Issuing - Primary Markets 8% Flashcards
Who can offer a Free Writing Prospectus?
Well established company distributing shares through:
Add-on offering
subsequent primary offering
May contain information that is not in the registration statement.
Such companies are called: WKSI - well known seasoned issuers.
When is a final prospectus due?
25 days from effective date for securities that qualify for listing on the exchange
OTC securities not listed on Nasdaq;
- 90 days from effective date if corporation has not previously
issued
stock to the public.
- 40 days if stock has been previously issued.
WKSI
Well Known Seasoned issuer:
- has not missed a debt or dividend payment in the last three years. - has $700m outstanding cap trading in secondary market
Regulation M
Addresses:
Capital Markets
M&A
and investment banking
Requires a chinese wall between investment banker and underwriter
Places market restrictions on market participants associated with public offerings including:
APO’s, IPO’s and subsequent primary offerings
What % ownership makes an insider?
10% or more
Restricted Period (prior to effective date)
The time during which the offering participants may not influence the price of the underwritten security.
Tier 1 - no restriction period (ADTV - average daily trading volume exceeds $1 million and public float is $150 million or more)
Tier 2 - one day prior to effective date (ADTV - $100k up to tier 1 and public float of at least $25 million)
Tier 3 - 5 days prior to effective date (do not qualify for tier 1 or 2)
Under regulation m
Passive Market Making
an underwriter on an APO who is also a market maker during the offering period
May only change its inventory net purchase position by more that 30% of its average trading volume.
(net purchase position equals shares purchased - shares sold)
(positive number is a net purchase
( negative number is a net sale
Short Position
An investor borrows securities and sells those securities
Stabilization
A process during the primary offering that allows the syndicate to buy back shares if the price in the Secondary market falls below those in the Primary Market when there are still shares to be sold in the primary market. It must be disclosed in the prospectus
Penalty Bid
associated with the stabilization process. A penalty charged to the syndicate, or selling group, when it buys back shares from those who purchased at POP. the group loses its concessions. Must be disclosed in prospectus
Analysts and research reports
May not participate in roadshows
Restricted from publishing research during the offering period
exceptions:
if analyst follows issuer in conjunction with other companies of the same sector, may publish as long as security isn’t highlighted or its position changed.
if research is on the issuer’s bonds, it is allowed because it is a non-equivalent security.
however, if the bonds are convertible, restriction would apply
analyst cannot talk to the security department without legal or compliance personnel present.
Exempt Securities
Government
Municipal securities
nonprofit (church bonds)
commercial paper (maturity of no more than 270 days, usually used to finance inventory)
issues of banks and trust companies (not bank holding companies)
Issues of small business investment companies(SBIC does SBA Loans)
Exempt Offerings
allows issuer to offer nonexempt, yet unregistered securities
Intrastate Offerings Regulation A offerings Regulation D Private Placements
Intrastate Offerings
Under Rule 147 of 33 Act, securities are exempt if all the following conditions are met:
80% of the:
-corporation’s gross revenues are derived from operations,
-assets,
-offerings proceeds are used to expand operations
*within one state
100% of the purchasers are principal residents of that state
Purchasers of the stock hold if for 9 months before it can be sold
out of state
Regulation A Offerings
Small issue or Small Dollar Exemption from registration
New issue of less that $5 million during a 12 month period
File an offering statement (called A1) with SEC and distribute an
offering statement to prospective buyers
must be given 48 hours prior or at time of purchase with a 5-day
right of recision
Sales Must be reported to SEC every 6 months
Regulation D Private Placements
referred to as letter stock or restricted stock
Conditions to be met:
Sophisticated Buyer
Offering Memorandum - equivalent to a prospectus
must receive assurance - a letter from the buyer that the buyer
does not intend to make a quick sale of the offering
The securities canot be sold to more than 35 nonaccredited
investors.
can be sold to an unlimited number of accredited investors
Purchaser Representative - who the unaccredited investor must use
to purchase offering
Cannot be advertised through media to general public
Rule 144
- Allows Public resale of restricted and control securities under certain conditions
- Addresses resale in the secondary market of previously unreg shares
- shares sold by insider or control persons at an issuing corporation
Rule 144 - Holding Period
The time restricted securities must be held before sold in the marketplace
Subject to SEC reporting requirements - 6 months - if not - 1 year
Control persons must hold for 90 days
Rule 144 - Trading Volume Formula
volume limit is either 1% of outstanding shares or trading volume for the last 4 weeks (the question usually gives 5 weeks volume) whichever is greater
Rule 144 - Notice of Proposed Sale with the SEC
if the sale involves more than 5,000 shares or if the aggregate dollar amount is great than $50,000 in any 3 month period, must file no later than date of sale.
if not sold within 3 months of filing, must file amended notice
Rule 144a Portal System
Allows a qualified institutional buyer to purchase unregistered securities outside of the US and import them if they buy form broker/dealers.
Qualified Institutional Buyer (QIB) has at least $100 million in assets under discretionary management
Regulation S
address off shore sales of restricted stock
requires a 1 year holding period
Secondary Offerings or Rule 144 trades
Security sale poceeds go to a party other than issuer
- a corporate office sells unregistered shares to the public
- a registration statement is filed
- can be combined with an APO
- an employees stock options that are used to purchase unreg shares
Tender Offer
- takeover through a formal offer to existing shareholders at a price above the market
- must remain open for 20 days once made
- if tender offer increases during this period it must pay the
difference to any who sold before the period and tender must
remain open 10 more days
- if tender offer increases during this period it must pay the
Net Long
- investor has the ability to deliver shares
- options and warrants must be exercised to be net long
Rule 145
- mergers and acquisitions
- substituting one stock for another
- transferring assets from one person to another
- exempts these from filing reg stmnt:
- Stock splits
- Changes in par value
- Stock dividends
APO
- Files an S3 and granted 3 year shelf offering
- For WKSI and SI
SI
Seasoned Issuer
- has $75m of outstanding cap and has not missed an interest or
dividend in the last 3 years
Unseasoned Issuer
- less than SI
- must file S1 for APO
- granted shelf offering of 2 years
Shelf Offerings
- Creates a window in time in which issuer may offer add’l shares to the public.
- The window may be 2-3 years depending on size
- Benefit is issuer does not have to file with SEC during this period
- priced “at the market”
FINRA Rule 5121
- Addresses conflicts of interest
- Broker dealer offering its own shares would have difficulty pricing
its own shares
- Broker dealer offering its own shares would have difficulty pricing
- Broker dealer is required to hire an independent underwriter
- must be qualified by having at least 3 offerings of at least 50% of
this size in the last 3 years
- must be qualified by having at least 3 offerings of at least 50% of
- Also applies to B/D having controlling relationship
FINRA - Committee on corporate finances - (lockup period definition)
- judges fairness of the underwriting spread
- underwriter must file docs with committee prior to effective date
- anything issuer has given underwriters in last 6 months should be
on report
- anything issuer has given underwriters in last 6 months should be
- unfair compensation
- warrants or options for a period exceeding 5 years
- lockup period
- priced below POP
- Shares may not be freely transferrable for 180 days
Reallowance
- Portion of the selling concession
Underwriting Spread
- Difference between POP and what underwriter receives
- Consists of;
- “manager’s fee”
- smallest
- reimburse underwriter for due diligence and acting as liaison
issuer and u/w
- syndicate fee
- divided based on liability participation
- selling concession
- largest
- paid to firm that actually sells the share to the public
- “manager’s fee”
Selling Group
- B/D that the syndicate allows to sell the shares
- ## no risk
Best Efforts
- Issuer must keep unsold shares
- Two Types
- All or None
- money held in escrow until all shares are sold, if not all sold,
money goes back to investor
- money held in escrow until all shares are sold, if not all sold,
- mini max
- specified minimum amount of the deal must sell or it is
cancelled
- specified minimum amount of the deal must sell or it is
- All or None
Standby Underwriting
- A special type of firm commitment underwriting
- associated with a stock rights offering
- assures all shares will be sold, if unsold shares are left, the standby purchases the remaining shares
Firm Commitment Underwriting
- Syndicate buys the shares from the issuer
- If syndicate is unsuccessful in selling the shares then the unsold shares are divided among each member based on its liability participation (based on % of participation)
Syndicate Letter
Agreement among underwriters
Syndicate
Team of B/D who sell the securities to the public
Underwriter
- A broker/dealer that helps the issuer sell securities to the public
- Known as an investment banker
- underwriting agreement - contract between the issuer and managing underwriter
Quiet Period
- Research may not be published by offering company
- IPO Quiet Period is 40 days after effective date
- APO “””””””””””””"”10 “”””””””””””””””””””””””
- essentially if you take your company public you can’t talk about its shares during this time
Primary
- Proceeds go directly to issuer
- IPO
- APO
Effective Date
- Cooling off period ends when SEC releases the securities for sale to the public
- final prospectus shows official price and effective date
- RR can not alter or write on prospectus
- however - investors can
Due Diligence - Cooling Period
- Held prior to the end of cooling off period
- Determine if due diligence has been exercised in all areas
Tombstone ad
- Shares important facts concerning the offering:
- probable price range
- description of the issue
- members of the syndicate (team of brokers that underwrite the
offering)
- Directs investors where to get a red herring/prospectus
S3
- abbreviated filing for Add on Offering APO - for those that qualify
S1
- registration statement filed to SEC
- provide
- Description of issuers business
- Shareholdings of issuer stock by
- officer, directors, and u/w
- identification of all control persons
- Biographical data on officers and directors
- Company’s capitalization, supported with certified financial
statements - Proposed usage of issuer’s proceeds
Securities act of 1933
- Provides purchasers of new securites w info regarding issuers
- Created SEC
- responsible for the enforcement of the act
- the paper act
- filing of registration statement
- sending of prospectus to investor
- addresses primary market
Who are the offering participants
- Issuing Corporation
and - Assisting underwriters
Blue Skied
- Registered under state securities laws
- three methods
- notification - file notice with state
- coordination - in coordination with issuers sec registration
- qualification - submit full registration to state and is qualified by
state
Red Herring
- preliminary prospectus for potential investors
- red border around cover page
- does not contain an offering price, may contain a range
- no effective date or public available date
- given out to generate indication of interest (IOI)
Cooling off Period
- begins when issuer files registration statement with the SEC
- offers nor sales may be made during this period
- lasts at least 20 days
- if deficiencies found, frozen till information received
Filing Date
- Day when SEC receives reg stmnt
- starts cooling off period
FINRA Rule 5130
- States B/D and reg persons are prohibited from buying the IPO from the syndicate
- also prohibited:
- fiduciaries for the managing underwriter
- accountants and attorneys
- immediate family members of B/D
- fiduciaries for the managing underwriter
- If a restricted person owns a portion of an (not more than 10%) established portfolio, that portfolio may buy
- Carve out provision - if more than 10%, portfolio may still buy by carving out 10% of shares purchased through IPO
- other exception of register persons:
- qualified to sell:
- investment companies
- variable products
- direct participation programs
- qualified to sell:
- IPO Purchasers must sign a positive affirmation that they are not restricted persons
- must reaffirm every 12 months
- negative consent letter can be sent
- states “if nothing has change, no response necessary”
- negative consent letter can be sent
- other exceptions to restricted
- B/D issuing its own shares or controlling relationship
Accredited Investor
financial institution (bank, trust, pension plan), a private business
development company, director of officer of the issuer, or an
individual with a net worth of $1 million or annual income of at
least $200,000 for the past 2 years; married joint of $300,000
Rule 147
Offering all the security in one state is an exempt transaction
Indications of Interest
Can be canceled by either party, is not binding
Registered secondary offering
Proceeds go to someone other than issuer
SEC’s main concern regarding information received from an issuer
Full and fair disclosure of all material facts to potential investors
