Communications with the Public & New Issue Market Flashcards
This deck focuses on terms and concepts relating to the securities issuance process as well as communications with the public.
What was the purpose of the act of 1933?
The 1933 Act requires all securities to be registered with the SEC for public sale unless the security is exempt or sold in an exempt transaction. The purpose is to ensure full and fair disclosure of all material information to investors.
The Act of 1933 requires what first step before any sales can take place of any new security?
The registration statement to be filed by the issuer with the SEC
What is the period following the filing of the registration statement called?
20-day cooling off period
What cannot occur during the 20 day cooling off period?
No sales or offers of the new issue security can occur
What is permitted during the cooling-off period?
The following activities/marketing materials are permitted:
- Red herring (aka preliminary prospectus)
- Collection of indications of interest
- Tombstone ad
- Road shows
- Free Writing Prospectus
What is the effective date?
This is the date the SEC permits sales to the public. It occurs once the underwriter has fully marketed the new issue securities to investors and know the price they want to sell for.
What is the meaning of the registration being effective?
This means that the issue can legally be sold.
What is the process of due diligence?
Due diligence is the process of gathering all information and ensuring that disclosures made by the issuer are both adequate and truthful.
What is a shelf registration?
Shelf registration, also called rule 415, allows an issuer with previously registered securities with the SEC a three-year window to issue new securities without going through the re-filing process which can be expensive and time-consuming. A shelf can be used for both equity and debt securities, but not for an IPO.
Which securities are exempt from the securities act of 1933?
- Government and Government Agency Securities
- Municipal Securities
- Commercial Bank Securities
- Commercial Paper with a maturity of 270 days or less
Under Rule 147, how long does an investor have to wait before they can resell purchased securities outside the state of issuance?
Securities can be sold outside of the state in which they were issued six months following the sale being completed.
What does the Act of 1934 require of corporate issuers with regarding reporting income and expenses?
The act of 1934 requires all issuers to file an annual audited 10-K with the SEC as well as quarterly 10-Q which is un-audited. It is intended that these reports are made public so that investors can make informed decisions.
Under the act of 1934 what is the definition of an insider?
Any officer of the company, a director, member of the Board of Directors, or a greater than 10% shareholder of the company’s equity are all considered insiders.
Under what conditions is a security exempt from the Act of ‘33 when it is offered only to the residents of a single state?
Under Rule 147, intrastate offerings are exempt from SEC registration if the following requirements are met:
The issuer must be incorporated in the state, all securities must be sold to state residents and one of the following criteria must be met:
- 80% of the revenue comes from the state
- 80% of the issuer’s assets are in that state
- 80% of the proceeds of the offering must be used in that state, or
- a majority of the employees must be located in the state.
What is another word for a preliminary prospectus?
Red Herring
What is the use or purpose of a preliminary prospectus or Red Herring?
It is used by the syndicate to gauge interest in the new IPO during the cooling off period.
Does the preliminary prospectus include an IPO price?
No
The preliminary prospectus will not have the final offering price (that is only included on the final prospectus). Instead, it will have a range of potential prices.
Define:
Tombstone announcement
An advertisement or announcement that the lead manager places in a newspaper to with the basic details about the offering. A tombstone ad is allowed to be published during the cooling off period.
Who is restricted from buying an IPO?
Restricted persons include:
- Broker-dealers for their own accounts
- The employees of broker-dealers
- Finders and fiduciaries of the managing underwriter such as accountants or attorneys
- Portfolio managers who are trying to purchase for their own personal accounts
- Immediate family members of a restricted person (includes spouse, parents, siblings, children, and in-laws)
What is a green shoe clause in underwriting?
The greenshoe clause allows the underwriters to increase the size of the deal and purchase up to 15% more shares from the issuer to satisfy demand. It can typically be exercised by the underwriters within 30 days after the effective date of the offering.
Define:
Stabilizing bid
A bid that the lead underwriter is allowed to place once an IPO begins trading, to support the price of the IPO. The underwriters can never stabilize above the IPO price.
Which law regulates the new issue of securities?
The Securities Act of 1933
Which securites law first required a prospectus and SEC registration before securities could be sold to the public?
The Securities Act of 1933
The Securities Act of 1933 protects investors in what specific ways?
- Requires registration and a prospectus for all new issues (unless the security is exempt or sold in an exempt transaction)
- Mandated companies provide full disclosure to investors
- Created the regulatory body for securities in the primary and secondary markets (SEC)
The Securities Act of 1933 requires a registration statement to be made to the SEC. What must this registration statement contain?
- Identification of anyone owning 10% or more of the company
- Intended use of raised capital proceeds
- Any pending lawsuits against the company
- Names and addresses of company officers and directors
- Compensation and five-year business histories (including past employers) of company officers and directors
- Amount and structure of the company’s current capitalizaton
Define:
“Blue Sky” laws
State laws designed to protect investors from highly speculative or fraudulent offerings, regulating the offer and sale of securities.
What are the three phases of taking a company public that were established in the Securities Act of 1933?
- Pre-registration period
- Cooling-off period
- Post-effective period
Does the SEC approve the registration document filed during the registration phase?
No. The SEC neither approves nor disapproves of the filing, only reviews it for appropriate disclosures such that an investor can make an informed decision about the company.
Minimum length of the cooling off period during the registration process
20 days
Disclosure document used to gather indications of interest during the cooling off period
Preliminary prospectus (red herring)
The day that the SEC releases a new issue for sale
Effective date
Securities that are exempt from the filing requirements of the Act of 1933
U.S. government, municipal bonds, fixed insurance products, national and state bank securities, non-profit securities, commercial paper and bankers acceptances with maturity of less than 270 days
Exemption from registration requirements for corporate offerings of less than $50 million in a 12 month period
Regulation A
Also known as a private placement exemption
Regulation D
Exemption from registration requirements for securities that are sold only within a state
Rule 147 (Intrastate offering)
The disclosure document that must be provided to investors in a Reg A offering
Offering circular
The maximum number of accredited investors that can participate in a Reg D offering
Unlimited
The maximum number of nonaccredited investors that can participate in a Reg D offering
35
The net worth and income criteria for an accredited investor under Regulation D
Net worth of $1,000,000 (exclusive of residence) or annual income of $200,000 or more ($300,000 jointly with spouse) in each of the two most recent years
Regulates the sale of control and restricted securities
Rule 144
Addresses the sale of nonregistered foreign and domestic securities to institutional investors
Rule 144A
Holding period required before restricted securities can be sold
6 months
Length of time a Form 144 filing covers
90 days
When a Form 144 must be filed
Concurrent with the sale
Addresses reclassifications, mergers or consolidations, and transfers of company assets
Rule 145
The amount of control securities that can be sold in a 90-day period under Rule 144
Greater of 1% of the total outstanding shares, or the average weekly trading volume of the preceding four weeks
Securities owned by directors, officers, or persons who own or control 10% or more of an issuer’s voting stock
Control stock
Regulation that excludes from registration offers and sales of securities directed by issuers to non-U.S. residents
Reg S
Type of restriction that applies to sellers of control stock under Rule 144
Volume limits
Provision of Act of 1933 and 1934 Securities Acts that applies to all securities, including those that are exempt from registration
Antifraud
The type of investor who may purchase non registered foreign and domestic securities under Rule 144A
Qualified Institutional Buyers (QIBs)
When securities registered under Rule 147 may be sold to a non-state resident
After 6 months (Updated from 9 months for new rule effective 4/20/2017)
Persons who are restricted from purchases of new issue securities under Rule 5130
FINRA member firms; employees of FINRA member firms, finders and fiduciaries; portfolio managers; persons owning 10% or more of member firm
The type of new issue security to which the provisions of Rule 5130 apply
Common stock
The percentage of income the issuer must receive in a state as one way to be eligible for a Rule 147 registration
80%
The maximum amount of securities that can be sold in a 12 month period under Tier 2 of Reg A+
$75 million
A security that is not subject to SEC registration requirements
Exempt security
Quiet period for a syndicate manager for writing research following an IPO
10 days after the effective date
Quiet period for a syndicate member for writing research following an IPO
10 days after the effective date
Quiet period for a syndicate manager for writing research following an additional offering
3 days after the effective date