Corporate Underwritings

Question 1

What is a firm underwriting commitment?

Answer 1

Investment banker acts as principal, buying issue from the company and then resells to the public, earning the spread. The underwriter assumes FULL financial liability

Question 2

What is a best efforts commitment?

Answer 2

Investment banker acts as “agent” taking no liability. If part of the issue is unsold it remains w/ issuer

Question 3

What are the 2 types of best efforts commitments, and give an explanation for both

Answer 3

All or none - deal is contingent on entire deal being sold; deal is canceled otherwise

Mini-maxi - minimum must be sold, underwriter continues to sell issue up to a max portion of deal (the maximum)

Question 4

What is stand-by underwriting?

Answer 4

Used when company attempts to sell additional shares through a RIGHTS offering. Underwriter stands-by on a FIRM commitment basis to “pick up” unsubscribed shares at subscription price

Question 5

What is a negotiated underwriting?

Answer 5

Typical for corporations - terms are just negotiated

Question 6

What is the formal agreement between members of the syndicate?

Answer 6

Agreement Among Underwriters

Question 7

Who has full control over syndicate decisions?

Answer 7

Managing underwriter

Question 8

What is due diligence?

Answer 8

Managing underwriter is responsible for researching issuer and for insuring full disclosure of investors

Question 9

What is the management fee?

Answer 9

Manager determines each member’s share of profit or loss after underwriting completed - for handling the underwriting, the manager gets a fee

Question 10

What are the 2 types of Syndicate account types, and what are characteristics of each?

Answer 10

Western and Eastern:
Western - divided as to responsibility and liability
Easter - United as to dividing responsibility and liability

Question 11

What is a Selling Group?

Answer 11

Used to help issue if underwriting is very large; earn SELLING CONCESSION

Question 12

What is the Underwriter’s Concession?

Answer 12

The profit that the managing underwriter concedes to the syndicate members if they sell issue directly to public

Question 13

What is the Selling Concession?

Answer 13

The profit that the Selling Group earns for helping syndicate sell bonds; comes out of Underwriter’s Concession

Question 14

What is a reallowance?

Answer 14

Small amount given to firms NOT in syndicate or selling group

Question 15

What is a Prospectus?

Answer 15

Part of the registration that is filed with the SEC - it gives complete disclosure about the issue

Question 16

What is the 20 day cooling off period?

Answer 16

Once a registration statement is issued, there is a 20 day period where sales of the issue are prohibited. Only the preliminary prospectus may be issued during this time

Question 17

What is blue skying?

Answer 17

Requirement that a company registers the issue in EACH state it wishes the security to be sold

Question 18

What is a red herring?

Answer 18

A preliminary prospectus - it states “THIS IS NOT AN OFFER TO SELL” in red ink. It is used by brokers to gauge an interest from potential buyers.

Question 19

What is a market out clause?

Answer 19

If there is insufficient interest and the bottom falls out of the market due to unforeseen events, the underwriter can be released from commitment

Question 20

What is the effective date?

Answer 20

When the final price amendment is filed with the SEC, and the issue can be sold with a Final Prospectus. (delivered as a printed document OR electronically)

Question 21

What is a Tombstone announcement?

Answer 21

When registration is effective, sale of the issue is permitted with final prospectus. Does NOT have the Selling Group names (it also cannot be structured as an advertisement)

Question 22

How long does the final prospectus have to be sent for:

1. IPO in pink sheets or OTCBB
2. Company listed on Pink Sheets or OTCBB
3. Issuers w/ securities on listed stock exchange

Answer 22

1. 90 days
2. 40 days
3. 25 days

Question 23

What persons are prohibited from buying IPO’s

Answer 23

1. FINRA Member firms, officers, employees, immediate family
2. Fiduciaries to member firms (lawyers, accountants, etc.) and Finders
3. Portfolio managers
4. Passive owners of broker dealers

Question 24

What is the green shoe clause?

Answer 24

Clause in the underwriting agreement that states that the underwriter may request up to 15% additional shares to cover oversales

Question 25

What is a sticky issue?

Answer 25

i.e: P.O.P. is set at $20 and opening quote on NASDAQ is $17. No one will want to buy from issuer for immediate loss

Question 26

What is a stabilizing bid?

Answer 26

Used to prevent this. Makes sure exchange opens with bid at equal to or just under POP

Question 27

What is a penalty bid clause?

Answer 27

Used to influence syndicate to sell only to long-term investors, not speculators
States that if manager buys back too many shares at stabilizing bid, the member loses his underwriting concession

Question 28

What is a Secondary offering?

Answer 28

A large offering of a currently trading issue that still must be sold under prospectus offering

Question 29

What is Rule 415 - Shelf registration?

Answer 29

Allows established/seasoned issuers to keep a blanket registration statement filed with the SEC for 3 years. During this period, the company can sell issues whenever it sees fit, and there is NO 20-day cooling period. This is cheaper and faster than regular S-1 Filing

Question 30

What is a horizontal merger?

Answer 30

Companies that are merging that are in the SAME business

Question 31

Vertical merger

Answer 31

Merging of companies that are in a DIFFERENT business

Question 32

What is a leveraged buy out?

Answer 32

IB’s help to arrange investors to take a company private by having these investors assume a substantial portion of debt

Question 33

What is a holding company?

Answer 33

Buys stock of another company and then gets representatives on the company’s BOD, influencing MGMT policies and decisions