Corporate Underwritings Flashcards
The primary purpose of an investment bank is to:
A. execute securities transactions for clients in the secondary market
B. assist corporations in the raising of capital through the issuance of securities
C. provide clients with checking accounts at higher rates than those offered by savings institutions
D. help broker-dealers increase their capital by obtaining loans from institutional investors
The best answer is B.
The purpose of an investment bank is to underwrite securities offerings for companies that wish to raise capital in the public market and also through private placements.
In a registered secondary distribution, which statement is FALSE?
A. The offering is made at the POP
B. The purchaser must receive a prospectus
C. The proceeds from the sale go to the issuer
D. The issue cannot be purchased on margin
The best answer is C.
Underwritten offerings can be primary or secondary offerings (or both at the same time!).
Assume that a privately held company wants to go public. The company wants to raise $300,000,000. To do this, the company will be issuing $150,000,000 of new shares (this is the primary portion of the distribution, where the proceeds of the sale go to the issuer) and another $150,000,000 consists of shares being sold by officers and directors of the company (who now want to cash out some or all of their investment in the company). The proceeds from the secondary portion go to the selling shareholders.
This is a combined primary and secondary offering. All shares are sold with a prospectus at the POP and full payment is required (which is the case for any prospectus offering).
When selecting syndicate members for a new corporate bond offering, the managing underwriter will consider all of the following attributes when choosing a potential member EXCEPT:
A. financial capability to handle its portion of the offering
B. track record in past underwritings
C. back-office capability
D. geographic location
The best answer is C.
When selecting underwriters in a corporate offering, the manager will consider the track record of that firm in previous underwritings; whether the firm has sufficient capital to handle its portion of the offering; whether the firm has participated in underwritings with that manager in the past; and the geographic location of the syndicate members, so that the broadest customer base can be reached.
The back-office capability (order processing, generation of confirmations and statements, delivery of securities, etc.) of the syndicate member is not a consideration since only the managing underwriter handles this aspect of the underwriting.
An underwriting commitment where the underwriter is liable for any unsold securities is a(n):
A. Best Efforts underwriting
B. Firm Commitment underwriting
C. Agency relationship
D. Best Efforts-Mini Max underwriting
The best answer is B.
In a firm commitment underwriting, the underwriter buys the issue outright from the issuer, with the intention of reselling the issue to the public at a profit. Thus, the underwriter is a principal in the transaction, and is taking full financial liability. Best efforts under writings often come with contingencies but these are agency transactions.
An underwriting agreement where the syndicate members are not liable for any unsold securities is a(n):
A. firm commitment underwriting
B. unmanaged underwriting
C. stand-by underwriting
D. all or none underwriting
The best answer is D.
In a firm commitment underwriting, the underwriter buys the issue outright from the issuer, with the intention of reselling the issue to the public at a profit. Thus, the underwriter is a principal in the transaction, and is taking full financial liability.
In a best efforts underwriting, the underwriter acts as agent, promising to use his best efforts to sell the issue, but takes no financial liability. In a best efforts - all or none underwriting, the underwriter acts as agent, using his best efforts to sell the issue, but takes no financial liability. However, if the entire amount is not sold, then the offering is canceled.
In a stand-by underwriting, the underwriter agrees to purchase any unsubscribed shares in a new issue rights offering on a firm commitment basis.
All underwritings that use broker-dealers to distribute the securities are “managed” offerings - they are managed by the syndicate manager.
Stand-by underwritings are a type of:
A. firm commitment underwriting used in initial public offerings
B. best efforts underwriting used in initial public offerings
C. firm commitment underwriting used in rights offerings
D. best efforts underwriting used in rights offerings
The best answer is C.
Stand-by underwritings are used in connection with rights offerings. If all of the new shares are not subscribed by the existing shareholders, the issuer has an underwriter stand-by on a firm commitment basis to purchase any unsubscribed shares. Thus, the issuer is assured of selling all of the new shares.
Stand-by underwritings are a(n):
A. firm commitment underwriting
B. best efforts underwriting
C. all or none underwriting
D. agency underwriting
The best answer is A.
Stand-by underwritings are used in connection with rights offerings. If all of the new shares are not subscribed by the existing shareholders, the issuer has an underwriter stand-by on a firm commitment basis to purchase any unsubscribed shares. Thus, the issuer is assured of selling all of the new shares.
Best efforts and all or none are types of underwritings where the underwriter is not liable for any unsold shares - the underwriter is acting as agent for the issuer helping in the sale of the offering.
In which of the following types of underwriting commitments are the underwriters acting as agents?
A. Firm
B. Best Efforts
C. Bought deal
D. Stand-By
The best answer is B.
The types of underwriting commitments are: Firm commitment (underwriter acts as principal), Best Efforts, Best Efforts-All or None (underwriter acts as agent in both), and Stand-By (underwriter acts as principal to buy unsubscribed shares in a rights offering from the issuer).A “bought deal” is a slang term for a type of firm commitment offering.
Which of the following activities is permitted during the “cooling off” period?
A. Accepting an indication of interest from the customer for part of the issue
B. Accepting an order for part of the issue in registration
C. Confirming a certain amount of the issue to a customer
D. Accepting a check from a customer for the part of the issue
The best answer is A.
During the cooling off period, an offer or sale of the issue is prohibited. Accepting an order, confirming a certain amount of the issue, 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 statement is TRUE about the preliminary prospectus used during the period when a new issue is “in registration?”
A. Before contacting a customer by telephone about the offering, that customer must receive a copy of the preliminary prospectus
B. The preliminary prospectus, accompanied by a research report, should be sent to all to the firm’s clients
C. Customers that would be prospective buyers of the offering may be sent the preliminary prospectus
D. The preliminary prospectus cannot be sent during the period when the issue is “in registration”
The best answer is C.
During the 20-day “cooling-off” period when a new issue is in registration, a new issue cannot be sold, offered, recommended, or advertised.
However, it is permitted to send preliminary prospectuses to any interested investors (legally, these are not an advertisement).
The sending of a research report is prohibited - this would be advertising.
There is no requirement to contact the prospective customer by phone before sending a preliminary prospectus. By sending out preliminary prospectuses, the underwriters can gauge investor interest in the issue, and can determine the final size and Public Offering Price for the deal.
What can be given to a client during the 20-day cooling off period for a new securities offering?
A. Prospectus
B. Advertisement
C. Recommendation
D. Red Herring
The best answer is D.
When a new issue is “in registration” during the 20-day cooling off period, the SEC reviews the filing for full and fair disclosure. This is the “quiet period” during which the issue cannot be advertised, recommended or sold.
The only permitted communication is a preliminary prospectus, also called a red herring (because it has a red disclaimer stating that it is not an advertisement). The red herring does not include the final POP, but it can have an estimated price range. The final POP is not set until the very end of the 20-day cooling off period.
A preliminary prospectus:
A. contains a link to the latest research report on the issuer
B. contains the public offering price of the issue
C. contains the financial statements of the issuer
D. contains sales projections of competitors
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. Offering documents do not typically contain forward looking projections on competitors or links to research reports.
Which statement is TRUE about the acceptance of an “indication of interest” for a registered offering during the 20 day cooling off period?
A. The indication is binding on institutional clients
B. The indication is binding on the broker dealer
C. The indication cannot be canceled by the customer
D. The indication can be unilaterally canceled by the brokerage firm
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.
What is permitted during the 20-day cooling off period for an Initial Public Offering?
A. Sale of the issue
B. Road show
C. Acceptance of an order to buy the issue
D. Recommendation of the purchase of the issue
The best answer is B.
During the quiet period for an IPO, the issuer very often runs a “road show” in major cities to invite interested institutional investors to learn about the company, its officers and business, and the securities being offered. The officers of the company who make presentations must make sure that the keep the road show informational and not promotional – because the issue cannot be “promoted” during the quiet period.
Remember, the during the 20-day cooling off period, the issue cannot be sold, advertised or promoted, and sale of the issue is prohibited.
What can an officer of a company say in a speech given at a road show during the 20-day cooling off period for an Initial Public Offering?
A. “Our issue is selling out fast, so you should place your orders now”
B. “Our company has grown its earnings by an average of 20% yearly over the past 5 years”
C. “Our planned new product introductions are expected to increase earnings by at least 20% a year over the next 5 years’
D. “Our underwriters have advised us that they intend to make the offering price very attractive, so investors can have a nice profit when the issue goes public”
The best answer is B.
During the quiet period for an IPO, the issuer very often runs a “road show” in major cities to invite interested institutional investors to learn about the company, its officers and business, and the securities being offered. The officers of the company who make presentations must make sure that the keep the road show informational and not promotional – because the issue cannot be “promoted” during the quiet period.
Choice A is inducing the placement of a purchase order and is prohibited. Choice B is a statement of fact, so it is permitted. Choice C is speculation, and is prohibited. Choice D is promising a profit - again, prohibited.
