A

Must be done only at the public offering price

34
Q

Final Prospectus

A

Includes the date, stabilization transactions, any penalty clauses

And a statement saying the SEC does not approve of Disapprove of the security

35
Q

Access equals delivery

A

Once the final prospectus is delivered on to the SEC it will be available at EDGAR on the SEC’s website. Therefore the investor will have access to this and the SEC will count this as them having had delivery of the prospectus.

36
Q

Prospectus violations

A

Misstatements in the prospectus
Sending sales literature with the preliminary prospectus
Altering the prospectus in any way
Sending excerpts of the prospectus
Accepting an order to purchase before the effective date of the registration statement

37
Q

New Issues and margin

A

Securities can not be purchased on margin for their first 30 days

38
Q

New issue of a firms own stock

A

Can only be sold through unsolicited orders

39
Q

Tombstone ads

A

Announce the availability of new issues for sale
only form of advertising permitted
not required to be filed with the SEC
Contains the Name of the issuer, managing underwriter, and the amount of the new issue
can only contain statements of facts
must indicate where a prospectus could be found
do not show selling group members
DO show public offering price

40
Q

Quiet period

A

No acting member of the public offering can publish a research report on the subject of the new issue for:
10 calendar days for an IPO
3 calendar days from a secondary offering

Eliminated for Emerging growth companies under the JOBS act

41
Q

Issuers and Brokers under the JOBS act

A

may communicate with qualified institutional investors and accredited investors to ascertain investor interest

42
Q

FINRA rule 5130

A

If you work for, are related to someone or live with someone who works or a broker dealer (restricted persons), you may not buy IPO stock

43
Q

Restricted Persons

A

People who are employed by a member firm or broker-dealer (And their immediate family)
Finders and Fiduciaries (attorneys, account and financial consultants) and their immediate families
Portfolio managers and their immediate family

44
Q

Immediate family means

A

Parents, spouses, and siblings
In-laws
Children
And any other person to whom the individual provides material support

Does NOT include Aunts, uncles and grandparents

45
Q

Restrictions on sales of IPO

A

Can not be sold to an account where a restricted person has a beneficial interest

46
Q

Preconditions for sale

A

The member firm can sell the new issue so long as they have made a good faith effort to confirm that the account is eligible to purchase new issues

47
Q

Not Restricted persons

A

Investment company registered under investment company act of 1940
Trust fund formed from 1,000 or more accounts and not primarily restricted persons
Insurance company with at least 1,000 policyholders and not primarily made of restricted persons
Investment club where restricted persons make up less then 10% of account value

48
Q

Exception to a restricted persons rule

A

A restricted person may purchase shares if they already hold the security and are buying to maintain their proportionate share of ownership in the company

49
Q

Stand By Purchasers

A

Are restricted purchasers that are allowed to by shares if the managing underwriters can not find any other purchasers for the shares as long as additional requirements are met

50
Q

Stand by purchasers requirements

A

agreement must be disclosed in the prospectus
Must be a written agreement
Securities sold through this are “locked up” for 3 months after purchase

51
Q

Under subscribed IPO

A

Underwriter may purchase portion of a public offering into their own account if they are unable to sell those shares to the public

52
Q

Retention…

A

is the difference between the underwriters compensation and the selling concession for a public offering

53
Q
A

Series 7 (20 decks)

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