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Series 7- Passed with 83% > Chapter 7- Issuing Securities 10-15 questions > Flashcards

Chapter 7- Issuing Securities 10-15 questions Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Securities Act of 1933

A

Regulates new issues of corporate securities and requires issuers to provide enough info to make an informed buying decision

Must be filed with SEC and published in prospectus

Also referred to as: Paper Act, Full Disclosure Act, New Issues Act, Truth in Securities Act, Prospectus Act

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2
Q

Securities act of 1934

A

Addresses secondary trading of securities, personnel and fraudulent trading practices

Also created the SEC

Amended in 1938 by Maloney Act which created the self regulating bodies FINRA, MSRB, and CBOE

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3
Q

Purpose of 1933 act, requirements to register

A

Securities act of 1933 main purpose is to inform the investor

Requires:
registration of new issues
Full and fair disclosure about itself and the offering
Make available all info necessary for an investor to judge merit
Regulation of underwriting and distribution of primary and secondary issues
Criminal penalties for fraud in issuance of new securities

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4
Q

Registration Statement

A

Must be filed with SEC for each issue

Must contain:

  • Prospectus
  • Description of business
  • Name and addresses of company officers and directors, their salaries and 5year business history
  • How much officers and directors own of company, plus 10%+ shareholders
  • Company capitalization, including equity and debt
  • How proceeds will be used
  • and legal proceedings

Underwriter can assist in preparing and filing the registration statement

Responsibility for documents falls on issuer, not underwriter

Must be signed by CEO, CFO, and Chief account officer as well as majority of BOD

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5
Q

Three phases of underwriting

A

Cooling period- At least 20 calendar day process after SEC receives Registration Statement

First Phase: Period before filing with SEC. no sales can be solicited or prospectus release

Second Phase: Indications of interest can be solicited through red herring (cooling period takes place)

Third Phase: Effective date reached (approval). Sales may be taken after final prospectus released

Deficiency letter is issued if there is missing material

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6
Q

Preliminary Prospectus (Red Herring)

A

Used as prospecting tool to gauge interest

No final price includes or effective date

Must be made available to anyone during the cooling period (between filing date of registration statement and effective date) who expresses interest

Underwriters may not take orders only indications of interest

Tombstone may be published to provide info about potential security (shows anticipated gross proceeds)

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7
Q

Advertising of a new issue

A

Only sales literature allowed is tombstone before effective date

Tombstone not required

May show anticipated gross proceeds

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8
Q

Due diligence meeting

A

Discussion of information on a company held by underwriter

Must be conducted by underwriter to provide info on issuance and intended use of proceeds

Investment banker must:
Examine proceed use
Perform financial analysis and feasibility study
Determine company stability
Determine reasonability of risk
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9
Q

Final Prospectus

A

Issuer amends preliminary prospectus to include final offer price and underwriting Spread

Registered reps can then take orders

Copy of prospectus MUST proceed sales or accompany

Must include basic details such as:
Offering date, description of underwriting, risk to purchases, process of price stabilization, legal opinion concerning formation of corp

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10
Q

SeC Review of Prospectus

A

Does not check for accuracy, just checks for completeness

Saying in the prospectus that the SEC approved the offering violates federal law

A disclaimer must be attached

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11
Q

Prospectus Delivery Requirement Period

A

Final prospectus must be delivered to buyers in secondary market for a specified time following the effective date

For IPOs this period is:
-90 days if security is to be quoted on OTC pink or OTCBB (non-Nasdaq)

  • 25 days if security will be in exchange or on Nasdaq
  • Sales at public offering price for secondary issue of Nasdaq stock
  • Non Nasdaq is 40 days for additional issues

Constituted as delivered if available on SEC website

Associated person may NOT mark on a prospectus whether it is preliminary or final

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12
Q

Underwriter

A

Broker dealer that specializes in investment banking and the distribution of new issues

Will often advise on type of financing based on current market and tax

Usually will form syndicate

May give several options of distribution with varying fees

US nonmember firms, like banks, cannot participate as investment banker

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13
Q

Investment banking

A

Securities broker/dealer that underwriter new issues

Functions:
Advising on best ways to raise long term capital
Raising capital through new securities
Buying securities from issuers and reselling to public
Distributing large block stock to public/institutions
Helping issuers comply with securities laws

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14
Q

Participants in a Corporate New Issue

A

Issuer responsible for:
Filing registration statement with SEC
Filing registration with states it wants to sell in (blue skying)
Negotiating price and spread with underwriter

Underwriter responsible for:
Assist with registration and distribution of new securities and may advise on best way to raise capital

Usually chooses To issue bonds but if bonds have high rates then might go stock

Cash dividends are paid out in after tax profits

Money market financing is a one year or less instrument

Capital market financing: long term financing for secured bonds, debentures and preferred or common stock. Require registration and sale by prospectus

Underwriters are required to be FINRA Member Firms. Banks cannot partake in corporate issues… can however partake in municipal underwriting

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15
Q

New issues

A

Companies going public in an IPO

Business purpose and product is defined

Sometimes, a Special Purpose Acquisition Company (SPAC) will raise money through IPO to begin a business

Present proposals to holders for approval

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16
Q

Additional Issues

A

Made of new securities issues of companies already trading

Can be also be classified by final distribution of funds

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17
Q

Primary Offering vs Secondary Offering vs split Offering

A

Primary- money raised for the company, can be done any time up to corp bylaw limit for amount of stock issued

Secondary Offering- major stockholders selling significant part of their holdings, all proceeds go to them

Split- combo

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18
Q

Shelf Offering

A

An issuer registers new securities without selling all of them

Additional offering only

Registration good for two years but a supplemental prospectus must be filed before sales

Can be sold for three years

May be used in debt or equity offering

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19
Q

Private placement

A

Selling to private investors instead of general public

Tend to be institutional investors or small groups of wealthy people

Generally exempt from securities act of 1933

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20
Q

Syndicate formation

A

May assemble before or after underwriting is awarded

Competitive bidding- the syndicate is formed before and a bid is made together, standard for corp securities

Negotiated underwriting- syndicate may be formed after negotiation of terms, standard for municipal securities

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21
Q

Pricing of New issues of public ally traded securities

A 
Variables to be considered:
Indication of interest
Market conditions, comps
Price syndicate will accept
PE ratios of similar companies
Dividend payment record
Debt ratio

Must be determined by effective date and put in final prospectus

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22
Q

Stabilizing Price

A

Price in which a syndicate member is able to bid for shares

Stabilizing after an issue is sold out is illegal

May not be made above the public offering price

Can be abandoned if Market does not level

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23
Q

Underwriting Agreement

A

Contract that establishes the relationship between a issuer and underwriter

Underwriter is acting in a principal capacity

Specifies terms and conditions of underwriting

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24
Q

Syndicate Members

A

Underwriting Manager-Negotiate with the issuer, directs the process for due diligence meeting and distribution process.

May have more than one manager

Syndicate Member- financial commitment to help bring issue to public by purchasing and selling an agreed-on amount (participation or bracket)
Sign an agreement that describes responsibilities and establishes what happens to unsold shares (western/divided, eastern/undivided)

25
Q

Selling group formation

A

Selling group members act as agents with no obligations to buy securities

Sign a selling group agreement which contains:

  • statement saying managers acts for all underwriters
  • amount allotted to sell and tentative offering price (firm before offering date)
  • when and how shares will be paid for
  • legal provisions limited each sell group liability

Selling group receives the concession (usually larger than the additional take down amount received by a syndicate member)

Review of takedown sizes: concession is largest, additional take down second, management fee is taken off top

Total takedown is concession and additional takedown lumped

26
Q

Firm Commitment agreement

A

Widely used

Underwriter and issuer agree to a specified price and quantity range, detailed in a letter of intent

Any losses incurred are prorated amongst underwriters

Market out clause- Specifies conditions in which the offering can be cancelled, limits risk

Underwriters can suspend or abort an offering if an event that effects value occurs (president of company dying)

Cannot abort if it is a nonmaterial event like a policy move by fed

27
Q

Standby (firm commitment)

A

An underwriter willing to purchase all shares not sold as a result of a rights offering expiring

28
Q

Best Efforts Underwriting vs All or None offering vs Mini-Max

A
  1. Calls for broker to buy securities from issuer as an agent, not a principal
  2. Underwriter must sell all of the shares or cancel underwriting. All funds collected are held in escrow
  3. Best efforts underwriting with a floor on acceptable amount of securities sold and a ceiling on max dollar willing to sell.
    Most frequent in LP offerings
29
Q

Compensation for underwriting

A

Issuer Receivers- underwriting proceeds

Investors pay- Public Offering Price

Underwriter Spread- Difference between the two amounts and consists of:

  1. Managers fee (only received by managing firm)
  2. Underwriting fee- fee for assuming risk of the issue
  3. Selling Concession- for placing security

Can only grant a discount to FINRA member firms or foreign firms who cannot be member

30
Q

Standard practice for how the spread is divided amongst the firm

A

Syndicate manager Fee: 10-20%
Underwriting syndicate: 20-30%
Selling Concessions: 50-60%

Syndicate manager fee- paid to managing underwriter

Underwriter fee- allocated to members based on allocation and risk

Selling concession- Amount received by any member that sells shares

Gross spread is total amount of fees combined

Firm commitment gets a larger spread
More risk makes a higher spread
More volatility, higher spread
More securities, lower per share cost

31
Q

Over allotments (green shoe option)

A

Allows underwriters to sell up to 15% more shares than original number

Derived from first corp that utilized option

Usually unwanted because it’s a higher cost of capital

32
Q

List of Exempt Securities

A 
US government securities
Municipal bonds
Commercial Paper and bankers acceptances with maturities less than 270 days
Insurance policy's and fixed annuity contracts
National and state bank securities
Building and loan securities
Non profits
Interests in railroad equipment

Banks also exempted from SEC registration because they file with bank regulators and make available

Variable insurance policies require registration and prospectus

33
Q

Securities qualifying for exemptions

A

Regulation A+: small/medium corp offerings
Reg D: private placements
Rule 147: securities sold and offered only intrastate
Reg S: Offers outside US
Rule 144, 145

34
Q

Regulation A+: Small and Medium offerings

A

Authorized through JOBs Act, enhanced regulation A past 5 mm

Two new offering tiers
Tier 1: $20 mm allowed to be raised in 12 month period, no more than $6mm on behalf of existing shareholders. Reviewed by individual states and SEC

Tier 2: up to $50 mm in 12 month period. No more than 15mm for selling shareholders. SEC reviewed and subject to rigorous disclosure requirements

Tier 2 must be qualified investors
To be qualified must:
1. Be an accredited investor defined in Rile 501
2. Limit investment to under 10% of net worth or net income

Specifically excludes investment companies

Abbrieviated notice of sale is filed with SEC

Does not need to provide audited financial info

Must send out final Offering circular 48 hours before sale confirmation

35
Q

Regulation D

A

SEC does not require registration if privately placed with:

  • Accredited investors that don’t need SEC protect
  • Max of 35 individual investors (non accredited)

Must be able to receive same info, amount of capital raising unlimited
Must be held for investment purposes only also referred to as lettered stock
Also referred to as legend stock

Filed on the internet

36
Q

Solicitation of private placement

A

Must meet certain requirements in regards to intended investor

Must reasonably believe investors are accredited, though they may have up to 35 non accredited

Synonymous with 
restricted (must be held for six months)
Unregistered (no registration statement)
Letter stock
Legend stock (restricted transfer
37
Q

Rule 147: Intrastate offerings

A 
80% income from state
80% of issuer assets in state
80% Offering proceeds are used in state
Underwriter in state and office in state
All purchasers are residents in state

Purchasers cannot sell out of state for 9 months

38
Q

Rule 144: Control and Restricted stock

A

Does not pertain to an IPO

Regulates sale of control and restricted securities

Control- owned by directors, officers or persons owning 10%+ (including family), can be sold at anytime

Restricted Securities- Acquired outside of public offering,
Must be held for 6 months

Volume limit applied to both:
In any 90 day period an investor may sell greater of:
1% of outstanding shares in class or
Average weekly trading volume over past four weeks

Always subject to volume limit, allowed to sell 4 times a year

Buying of shares effectively registers it

Form 144 must be filled out when selling stock, unless it does not exceed 5k share or 50k value

Form is good for 90 days

Can right calls against long positions if underlying stock is unrestricted

39
Q

Rule 144a

A

Allows non registered securities to be sold without holding period requirement

Must be qualified institutional buyer with over 100B in assets

40
Q

Rule 145

A

Requires stockholder approval for company reorganization or acquisitions or merging (proxy voting)

Reclassification- when one security class is being redesignated to another with differing ownership rights

Shares resulting from stock split are not required to be registered under the role

41
Q

Regulation S: Offers and Sales Outside US

A

Sales outside of the United States

Excluded from Registration

Can be no directed selling effort in Us

Cannot be resold in US for 12 months

Must be reported to SEC

42
Q

Anti fraud Regulations of the Acts of 1933 and 1934

A

No securities are exempt from anti fraud

43
Q

FINRA Rule 5130- Protecting the public and restricted persons prohibitions

A

Members may not withhold securities at public offering for own gain or to reward persons to direct future business

Insiders cannot take advantage to gain access to an offering before others

Only applies to IPOs

May not sell new issue to restricted persons including:
Member firms
employees of firms
Finders and fiduciaries acting on behalf of managing underwriter
Portfolio managers
10% plus of firm
Or immediate fam

May own 10% share or less in an account that purchases shares

44
Q

Spinning

A

Allocating highly sought after IPO shares to people in position to direct securities business to firm

45
Q

Investor wanting to sell stock under Rule 144 files a form. How many days is it effective?

A

90 days

46
Q

A regulation Tier 1 securities offering allows for raising of

A

20my in 12 month period

47
Q

Officer in a public company buys 400 shares of registered stock

A

He may sell immediately but would be subject to volume limitations

48
Q

What can a registered representative do with a preliminary prospectus?

A

Can only give to the customer

Important information can only be pointed out orally

49
Q

The underwriting agreement establishes a relationship between

A

The issuer and the underwriters

50
Q

The syndicate letters are signed by

A

The managing underwriter and syndicate members

The registration is signed by the managing underwriter and the issuer

51
Q

Cooling Period

A

Underwriters may not:

Make offers to sell the securities
Take orders or
Distribute sales literature

They may however:
Take indications of interest
Distribute preliminary prospectus or
Publish tombstone advertisements about potential availability

52
Q

Accredited investor

A
  • net worth of 1 mm not including net in residence or

- annual income of 200,000 in 2 most recent years (300 with spouse) and expects same level

53
Q

Issuer may not direct sales of a new issue to

A

Officers of the managing underwriter

They are restricted

54
Q

Filling an updated prospectus is a requirement of

A

The securities act of 1933

55
Q

New issues are sold without a

A

Markup or commission

They are sold at public offering price

56
Q

Member firm receiving an order from an investment advisor regarding the purchase of an IPO must:

A

Obtain a representation from the conduit stating that the purchaser is not a restricted person

57
Q

Accredited Investor

A

Annual income of 200k or more

1mm net worth not including residence, office or director of issuer and institutions

58
Q

Stabilizing transactions

A

Not allowed above the POP

Must notify SEC in the registration statement and in the prospectus

59
Q

Sec No Approval Clause

A

Must be stated on the cover

Series 7- Passed with 83% (19 decks)

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