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SIE > Primary & Secondary Markets; Executing a Trade (Unit 1) > Flashcards

Primary & Secondary Markets; Executing a Trade (Unit 1) Flashcards

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1
Q

Issuer transactions

A

Happens in the primary market where securities are sold by the issuer (gov’t or corp) to the investing public

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2
Q

Primary market or primary offer

A

Issuer is selling a security to raise capital

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3
Q

Why would an issuer sell securities and what market is it

A

Primary market;
they can raise capital relatively quickly to take advantage of changes in economy or can raise money for infrastructure programs

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4
Q

Purpose of Securities Act of 1933

A
  • registration of new issues (unless exempt)
  • require full and fair disclosure in connection with the sale of securities to the public
  • require all investors receive prospectus before purchase and make available all info necessary for an investor to judge the issue’s merit
  • regulate the underwriting and distribution of primary issues
  • provide criminal penalties for fraud in the issuance of new securities
  • detail steps taken before a new issue is brought to market
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5
Q

Definition of prospectus

A

A detailed disclosure document that all investors must receive prior to purchase in accordance with the Securities Act of 1933

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6
Q

Types of offerings to the public in primary market

A

IPOs and APOs

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7
Q

Definition of IPO

A

The first time an issuer distributes securities to the public

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8
Q

Definition of APO

A

Also known as Follow-On Offerings; can be multiple over time; these are primary so proceeds go to issuer; it comes after IPO (so shares are already available to public

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9
Q

Who can be an issuer?

A

Corporations, municipalities, and federal government

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10
Q

National Market System (NMS)

A

Large corporations’ stocks that, after being issued, trad on a national exchange or Nasdaq; as opposed to non-NMS securities

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11
Q

Who can be an underwriter?

A

Broker-dealers, and investment bankers

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12
Q

What do investment bankers do?

A

Help the issuer structure new issues and, at times, for syndicates with other underwriters to facilitate this capital-raising process

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13
Q

Types of underwriting commitments

A

Best efforts, and firm commitment

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14
Q

Best efforts underwriting

A

Underwriters (or syndicate) sells securities from issuer to the investor acting simply as an agent
- low risk for underwriters because they’re not purchasing shares themselves
- closed by collecting client funds into an escrow account so now underwriter capital is at risk

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15
Q

Two types of best efforts underwritings

A

All-or-none (AON), and mini-max

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16
Q

AON underwriting

A
  • Best Efforts
  • issuer wants an agreement that BD must sell all the shares or cancel the underwriting
  • uncertain outcome
  • so funds collected from investors in offering period are held in escrow pending final disposition of the underwriting
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17
Q

Mini-max underwriting

A
  • Best Efforts
  • issuer sets minimum amount (the floor) the issuer needs to raise to move forward with the underwriting
  • issuer sets maximum amount of securities they are willing to sell
  • BD finds enough interested buyers to support the floor
  • BD then expands to ceiling
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18
Q

Firm Commitment underwriting

A
  • widely used
  • underwriters contract with the issuer to buy the securities then resell to public at higher price (POP) and earn difference (spread) for their work
  • underwriters are at risk for shares they can’t sell to public
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19
Q

Definition of syndicate

A

A joint venture common in large firm commitment underwritings where a group of BDs share both the risk and profits from the underwriters

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20
Q

Types of investors in primary market

A

Institutional, retail, and accredited

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21
Q

Institutional investors definition

A

Entity that pools money to purchase securities (banks, pensions, hedge funds, etc.)

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22
Q

QIB (qualified institutional buyers) definition

A

An institutional investor that owns and invests a minimum of $100 million in securities on a discretionary basis

23
Q

Retail investor definition

A

An investor that doesn’t qualify as an institution; requires higher communication and disclosures because they’re not as knowledgable

24
Q

Accredited investor definition

A

A subset of all institutional investors and some retail investors. Retail investors include meeting one or more of the following:
- insiders of the issuer (officers, major stockholders)
- those who meet certain financial criteria (income of $200k+ in last 2 years OR net worth of $1M+ not including primary residence)
- people qualified based on certain professional certifications or credentials
- holders of Series 7, 65, 82

25
Q

Rule 501 of Regulation D of the Securities Act of 1933

A

Qualifications for accredited investors who don’t need the same level of protection given their higher sophistication level than the average retail investor

26
Q

Municipal advisor definition

A

Type of investment banker than advises municipalities on issuing debt and securities, but can’t be compensated as part of the sale of issue they provide advise on - so can’t switch roles from advisor to underwriter

27
Q

Process of bringing a new issue to market as outlined in the Securities Act of 1933

A
  • file a registration statement (S-1)
  • complete the cooling-off period
28
Q

Registration statement (S-1)

A

First step in process to register primary issue with SEC; statement discloses material info about the issue; part of the statement is the prospectus which must be provided to all purchasers of the new issue; must include:
- description of issuer’s business
- names, addresses, salaries, and 5-year business history of company officers and directors
- amount of corporate securities company officers and directors own and identification of investors who own 10%+ of company
- company’s capitalization including equity and debt
- description of how proceeds will be used
- whether the company is involved in any legal proceedings

29
Q

The Cooling-Off Period

A
  • step 2 of the issuing of new securities
  • lasts for minimum of 20 calendar days
  • if the SEC finds the S-1 needs revision or expansion, it’ll suspend the review and issue a deficiency letter to the issuer
  • 20-day period resumes with a corrected S-1
  • no sales or solicitation of sales of the security during this period
  • other activities are allowed
30
Q

Activities allowed during the cooling-off period

A
  • issuers (or with the help of underwriters) to place tombstone ads
  • a preliminary prospectus (red herring) may be delivered
  • indications of interest may be gathered
  • due diligence from the underwriters
  • state registration (blue-sky filings) requirements are addressed
  • the release (or effective) date is reached
31
Q

Tombstone ads

A
  • the only type of ad allowed to be run during cooling-off period
  • barebone, minimal info
  • announcement and description of the securities to be offered
  • can be placed by issuer directly or with assistance of underwriters
  • limited to name of issuer, type of security being offered, number of shares to be sold, POP or range, names of underwriting members (when placed by underwriters
  • must contain a required, common advisory statement
32
Q

Preliminary prospectus (red herring)

A
  • can be used as a prospecting tool during the cooling-off period
  • must be made available to any customer who expresses interest in the securities during the cooling-off period
  • allows issuers and underwriters to gauge investor interest and indications of interest
33
Q

Indications of interest during the cooling-off period

A

Non-binding expression of interest from an investor to buy securities when they are available

34
Q

Due diligence during the cooling-off period

A

Underwriters examine the issue to determine suitable customers; hold meetings to present findings to representatives offering the security to their customers

35
Q

State registration requirements (blue-sky filings) addressed during the cooling-off period

A
  • process of coordinating federal and state registrations
  • when properly files, security is registered in the state at same time it is released by the SEC
36
Q

Release (or Effective) date

A
  • on or after the cooling-off period
  • investors may purchase the issue
  • SEC uses non-endorsing language
  • will enter secondary markets shortly after the IPO
37
Q

Final prospectus

A
  • made available at release
  • delivered to all who purchase the new security at IPO
  • same info as red herring plus release date and POP
  • copy must proceed or accompany all sales confirms
  • must include desc of the offering, offering price, selling discounts, release date, use of the proceeds, description of the underwriting, history of the business, risk to purchasers, description of management, material financial info, legal opinion concerning the formation of the corporation, SEC disclaimer
38
Q

Standard SEC disclaimer

A

These securities have not been approved or disapproved by the SEC, nor have any representations been made about the accuracy or the adequacy of the information

39
Q

Hybrid, split, or combination offerings

A

Types of IPO where the corporation allows some existing shareholders (founders, early investors, etc) to sell their shares along with the newly issued shares

40
Q

Shelf offering

A

Issuers who are already publicly traded companies can register new securities but have 2 years (3-year for WKSI like companies on major exchanges) to sell the shares so they don’t have to reregister the security and wait until market conditions are favorable. A supplemental prospectus must be filed with the SEC before each sale

41
Q

Prospectus delivery rules from primary to secondary market

A

Investors that purchase IPO or APO shares on secondary market are entitled to final prospectus if the purchase is made within a certain number of days of the release date
NMS securities:
IPO - 25 days
APOs - 0 days (no requirement)
non-NMS securities
IPOs - 90 days
APOs - 40 days
Access to the prospectus on the SEC website is sufficient for requirements

42
Q

Who is exempt from registration of securities?

A

Issuers: US government, munis, national and state banks (but not bank holding companies), S&Ls, nonprofits, common carriers

Issues: commercial paper, bankers’ acceptances, and other securities that have maturities of 270 days or less insurance policies and fixed annuity contracts (but not variable annuities)

Transactions: Regulation A Tier 1 and 2; Rule 147; Regulation D

43
Q

Regulation A definition

A

Rule to ease small and medium-sized offerings; has Tier 1 and Tier 2; open to the public; advertising/solicitation allowed; investment limits only on Tier 2

44
Q

Regulation A Tier 1

A

Securities offerings up to $20M in 12-month period; of the $20M, no more than $6M can be sold on behalf of existing selling shareholders (like combo offering); SEC and state review; no investment limits

45
Q

Regulation A Tier 2

A

Securities offerings up to $75M in 12-month period; of the $75M, no more than $22.5M can be sold on behalf of existing selling shareholders (like combo offering); SEC review only; must be qualified investor

46
Q

Qualifications for investing in Regulation A Tier 2

A

Be an accredited investor

Limit to max of 10% of investor’s net worth or net income (self-certification)

47
Q

Rule 147

A

The Intrastate Offering Rule

Required: take place in 1 state, HQ is in state, all purchasers are residents of state, BD is based in the state (if used), not sold to nonresidents for 6 months

Meet 1: 80% of income is in the state, 80% of issuers’ assets are in the state; 80% of proceeds are used in the state; majority of company’s employee’s work in the state

48
Q

Regulation D

A

Private Placements under rule 506(b); doesn’t require registration as long as there are no more than 35 non-accredited investors; must have access to same type of info as nonexempt securities; must sign letter with legend; must file Form D
Also called: restricted, unregistered, letter stock, legend stock

49
Q

Solicitations/advertising with Regulation D

A

Can advertise/solicitate private placements if all purchasers are accredited investors

50
Q

Official statement

A

Used in munis; = prospectus

51
Q

Offering circular or notice of sale

A

Used in exempt securities; = prospectus but not as detailed in disclosures

52
Q

Securities Exchange Act of 1934

A

Regulates how securities are traded on the secondary market; created the SEC; regulates trading on exchanges and OTC

53
Q

Market centers

A

Locations (physical and digital) where buyers and sellers gather and trade; 4 types of market centers

54
Q
A

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