Chapter 7- Issuing Securities 10-15 questions Flashcards
Securities Act of 1933
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
Securities act of 1934
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
Purpose of 1933 act, requirements to register
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
Registration Statement
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
Three phases of underwriting
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
Preliminary Prospectus (Red Herring)
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)
Advertising of a new issue
Only sales literature allowed is tombstone before effective date
Tombstone not required
May show anticipated gross proceeds
Due diligence meeting
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
Final Prospectus
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
SeC Review of Prospectus
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
Prospectus Delivery Requirement Period
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
Underwriter
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
Investment banking
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
Participants in a Corporate New Issue
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
New issues
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
Additional Issues
Made of new securities issues of companies already trading
Can be also be classified by final distribution of funds
Primary Offering vs Secondary Offering vs split Offering
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
Shelf Offering
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
Private placement
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
Syndicate formation
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
Pricing of New issues of public ally traded securities
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
Stabilizing Price
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
Underwriting Agreement
Contract that establishes the relationship between a issuer and underwriter
Underwriter is acting in a principal capacity
Specifies terms and conditions of underwriting
Syndicate Members
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)
Selling group formation
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
Firm Commitment agreement
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
Standby (firm commitment)
An underwriter willing to purchase all shares not sold as a result of a rights offering expiring
Best Efforts Underwriting vs All or None offering vs Mini-Max
- Calls for broker to buy securities from issuer as an agent, not a principal
- Underwriter must sell all of the shares or cancel underwriting. All funds collected are held in escrow
- 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
Compensation for underwriting
Issuer Receivers- underwriting proceeds
Investors pay- Public Offering Price
Underwriter Spread- Difference between the two amounts and consists of:
- Managers fee (only received by managing firm)
- Underwriting fee- fee for assuming risk of the issue
- Selling Concession- for placing security
Can only grant a discount to FINRA member firms or foreign firms who cannot be member
Standard practice for how the spread is divided amongst the firm
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
Over allotments (green shoe option)
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
List of Exempt Securities
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
Securities qualifying for exemptions
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
Regulation A+: Small and Medium offerings
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
Regulation D
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
Solicitation of private placement
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
Rule 147: Intrastate offerings
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
Rule 144: Control and Restricted stock
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
Rule 144a
Allows non registered securities to be sold without holding period requirement
Must be qualified institutional buyer with over 100B in assets
Rule 145
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
Regulation S: Offers and Sales Outside US
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
Anti fraud Regulations of the Acts of 1933 and 1934
No securities are exempt from anti fraud
FINRA Rule 5130- Protecting the public and restricted persons prohibitions
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
Spinning
Allocating highly sought after IPO shares to people in position to direct securities business to firm
Investor wanting to sell stock under Rule 144 files a form. How many days is it effective?
90 days
A regulation Tier 1 securities offering allows for raising of
20my in 12 month period
Officer in a public company buys 400 shares of registered stock
He may sell immediately but would be subject to volume limitations
What can a registered representative do with a preliminary prospectus?
Can only give to the customer
Important information can only be pointed out orally
The underwriting agreement establishes a relationship between
The issuer and the underwriters
The syndicate letters are signed by
The managing underwriter and syndicate members
The registration is signed by the managing underwriter and the issuer
Cooling Period
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
Accredited investor
- 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
Issuer may not direct sales of a new issue to
Officers of the managing underwriter
They are restricted
Filling an updated prospectus is a requirement of
The securities act of 1933
New issues are sold without a
Markup or commission
They are sold at public offering price
Member firm receiving an order from an investment advisor regarding the purchase of an IPO must:
Obtain a representation from the conduit stating that the purchaser is not a restricted person
Accredited Investor
Annual income of 200k or more
1mm net worth not including residence, office or director of issuer and institutions
Stabilizing transactions
Not allowed above the POP
Must notify SEC in the registration statement and in the prospectus
Sec No Approval Clause
Must be stated on the cover
