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SIE Exam Prep 2 -- SANDBOX > Issuing Securities > Flashcards

Issuing Securities Flashcards

This deck focuses on the securities issuance process, including SEC registration, exemptions from registration, and the role of underwriters in bringing new issues to market.

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SIE Exam flashcards
1
Q

The identification number of a bond

A

CUSIP number

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2
Q

Municipal issue disclosure document for prospective buyers

A

Official statement

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3
Q

When each prospective purchaser must receive a final official statement

A

At or before the settlement date

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4
Q

Published notice that solicits bidding for an upcoming municipal bond issue

A

Official Notice of Sale

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5
Q

Group of investment bankers that collectively share the risk of a competitive bid

A

Syndicate

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6
Q

Document that formalizes the relationship between the syndicate members in a negotiated underwriting

A

Agreement among the underwriters

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7
Q

The two components of the total takedown

A

Selling concession and additional takedown

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8
Q

The portion of the total takedown that compensates selling group members

A

Selling concession

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9
Q

The portion of the municipal bond spread paid to the syndicate manager

A

Manager’s fee

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10
Q

Firms that assist the syndicate in distributing new securities without financial risk

A

Selling group

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11
Q

Typical syndicate allocation priority for municipal securities

A

Presale, group, designated, member order

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12
Q

Requires registration of new issues; regulates primary market activity

A

Securities Act of 1933

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13
Q

Exempts U.S. government securities from registration requirements

A

Securities Act of 1933

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14
Q

Requires the delivery of prospectuses for full and fair disclosure

A

Securities Act of 1933

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15
Q

Prohibits fraudulent activity in underwriting and distributing new securities

A

Securities Act of 1933

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16
Q

Minimum length of the cooling off period during the registration process

A

20 days

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17
Q

Disclosure document used to gather indications of interest during the cooling off period

A

Preliminary prospectus (red herring)

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18
Q

The day that the SEC releases a new issue for sale

A

Effective date

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19
Q

Holding period required before restricted securities can be sold

A

6 months

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20
Q

Addresses reclassifications, mergers or consolidations, and transfers of company assets

A

Rule 145

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21
Q

The amount of control securities that can be sold in a 90-day period under Rule 144

A

Greater of 1% of the total outstanding shares, or the average weekly trading volume of the preceding four weeks

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22
Q

Securities owned by directors, officers, or persons who own or control 10% or more of an issuer’s voting stock

A

Control stock

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23
Q

Type of restriction that applies to sellers of control stock under Rule 144

A

Volume limits

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24
Q

Provision of Act of 1933 and 1934 Securities Acts that applies to all securities, including those that are exempt from registration

A

Antifraud

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25
Q

The type of new issue security to which the provisions of Rule 5130 apply

A

Common stock

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26
Q

The percentage of income the issuer must receive in a state to be eligible for a Rule 147 registration

A

80%

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27
Q

A security that is not subject to SEC registration requirements

A

Exempt security

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28
Q

An accredited investor is defined as an individual with net income of

A

$200,000 or more in each of the two most recent years; $300,000 if joint income with a spouse OR $1mm of net worth (excluding primary residence)

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29
Q

A 6 month resale restriction applies to the sale of securities to non-state residents under

A

Rule 147 offerings (Intrastate)

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30
Q

Access equals delivery refers to the

A

electronic delivery of prospectuses

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31
Q

A seller can file Form 144 no more than

A

4 times a year or every 90 days

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32
Q

To sell restricted stock under Rule 144 the seller must have held stock, fully paid, for

A

6 months

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33
Q

A rights offering is typically followed by what kind of underwriting?

A

A standby underwriting, where a broker dealer takes on shares not purchased by existing shareholders.

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34
Q

Persons that are defined as family members under Rule 5130

A

A person’s parents, mother-in-law or father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, and any other individual to whom the person provides material support.

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35
Q

Examples of securities that are exempt from the filing requirements of the Act of 1933

A

U.S. government, municipal bonds, non-profit securities, commercial paper with maturity of no more than 270 days, and commercial bank securities

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36
Q

Also known as a private placement exemption

A

Regulation D

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37
Q

Exemption from registration requirements for securities that are sold only within a state

A

Rule 147 (Intrastate)

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38
Q

The maximum number of accredited investors that can participate in a Reg D offering

A

Unlimited

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39
Q

The maximum number of unaccredited investors that can participate in a Reg D offering in excess of $5 million

A

35

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40
Q

The net worth and income criteria for an accredited investor under Regulation D

A

Net worth of $1,000,000 (exclusive of residence) and annual income of $200,000 or more ($300,000 jointly with spouse) in each of the two most recent years

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41
Q

Regulates the sale of control and restricted securities

A

Rule 144

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42
Q

Addresses the sale of nonregistered foreign and domestic securities to institutional investors

A

Rule 144A

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43
Q

Holding period required before restricted securities can be sold

A

6 months

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44
Q

When securities registered under Rule 147 may be sold to a non-state resident

A

After 6 months

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45
Q

Persons who are restricted from purchases of new issue securities under Rule 5130

A

FINRA member firms; employees of FINRA member firms, finders and fiduciaries; portfolio managers; immediate family members of restricted persons

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46
Q

The type of new issue security to which the provisions of Rule 5130 apply

A

Initial Public Offering (IPO) of common stock

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47
Q

Minimum assets required for classification as a qualified institutional buyer (QIB)

A

$100 million

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48
Q

access equals delivery

A

The fact that a final prospectus is not required to be physically delivered to investors. Instead, delivery is met as long as each purchaser is sent notice regarding where the document can be accessed online.

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49
Q

accredited investors

A

A type of investor who is always allowed to invest in a Regulation D private placement. This includes:

  1. individuals with a net worth of at least $1 million, excluding the value of their primary residence;
  2. individuals who have earned at least $200,000 in income in each of the past two years ($300,000 for married couples);
  3. officers, partners, and directors of the issuer; or
  4. institutional investors with $5 million in assets and a legitimate business purpose.
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50
Q

agreement among underwriters (AAU)

A

A document signed by the syndicate manager and syndicate members that establishes the terms of the deal and binds the syndicate.

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51
Q

all-or-none

A

A type of best efforts underwriting in which, if the underwriter is unable to sell all the shares within a certain time period, the entire deal will be cancelled.

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52
Q

best efforts

A

A type of underwriting in which the underwriters act as agents and have no responsibility or financial liability for any unsold shares.

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53
Q

build a book

A

The main responsibility of the underwriters, which is to market the new securities to potential investors and collect indications of interest. This process begins during the cooling-off period once the registration statement has been filed.

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54
Q

competitive bid

A

A process during which an issuer selects an underwriter solely based on price.

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55
Q

control stock

A

Defined under Rule 144 as stock that is owned by a corporate insider and can only be sold subject to volume limitations. Specifically, over any 90-day period, an insider can sell the greater of 1% of the company’s outstanding shares or the average weekly trading volume during the four weeks preceding the sale.

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56
Q

cooling-off period

A

The time from the filing of a registration statement to when the SEC declares the registration effective, allowing for public sale. During this period, which typically lasts for at least 20 days, the new-issue security can be marketed to the public, but there can be no offers or sales.

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57
Q

designated orders

A

Orders during a municipal bond underwriting that are credited to a specific syndicate member, benefiting only that particular firm.

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58
Q

effective date

A

The date on which the SEC is satisfied that adequate disclosures have been made in the company’s registration statement and therefore the shares can now legally be sold to the public by the underwriters.

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59
Q

exchange offer

A

When a company exchanges new debt or equity securities for its existing securities. Examples can include stock splits and stock dividends.

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60
Q

exempt securities

A

A security exempt from the SEC-registration requirements of the ‘33 Act. These include US government and agency securities, securities issued by nonprofits, municipal bonds, commercial bank securities, and short-term corporate debt with a maximum maturity of 270 days.

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61
Q

exempt transactions

A

An exemption from the SEC-registration requirements of the ‘33 Act based on the manner of sale. This includes exemptions under Regulation D, Rule 144, Rule 144A, and Rule 147.

62
Q

firm commitment

A

The most common type of underwriting, where the syndicate buys all the shares from the issuer and looks to resell them to the public. Whatever the underwriters cannot resell, they own and therefore they have financial liability for the securities.

63
Q

final prospectus

A

A legal document that must be provided to all investors in a new issue no later than the settlement date of the transaction. It includes all material information about the business as well as the public offering price.

64
Q

free writing prospectus (FWP)

A

A written or graphic communication that is used by the issuer during the cooling-off period in addition to its registration statement. The purpose of it is to allow the issuer to provide new and ongoing information to the public during the registration process without having to completely redo its registration statement or preliminary prospectus.

65
Q

follow-on offering

A

A type of offering in which an already public company sells additional shares to the public

66
Q

group orders

A

The first orders received after a municipal bond syndicate has been awarded the business, but prior to each syndicate member receiving its allocation of bonds. The proceeds from these orders are allocated to all members of the syndicate based on their pro rata participation in the account.

67
Q

insiders

A

Also referred to as affiliates, these are defined as officers, directors, and shareholders of greater than 10% of a company.

68
Q

initial public offering (IPO)

A

A type of offering in which a company sells stock to the public for the first time.

69
Q

managing underwriter

A

In a syndicate, the lead underwriter, which is responsible for organizing the syndicate and being the primary liaison with the issuer. Typically, the managing underwriter takes on the largest allocation of securities, meaning it has the most risk in the transaction.

70
Q

manager’s fee

A

A component of the underwriting spread that compensates the syndicate manager for its lead role in the process. It is the smallest component of the spread.

71
Q

material event notices

A

Notices that must be made to investors by municipal issuers within 10 business days of any material event that may impact the issuer’s financial condition.

72
Q

merger and acquisition (M&A)

A

The process of one company purchasing or merging with another.

73
Q

member orders

A

The last orders to be filled in a municipal bond underwriting, as they are placed by members of the syndicate for their own inventory or related accounts.

74
Q

mini-max deal

A

A type of best efforts underwriting in which, if the underwriter is unable to sell a minimum amount of shares within a certain time period, the entire deal will be cancelled.

75
Q

negotiated underwriting

A

A process during which an issuer selects an underwriter based on a variety of factors, including price, sector expertise, and rapport.

76
Q

non-accredited investors

A

A type of investor who does not meet the asset or net-worth requirements of an accredited investor and therefore can only invest in certain types of private placements. For larger deals, there is a maximum of 35 non-accredited investors all of whom must be sophisticated or have a purchaser representative who is a professional that can help them evaluate the deal.

77
Q

primary offering

A

A type of offering in which the company creates brand new shares to sell and receives all the proceeds.

78
Q

primary market

A

The marketplace where new-issue securities are sold to the public in order to raise capital for the issuer.

79
Q

presale orders

A

The first orders received even before a municipal bond syndicate has been awarded the business and the terms of the deal have been finalized. These customers have top priority in getting their orders filled, and the proceeds from these orders are allocated to all members of the syndicate based on their pro rata participation in the account.

80
Q

preliminary prospectus

A

Sometimes referred to as a red herring,a document that is provided to potential investors by the underwriters during the cooling-off period in order to market the deal. It contains all material information about the issuer, but does not contain the public offering price, as that is yet to be decided.

81
Q

pre-filing period

A

The time period before a company files its registration statement with the SEC. During this period, there can be no marketing of the securities or sales to the public.

82
Q

priority of orders

A

The order in which a municipal bond syndicate must allocate bonds to investors. The standard order priority is:

  1. presale orders,
  2. group orders,
  3. designated orders, and
  4. member orders.
83
Q

private placement

A

An exemption from the requirements of the ‘33 Act that allows a company to raise new capital privately without having to register the shares with the SEC. In order to be eligible, the company must meet all the requirements of Regulation D.

84
Q

purchaser representative

A

A professional, such as an attorney or financial adviser, who can be used by non-accredited investors so that they may be considered sophisticated, therefore allowing them to be eligible to invest in a private placement.

85
Q

qualified institutional buyer (QIB)

A

Defined as an institution managing a securities portfolio of at least $100 million or a broker-dealer managing a securities portfolio of at least $10 million. Under Rule 144A, QIBs can freely trade private placements among themselves.

86
Q

registration statement

A

A document that must be filed with the SEC by an issuer in order for the issuer to register securities for public sale. It contains all material information about the company as well as the securities being issued.

87
Q

Regulation D

A

An exemption from the requirements of the ‘33 Act that allows a company to raise new capital privately without having to register the shares with the SEC. These offerings must be direct-ed to accredited investors (e.g., high-net-worth individuals or institutional investors), and typically there can only be a limited number of non-accredited investors.

88
Q

restricted person

A

Defined by FINRA Rule 5130, an individual or entity that is generally prohibited from purchasing an IPO of common stock. Restricted persons include:

  1. FINRA member firms and their employees;
  2. the attorneys and accountants of the managing underwriter;
  3. portfolio managers for their personal investment accounts; and
  4. immediate family members of restricted persons.
89
Q

restricted stock

A

Stock that has never been SEC registered (e.g., private placement shares). Under Rule 144, if an investor holds restricted stock for six months (one year for companies not subject to SEC-reporting requirements), the investor is free to resell the shares into the public market, assuming the issuer is a public company.

90
Q

road show

A

Typically run by the issuer and syndicate manager, this is where these parties travel around to major cities to meet with prospective investors and market the new-issue securities.

91
Q

Rule 144

A

An SEC rule that defines the conditions under which control stock (shares held by insiders) and restricted stock (shares that have never been SEC registered) can be resold.

92
Q

Rule 144A

A

An exemption from the requirements of the ‘33 Act that allows qualified institutional buyers (QIBs) to freely trade private placements among themselves. QIBs are institutions that are managing a securities portfolio of at least $100 million or broker-dealers managing a securities portfolio of at least $10 million.

93
Q

Rule 145

A

An SEC rule that states that whenever a company proposes to reclassify its ownership, acquire another business, or merge with another company that new securities are being issued and therefore the securities must be registered and shareholders are entitled to a prospectus.

94
Q

Rule 147

A

Provides an exemption from the requirements of the ‘33 Act that allows a company to sell securities in its home state and avoid SEC registration. To be eligible, a company must have its principal place of business in the state and meet one of the following requirements:

  1. at least 80% of the assets must be located in the state;
  2. at least 80% of the revenue must come from doing business in the state;
  3. at least 80% of offering proceeds must be used in the state; or
  4. a majority of the em-ployees must be located in the state.

Additionally, all purchasers of securities must be state residents who cannot resell outside the state for six months.

95
Q

secondary offering

A

A type of offering in which shareholders sell existing shares of the company and receive all the proceeds. In this situation, no new shares are created by the company and therefore the company receives no proceeds.

96
Q

Securities Act of 1933

A

Sometimes referred to as the Truth in Securities Act, a federal law that requires all new securities to be registered with the SEC unless the security is exempt or sold through an exempt transaction. The goal of this act is to prohibit fraud in the sale of securities to the public while ensuring that investors receive full material disclosures about the securities.

97
Q

selected dealer agreement

A

A document signed by the syndicate manager and selling group firms that engages the selling group firms to act as agents on the deal.

98
Q

selling concession

A

A component of the underwriting spread that compensates the syndicate manager, members, or selling group firms for actually selling the shares. It is the largest component of the spread.

99
Q

selling group

A

A firm that is contracted as part of an underwriting to help market and sell the securities without taking on any financial risk.

100
Q

shelf registration

A

A type of registration statement that can be used by certain large companies in a follow-on offering allowing them to pre-register securities and sell them at a later date up to three years in the future. It provides issuers additional flexibility to raise capital quickly when market conditions are most favorable.

101
Q

split offering

A

A combination of a primary and secondary offering, where the company creates shares and receives some of the proceeds and shareholders sell existing shares and receive some of the proceeds.

102
Q

stabilization

A

Allows the syndicate manager to bid on new-issue securities in the open market to prevent a decline in price. The manager can never bid above the public offering price.

103
Q

standby commitment

A

A type of firm commitment that is used in conjunction with a rights offering. In case current shareholders decide not to maintain their proportionate ownership in the company and purchase the additional shares being issued, there is an underwriter standing by to purchase any shares that are not subscribed to in the offering and that will then look to resell those shares to the public. Whatever underwriters cannot resell, they own.

104
Q

syndicate

A

A group of investment banks that work together in order to help an issuer market and sell securities to the public. The benefit of having a syndicate compared to one sole underwriter is that it allows for risk-sharing.

105
Q

syndicate members

A

Investment banks that work in connection with the syndicate manager in an underwriting. Similar to the manager, they assume risk, as they are allocated securities and responsible for reselling the securities to the public. Whatever they cannot resell, they own.

106
Q

tender offer

A

An offer by the issuer or an outside investor to purchase at least 5% of a company’s common stock directly from the company’s shareholders.

107
Q

tombstone ad

A

basic deal announcement that is permitted to be published by the underwriters during the cooling-off period. It can only contain factual information about the issuance, such as the names of the issuer and underwriter and a description of the issuer’s business.

108
Q

total takedown

A

The portion of the spread received by a syndicate member if they are allocated a share and also sell that share themselves. It is calculated as the underwriting fee plus the selling concession.

109
Q

underwriter

A

An investment bank that works with an issuer to help the issuer market and sell securities to the public.

110
Q

underwriting agreement

A

The contract executed between the issuer and the lead underwriter detailing the terms and conditions of the offering.

111
Q

underwriting fee

A

A component of the underwriting spread that compensates the syndicate manager and syndicate members based on their allocations. Essentially, it compensates the manager and members for taking on the risk for the securities.

112
Q

underwriting spread

A

The compensation that the syndicate receives in an underwriting. It is calculated as the difference between what the underwriters pay the issuer compared to the public offering price that investors pay for the shares.

113
Q

What was the purpose of the act of 1933?

A

The 1933 Act requires all securities to be registered with the SEC for public sale unless the security is exempt or sold in an exempt transaction. The purpose is to ensure full and fair disclosure of all material information to investors.

114
Q

The Act of 1933 requires what first step before any sales can take place of any new security?

A

The registration statement to be filed by the issuer with the SEC

115
Q

What is the period following the filing of the registration statement called?

A

20-day cooling off period

116
Q

What cannot occur during the 20 day cooling off period?

A

No sales or offers of the new issue security can occur

117
Q

What is permitted during the cooling-off period?

A

The following activities/marketing materials are permitted:

  1. Red herring (aka preliminary prospectus)
  2. Collection of indications of interest
  3. Tombstone ad
  4. Road shows
  5. Free Writing Prospectus
118
Q

What is the effective date?

A

This is the date the SEC permits sales to the public. It occurs once the underwriter has fully marketed the new issue securities to investors and know the price they want to sell for.

119
Q

What is the meaning of the registration being effective?

A

This means that the issue can legally be sold.

120
Q

What is the process of due diligence?

A

Due diligence is the process of gathering all information and ensuring that disclosures made by the issuer are both adequate and truthful.

121
Q

What is a shelf registration?

A

Shelf registration, also called rule 415, allows an issuer with previously registered securities with the SEC a three-year window to issue new securities without going through the re-filing process which can be expensive and time-consuming. A shelf can be used for both equity and debt securities, but not for an IPO.

122
Q

Which securities are exempt from the securities act of 1933?

A
  1. Government and Government Agency Securities
  2. Municipal Securities
  3. Commercial Bank Securities
  4. Commercial Paper with a maturity of 270 days or less
123
Q

Under Rule 147, how long does an investor have to wait before they can resell purchased securities outside the state of issuance?

A

Securities can be sold outside of the state in which they were issued six months following the sale being completed.

124
Q

Under the act of 1934 what is the definition of an insider?

A

Any officer of the company, a director, member of the Board of Directors, or a greater than 10% shareholder of the company’s equity are all considered insiders.

125
Q

Under what conditions is a security exempt from the Act of ‘33 when it is offered only to the residents of a single state?

A

Under Rule 147, intrastate offerings are exempt from SEC registration if the following requirements are met:

The issuer must be incorporated in the state, all securities must be sold to state residents and one of the following criteria must be met:

  • 80% of the revenue comes from the state
  • 80% of the issuer’s assets are in that state
  • 80% of the proceeds of the offering must be used in that state, or
  • a majority of the employees must be located in the state.
126
Q

What is another word for a preliminary prospectus?

A

Red Herring

127
Q

What is the use or purpose of a preliminary prospectus or Red Herring?

A

It is used by the syndicate to gauge interest in the new IPO during the cooling off period.

128
Q

Does the preliminary prospectus include an IPO price?

A

No

The preliminary prospectus will not have the final offering price (that is only included on the final prospectus). Instead, it will have a range of potential prices.

129
Q

Define:

Tombstone ad

A

An advertisement or announcement that the lead manager places in a newspaper to with the basic details about the offering. A tombstone ad is allowed to be published during the cooling off period.

130
Q

Who is restricted from buying an IPO?

A

Restricted persons include:

  • Broker-dealers for their own accounts
  • The employees of broker-dealers
  • Finders and fiduciaries of the managing underwriter such as accountants or attorneys
  • Portfolio managers who are trying to purchase for their own personal accounts
  • Immediate family members of a restricted person (includes spouse, parents, siblings, children, and in-laws)
131
Q

What is a green shoe clause in underwriting?

A

The greenshoe clause allows the underwriters to increase the size of the deal and purchase up to 15% more shares from the issuer to satisfy demand. It can be exercised by the underwriters for up to three years after the effective date.

132
Q

Define:

Stabilizing bid

A

A bid that the lead underwriter is allowed to place once an IPO begins trading, to support the price of the IPO. The underwriters can never stabilize above the IPO price.

133
Q

What are the three phases of taking a company public that were established in the Securities Act of 1933?

A
  1. Pre-registration period
  2. Cooling-off period
  3. Post-effective period
134
Q

Does the SEC approve the registration document filed during the registration phase?

A

No. The SEC neither approves nor disapproves of the filing, only reviews it for appropriate disclosures such that an investor can make an informed decision about the company.

135
Q

A shareholder of company XYZ owns 1000 shares. What are the maximum number of shares they can sell in a tender offer?

A

A tender offer is an offer by the issuer or an outside investor to purchase at least 5% of the company’s stock directly from the company’s shareholders. As a shareholder, you can only tender shares you own. Therefore, in this example, the investor could tender the 1,000 shares owned. It is prohibited for an investor to short into a tender (sell more shares then they actually own).

136
Q

In which market do securities trade after the IPO?

A

The Secondary Market

Trading in the secondary market is only between investors in the company, following the IPO. None of that capital goes back to the company, which only receives proceeds from the initial public offering.

137
Q

What is the third market?

A

The third market is where exchange-listed securities trade over-the-counter.

138
Q

What is the fourth market?

A

The fourth market are when securities are traded directly between institutional investors without the services of a broker-dealer. Generally. these trades are conducted on ECNs.

139
Q

What is another term for an investor’s position that they own?

A

A long position

140
Q

What is another term for an investor position where she has sold stock to others that she doesn’t already own?

A

A short position

141
Q

What are the three types of firms in an underwriting syndicate?

A
  1. Syndicate manager
  2. Syndicate members
  3. Selling group
142
Q

How are the syndicate members distinct from the selling group?

A

Members of the syndicate put up their own capital to purchase the shares of the new issue and resell them to the public. Put differently, syndicate members have financial liability for unsold securities. Members of the selling group may assist in the distribution of shares by selling them to clients but none of their own capital is at risk.

143
Q

What offering type is made up of new securities issued by companies that are already publicly traded?

A

Follow-on offering

144
Q

In what type of securities offering do all the proceeds go directly to the issuer?

A

A primary offering. In a primary offering, the issuer creates brand new shares to sell and receives the proceeds for those shares.

145
Q

In what type of securities offering do all the proceeds go directly to existing shareholders?

A

A secondary offering. In a secondary offering, shareholders are reselling existing shares and receiving the proceeds for those sales.

146
Q

What are the two types of underwriting committments?

A

Firm commitment and best efforts

147
Q

What is the defining element of a firm commitment?

A

In a firm committment, the underwriter will purchase shares from the issuer and resell them to the public. Whatever the underwriter cannot resell, they own. Therefore, in a firm committment the underwriter takes on financial liability for any unsold shares.

148
Q

Does a best efforts offerings have more or less for the underwriter than a firm commitment ?

A

Less, because the underwriter has no financial liability for the shares. They solely act as agents.

149
Q

What are the two types of best efforts underwriting?

A

All-or-none and a mini-max deal. In an all-or-none, the underwriter must sell 100% of the shares or else the deal is cancelled. In a mini-max, the underwriter must sell a minimum threshold of shares or else the deal is cancelled.

150
Q

Disney is a public company that decides to sell additional shares. What kind of offering is this?

A

Follow-on

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