Corporate Underwritings Flashcards
Underwriting syndicate group members:
A. share in both selling responsibility for the new issue and liability for any unsold portion of the new issue
B. share in selling responsibility for the new issue but are not liable for any unsold portion of the new issue
C. do not share in selling responsibility for the new issue and are liable for any unsold portion of the new issue
D. do not share in selling responsibility for the new issue and are not liable for any unsold portion of the new issue
The best answer is A.
Syndicate members in the underwriting group share in both the selling responsibility for the issue and in liability for any unsold shares (or bonds).
In an underwriting, which of the following is earned by a syndicate member who sells the issue directly to the public?
A. Underwriter’s Concession
B. Selling Concession
C. Spread
D. Management Fee
The best answer is A.
The spread is the gross compensation earned by the syndicate. Out of this gross amount, portions can be earned by the members of the underwriting group. The syndicate manager earns the management fee - typically the smallest portion of the spread. Once the management fee is deducted from the spread, this leaves the underwriter’s concession. This is the amount earned by a syndicate member who sells the issue to the public. Out of the underwriter’s concession, the syndicate member can give up a selling concession to a selling group member for helping find a customer for the issue. Also out of the underwriters concession, a syndicate member can give up a reallowance (a small amount) to a non-member of the selling group who sells some of the issue.
In a corporate underwriting, a syndicate member that has sold its portion, wishes to place additional orders to be filled from the unsold allocations of other members. These orders:
A. cannot be filled
B. will be filled by the manager with the ordering member receiving the selling concession
C. will be filled by the manager with the ordering member receiving the underwriter’s concession (or “takedown”)
D. will be filled by the manager with the ordering member receiving the spread
The best answer is B.
When a syndicate member sells its own allotment, the syndicate member earns the underwriter’s concession (for a corporate underwriting) or the “takedown” (for a municipal underwriting). In a Western account, in theory, once the syndicate member has sold his allotment, it has no more profit potential. However, the manager will permit this syndicate member to help other syndicate members, if it looks like there will be an undersale on their portion of the issue. The manager allows this syndicate member to place orders filled out of the other members’ allotments as a “selling group” member, and for these orders, this syndicate member earns the selling concession.
In a new issue underwriting, which of the following is typically the smallest?
A. Underwriter’s Concession
B. Selling Concession
C. Spread
D. Management Fee
The best answer is D.
The spread is the gross compensation earned by the syndicate. Out of this gross amount, portions can be earned by the members of the underwriting group. The syndicate manager earns the management fee - typically the smallest portion of the spread. Once the management fee is deducted from the spread, this leaves the underwriter’s concession. This is the amount earned by a syndicate member who sells the issue to the public. Out of the underwriter’s concession, the syndicate member can give up a selling concession to a selling group member for helping find a customer for the issue.
ABC Corporation stock is being sold in a primary offering. The total offering is $10,000,000, of which $7,000,000 is allocated to the syndicate and $3,000,000 is allocated to the selling group. The public offering price is set at $10.00 per share. The issuer received $9.00 per share from the underwriters. The management fee has been set at $.10 per share; the selling concession is $.30 per share. A syndicate member sells to a selling group member. How much will the syndicate member earn per share?
A. $ .10
B. $ .30
C. $ .60
D. $ .90
The best answer is C.
If a syndicate member sells through a selling group member, the syndicate member earns $.60. The syndicate member gets the stock from the manager at $9.10 to resell at $10 to the public for a $.90 underwriter’s concession. The syndicate member gives up $.30 of this to the selling group member as a selling concession, leaving the syndicate member with $.60.
A “reallowance” is a discount given to a:
A. syndicate member
B. selling group member
C. non-member of the underwriting “group”
D. retail customer
The best answer is C.
The reallowance is the discount from the public offering price given to a firm that is not in the syndicate or selling group. It is very small and many underwritings do not include it if the underwriting group is expected to sell out the issue without any problems.
The issuer is responsible for all of the following in a new corporate offering EXCEPT:
A. printing of the prospectus
B. printing of the certificates
C. registration of the Securities and Exchange Commission
D. selling the securities to the investment community
The best answer is D.
In a new corporate offering, the issuer is responsible for printing the certificates; printing the prospectus; and registering the issue with SEC and each state in which the issue will be sold. The underwriter is responsible for all selling expenses incurred in completing the offering.
In a corporate new issue offering, the underwriter’s responsibilities include which of the following?
I Managing the syndicate account
II Determining each syndicate member’s participation
III Printing the certificates
IV Registering the certificates
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is A.
The manager runs the syndicate account and determines each member’s participation in the underwriting’s profit or loss. In a new issue offering, the issuer is responsible for originally printing and delivering the shares. These shares go to the transfer agent, who transfers the shares into the names of the purchasers of the new issue. Corporate new issues must be registered with the SEC under the Securities Act of 1933, unless an exemption is available. These securities must also be registered in each state under that state’s “Blue Sky Laws”. Both registrations are the responsibility of the issuer.
During the 20-day cooling off period when a non-exempt new issue is in registration, which of the following is permitted?
A. Sale of the issue to interested parties
B. Distribution of a preliminary prospectus
C. Recommendation of the purchase of the issue
D. Solicitation of orders to buy the issue
The best answer is B.
During the 20-day cooling off period that follows the registration statement filing with the SEC, an offer or sale of the issue is prohibited. Soliciting or accepting an order, confirming a certain amount of the issue, recommending the security, or accepting a check from a customer are all considered to be “sales” and are prohibited (until registration is effective). Sending a preliminary prospectus or accepting an indication of interest does not legally constitute an “offer” under the Securities Act of 1933, and thus is permitted.
Which statements are TRUE about the “red herring” preliminary prospectus?
I It is used to solicit indications of interest
II Its use terminates when the 20-day cooling off period expires
III It contains the final offering price of the issue
IV It is not considered to be an “offer” of the issue
A. I and III only
B. II and IV only
C. I, II, IV
D. I, II, III, IV
The best answer is C.
The red herring is used during the 20-day cooling off period to solicit indications of interest. It is not considered an offer to sell - this can only be done through the final prospectus which is available as of the effective date. The “red herring” does not contain the final offering price. On its cover, there is no price or simply an estimated price. The final price is not set until just prior to the effective date and this price is printed on the final prospectus.
A preliminary prospectus:
I contains the public offering price of the issue
II does not contain the public offering price of the issue
III contains the financial statements of the issuer
IV does not contain the financial statements of the issuer
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
The preliminary prospectus contains the financial statements of the issuer. It does not contain the Public Offering Price - this is not set by the underwriters until just before the offering is made. Thus, it is found only in the Final Prospectus.
Which of the following statements are TRUE about the acceptance of an “indication of interest” for a registered offering during the 20 day cooling off period?
I The indication cannot be canceled by the customer
II The indication cannot be canceled by the brokerage firm
III The indication can be canceled by the customer
IV The indication can be canceled by the brokerage firm
A. I and III
B. I and IV
C. II and III
D. III and IV
The best answer is D.
Indications of interest which are accepted prior to the effective date of an issue in registration are not binding. The customer or the firm can cancel the indication at any time without penalty. During the cooling off period, orders cannot be accepted (these are binding) because the final prospectus is not yet available. Under the Securities Act of 1933, an offer or sale can only be made with the final prospectus. The final prospectus is available and sales commence as of the effective date.
Which of the following statements are TRUE about new stock offerings?
I New issues are sold under a prospectus
II New issues are not sold under a prospectus
III New issues are sold at the Public Offering Price
IV New issues are sold at the Public Offering Price plus a commission or mark-up
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
New stock issues are sold under a prospectus that states the Public Offering Price, which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.
Which of the following information would be found in a new issue “tombstone” announcement?
I The net proceeds to the issuer
II Type of security offered
III Names of the underwriters
IV Aggregate offering price
A. I and IV only
B. II and III only
C. II, III, IV
D. I, II, III, IV
The best answer is C.
A tombstone announcement is published once a new issue’s registration is effective. Under SEC rules, the announcement is very limited in scope, since it cannot be considered to be an “offer or advertisement,” since these can only be made through the prospectus.
The information in the Tombstone is limited to: Name of issuer; names of underwriters; type of security; public offering price of security; aggregate public offering price of issue; nature of the issuer’s business. Any additional information is not allowed.
Therefore, the net proceeds received by the issuer after the underwriter’s discount (spread) is paid, is not found in the Tombstone. Please note, however, that this information is found on the front cover of the prospectus.
The self-supporting spouse of a registered representative has an account with your firm. Your firm is underwriting the initial public offering (IPO) of ACME Co. common stock, and the spouse inquires about whether it is possible to receive an allocation. The registered representative should inform the spouse that the issue:
A. cannot be purchased through the IPO
B. can only be purchased through the IPO if the amount purchased is insubstantial
C. can only be purchased through the IPO with the approval of FINRA
D. can be purchased through the IPO without restriction
The best answer is A.
FINRA prohibits the purchase of equity IPOs (Initial Public Offerings) by industry “insiders.” The list of prohibited purchasers includes FINRA member firms for their own accounts, officers and employees of member firms (and their immediate family members), fiduciaries to member firms (such as accountants and lawyers that are retained by FINRA member firms); and investment managers for investment companies, insurance companies, pension plans, who want to buy personally, etc.
