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Series 7 Top-off Exam > Communications with the Public & New Issue Market > Flashcards

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.

1
Q

What was the purpose of the act of 1933?

A

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.

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2
Q

The Act of 1933 requires what first step before any sales can take place of any new security?

A

The registration statement to be filed by the issuer with the SEC

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3
Q

What is the period following the filing of the registration statement called?

A

20-day cooling off period

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4
Q

What cannot occur during the 20 day cooling off period?

A

No sales or offers of the new issue security can occur

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5
Q

What is permitted during the cooling-off period?

A

The following activities/marketing materials are permitted:

  1. Red herring (aka preliminary prospectus)
  2. Collection of indications of interest
  3. Tombstone ad
  4. Road shows
  5. Free Writing Prospectus
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6
Q

What is the effective date?

A

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.

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7
Q

What is the meaning of the registration being effective?

A

This means that the issue can legally be sold.

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8
Q

What is the process of due diligence?

A

Due diligence is the process of gathering all information and ensuring that disclosures made by the issuer are both adequate and truthful.

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9
Q

What is a shelf registration?

A

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.

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10
Q

Which securities are exempt from the securities act of 1933?

A
  1. Government and Government Agency Securities
  2. Municipal Securities
  3. Commercial Bank Securities
  4. Commercial Paper with a maturity of 270 days or less
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11
Q

Under Rule 147, how long does an investor have to wait before they can resell purchased securities outside the state of issuance?

A

Securities can be sold outside of the state in which they were issued six months following the sale being completed.

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12
Q

What does the Act of 1934 require of corporate issuers with regarding reporting income and expenses?

A

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.

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13
Q

Under the act of 1934 what is the definition of an insider?

A

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.

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14
Q

Under what conditions is a security exempt from the Act of ‘33 when it is offered only to the residents of a single state?

A

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.
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15
Q

What is another word for a preliminary prospectus?

A

Red Herring

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16
Q

What is the use or purpose of a preliminary prospectus or Red Herring?

A

It is used by the syndicate to gauge interest in the new IPO during the cooling off period.

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17
Q

Does the preliminary prospectus include an IPO price?

A

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.

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18
Q

Define:

Tombstone announcement

A

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.

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19
Q

Who is restricted from buying an IPO?

A

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)
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20
Q

What is a green shoe clause in underwriting?

A

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.

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21
Q

Define:

Stabilizing bid

A

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.

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22
Q

Which law regulates the new issue of securities?

A

The Securities Act of 1933

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23
Q

Which securites law first required a prospectus and SEC registration before securities could be sold to the public?

A

The Securities Act of 1933

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24
Q

The Securities Act of 1933 protects investors in what specific ways?

A
  • 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)
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25
Q

The Securities Act of 1933 requires a registration statement to be made to the SEC. What must this registration statement contain?

A
  • 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
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26
Q

Define:

“Blue Sky” laws

A

State laws designed to protect investors from highly speculative or fraudulent offerings, regulating the offer and sale of securities.

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27
Q

What are the three phases of taking a company public that were established in the Securities Act of 1933?

A
  1. Pre-registration period
  2. Cooling-off period
  3. Post-effective period
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28
Q

Does the SEC approve the registration document filed during the registration phase?

A

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.

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29
Q

Minimum length of the cooling off period during the registration process

A

20 days

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30
Q

Disclosure document used to gather indications of interest during the cooling off period

A

Preliminary prospectus (red herring)

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31
Q

The day that the SEC releases a new issue for sale

A

Effective date

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32
Q

Securities that are exempt from the filing requirements of the Act of 1933

A

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

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33
Q

Exemption from registration requirements for corporate offerings of less than $50 million in a 12 month period

A

Regulation A

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34
Q

Also known as a private placement exemption

A

Regulation D

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35
Q

Exemption from registration requirements for securities that are sold only within a state

A

Rule 147 (Intrastate offering)

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36
Q

The disclosure document that must be provided to investors in a Reg A offering

A

Offering circular

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37
Q

The maximum number of accredited investors that can participate in a Reg D offering

A

Unlimited

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38
Q

The maximum number of nonaccredited investors that can participate in a Reg D offering

A

35

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39
Q

The net worth and income criteria for an accredited investor under Regulation D

A

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

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40
Q

Regulates the sale of control and restricted securities

A

Rule 144

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41
Q

Addresses the sale of nonregistered foreign and domestic securities to institutional investors

A

Rule 144A

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42
Q

Holding period required before restricted securities can be sold

A

6 months

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43
Q

Length of time a Form 144 filing covers

A

90 days

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44
Q

When a Form 144 must be filed

A

Concurrent with the sale

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45
Q

Addresses reclassifications, mergers or consolidations, and transfers of company assets

A

Rule 145

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46
Q

The amount of control securities that can be sold in a 90-day period under Rule 144

A

Greater of 1% of the total outstanding shares, or the average weekly trading volume of the preceding four weeks

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47
Q

Securities owned by directors, officers, or persons who own or control 10% or more of an issuer’s voting stock

A

Control stock

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48
Q

Regulation that excludes from registration offers and sales of securities directed by issuers to non-U.S. residents

A

Reg S

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49
Q

Type of restriction that applies to sellers of control stock under Rule 144

A

Volume limits

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50
Q

Provision of Act of 1933 and 1934 Securities Acts that applies to all securities, including those that are exempt from registration

A

Antifraud

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51
Q

The type of investor who may purchase non registered foreign and domestic securities under Rule 144A

A

Qualified Institutional Buyers (QIBs)

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52
Q

When securities registered under Rule 147 may be sold to a non-state resident

A

After 6 months (Updated from 9 months for new rule effective 4/20/2017)

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53
Q

Persons who are restricted from purchases of new issue securities under Rule 5130

A

FINRA member firms; employees of FINRA member firms, finders and fiduciaries; portfolio managers; persons owning 10% or more of member firm

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54
Q

The type of new issue security to which the provisions of Rule 5130 apply

A

Common stock

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55
Q

The percentage of income the issuer must receive in a state as one way to be eligible for a Rule 147 registration

A

80%

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56
Q

The maximum amount of securities that can be sold in a 12 month period under Tier 2 of Reg A+

A

$75 million

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57
Q

A security that is not subject to SEC registration requirements

A

Exempt security

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58
Q

Quiet period for a syndicate manager for writing research following an IPO

A

10 days after the effective date

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59
Q

Quiet period for a syndicate member for writing research following an IPO

A

10 days after the effective date

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60
Q

Quiet period for a syndicate manager for writing research following an additional offering

A

3 days after the effective date

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61
Q

Quiet period for a syndicate member for writing research following a subsequent (additional) primary offering

A

No quiet period required

62
Q

An offering circular in a Regulation A offering must be received by purchasers at least

A

48 hours prior to confirmation of sale

63
Q

Under Regulation D, an accredited investor is defined as an individual with net income of

A

$200,000 or more in each of the two most recent years; $300,000 if joint income with a spouse OR $1mm of net worth (excluding primary residence)

64
Q

A 6 month resale restriction applies to the sale of securities to non-state residents under

A

Rule 147 offerings (Intrastate) (Updated from 9 months for new rule effective 4/20/2017)

65
Q

Access equals delivery refers to the

A

electronic delivery of prospectuses

66
Q

Both All or None and Mini-Max offerings require the deposit of customer funds in

A

an escrow account until the specified threshold is met

67
Q

A seller can file Form 144 no more than

A

4 times a year or every 90 days

68
Q

To sell restricted stock under Rule 144 the seller must have held stock, fully paid, for

A

6 months

69
Q

A member going public may direct the sale of its new issue to its employees. True or false?

A

True. This is an exception to 5130 in which restricted persons, that are employees of the issuer, are allowed to buy restricted stock.

70
Q

TRUE of FALSE? An SEC registration statement requires that an issuer include both financial results & financial projections.

A

FALSE. Although an issuer is required to include audited financials, it is not required to include financial projections.

71
Q

In the sale of an IPO, when must the red herring be delivered to investors?

A

at least 48 hours prior to the trade confirmation.

72
Q

In a best efforts mini-max or a best efforts all-or-none, where are customer funds held until the transaction is confirmed?

A

An escrow account

73
Q

A rights offering is typically followed by what kind of underwriting?

A

A standby underwriting, where a broker dealer takes on shares not purchased by existing shareholders.

74
Q

Persons that are defined as family members under Rule 5130

A

A person’s parents, mother-in-law or father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, and any other individual to whom the person provides material support.

75
Q

Under FINRA Rule 5130 dealing with IPOs, how often must a rep obtain a representation from a client that the individual is not a restricted person?

A

At least annually. The initial confirmation must be made via a positive affirmation letter whereas subsequent confirmations must be obtained via negative consent.

76
Q

Examples of securities that are exempt from the filing requirements of the Act of 1933

A

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

77
Q

Exemption from registration requirements for corporate public offerings of up to $5 million in a 12 month period is known as a

A

Regulation A offering

78
Q

The type of new issue security to which the provisions of Rule 5130 apply

A

Initial Public Offering (IPO) of common stock

79
Q

Minimum assets required for classification as a qualified institutional buyer (QIB)

A

$100 million

80
Q

Prohibited practice of allocating highly sought after IPO shares to individuals who can direct business to the firm in return

A

Spinning

81
Q

Holding period before unregistered securities that have been sold outside the U.S. to non-U.S. residents can be sold in the U.S.

A

12 months

82
Q

Rule that permits advertising for intrastate offerings to extend beyond state borders

A

Rule 147A

83
Q

Requires registration of new issues; regulates primary market activity

A

Securities Act of 1933

84
Q

Regulates secondary market activity; requires registration of broker-dealers

A

Securities Exchange Act of 1934

85
Q

Created the SEC

A

Securities Exchange Act of 1934

86
Q

Requires corporate bond issuers to appoint trustees to protect the interests of bondholders

A

Trust Indenture Act of 1939

87
Q

Defines registration of securities at state levels

A

Uniform Securities Act

88
Q

Exempts U.S. government securities from registration requirements

A

Securities Act of 1933

89
Q

Requires the delivery of prospectuses for full and fair disclosure

A

Securities Act of 1933

90
Q

Prohibits fraudulent activity in underwriting and distributing new securities

A

Securities Act of 1933

91
Q

Three characteristics of bonds subject to provisions of Trust Indenture Act of 1939

A

Issued by corporations, size over $50 million in a 12 month period, maturity of 9 months or more

92
Q

Examples of prohibited activities that involve price manipulation

A

Wash sales, pegging, matched orders, price fixing

93
Q

Requires corporate bond issuers to appoint trustees to protect the interests of bondholders

A

Trust Indenture Act of 1939

94
Q

Corporate debt instruments with a maturity of no more than 270 days

A

Commercial paper

95
Q

Maximum maturity of commercial paper

A

270 days

96
Q

Protects bondholder through a written agreement between issuer and trustee

A

Trust Indenture

97
Q

Act that requires the naming of a trustee to protect bondholders for corporate debt issues

A

Trust Indenture Act of 1939

98
Q

What does the Trust Indenture Act of 1939 require?

A

The Act requires that corporate debt issuances of more than $50 million include a trust indenture. The indenture consists of a set of convenants (promises) that detail the obligations of the issuer and rights of the bondholders. The written agreement is made between the issuer and a trustee, typically a bank, that represents the interests of the bondholders.

99
Q

Which U.S. law governs corporate bonds?

A

The Trust Indenture Act of 1939

100
Q

Define:

tombstone ad

A

An advertisement published by theunderwriter with basic information about a new issue. They are allowed to be used during the cooling-off period.

101
Q

Define:

cooling-off period

A

The time period, typically 20 days, after a company files its registration statement with the SEC. During this period, the underwriter can market the new issue securities to investors, but cannot actually engage in sales.

102
Q

When is a “red herring” used?

A

After the initial filing and during the cooling-off period, the issuer can create a preliminary prospectus, or “red herring.” It is a way for broker dealers to gauge interest in the issue.

103
Q

What activities are permitted and prohibited during the cooling-off period?

A
  • Permitted
    • Collecting indications of interest
    • Publication of tombstone ads
    • Road shows
    • Free writing prospectus
    • Preliminary prospectus (aka red herring)
  • Prohibited
    • Sales
    • Orders
    • Money changing hands
104
Q

What is the role of the underwriters during the cooling-off period?

A

During the cooling-off period, the underwriter is engaged to market the transactions to potential investors and help determine the offering price of the securities.

105
Q

What is the intent of the SEC’s no approval clause printed on the first page of a prospectus?

A

Informing potential investors that the SEC is not guaranteeing the accuracy of prospectus information and is not recommending or approving the security in any way, thereby absolving the SEC of liability in the case fraudulent claims are made.

106
Q

What are the three types of firms in an underwriting syndicate?

A
  1. Syndicate manager
  2. Syndicate members
  3. Selling group
107
Q

How are the syndicate members distinct from the selling group?

A

Members of the syndicate put up their own capital to purchase the shares of the new issue and resell them to the public. Put differently, syndicate members have financial liability for unsold securities. Members of the selling group may assist in the distribution of shares by selling them to clients but none of their own capital is at risk.

108
Q

Define:

gross spread

A

The difference between what the syndicate pays the issuer for the shares versus the public offering price that the issuer sells the shares to the public for. This difference is the gross profit for the syndicate.

109
Q

Define:

management fee

A

The component of the gross spread that is paid to the syndicate manager for taking on their lead role in the syndicate. The fee is paid to the manager for every single share in the deal.

110
Q

Define:

underwriter fee

A

The compensation received by the syndicate manager or syndicate member for taking on risk for a share as a part of an underwriting. The amount is based on each firm’s allocations.

111
Q

What are the two types of underwriting committments?

A

Firm commitment and best efforts

112
Q

What is the defining element of a firm commitment?

A

In a firm committment, the underwriter will purchase shares from the issuer and resell them to the public. Whatever the underwriter cannot resell, they own. Therefore, in a firm committment the underwriter takes on financial liability for any unsold shares.

113
Q

Does a best efforts offerings have more or less compensation for the underwriter than a firm commitment ?

A

Less, because the underwriter has no financial liability for the shares. They solely act as agents.

114
Q

What are the two types of best efforts underwriting?

A

All-or-none and a mini-max deal. In an all-or-none, the underwriter must sell 100% of the shares or else the deal is cancelled. In a mini-max, the underwriter must sell a minimum threshold of shares or else the deal is cancelled.

115
Q

Which securities are exempt from SEC registration?

A
  • US Government and Goverment Agency securities
  • Municipal securities
  • Commercial paper with a maximum maturity of 270 days
  • Commercial bank securities
116
Q

In an intrastate offering, what percentage of the securities must be sold to state residents?

A

Under Rule 147, 100% of the securities must be sold to state residents. Those state residents can resell within the state immediately, but must wait six months to resell outside of the state.

117
Q

What two types of stock are subject to Rule 144?

A
  1. Restricted Stock: stock that has never been SEC registered
  2. Control Stock: stock owned by a corporate insider
118
Q

Under Rule 144, what is the maximum amount of control stock that an insider can sell over a 90-day period?

A

Over any 90-day period, an insider can sell the greater of 1% of the company’s outstanding shares or the average weekly trading volume over the past four weeks preceding the sale.

119
Q

Define:

accredited investor

A

A sophisticated investor that is permitted to freely invest in private placements. It includes:

  1. officers and directors of the issuer,
  2. Institutional investors
  3. Individuals with a net worth of at least $1 million exluding their primary residence or those with annual income of $200,000 for the past two years ($300,00 for married couples)
120
Q

Define:

affiliated person

A

A corporate insider, meaning an officer, director, or greater than 10% shareholder.

121
Q

Define:

best efforts offering

A

A type of underwriting committment where the syndicate acts an agent and has no financial liability for any unsold shares.

122
Q

Define:

control stock

A

Stock that is owned by a corporate insider.

123
Q

Define:

effective date

A

The date the SEC clears new issue securities for public sale.

124
Q

Define:

exempt securities

A

Securities that can be sold to the public without having to be registered with the SEC. This includes:

  1. US Government and Government Agency securities
  2. Municipal bonds
  3. Commercial paper with a maximum maturity of 270 days
  4. Commercial bank securities
125
Q

Define:

firm commitment offering

A

A type of underwriting committment in which the syndicates purchases the shares from the issuer and looks to resell them to the public. Any shares that the syndicate cannot resell to the public, they will own, and therefore they have risk for any unsold shares.

126
Q

Define:

indications of interest

A

Non-binding indications placed by potential investors during the cooling-off period that indicates that they may be interested in purchasing the new issue security.

127
Q

Define:

insider

A

An officer, director, or greater than 10% shareholder.

128
Q

Define:

intrastate offering

A

Securities sold under Rule 147. In this type of offering, because the securities are only sold within a single state, SEC registration is not required.

129
Q

Define:

lead underwriter

A

The investment bank with the lead responsibility for underwriting a new issue. They will put together a syndicate of other banks if necessary and manage each step of the process from filing to offering.

130
Q

Define:

mini-max underwriting

A

A best efforts underwriting where the deal will only occur if the underwriter can sell a minimum threshold of securities.

131
Q

Define:

Regulation A

A

An exempt transaction for small issuances that allows a company to raise up to $50 million publicly over a 12-month period without having to go through the full SEC registration process.

132
Q

Define:

Regulation D

A

An exemption from SEC registration for private placement transactions, which can be sold to an unlimited number of accredited, but no more than 35 nonaccredited investors.

133
Q

Define:

Rule 144

A

Permits the sale of restricted stock and control stock.

134
Q

Define:

Rule 144A

A

An exemption from SEC registration which allows qualified institutional buyers to freely trade private placements among themselves.

135
Q

Define:

selling concession

A

The component of the underwriting spread received by the firm that sells that particular share.

136
Q

Define:

underwriting agreement

A

The binding contract between the issuer and syndicate manager detailing the terms in an underwriting.

137
Q

Define:

All-or-None underwriting

A

A type of underwriting where the syndicate acts as an agent and has no financial liability for any unsold securities. If the underwriters are unable to sell the shares, the deal will be cancelled.

138
Q

Define:

negotiated underwriting

A

A type of deal where the underwriter is chosen by the issuer based on a myriad of factors such as relationship between the parties, price, and sector expertise.

139
Q

Define:

offering circular

A

A document received by investors for certain exempt transactions that takes the place of the prospectus and provides detailed information about the issuer.

140
Q

Define:

offering memorandum

A

A document received by investors for certain exempt transactions that takes the place of the prospectus and provides detailed information about the issuer.

141
Q

Define:

selling group

A

Firms within the syndicate that act as agents and have no allocations or risk for any unsold securities. Instead, they only get compensated for what they sell.

142
Q

Define:

20-day cooling-off period

A

The period after filing a registration statement with the SEC where the underwriter and issuer are marketing the new issue securities to investors, but cannot actually take orders for the securities or sell anything.

143
Q

FINRA rules that address fair and ethical dealings with the public

A

Conduct Rules

144
Q

Disclosure required by firms in written research and public appearances by analysts and broker dealers

A

Whether they or family members have a financial interest; whether the employer firms owns 1% or more of the subject’s equity securities

145
Q

Type of securities business most subject to conflicts of interest by research analysts and in research reports

A

Investment banking

146
Q

Prepared by a firm’s analysts to present background information and rate the potential performance of an issuer’s securities

A

Research reports

147
Q

FINRA communications category of static social media like Facebook pages

A

Retail communication subject to approval before use

148
Q

FINRA communications category for email, chat rooms, and instant messages

A

Correspondence subject to spot checks

149
Q

Years of average annual performance that mutual funds must disclose in customer communications

A

1, 5 and 10 year, or since inception

150
Q

Define:

generic advertising

A

Communications with the public that refer to securities generally, but do not recommend any specific security.

Series 7 Top-off Exam (8 decks)

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