Issuing Securities

Question 1

Free Writing Prospectus (FWP)

Answer 1

Any form of written communication published or broadcast by an issuer containing information about the securities offered for sale that does not meet the definition of a statutory prospectus. Examples: marketing materials, graphs, term sheets, emails, press releases. The FWP should include a legend recommending that the individual read the statutory prospectus to obtain more information relating the securities being offered.

Question 2

Required Elements of the Final Prospectus

Answer 2

Type and description of the securities, price of the security, use of the proceeds, underwriter’s discount, date of offering, biographical data for company officers and directors, information regarding large stockholders, company financial data, risks to purchaser, legal matters concerning the company, SEC disclaimer.

Question 3

Tombstone Ad

Answer 3

The only form of advertising that is allowed during the cooling-off period. A tombstone ad is an announcement and description of the securities to be offered. Lists the name of the underwriters, where a prospectus may be obtained, and a statement that the tombstone ad does not constitute an offer to sell the securities and that the offer may only be made by a prospectus.

Question 4

Firm Commitment

Answer 4

In a firm commitment underwriting, the underwriter guarantees to purchase all of the securities being offered for sale by the issuer regardless of whether they can sell them to investors. This is the most desirable agreement for the issuer because it guarantees all of the money right away. The more in demand the offering is, the more likely it is that it will be done on a firm commitment basis. In a firm commitment, the underwriter puts its own money at risk if it can’t sell the securities to investors.

Question 5

Market Out Clause

Answer 5

An underwriter offering securities for an issuer on a firm commitment basis is assuming a substantial amount of risk. As a result the underwriter will insist on having a market out clause in the underwriting agreement. A market out clause would free the underwriter from its obligation to purchase all of the securities in the event of a development that impairs the quality of the securities or that adversely affects the issuer.

Question 6

Best Efforts

Answer 6

In a best efforts underwriting, the underwriter will do its best to sell all of the securities that are being offered by the issuer, but in no way is the underwriter obligated to purchase the securities for its own account. The lower the demand for the issue, the greater the likelihood that it will be done on a best efforts basis. Any shares or bonds in a best efforts underwriting that have not been sold will be returned to the issuer.

Question 7

Mini-Maxi

Answer 7

A type of best efforts underwriting that does not become effective until a minimum amount of the securities have been sold. Once the minimum has been met, the underwriter may then sell the securities up to the maximum amount specified under the terms of the offering. All funds collected from investors will be held in escrow until the underwriting is completed. If the minimum amount of securities specified by the offering cannot be reached, the offering will be canceled and the investors’ funds that were collected will be returned to them.

Question 8

All Or None (AON)

Answer 8

With an all-or-none (AON) underwriting, the issuer has determined that it must receive the proceeds from the sale of all of the securities. Investors’ funds are held in escrow until all of the securities are sold. If all of the securities are sold, the proceeds will be released to the issuer. If not all of the securities are sold, the issue is canceled, and the investors’ funds will be returned. Contingent offerings must have a qualified financial institution (QFI) to act as an escrow agent for the offering..

Question 9

Management Fee (Underwriting)

Answer 9

The lead or managing underwriter will receive a fee known as a management fee for every share that is sold. In most cases, the managing underwriter is the firm that negotiated the terms of the offering with the issuer and formed the syndicate.

Question 10

Underwriter’s Fee

Answer 10

The underwriter’s fee is the cost of bringing the issue to market, and is a fee assessed for each share that is sold by the syndicate. If there is any money remaining after all expenses are paid, the syndicate members will split it based upon their commitment level in the underwriting.

Question 11

Selling Concession

Answer 11

Paid to any syndicate member who sells the shares to the investors. The selling concession is the only fee that the selling group members may earn.

Question 12

Underwriting Spread

Answer 12

The total amount of the management fee, the underwriting fee, and the selling concession. This is the difference between the gross proceeds of the offering and the net proceeds to the issuer. Quoted in a per share value.

Question 13

Factors that Affect the Underwriting Spread

Answer 13

The type of securities to be offered, the size of the issue, the quality of the securities to be issued, the perceived demand for the securities, the type of underwriting agreement, the quality of the issuer’s business.

Question 14

FINRA Rule 5130

Answer 14

Replaced the free-riding and withholding rule. Requires that a broker dealer obtain an eligibility statement from all account owners who purchase a new issue of stock within 12 months prior to the purchase. A broker dealer underwriting a new issue must make a complete and bona fide offering of all securities being issued to the public and may not withhold any of the securities for the account of underwriters, the account of another broker dealer, the account of a firm employee or financially-dependent family member, the account of employees of other FINRA members.

Question 15

Underwriter’s Responsibilities

Answer 15

To market the issue to investors, assist in the determination of the terms of the offering, purchase the securities directly from the issuer to resell to investors.

Question 16

Issuer’s Responsibilities

Answer 16

Filing a registration statement with the SEC, registering the securities in the states in which it will be sold - also known as blue-skying the issue, negotiating the underwriter’s compensation and obligations to the issuer.

Question 17

Securities Act of 1933

Answer 17

First major piece of securities industry legislation. Requires nonexempt issuers (typically corporate issuers) to file a registration statement with the SEC which is reviewed for a minimum of 20 days. During this time (the cooling-off period) no sales of securities may take place. The SEC may issue a deficiency letter or a stop order to extend the cooling-off period. The registration statement is formally known as the S1.

Question 18

Securities That are Exempt from Securities Act of 1933

Answer 18

Debt securities with maturities of less than 270 days and sold in denominations of $50,000 or more, employee benefit plans, option contracts on stocks and indexes.

Question 19

Issuers That are Exempt from Securities Act of 1933

Answer 19

U.S. government, state and municipal governments, foreign national governments, Canadian federal and municipal governments, insurance companies, banks and trusts, religious and charitable organizations.

Question 20

Transactions That are Exempt from Securities Act of 1933

Answer 20

Private placements/regulation D offerings, rule 144, regulation S offerings, regulation A offerings, rule 145, rule 147 intrastate offerings.

Question 21

Private Placements/Regulation D Offerings

Answer 21

A sale of securities made to a group of accredited investors and not offered to the general public. All investors must hold the securities for at least six months and sign a letter stating that they are purchasing the securities for investment purposes. Stock purchased in this way is called lettered stock, legend stock, or restricted stock. There is no limit as to how many accredited investors may purchase the securities. Currently, you are allowed to raise an unlimited amount of capital from accredited investors without SEC registration via S1.

Question 22

Private Investment in a Public Equity (PIPE)

Answer 22

Public companies that wish to obtain additional financing without selling securities to the general public may sell securities to a group of accredited investors through a private placement. These are usually institutional investors who wish to invest a large amount of capital. Common stock, convertible or nonconvertible debt, and rights and warrants may all be sold to investors through a PIPE transaction. Benefits include reduced transaction cost, term disclosure only upon completion of the transaction, increased institutional ownership, quick closing. Securities sold through a PIPE transaction are subject to Rule 144. If the issuer files a registration statement after the closing of the offering, sales may begin immediately upon the effective date.

Question 23

Regulation S Offering

Answer 23

Domestic issuers who make a distribution of securities exclusively to offshore investors do not have to file a registration statement for the securities. In order to qualify for the exemption, the issuer may make no offering of the securities within the United States and may not announce or distribute literature relating to the securities within the United States. These securities issued are subject to a distribution compliance period, during which the securities may not be resold to domestic investors. This period is 6 months for equities if the issuer is a reporting company and files 10-Qs, 10-Ks, and 8-Ks, and one year for non reporting companies. The period for debt is 40 days. Sales of the securities may take place in off-shore markets anytime after the initial sale. Issuers must report the sales of securities under Regulation S by filing form 8-K.

Question 24

Regulation A Offering

Answer 24

Allows issuers to raise up to $50 million in any 12-month period. This offering provides issuers with an exemption from the standard registration process which allows smaller companies access to the capital markets without having to go through the expense of filing a full registration statement with the SEC. The issuer will instead file an abbreviated notice of sale or offering circular known as an S 1-A with the SEC and purchasers of the issuer will be given a copy of the offering circular rather than a final prospectus. Purchasers of the issue must have the preliminary or final offering circular mailed to them 48 hours before mailing the confirmation. The same cooling-off period also applies here.

Question 25

Regulation A Tiers Via The JOBS Act

Answer 25

The JOBS Act further refined Regulation A into two tiers, with Regulation A now sometimes being referred to as Regulation A plus. Tier 1 allows issuers to raise up to $20 million. Of this $20 million, no more than $6 million may be offered by selling shareholders. Tier 2 allows issuers to raise up to $50 million, of which no more than $15 million may be offered by selling shareholders.

Question 26

Rule 145

Answer 26

Requires that shareholders approve any merger or reorganization of the company’s ownership. Any merger or acquisition will be reported to the SEC on Form S-4. Stockholders must be given full disclosure of the proposed transaction or reclassification and must be sent proxies to vote on the proposal. This covers mergers involving a stock swap or offer of another company’s securities in exchange for their current stock, reclassification involving the exchange of one class of the company’s securities for another, asset transfers involving the dissolution of the company or the distribution or sale of a major portion of the company’s assets.

Question 27

Rule 147 Intrastate Offering

Answer 27

Rule 147 pertains to offerings of securities that are limited to one state. Because the offering is being made only in one state, it is exempt from SEC registration and is subject to the jurisdiction of the state securities administrator. In order to qualify for an exemption from SEC registration 80% of the issuer’s income must be received in that state, 80% of the offering’s proceeds must be used in that state, 80% of the issuer’s assets must be located in that state, a majority of the issuer’s employees are based in-state. All purchasers must be located within the state and must agree not to resell the securities to an out-of-state resident for 6 months. If the issuer is using an underwriter, the broker dealer must have an office in that state.

Question 28

Rule 147A

Answer 28

Allows companies that are incorporated or organized out of state to use the Rule 147 exemption so long as the company’s principal place of business is in that state. Rule 147A also allows issuers to use the internet and to advertise securities being offered. Offers may be made to residents while out of state.

Question 29

Rule 415 Shelf Registration

Answer 29

Allows an issuer to register securities that may be sold for its own benefit, for the benefit of a subsidiary, or in connection with business plans in an amount that may be reasonably sold by the issuer within a two-year period. The two-year window starts from the registration date and allows the issuer and underwriters flexibility in the timing of the offering. Issuers who qualify as well-known seasoned issuers (WKSI) and who qualify for automatic registration may sell securities for up to three years. Rule 415 also allows the issuer to register to sell securities on a continuous basis in connection with an employee benefit plan or upon the conversion of other securities.

Question 30

Well-Known Seasoned Issuer (WKSI)

Answer 30

A WSKI has a market capitalization of at least $700 million or has issued at least $1 billion in non-convertible securities. Issuers who qualify as well-known seasoned issuers (WKSI) and who qualify for automatic registration may sell securities for up to three years.

Question 31

Issuing Municipal Securities

Answer 31

Prior to issuing any bonds, a municipal issuer must authorize the issuance of the bonds through a bond resolution and obtain a preliminary legal opinion. The bond resolution authorizes the sale of the bonds and describes the issuer’s obligations to the bondholders. The preliminary legal opinion helps to determine how the bonds may be offered.

Question 32

The Official Notice of Sale Does Not Include

Answer 32

The yield to maturity (YTM), the bond’s rating, the name of the underwriter, the amount of accrued interest.

Question 33

The Muni Bond Contract Includes

Answer 33

Bond resolution, trust indenture (if any), applicable state and federal laws, any other documentation regarding the issuer.

Question 34

The Syndicate Agreement Contains

Answer 34

Each members participation in the offering (member’s commitment), method of allocating bonds, name of managing underwriter, management fee and spread, member expenses and amount of good faith deposit, liability for unsold bonds, type of syndicate account (eastern or western).

Question 35

Determining the Reoffering Yield

Answer 35

Determining this is known as writing the scale. Most general obligation muni bonds are issued with a serial maturity that matures over a period of years. The longer-term maturities carry higher yields than the bonds that mature earlier. When the syndicate has determined the prices and yields, it will submit the bid to the issuer, along with the required good faith deposit. All competitive underwritings are done on a firm commitment basis, and the winning syndicate is required to purchase all of the bonds from the issuer, even if it can’t sell them to investors.

Question 36

Muni Bond Underwriter’s Compensation

Answer 36

Management fee, underwriting fee, additional takedown, selling concession.

Question 37

The Total Takedown

Answer 37

What syndicate members can earn on sales of the bonds to their customers. The total takedown consists of the additional takedown and the selling concession.

Question 38

Muni Bond Selling Concession

Answer 38

May be earned on sales of bonds made by dealers who are not syndicate members. Selling group members may purchase bonds directly from a syndicate member and earn the selling concession on sales to their customers.

Question 39

Order Period

Answer 39

The time set by the syndicate manager during which orders will be solicited for the bonds. All order will be filled based upon the order priority agreed to in the syndicate letter and without regard to when the order was received. The order allocation priority is very important, especially when the issue is in high demand and there are more orders than bonds available to fill the orders.

Question 40

Different Types of Muni Bond Orders

Answer 40

Presale orders, syndicate or group net orders, designated orders, member orders, member-related orders.

Question 41

Presale Orders

Answer 41

Entered by institutional investors, who agree to purchase the bonds prior to the bond’s pricing and terms being finalized. Presale orders are given the highest priority when allocating bonds to customers. The total spread, less the management fee, is deposited into the syndicate account and is divided up among the syndicate members based on their participation. If any bonds remain after all presale orders are filled, they will be allocated to the syndicate orders.

Question 42

Syndicate Orders/Group Net Orders

Answer 42

Order where the sales credit for the order is shared by members of the syndicate, based on their participation. A member may designate its orders as syndicate orders to give them a better chance of being filled. The entire sales credit, less the management fee, is deposited into the syndicate account. After all syndicate orders are filled, any remaining bonds will be distributed to designated orders.

Question 43

Designated Orders

Answer 43

Usually submitted by a syndicate member for the account of a large institution. With a designated order, the large institution will designate which syndicate members and which syndicate member agents receive the sales credit. If any bonds remain, the next orders to be filled are the member orders.

Question 44

Member Orders

Answer 44

Orders submitted by syndicate members for their own customers. The syndicate member receives all of the sales credit. Member orders are traditionally smaller orders for individual accounts. If there are any bonds remaining, the last type of order to be filled is member-related orders.

Question 45

Sale Date

Answer 45

Municipal bonds are exempt from the Securities Act of 1933 and are not subject to a cooling-off period. As a result, the bonds may be sold as soon as the issue is awarded. Sales of municipal new issues may begin on the earliest of the following: when the syndicate purchases the bonds from the issuer, specified date of sale, when the syndicate receives the first order.

Question 46

The Final Confirmation Shows

Answer 46

Settlement date, amount of accrued interest (if any), total amount due, all relevant facts relating to the trade.

Question 47

Examples of Fiduciary Capacities (For Muni Bonds)

Answer 47

Financial advisor, transfer agent, paying agent, indenture trustee, clearing agent, correspondent for another dealer, registrar, safekeeping agent.

Question 48

Bond Counsel

Answer 48

During an offering of municipal bonds, the issuer will retain legal counsel to represent it in the transaction. The bond counsel will: confirm that the issuer is legally allowed to issue the bonds, confirm that the debt is a legally binding obligation of the issuer, ensure that the issue has been properly announced, ensure that the bond certificates have been legally printed, issue a legal opinion.