offerings

Question 1

two types of offering

Answer 1

1. public

2. private placement

Question 2

advantages and disadvantages of public offering

Answer 2

The primary advantage of a public offering is that an unlimited number of investors (both retail and institutional) are permitted to participate. However, the disadvantages of a public offering include the regulatory costs (legal and accounting) and time required to fulfill the disclosure requirements of the Securities Act of 1933.

Question 3

Private Placements

Answer 3

In some cases, institutional investors (e.g., pension funds, insurance companies, venture capitalists, and private equity investors) provide start-up capital to new companies. The capital is typically raised through a form of non-public offering that’s referred to as a private placement. The primary advantages of a private placement is that it’s faster and less costly than a public offering. However, there may be limits as to the type and number of investors that may participate in these types of transactions.

Question 4

Initial Public Offering (IPO) Versus Follow-On Offering

Answer 4

When an issuer offers securities to the public for the first time, the process is referred to as its initial public offering (IPO). However, if a company has already gone public and intends to raise additional capital through a sale of common stock, it’s conducting a follow-on offering. Keep in mind; these additional (post-IPO) offerings are still considered primary distributions. The best way to define a primary distribution is that it’s an offering in which the proceeds of the deal are paid to the issuer.

Question 5

Disclosure of Participation or Interest in Primary or Secondary Distribution (FINRA Rule 2269)

Answer 5

While involved in a follow-on offering, a FINRA member firm may be recommending or trading the existing shares of a company in the secondary market, while also soliciting potential investors for the additional shares being offered. FINRA rules generally require written disclosure to customers for trades in any security in which a firm is participating in the distribution or is otherwise financially interested.

Question 6

primary distributions

Answer 6

The best way to define a primary distribution is that it’s an offering in which the proceeds of the deal are paid to the issuer.

Question 7

Combined (Split) Offerings

Answer 7

In a combined offering, some of the shares are offered by the issuer, while the remainder are offered by selling shareholders. The shares being sold by the company are newly created, constitute a primary offering, and increase the company’s number of outstanding shares. The company issuing the securities receives the proceeds on this portion of the sale. When the company’s existing shares are sold by some of its current (selling) shareholders, it’s considered a secondary offering. The selling shareholders receive the proceeds on this portion of the offering, not the issuer. Selling shareholders may include officers of the company or early-entrance investors (e.g., the institutional investors that were mentioned previously) that are seeking to either cash out or reduce their holdings in the company.

Question 8

If the offering is split, it’s imperative for the underwriters to disclose

Answer 8

to any purchaser that a portion of the offering’s proceeds will be paid to the selling shareholders.

Question 9

underwriter

Answer 9

raising capital. When acting as an underwriter, an investment banker may assume risk by buying the new issue from the issuing corporation and reselling it to the public. The investment banking function brings together the issuer and potential buyers. The proceeds of these offerings may represent new funds to the issuer or they may be used to refinance its capital structure.

Question 10

underwriting syndicate.

Answer 10

The sale of a public offering is typically conducted through a group of broker-dealers that’s referred to as an underwriting syndicate. The responsibilities of the syndicate members are dependent on the type of underwriting agreement.

Question 11

Firm-Commitment (

Answer 11

If a syndicate agrees to purchase the entire offering from the issuer and absorb any securities that remain unsold, it’s engaging in a firm-commitment underwriting. In this case, the syndicate is firmly committing itself to the issuing corporation for the entire amount of the offering. Regardless of whether it can sell all of the securities, the syndicate acts in a principal (at risk) capacity.
For example, a corporation wants to sell $10,000,000 of stock, but the syndicate is only able to sell $8,000,000. In a firm commitment, the syndicate members will absorb the $2,000,000 of unsold stock for their own accounts.

Question 12

Best-Efforts

Answer 12

(Acting as Agent) In a best-efforts underwriting, the syndicate agrees to sell as much of the new offering as they’re able. Best-efforts underwriters are acting in the capacity of an agent by finding purchasers for the issuer, rather than as a principal for their own accounts.
For example, a corporation wants to sell $10,000,000 of stock, but the underwriters are only able to sell $8,000,000. In a best-efforts underwriting, only the $8,000,000 of stock will be issued. The unsold portion is returned to the issuer.

Question 13

All-or-None

Answer 13

One of these contingencies is the best-efforts-all-or-none. As in a simple best-efforts arrangement, the underwriters act as agents for the issuer and attempt to sell as much of the offering as possible. However, if the entire offering is not sold, all sales that were made must be cancelled and the money must be returned to the subscribers.

Question 14

Mini-Maxi

Answer 14

Another variation of a best efforts underwriting is the mini-maxi underwriting. With this form, there is a minimum threshold of sales that must be met for the offering to avoid being cancelled. However, once that minimum is met, additional sales may be made up to a specified maximum amount.
For example, a corporation intends to sell $10,000,000 of stock. Based on the company’s capital needs, it requires that at least 70% of the offering be sold. Therefore, a minimum of $7,000,000 of the stock must be sold or the entire issue will be cancelled. Once the minimum sales level has been satisfied, the underwriters will continue to sell the remaining securities ($3,000,000) without the risk that the offering will be cancelled.

Question 15

preemptive rights offering

Answer 15

In this offering, the current shareholders are given rights which provide them with the opportunity to purchase additional shares at a small discount before the offering is made public.

Question 16

standby underwriting arrangement

Answer 16

However, out of the fear that a significant number of existing shareholders will choose to leave the rights unsubscribed, the issuer may arrange for a standby underwriting. In a standby underwriting arrangement, the syndicate (in return for a fee) agrees to purchase any unsubscribed shares remaining after the rights offering. Standby agreements are executed on a firm-commitment basis.

Question 17

market-out clause

Answer 17

If the written agreement that’s entered into by the underwriting syndicate and the issuer contains a market-out clause, the syndicate may be permitted to cancel the agreement. The justification for cancelling the commitment is based on certain events occurring that make marketing the issue difficult or impossible. Examples include a material adverse event that affects the (proposed) issuer or a general disruption in financial markets

Question 18

Shelf Registration

Answer 18

Certain issuers of existing publicly traded securities can utilize a form of registration that allows them to sell additional securities on either a delayed or continuous basis. This process is referred to as shelf registration and is allowed only for an amount that may reasonably be sold within three years after the initial date of registration. The advantage of the shelf registration method is that the issuer can complete all the necessary paperwork in advance and be prepared to market the shares to the public when conditions are the most favorable

Question 19

Syndicate

Answer 19

If the syndicate manager is interested in working with an issuer, it will then form a syndicate by inviting other firms to participate in the distribution and share in liability. The written agreement between the manager and syndicate members (referred to as the syndicate letter or agreement among underwriters) is signed by the participants and specifies each firm’s rights and obligations

Question 20

selling group

Answer 20

In some cases, the syndicate will recruit other broker-dealers to assist in the distribution. These firms are selling group members that do not assume financial liability for the offering; instead, they act as sales agents. Any shares that are not sold by the selling group are retained by the syndicate since the syndicate members remain financially liable for any unsold shares. To join a selling group, a broker-dealer must sign a selling group agreement which provides details regarding the relationship and responsibilities between the selling group and the syndicate manager. The underwriters and selling group members are collectively referred to as distribution participants.

Question 21

Underwriting Spread

Answer 21

The term underwriting spread refers to the difference between the amount paid by the investing public and the amount received by the issuing corporation. In fact, the spread represents the syndicate’s gross profit. Depending on how the shares are sold, the spread may be shared by the manager, syndicate members, and selling group members.
The spread consists of the following components:
 Manager’s Fee—the portion that’s paid to the managing underwriter for each share of the offering
 Member’s/Underwriter’s Fee—the portion that’s paid to the syndicate member that assumes the risk or liability for the shares
 Concession—the portion that’s paid to the firm that sells the shares

Question 22

Payments for Market Making

Answer 22

Broker-dealers that act as underwriters may also choose to act as a market maker for an issuer’s securities in the secondary market. In this scenario, FINRA is concerned that issuers may compensate these firms to agree to act as market makers. Since issuers are not regulated by FINRA, the rule prohibits a FINRA member firm or any person who is employed by the member from accepting any payment or other compensation (either directly or indirectly) from an issuer of a security or any affiliate or promoter for:
 Publishing a quote (including indications of interest)
 Acting as a market maker in a security
 Submitting an application in connection with market-making activity
The rule does not prohibit a member firm from accepting (1) payment for bona fide services, such as investment banking (which includes underwriting fees), and (2) reimbursement for registration fees that are paid to the SEC or a state regulator, or for listing fees that are imposed by an SRO.

Question 23

registration statement

Answer 23

The Securities Act of 1933 attempts to prevent fraud in the sale of new issues by requiring registration and ensuring that investors are provided with adequate information about the offering to make an informed investment decision. This information is provided through the registration statement, which is a public document that issuers file with the SEC.

Registration Statement According to the Securities Act of 1933, a registration statement must contain detailed information about the issuer, its business, its owners, and its financial condition. The required information includes:
 The character of the issuer’s business
 A balance sheet created within 90 days prior to the filing of the registration statement
 Financial statements that show profits and losses for the latest fiscal year and for the two preceding fiscal years
 The amount of capitalization and use of the proceeds of the sale
 Funds paid to affiliated persons or businesses of the issuer
 Shareholdings of senior officers, directors, and underwriters, and identification of individuals who hold at least 10% of the company’s securities
Issuers are also required to prepare a prospectus for distribution to potential purchasers. The prospectus is essentially an abbreviated version of the registration statement

Question 24

The Registration Process

Answer 24

The Registration Process
Let’s take a look at the process by which securities are registered. The process includes the following three phases:
1. The preregistration period
2. The cooling-off (waiting) period
3. The post-effective period

Question 25

Pre-Registration (Pre-Filing) Period

Answer 25

During the pre-registration phase, an issuer prepares its registration statement. An underwriter will often assist the issuer during this process; however, the underwriter may not yet discuss the new issue with its customers. This is the point at which the due diligence process begins for the managing underwriter. When the registration statement is completed, the issuer files it with the SEC. The date on which it’s filed marks the end of the pre-registration period.

Question 26

The Cooling-Off Period

Answer 26

The second phase in the registration process is the 20-day cooling-off or waiting period. During this time, the SEC reviews the issuer’s registration statement to determine if it’s complete and that it contains no misleading statements. However, the SEC does not judge the investment merits of the issue or the appropriateness of the pricing of the issue. If the SEC believes the registration statement to be incomplete or misleading, it sends a deficiency letter to the issuer. If this happens, the issuer is required to refile an amended registration statement for SEC review.
due diligence meeting take place
effective date

Question 27

Preliminary Prospectus (Red Herring)

Answer 27

During the cooling-off period, broker-dealers are able to send a condensed form of the registration statement to potential buyers. This document is referred to as the preliminary prospectus or red herring. The red herring has a statement on its cover page (in red writing) to indicate that a registration statement has been filed with the SEC, but has not yet been declared effective. Also, the final offering price is not included in the red herring; instead, it may indicate a price range (e.g., $14 to $17 per share).

Question 28

what can the underwriter do during the cooling -off period?

Answer 28

During the cooling-off period, underwriters are permitted to:
 Discuss the issue
 Provide the red herring to potential purchasers
 Record the names of persons that provide an indication of interest (the indications are non-binding for either party)

Question 29

what CANNOT the underwriter do during the cooling -off period?

Answer 29

During this period, underwriters are not permitted to:
 Accept payment for the new issue in advance
 Sell the new issue (since the deal is not effective and has not been priced)

Question 30

Exempt Securities

Answer 30

The SEC has determined that the following securities are exempt from the registration and prospectus requirements of the Act of 1933:
 U.S. government and U.S. government agency securities
 Municipal securities
 Securities issued by non-profit organizations
 Short-term corporate debt instruments that have a maximum maturity of 270 days (e.g., commercial paper)
 Securities issued by domestic banks and trust companies
 Securities issued by small business investment companies
Although these securities are exempt from the registration and prospectus requirements of the Securities Act of 1933, they remain subject to the Act’s anti-fraud provisions

Question 31

Regulation D

Answer 31

Under Regulation D, an issuer’s private placement of securities qualifies for an exemption provided the following conditions are met:
 The issuer has reason to believe that the buyer is a sophisticated investor (i.e., one who is experienced enough to evaluate any risks involved)
 The buyer must have access to the same financial information that would normally be included in a prospectus. This information is provided in the private placement memorandum.
 The issuer must be assured that the buyer does not intend to make a quick sale of the securities. This is usually accomplished by means of an investment letter (also referred to as a lock-up agreement).
 The securities are sold to no more than 35 non-accredited investors.

Question 32

Accredited Investor

Answer 32

Financial institutions (e.g., banks), large tax-exempt plans, or private business development companies
 Directors, executive officers, or general partners of the issuer
 Individuals who meet either one of the following criteria:
‒ Have a net worth of at least $1,000,000 (not including primary residence) or
‒ Have gross income of at least $200,000 (or $300,000 combined with a spouse) for each of the past two years with the anticipation that this level of income will continue`

Question 33

Rule 144

Answer 33

Rule 144

Rule 144 regulates the sale of restricted stock and control (affiliated) stock.

Question 34

Restricted stock

Answer 34

Restricted stock is unregistered stock and is typically acquired by an investor through a private placement.

Question 35

Control stock

Answer 35

Control stock is registered stock and is acquired by a control (affiliated) person in the secondary market. Control persons may include officers, directors, or other insiders (those with more than 10% ownership) and their respective family members. Any stock that’s acquired by control persons, even if purchased in the open market, must be sold according to Rule 144.

Question 36

holding period under Rule 144 for reporting company

Answer 36

If the issuer is a reporting company, the holding period is six months;

Question 37

holding period under Rule 144 for non-reporting company

Answer 37

however, if the issuer is a non-reporting company, the holding period is one year.

Question 38

holding period under Rule 144 for control stock

Answer 38

For control stock, there is no mandatory holding period.

Question 39

Under Rule 144, you must fill out what

Answer 39

Under Rule 144, an investor who intends to sell either restricted or control stock must file Form 144 to notify the SEC at the time he places the sell order with the broker-dealer. If the securities are not sold within 90 days of the date that the notice was filed with the SEC, an amended notice must be filed. However, SEC notification is not required if the amount of the sale does not exceed 5,000 shares and the dollar amount does not exceed $50,000

Question 40

Under Rule 144, you do not need to fill out the form if

Answer 40

However, SEC notification is not required if the amount of the sale does not exceed 5,000 shares and the dollar amount does not exceed $50,000

Question 41

Rule 144 sets a limitation on the amount of stock that an affiliate

Answer 41

Rule 144 sets a limitation on the amount of stock that an affiliate may sell over any 90-day filing period. For NYSE- and Nasdaq-listed stock, the maximum that may be sold is the greater of 1% of the total shares outstanding or the stock’s average weekly trading volume of the past four weeks.
For restricted (private placement) stock, there is no volume restriction for non-affiliates of the issuer. Non-affiliates are persons who are not associated with the issuer. However, volume restrictions continue to apply to insiders and affiliates.

Question 42

Rule 144A

Answer 42

Rule 144A is designed to permit sales of restricted securities to sophisticated investors without being subject to the conditions that are imposed by Rule 144. Ultimately, Rule 144A creates a more liquid private placement market. The securities being offered under Rule 144A may be equity or debt securities and they may be offered by either a domestic or foreign issuer. After the issuance, the securities may be immediately resold to qualified institutional buyers.

Question 43

Qualified Institutional Buyers (QIBs)

Answer 43

Qualified Institutional Buyers (QIBs) To be considered a qualified institutional buyer, the entity must satisfy the following three-part test:
1. First, only certain types of investors are eligible, including:
 Insurance companies
 Registered investment companies and registered investment advisers
 Small business development companies
 Private and public pension plans
 Certain bank trust funds
 Corporations, partnerships, business trusts, and certain non-profit organizations
2. The buyer must be purchasing for its own account or for the account of another QIB.
3. The buyer must own and invest at least $100 million of securities of issuers that are not affiliated with the buyer.
Note: Under no circumstances is an individual considered to be a QIB.

Question 44

Rule 145 of the Securities Act of 1933

Answer 44

Under Rule 145 of the Securities Act of 1933, certain types of securities reclassifications are considered to be sales and are subject to the registration and prospectus requirements of the Act. The reclassifications include:
 An issuer that substitutes one security for another
 A merger or consolidation in which the securities of one corporation are exchanged for the securities of another corporation
 A transfer of assets from one corporation to another
However, stock splits, reverse stock splits, or changes in par value are not considered reclassifications and are therefore not subject to the rule.

Question 45

Rule 147 and 147A

Answer 45

Rule 147 and 147A
A federal registration exemption is available for securities that are sold within the borders of one state, provided the instruments of interstate commerce are not used to sell the securities. If a company is conducting an offering and only selling its securities to its state residents, the offering is exempt from SEC or federal registration. However, the issuer is required to register the securities in the state in which it’s being sold.
Under Rule 147, an issuer is required to meet one of the following four requirements:
1. At least 80% of its consolidated gross revenues are derived from the operation of a business or of real property that’s located in the state or territory or from the rendering of services within the state or territory;
2. At least 80% of its consolidated assets are located within the state or territory at the end of its most recent semi-annual fiscal period prior to the first offer of securities under the exemption;
3. At least 80% of the net proceeds from the offering are intended to be used by the issuer, and are in fact used in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within the state or territory; or
4. A majority of the issuer’s employees are based in the state or territory

Question 46

Issuing General Obligation (GO) Bonds

Answer 46

need voter approval and debt limitations

Question 47

Issuing Revenue Bonds (munis)

Answer 47

Feasibility Study To identify whether a revenue project will be able to bring in the necessary revenues the municipality must hire a consulting engineer to study the project and present a report. This report examines the general need for the proposed project and whether the project is a sound economic investment. An accounting firm is usually retained to help determine if the revenues will be sufficient to cover expenses and debt service.

Question 48

Rule G-11

Answer 48

Responsibilities of Syndicate Manager (Rule G-11) The manager generally makes the largest underwriting commitment. Some of the responsibilities of the manager include keeping track of all sales and the number of bonds that remain unsold, presiding over the preliminary pricing meeting in which the members are asked to submit their pricing scale, and maintaining/preserving books and records related to syndicate operations. These records include:
 Settlement date with issuer
 Allotment of securities and sale prices
 Names of syndicate members and their percentage of liability
Syndicate Letter For a competitive sale, as the manager forms the syndicate, it will invite other firms to participate by sending a syndicate letter which binds all of the members together. For a negotiated sale, the document is referred to as the agreement among underwriters.

Question 49

Rule G-32

Answer 49

This rule requires that disclosure documents be filed with the MSRB and provided to customers. EMMA is the MSRB’s data port through which municipal bond underwriters and issuers submit specific documents (e.g., official statements).