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Laws and Regulations > Issuing Corporate Securities > Flashcards

Issuing Corporate Securities Flashcards

1
Q

The Securities Act of 1933

A

(The Paper Act)

Regulates the first or primary market

Mainly wants to make sure there is full and fair disclosure of all the facts relating to the security to be issued

Issuer gives the SEC a registration statement
then the SEC will approve or deny their request to register their security

The SEC doesn’t guarantee the validity or anything about the security.

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2
Q

The Registration Process for Corporate Securities

A

Step 1: Issuer files a registration statement with the SEC
This is called the S1

Step 2: Cooling off period 20 days
The registration document is under review for a minimum of 20 days
During this period there’s a couple things that can still be dome while its under review:
-Registered Reps can send out a preliminary prospectus to get an indication of interest in the security Known as a red haring. It has a disclosure that says the security is under review by the SEC and nobody is actually selling it right now. It must be sent in hard copy. And there cant be any business cards or other materials sent with it.
-Issuers can hold a road show. Basically meet with potential investors and show them about the security
-Due Diligence meeting
-SEC will issue a deficiency letter basically asking for more information or clarification in the security (if issued it will extend the cooling off date longer)

Step 3: Effective Date
The date the SEC sets that the security can now be sold on the market

The SEC never approves the Issue <= they will try to screw you up on this test.
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3
Q

Hot Issues

A

One that trades at an immediate premium in the secondary market.
Ie: the IPO was for $25/share and immediately once it hits the secondary market it starts to trade at $40/share.

There are rules for hot Issues:
- The broker dealer may not withhold securities for their own account or the accounts of their employees or those how are financially dependent upon their employees

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4
Q

Directed Stock

A

The issuer says They want X amount of stock allocated to these specific people (usually employees)

This is allowed

If the issue is on high demand then there can be a green shoe provision which allows the issuer to sell additional shares so that they can sell a lot at the IPO and still have directed stock

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5
Q

Carve Out Procedure

A

Issues come about when you have restricted and non restricted people both owning a portion of a fund (not a stock but a fund ie: hedge fund)

No more than 10% of the benefit of an IPO can be allocated to restricted people who participate in that fund

If the fund purchases new funds they have to cut away some of the ownership of restricted peoples in specific stocks they are restricted so that only 10% of those stock ownerships go to the restricted persons.

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6
Q

Prospectus

A
  • Preliminary
    Is a prospecting tool, that’s it. Nothing on it is finalized and can be changed.
    Items that are not in the Preliminary prospectus:
    - The offering price
    - The proceeds to the issuer
    - The underwriters discount
  • Final Prospectus (statutory prospectus)
    Should be given to all purchasers at or before the time of transaction.
    Its can be delivered electronically
    If the prospectus can be viewed on the SEC’s website, then that prospectus is considered delivered (access = delivery)
  • Free Writing Prospectus
    Any communication about the issuer while the securities are in registration that do not meet the definition of a statutory prospectus
    Ie: graphs emails term sheets a recorded interview of the president on the company talking about the company
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7
Q

After Market Prospectus Delivery Requirements

A

Purchaser must get prospectus for: (after initial IPO date anyone who buys the security for ___ amount of days must get a prospectus)

IPO Listed Securities (listed on NASDAQ or NYSE)
= 25 days

IPO OTC BB / Pink OTC
= 90 days

Additional Issue (its not their first public offering) Listed	 
= No requirement
Additional Issue (its not their first public offering) OTC BB / PINK OTC 
= 40 days
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8
Q

Underwriting Syndicate

A

A group of underwriters for the company going public

They have a legal and financial responsibility to the issuer to market the stock as effectively as they can

The syndicate may create a selling group that is in charge of selling and marketing the security to investors. These people don’t have legal and financial responsibility to the issuer. They earn part of the selling amount.

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9
Q

Different types of underwriting agreements

A
  • Firm Commitment (usually for securities in high demand)
  • Best Effort (usually for securities not in high demand)
  • Contingent Underwritings
  • Standby Underwriting
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10
Q

Firm Commitment

A

(usually for securities in high demand)

Best deal for the issuer it guarantees them all their money right away

The underwriters purchase all the shares of the company immediately then sell it themselves.

Usually have a Market Out Clause

Basically says the underwriters have the ability to cancel the underwriting if a material event takes place that impairs the ability of the underwriters to sell the securities.

Something changed that hurt that security

You cannot invoke a market out clause if the stock market crashes instead it would be for stuff like a product the company sells turns out to be a flop or all the buildings burnt down.

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11
Q

Best Effort

A

(usually for securities not in high demand)

Underwriters don’t put their own capital at risk. Un sold shares are cancelled or returned to issuer

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12
Q

Contingent Underwritings

A

All or none - need to sell all the issued stock or none of them. Investors buying stock will have their purchasing money held in escrow and either returned to them if failed or sent to issuer in exchange for securities

Mini - Maxi - need to sell a minimum amount of stock and a max of this amount or nothing at all. Investors buying stock will have their purchasing money held in escrow and either returned to them if failed or sent to issuer in exchange for securities. If the minimum is reached the purchases happen.

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13
Q

Standby Underwriting

A

A standby underwriter will standby ready to purchase the remaining shares not purchased by initial shareholders

This is a firm commitment to underwriting for non-IPO’s

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14
Q

Different Types of Offerings

A
  • IPO’s - the first time issuers have offered stock
  • Subsequent Primary - Issuer is raising new capital its not their first time in the market proceeds go to the issuer or the company
  • Secondary - Selling stock and shareholders receive proceeds
  • Combined or split offering - Combination of a secondary and Subsequent Primary Offerings
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15
Q

Stabilization

A

The only form of market manipulation allowed by the SEC

The underwriter of an offering may enter into a stabilizing bid to help the stock not drop in price hard core at the beginning.

Syndicates may only enter 1 Stabilizing Bid

Only allowed for Fixed Price / Firm Commitment Offerings

Bid can only be at or below offering price

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16
Q

Exempt Securities and Issuers from registration process:

A

Short Term Debt Securities

US Government

State and Municipal Governments

Foreign national Governments

Canadian federal and municipal governments

Insurance Companies

Banks, Trusts Credit unions, savings and loans

Religious and charitable organizations

17
Q

Private Placement or Regulation D

A

A sale of securities to accredited investors (an individual who makes 200k or more per year or a couple who makes 300k per year or more or they have 1 million net worth or more without the house)

You can sale these securities without the SEC registration process for that offering

For someone to be an accredited investor they must answer a questioner by the SEC. It can be online as long as it is password protected

No commissions can be paid to registered reps on these types of sales

The investor must hold those securities for 6 months before selling them again.

Types of private placements:
504 D = $5 million can be raised
506 D = unlimited amount can be raised

18
Q

Rule 144

A

Sets the sale requirements for stock that is obtained through a private placement

Says that you must hold the stock for 6 months and that you can sell that stock freely if you are not the issuer or affiliated with the issuer for 90 days

Says for restricted or controlled stock persons are subject to volume limits:
- The max amount a restricted or controlled person may sell is the greater of
- 1% of the outstanding stock
OR
- Average weekly trading volume during most recent 4 weeks

Form 144 must be filed at the time the order is placed. Then they have 90 days to sell that volume limitation of stock. They can do this every 90 days (or 4 times per year)

19
Q

Requirements for rule 144

A
  • Stock that is sold under Rule 144 becomes part of the public float (It can be bought and sold between investors in the secondary market)
  • Broker Dealers may not buy the stock for their own account or solicit buy orders to help out the restricted/ controlled individual BUT they can call back retail investors who expressed unsolicited interest in that stock within the last 10 days. They can also call back broker-dealers who expressed interest in that stock in the last 60 days
20
Q

Pipe Transaction (Private Transaction In a Public Entity)

A

A company may go to a small group of large investors (or just one large investor) to sell some additional stock instead of doing an IPO or subsequent offering.

Companies would want to do these because:

- They are less expensive
- Less legal work (there's no underwriters)
- It is anonymous (it isn't announced until it is completed)

Usually if a company announces a subsequent offering it drops in price in the market place because of the greater supply

The announcement is done after it has happened and is called an 8K

Securities acquired through a pipe transaction are also subject to a 6 month holding period unless the issuer files a registration statement after the transaction is completed.

21
Q

Rule 144A

A

Allows for the resale of restricted stock without regard to the 6 month as long as the buyer of said stock is a QIB (Qualified Institutional Buyer)

A QIB is a person or entity that has at least $100 million in assets/ Investments
OR
Is a broker-dealer with at least $10 million in assets

If a person is a QIB the restricted individual can sell the stock to them immediately

How to determine if the buyer is a QIB:

- They can use any information filed with the SEC or regulators like 10K 10Q NYSE FINRA Signed affidavit by the CEO.
- It may NOT use the information found on a new account card
22
Q

Rule 145

A

Deals with things like mergers and acquisitions and stock swaps

If a company is going to reclassify its securities (ie: changing from preferred to common). Or if a stock has a spin-off or split-off then Rule 145 deals with it as well.

If a company has little companies underneath it the subsidiary’s value is reflected in the holdings of the parent company. If that subsidiary wanted to spin/split off into its own independent entity it can do that.

It would issue existing shareholders new shares in the now independent company.

23
Q

Rule 147

A

Intrastate Offerings (security is only offered in one state)

When you do this you would file a registration statement with that state securities administrator and register your securities through a process called qualification

Buyer of these types of securities must sign a letter saying that they will not sell those shares to out of state residents for at least 6 months.

To qualify to issue one of these the company must be headquartered in that state. If using an underwriter they underwriter must be registered in that state.

They must also meet one of the 80% doing business rules:

-80% of their income must be derived in that state
OR
-80% of proceeds must be used within that state
OR
-80% of their assets must be housed within that state

24
Q

Rule 147A

A

Intrastate Offerings:

Allows for sales to residents of more than one state

25
Q

Regulation S

A

Means a company is selling its securities outside of the United States and outside the jurisdiction of the SEC

These sales are exempt from registration

If securities are sold to offshore entities they may not be resold back into the US for
- 40 days if a debt security
OR
- 6 months for equity Securities

Would be disclosed through an 8K

Overseas investors can sell securities to another outside US investor whenever they want

26
Q

FREE CARD

A

FREE CARD

27
Q

Crowdfunding

A

A way for small companies to raise cash

Done through crowdfunding portals (websites)

These portals must be registered through the SEC and must be members of FINRA

Portals required to offer crowdfunding material for investors to educate purchasers about crowdfunding and that material must specifically define the unique risks involved in investing in these very small companies.

Issuers who sell securities by using crowdfunding portals file Form C with the SEC

Securities purchased through crowd funding are subject to 12 month Lock up (they may not be resold in that time). 
	Exceptions:
		-owner of security dies
		-owner gets a divorce
		-sold to a relative

Limits on crowdfunding:

  • People who have income or net worth less than 100k/yr can only invest the greater of $2000 or 5% of their income or net worth.
  • People who have income or net worth greater than 100k/yr can only invest the lesser of 10% of income or net worth to a maximum of $100k
28
Q

Issuing Research Reports During Distribution

A

Usually Company Sells additional shares and a Broker Dealer is publishing research reports on that company.

Rule 137 - Broker dealer is a non-participant
(they aren’t apart of the syndicate or affiliated with the issuing company at all they have no vested interest in the marketing of these shares)
= they can publish whatever they want

Rule 138 - Broker-Dealer is a member of syndicate but are writing about a different security than the one they are involved in with the syndicate (and the security being written about couldn’t be converted into that stock they are syndicating with)
= they can publish whatever they want.

Rule 139 - Broker-Dealer is publishing research on the syndicate’s security the B/D is involved in
= they can continue to publish with certain limits:
- The rating of the security must not be higher than the recommendation that was previously in the prior research reports.
- If security is part of multiple companies in the same industry the company may still be in that report as long as the font and type is not special for that security you can highlight it or bold it or underline it

29
Q

Blackout for Issuing Research

A

IPO’s - the following are restricted from releasing research about the company for 10 days after the first day of the public offering

- Managers
- Chief Officers
- Syndicate Members

Additional Offerings - managers and co-managers must wait 3 days but syndicate members have no quiet period

30
Q

Rule 415

A

Shelf Registration

Allows issuers to register securities for sale and allows them to determine the timing of that sale. They register the securities then can sell them at any time in a 2 year period

Well Known Seasoned Issuers (WKSI) - it allows them 3 years to sell the security
To be a WKSI you must
- Have a market capitalization of at least $700 million or $1 billion in nonconvertible debt

If the issuers market Capitalization drops below the limit during the registration process (they loose their WKSI qualification) they may continue to sell those securities until the filing of their next annual report (10k)

31
Q

Additional Communication Rules

A

Reporting Issues (THOSE THAT FILE 10K AND 10Q 8K with the SEC) may issue business communication

Including forward-looking statement - used to indicate to the reader that the following statement is not a statement of fact. Ie: we believe it will grow 5 million this year

Non reporting Issuers may only use statements of fact

Gun jumping rules
Ensures that people don’t go out and try to publish this or that to manipulate the market in their favor before issuing a security

32
Q

Road Shows

A

Analysts may not attend roadshows unless the issuer is an emerging growth company (they have less than $1 billion in revenue)

Electronic Road Shows - if they are recorded and to be distributed to interested parties later down the road then at least one copy must be files with the SEC

33
Q

DPP (direct participation program) Roll-Up Transaction

A

If several DPP programs want to combine to create one large DPP:

  • If a broker-dealer is used to help facilitate this roll up:
    The max roll up fee for B/D is 2% and is paid whether the roll-up was successful or not
  • If any research has been published speaking negatively about the roll-up. The broker-dealer has to disclose this information to potential voters otherwise it is considered fraud by the Broker-Dealer
34
Q

Alternative Public Offering (also known as a reverse merger)

A

A private company obtains control of a public company. When completed the private company becomes a public company and is reported to the SEC via 8k form

35
Q

Restricted Persons

A
  • Restricted Person is one who may not purchase an IPO or Hot Issue.

Basically anyone who has a series 7 license or anyone who is financially dependent upon someone who has a series 7

36
Q

Contingently approved Persons

A

Someone who may be allowed to purchase a IPO or Hot Issue. Are people how are related to the series 7 person but aren’t financially dependent upon them. IE: a father in law. They should purchase the shares from another Broker dealer not the one where their family member is employed

37
Q

Restricted Stock

A

stock that has been obtained through a private placement (acquired through non public means)

38
Q

Controlled Stock

A
  • stock that is owned by an individual who is in a position to control the issuer (ie: Mark Zuckerberg controls Facebook if he also owns Facebook stock then that stock is controlled stock)

Mark Zuckerberg could go into the marketplace and purchase Facebook stock. Then it wouldn’t be restricted but it would be controlled

Laws and Regulations (5 decks)

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