Series 7 STC Offerings (Ch. 13) Flashcards
An underwriting agreement for equity securities is signed by which two parties?
The managing underwriter and the issuer
The members of the syndicate and the issuer
The managing underwriter and the members of the syndicate
The issuer and the investor who has committed to purchase the shares
The managing underwriter and the issuer
When a broker-dealer agrees to underwrite securities by acting as the managing underwriter on behalf of an issuer that’s seeking to raise capital, an underwriting agreement is signed by the two parties.
If a company conducts a private investment in public equity (PIPE) offering, how will it typically impact the company’s stock?
The company’s share price is unaffected.
The company’s share price will rise.
The company’s share price will decline.
The company’s share price will decline prior to the offering and rise after the offering.
The company’s share price will decline.
A PIPE offering is a private placement of securities in which a broker-dealer assists an issuer by distributing restricted (i.e., unregistered) securities to a small group of accredited investors (e.g., hedge funds). These restricted securities are purchased at a price that’s below the current price of the common stock at the time of the announcement. Once the PIPE offering is announced, the company’s share price will often decline. This price decline is in part a reflection of the increase in the number of shares outstanding (potential dilution), but also due to the perception that the company is not only in need of capital, but that it has limited means available to raise the capital.
A company whose stock is listed on Nasdaq is in the process of raising capital by offering common stock and filing documentation with the SEC. The shares will be priced:
Based on the price of the initial public offering
Based on the price of the existing shares
Based on the price of the S&P 500 Index
Based on the price of the option contracts on the stock
Based on the price of the existing shares
Since the company’s stock is currently listed on Nasdaq, this is a follow-on offering, and not an IPO. In this case, the underwriters will use the current market price of the existing shares to price the offering.
A brokerage firm is a subsidiary of a public company. If a registered representative (RR) wants to recommend this company’s stock to a customer, which of the following actions must be taken?
The RR must disclose this relationship to the customer prior to executing the order.
The RR must receive a signed power of attorney from the customer prior to executing the order.
The RR must receive a signed agreement from the customer at least one business day prior to executing the order.
The RR is only able to execute the order if the customer is an institutional investor.
The RR must disclose this relationship to the customer prior to executing the order
If a broker-dealer is controlled by a public company and has a customer who wants to purchase the stock of that company, the broker-dealer or its RRs must disclose the control relationship to the customer prior to accepting the order. If the initial disclosure was made verbally, then written disclosure must also be provided prior to settlement (i.e., prior to completion of the transaction). If the control relationship transaction involves a discretionary client, the client’s specific written permission must be obtained prior to each transaction.
In a municipal bond underwriting, the monetary difference between what the issuer receives and the public offering price is referred to as the:
Manager’s fee
Total takedown
Concession
Spread
Spread
In a municipal bond underwriting, the spread is the gross profit that’s earned by the syndicate. The spread represents the monetary difference between what the issuer receives for the bonds and the public offering price for the bonds. The total takedown is the discount that the manager of the syndicate gives to syndicate members on any bonds they sell (it’s the combination of the takedown plus the concession). The concession is a trade discount given to dealers that are not members of the syndicate. For example, a syndicate member may take down bonds at par minus 5/8 of a point and sell them to the public at par, thereby making a 5/8-point profit. The dealer that’s not a member of the syndicate may buy the bonds at par minus 1/4-point concession and sell them to the public at par, thereby making a 1/4-point profit.
What is the Total Takedown in an underwriting?
The discount that the manager of the syndicate gives to syndicate members on any bonds they sell; it’s the combination of the takedown plus the concession (Takedown + Concession)
What is the Concession in an underwriting?
A trade discount given to dealers that are not members of the syndicate.
Which of the following is example of a best efforts underwriting?
For an offering involving 5 million shares, the underwriters are able to sell 4 million shares and return the 1 million unsold shares to the company.
For an offering involving 5 million shares, the underwriters are able to sell 4 million shares, but are still required to pay the company for all 5 million shares.
For an offering involving 5 million shares, the underwriters are able to sell 5 million shares, but are required to pay the company for an additional 750,000 shares.
For an offering involving 5 million shares, the underwriters are able to sell 4 million shares and return 1.75 million shares to the company.
You answered correctly
In a best-efforts underwriting, the underwriters agree to sell as much of the new offering as they can. However, there’s a stipulation which allows the underwriter to return the unsold portion back to the issuer.
For an offering involving 5 million shares, the underwriters are able to sell 4 million shares and return the 1 million unsold shares to the company.
In a best-efforts underwriting, the underwriters agree to sell as much of the new offering as they can. However, there’s a stipulation which allows the underwriter to return the unsold portion back to the issuer.
T/F. In a best-efforts underwriting, the underwriters agree to sell as much of the new offering as they can. However, there’s a stipulation which allows the underwriter to return the unsold portion back to the issuer.
True
In an underwriting of a new issue by a syndicate, which of the following statements is TRUE?
The reallowance is larger than the underwriting spread.
The selling concession is larger than the underwriting spread.
The underwriting spread is larger than the selling concession.
The reallowance is larger than the selling concession.
The underwriting spread is larger than the selling concession.
In the underwriting of a new issue, the underwriting spread is larger than the selling concession. In fact, the selling concession is just one part of the total underwriting spread. The selling concession is the portion that’s given to the selling group for selling shares in a best-efforts capacity. The selling group is not entitled to the portion of the spread related to the assumption of liability because the selling group accepts no liability for the shares. A reallowance is compensation given to broker-dealers who are non-members of the syndicate or selling group and want to participate in the sale of the shares. The reallowance is a part of the selling concession.
(26757)
T/F. A reallowance is compensation given to broker-dealers who are non-members of the syndicate or selling group and want to participate in the sale of the shares. The reallowance is a part of the selling concession.
True
If a new offering of municipal bonds is being distributed by a syndicate that’s agreed to a divided account, how does it work?
The manager sells all of the bonds.
Each member is responsible for only its portion of the offering.
All members sell, but are responsible for any unsold bonds based on their percentage of liability.
The selling group sells all of the bonds.
Each member is responsible for only its portion of the offering.
In a divided (Western) account, each member is only responsible for selling its portion of the issue. Therefore, any unsold bonds remain the responsibility of the member that failed to sell them. However, if the offering was being distributed through an undivided (Eastern) account, the syndicate manager would distribute any unsold bonds on a pro rata basis according to each member’s percentage of liability.
XYZ Corporation has 44,000,000 shares of common stock authorized and 25,000,000 shares issued, of which 1,000,000 shares are treasury stock. The corporation is issuing an additional 12,000,000 shares through a standby underwriting. If only 9,000,000 shares are subscribed to in the corporation’s offering, the company:
Is not able to raise any additional capital
Is able to raise capital by selling 9,000,000 shares
Is able to raise capital by selling 12,000,000 shares
Is required to buy 3,000,000 shares from its existing shareholders
Is able to raise capital by selling 12,000,000 shares
With a standby underwriting, if the current shareholders fail to subscribe to any of the stock that’s available through the rights offering, the investment banker (underwriter) will purchase the residual shares on a firm-commitment basis. Since the corporation only sold 9,000,000 shares, the underwriters will purchase the remaining 3,000,000 shares and the company will receive the sales proceeds based on all 12,000,000 shares.
T/F. With a standby underwriting, if the current shareholders fail to subscribe to any of the stock that’s available through the rights offering, the investment banker (underwriter) will purchase the residual shares on a firm-commitment basis
True
A corporation is issuing 15,000,000 shares of stock at a public offering price of $25 per share. The manager of the underwriting syndicate receives $0.35 per share. The compensation for syndicate members is $1.40 per share for each share they sell. The selling group’s concession is $1.05 per share for each share they sell. The syndicate is allocated 12,000,000 shares and the selling group is allocated 3,000,000 shares. When the issue is completely sold, the issuing corporation will receive:
$348,750,000
$375,000,000
$333,000,000
$279,000,000
$348,750,000
The issuing corporation will receive the public offering price less the underwriting spread. The underwriting spread is comprised of the manager’s fee, the underwriter’s fee (for assuming risk), and the concession (for selling). The underwriter’s fee is the determined by finding the difference between the syndicate member’s compensation for each share sold and the concession. In this case, the underwriter’s fee is $0.35 ($1.40 - $1.05). The total spread is $1.75 ($0.35 manager’s fee + $0.35 underwriter’s fee + $1.05 concession). Therefore, the proceeds to the issuer are $23.25 per share ($25 - $1.75), which equals $348,750,000 (15,000,000 shares x $23.25).
An initial public offering is planned and will include a total of 20 million shares. If the offering is oversubscribed, the underwriters are able to purchase:
No additional shares
An unlimited number of additional shares
Two million additional shares
Three million additional shares
Three million additional shares
If a new issue is underpriced and in great demand because of its growth prospects, the offering is considered oversubscribed. Utilizing the Green Shoe Clause, underwriters typically have a period of 30 days to request the use of the provision and purchase additional shares up to a maximum of 15% of the offering. Therefore, the underwriters are able to purchase an additional three million shares (20 million x 15%) from the issuer or selling shareholders so that they’re able to meet the demand.
If an offering is oversubscribed, the underwriters can purchase a maximum of _____% of shares
15%
A customer contacts a registered representative (RR) and inquires about an upcoming IPO for which the RR’s firm will be a syndicate member. Which of the following actions is MOST appropriate?
Send the customer a preliminary prospectus and offer to discuss certain portions.
Send the customer a preliminary prospectus and highlight certain portions.
Send the customer a preliminary prospectus and underline the most important sections.
Send the customer a preliminary prospectus and instruct the customer to read only the section labeled “underwriting.”
Send the customer a preliminary prospectus and offer to discuss certain portions.
A prospectus cannot be amended or altered in any way, including highlighting and/or underlining relevant portions of the document. However, an RR may discuss certain portions of the prospectus with the client, but should not make any marks on the document.
Which of the following statements is TRUE regarding crowdfunding?
It’s used by established companies to raise additional capital.
Suitability is not a concern since this method of raising capital is used by venture capital funds.
There’s no limit to the amount of funds a customer can invest.
The broker-dealer and the funding portal must be registered with the SEC and be a FINRA member.
The broker-dealer and the funding portal must be registered with the SEC and be a FINRA member.
The Jumpstart Our Business Startups (JOBS) Act established the provisions that allow small businesses to raise capital using the internet through a process that’s referred to as crowdfunding. The broker-dealer and the funding portal must be registered with the SEC and be a FINRA member. Suitability is of great consideration due to the potential risks of investing in these types of companies and there’s a limit to th
T/F. Crowdfunding is for smaller companies
True
A company whose principal office is in Missouri is offering securities under Rule 147. A registered representative could sell these securities to:
A person who owns property in Missouri
A person who’s employed in Missouri, but is a resident in Illinois
A person who owns a home in Missouri that’s used as a rental property
A person who’s a resident of Missouri, but is employed by a company is Illinois
A person who’s a resident of Missouri, but is employed by a company is Illinois
Securities that are offered under Rule 147 (an intrastate offering) may only sold to residents of the particular state. The state in which the person is employed is irrelevant.
A registered representative’s client is the CEO of a company and the client is considering raising capital to grow the business. Which of the following is NOT an advantage of conducting an initial public offering (IPO)?
The ability to raise capital quickly
The ability to raise an unlimited amount of capital
The ability to market the offering to retail investors
The ability to market the securities in many different states
The ability to raise capital quickly
Securities may be offered or issued in two ways, through a private placement or a public offering. The advantage of a public offering that’s registered with the SEC is the large number of investors (both retail and institutional) that are permitted to participate, the ability to raise an unlimited amount of capital, and the ability to market the offering in many different states. However, a significant disadvantage is the cost and time it takes to register with the SEC in order to conduct a public offering.
T/F. A mini-max underwriting is a variation of a best efforts underwriting. With this form, there’s a minimum threshold of sales that must be completed for the offering not to be cancelled.
True
The BKP Corporation has entered into a best efforts, mini-max underwriting agreement that requires the sale of at least 80% of the shares. If the total offering is 9,000,000 million shares and the underwriters were able to sell 7,500,000 million shares, which of the following statements is TRUE?
The offering is cancelled.
The offering allows the issuer to raise capital.
The offering requires the underwriters to sell all 9 million shares.
The offering requires the underwriter to purchase the 1.5 million shares left unsold.
The offering allows the issuer to raise capital.
A mini-max underwriting is a variation of a best efforts underwriting. With this form, there’s a minimum threshold of sales that must be completed for the offering not to be cancelled. However, once that minimum is met, additional sales may be made up to a specified maximum amount. Since at least 80% of the shares were sold (9,000,000 x 80% = 7,200,000 million shares), the offering is allowed to proceed and the issuer is able to raise capital.
An institutional investor purchased shares of a company in a private placement. The company is now going public by conducting an IPO and the investor has been notified that it can sell some of the shares it purchased along with the company. Which of the following statements is TRUE?
This type of activity is permitted and is referred to a combined offering.
This type of activity is permitted and is referred to as a private investment in public equity (PIPE).
This activity is only permitted if a follow-on offering is being conducted.
This type of activity is a violation of SEC rules.
This type of activity is permitted and is referred to a combined offering.
When some shares are offered by the issuer and the remainder are offered by selling shareholders, it’s referred to as a combined (split) offering. The shares being sold by the issuer are newly created and constitute a primary offering. For these shares, the issuer receives the proceeds of the sale. When the company’s existing shares are sold by its current shareholders (selling shareholders), it’s considered a secondary offering and the proceeds of this portion of the offering to the selling shareholders. Selling shareholders may include officers of the company or early-entrance investors (e.g., institutional investors) that are seeking to either cash out or scale back their holdings in the company.
(26743)
When some shares are offered by the issuer and the remainder are offered by selling shareholders, it’s referred to as a ________ (split) offering
Combined
A registered representative is employed by a large online brokerage firm that does not offer equity IPOs to its customers. Which of the following actions is permitted?
The RR is permitted to purchase shares of an equity IPO for her own account at a different firm.
The large online brokerage firm is permitted to purchase shares of an equity IPO.
The spouse of the RR is permitted to purchase shares of an equity IPO at a different firm.
The brother of the RR is permitted to purchase shares of an equity IPO at a different firm.
The brother of the RR is permitted to purchase shares of an equity IPO at a different firm.
Restricted persons are not permitted to purchase shares of an equity IPO. This includes any FINRA member broker-dealer and its employees, immediate family members of the employees if they provide/receive material support (e.g., a spouse), or if the sale is made through the RR’s firm. Since the RR’s firm does not offer equity IPOs, the brother (non-supported) is permitted to purchases equity IPO shares through a different firm.
A customer contacts a registered representative (RR) and inquires about the meaning of the term “exempt securities.” The BEST response for the RR is that:
The issuer may offer these types of securities without filing documentation with the SEC
The issuer may offer these types of securities without filing documentation with the SEC and they’re exempt from antifraud provisions
The issuer may offer these types of securities without filing documentation with the SEC, but only if it provides a prospectus to non-institutional (retail) investors
The issuer may offer these types of securities without filing documentation with the SEC, but only if it limits the amount of securities being offered
The issuer may offer these types of securities without filing documentation with the SEC
The term “exempt securities” refers to certain securities that are exempt from the registration (filing) and prospectus requirements of the Securities Act of 1933. However, they’re not exempt from the antifraud provisions of the Act. This means that, in the event that fraud occurs, the SEC may prosecute offenders regardless of the status of the security sold. The type of investors or the amount of capital being raised is irrelevant.
T/F. The term ‘exempt securities’ means that an issuer is exempt from registering securities AND a prospectus with the SEC
True
A large manufacturing company whose stock is listed on the NYSE will most likely use shelf registration to:
Offer securities to qualified institutional buyers under Rule 144A
Offer securities to accredited investors under Regulation D
Allow the company and its underwriters to offer securities publicly with the flexibility of selling the securities when market conditions are the most favorable
Allow the company and its investment bankers to acquire other company’s stock when market conditions are the most favorable
Allow the company and its underwriters to offer securities publicly with the flexibility of selling the securities when market conditions are the most favorable
An existing public company can offer securities on a delayed or continuous basis under shelf registration. Registration is allowed only for an amount that may reasonably be sold within three years after the initial date of registration. The advantage of the delayed distribution is that it provides the issuing company and its underwriters with the flexibility of selling the securities when market conditions are the most favorable.
The time limit for Shelf Registration is _____ years
3 years
A customer contacts his registered representative (RR) to inquire as to why the RR’s broker-dealer has stopped making purchasers of the stock of a company that’s in the process of conducting a follow-on offering. Which of the following is the BEST response?
The firm is an underwriter.
The firm is not an underwriter.
The stock is listed on Nasdaq.
The stock is listed on the NYSE.
The firm is an underwriter.
Under Regulation M, the SEC restricts distribution participants (e.g., underwriters and issuers) from bidding for or making secondary market purchases of a stock that’s currently being offered in a distribution (e.g., a follow-on offering).
Broker-Dealer A has been invited to join a syndicate to sell a new offering of common stock. The head of Broker-Dealer A’s syndicate department notices that the agreement among underwriters mentions a penalty bid. Which of the following choices is an example of a penalty bid?
If Broker-Dealer A fails to sell its allotment, it will be liable for twice its normal commitment.
If Broker-Dealer A fails to solicit a certain number of indications of interest, it will be required to pay a fee to the syndicate manager.
If Broker-Dealer A sells some of the issue to a customer who later sells the stock back to the syndicate at the stabilizing bid, Broker-Dealer A will forfeit the concession on those shares.
If Broker-Dealer A sells some of the issue to a customer who later sells the stock back to the syndicate at the stabilizing bid, Broker-Dealer A could be penalized for failure to maintain the public offering price.
If Broker-Dealer A sells some of the issue to a customer who later sells the stock back to the syndicate at the stabilizing bid, Broker-Dealer A will forfeit the concession on those shares.
A penalty bid is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member when securities that were originally sold are repurchased by the syndicate in stabilizing transactions.
T/F. A penalty bid is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member when securities that were originally sold are repurchased by the syndicate in stabilizing transactions.
True
