Chapter 7- Issuing Securities 10-15 questions

Question 1

Securities Act of 1933

Answer 1

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

Question 2

Securities act of 1934

Answer 2

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

Question 3

Purpose of 1933 act, requirements to register

Answer 3

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

Question 4

Registration Statement

Answer 4

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

Question 5

Three phases of underwriting

Answer 5

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

Question 6

Preliminary Prospectus (Red Herring)

Answer 6

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)

Question 7

Advertising of a new issue

Answer 7

Only sales literature allowed is tombstone before effective date

Tombstone not required

May show anticipated gross proceeds

Question 8

Due diligence meeting

Answer 8

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

Question 9

Final Prospectus

Answer 9

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

Question 10

SeC Review of Prospectus

Answer 10

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

Question 11

Prospectus Delivery Requirement Period

Answer 11

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

Question 12

Underwriter

Answer 12

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

Question 13

Investment banking

Answer 13

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

Question 14

Participants in a Corporate New Issue

Answer 14

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

Question 15

New issues

Answer 15

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

Question 16

Additional Issues

Answer 16

Made of new securities issues of companies already trading

Can be also be classified by final distribution of funds

Question 17

Primary Offering vs Secondary Offering vs split Offering

Answer 17

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

Question 18

Shelf Offering

Answer 18

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

Question 19

Private placement

Answer 19

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

Question 20

Syndicate formation

Answer 20

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

Question 21

Pricing of New issues of public ally traded securities

Answer 21

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

Question 22

Stabilizing Price

Answer 22

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

Question 23

Underwriting Agreement

Answer 23

Contract that establishes the relationship between a issuer and underwriter

Underwriter is acting in a principal capacity

Specifies terms and conditions of underwriting

Question 24

Syndicate Members

Answer 24

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)

Question 25

Selling group formation

Answer 25

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

Question 26

Firm Commitment agreement

Answer 26

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

Question 27

Standby (firm commitment)

Answer 27

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

Question 28

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

Answer 28

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

Question 29

Compensation for underwriting

Answer 29

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

Question 30

Standard practice for how the spread is divided amongst the firm

Answer 30

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

Question 31

Over allotments (green shoe option)

Answer 31

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

Question 32

List of Exempt Securities

Answer 32

``` 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

Question 33

Securities qualifying for exemptions

Answer 33

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

Question 34

Regulation A+: Small and Medium offerings

Answer 34

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

Question 35

Regulation D

Answer 35

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

Question 36

Solicitation of private placement

Answer 36

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 ```

Question 37

Rule 147: Intrastate offerings

Answer 37

``` 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

Question 38

Rule 144: Control and Restricted stock

Answer 38

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

Question 39

Rule 144a

Answer 39

Allows non registered securities to be sold without holding period requirement Must be qualified institutional buyer with over 100B in assets

Question 40

Rule 145

Answer 40

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

Question 41

Regulation S: Offers and Sales Outside US

Answer 41

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

Question 42

Anti fraud Regulations of the Acts of 1933 and 1934

Answer 42

No securities are exempt from anti fraud

Question 43

FINRA Rule 5130- Protecting the public and restricted persons prohibitions

Answer 43

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

Question 44

Spinning

Answer 44

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

Question 45

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

Answer 45

90 days

Question 46

A regulation Tier 1 securities offering allows for raising of

Answer 46

20my in 12 month period

Question 47

Officer in a public company buys 400 shares of registered stock

Answer 47

He may sell immediately but would be subject to volume limitations

Question 48

What can a registered representative do with a preliminary prospectus?

Answer 48

Can only give to the customer Important information can only be pointed out orally

Question 49

The underwriting agreement establishes a relationship between

Answer 49

The issuer and the underwriters

Question 50

The syndicate letters are signed by

Answer 50

The managing underwriter and syndicate members The registration is signed by the managing underwriter and the issuer

Question 51

Cooling Period

Answer 51

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

Question 52

Accredited investor

Answer 52

- 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

Question 53

Issuer may not direct sales of a new issue to

Answer 53

Officers of the managing underwriter They are restricted

Question 54

Filling an updated prospectus is a requirement of

Answer 54

The securities act of 1933

Question 55

New issues are sold without a

Answer 55

Markup or commission They are sold at public offering price

Question 56

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

Answer 56

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

Question 57

Accredited Investor

Answer 57

Annual income of 200k or more 1mm net worth not including residence, office or director of issuer and institutions

Question 58

Stabilizing transactions

Answer 58

Not allowed above the POP Must notify SEC in the registration statement and in the prospectus

Question 59

Sec No Approval Clause

Answer 59

Must be stated on the cover