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Wharton > Series 79 - deck 2 > Flashcards

Series 79 - deck 2 Flashcards

1
Q

The contract between the issuer and the lead underwriter or syndicate manager

A

Underwriting agreement

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2
Q

No correlation between market movements

A

Random walk theory

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3
Q

prevents issuer from issuing additional subordinated debt

A

layering

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4
Q

Rule 144

A

Must file a note with SEC if he/she wished to sell 5000 shares or $50,000 in aggregate in any three month period. Must take place within three months of filing the form

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5
Q

Regulation M

A

Restricted period for a merger begins the day proxy materials are sent to shareholders

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6
Q

HSR wait periods

A

Typically 30 days provided there are no hangups

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7
Q

FINRA inspection requirements

A

Firm must maintain copies for the last three years

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8
Q

Who is liable for misleading information in a registration statement?

A

Anyone who participates in prep of file - Issuer, senior management, underwriters, attorney’s accountant who consented to be named.
Penalties are cost of investment plus reasonable interest (Investors can sue)

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9
Q

Liabilities for misleading information

A

burden of proof - allows participant to avoid liablility, withdraw transaction, due diligence defense - after reasonable investigation, person believed the information to be true (standard of reasonableness - prudent man). Acct who did not consent to be named can’t access due diligence defense.

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10
Q

State security laws

A

require the issuer and underwriter be appropriately registered in each state where securities are sold.

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11
Q

No gun-jumping

A

Issuer discusses a transaction after decision to go public but before it files a registration statement.

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12
Q

Cooling off period

A

20 days after registration is filed
Syndicate can’t accept orders for securities, no money, no advertisements; Syndicate can collect indications of interest (not binding!!!) Once effective orders can be confirmed
preliminary prospectus - (red herring) no an offer for securities (says across top in red print)
- Can do tombstone ad, road shows, free writing prospectus

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13
Q

Effective date

A

when they know the price…might not be 20 days after filing because of a request for acceleration! SEC reviews the docs for sufficient investor disclosure. Must deliver to al linvestors with the latest price confirmation (e-delivery of prospectus ok)

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14
Q

What is the prospectus form?

A

Form 424B

includes stabilization disclosure

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15
Q

Prospectus

A

Underwriter is prohibited from making any changes to the prospectus after the effective date

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16
Q

Quiet period for equity research

A

Applies to issuers with more than 1 billion in revenue in year prior to IPO; # of days after the effective date vbefore research can publish

  • 40 days for syndicate manager
  • 25 days for syndicate member
  • Follow on - 10 days for syndicate manager
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17
Q

Timeline Summary

A

Preregistration
- No sales, no marketing, no indications of interest
Cooling off period (after issuer files with SEC
- No sales, mktg ok, road show ok, indications of interest ok, FWPs ok,
Post-effective date (after SEC clears the issue)
- Sales ok, all purchases must receive final prospectus which must be filed with the final offer price with the SEC within 15 days of effective date, quiet periods for research

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18
Q

SEC Rule 415

A

Shelf registration - allows issuer to sell securities on a delayed or continous basis and at various times and prices. (pre-register) 3 years - used for debt or equity

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19
Q

Well known Seasoned issuer

A

Public equity $700 million in public float (excludes affiliate shareholders) OR Debt - $1bn in non-convertible debt w/in past 3 yrs AND SEC filer for at least one year

Automatic Shelf registration, Filing fees pay as you go, Free writing prospectus can be usd at any time

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20
Q

Seasoned Issuer

A

Greater than $75mm and at least 1 year filing with SEC

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21
Q

Unseasoned Issuer

A

Less than $75 mm or Less than one year with SEC

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22
Q

non-reporting issuer

A

a non-SEC filer; private company registering an IPO

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23
Q

Ineligible issuer

A

1- not current with SEC filings
2- Filed for bankruptcy win last 3 years
3- blank check company (raises money with no busines plan, no use for proceeds - public private equity company)

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24
Q

10-K

A

Cover Page - stock price, outstanding share, public float
Part I - Issuers business, current legal proceedings
Part II - MD&A (management discussion and analysis) - narrative discussion of company’s performance - 2 BS, 3 IS, 3 CFS, - Market Risk disclosures
Part III - Affiliate
Part IV - Exhibits, supplements, and certificates

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25
Q

10-Q

A

Part I - MDA and Financials - qtr end, prior year end on BS, 4 IS Qtr, YTD, Prior year quarter, Prior YTD; Disclose any change to market risk factors
Part II - Exhibits, supplements, and certifiations Major shareholders are not in 10-Q**

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26
Q

8-K

A

Newsworthy event - earnings announcement, merger, bankruptcy, default on a loan, pledging key assets as collateral, delisting or transferring exchanges, change in auditors, change in company address **class action lawsuit again company would not require an 8-K

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27
Q

SEC filers

A

Large accelerated filer (700 million float and SEC filer for a year), Accelerated filer (greater than 75 million float and SEC filer for a year), Non-accelerated filer (less than 75 million or SEC filer for less than a year), Smaller reporting company (less than 75 million or less than 50 mm in revenues)

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28
Q

Reporting requirements

A

Large accelerated (10-K - 60 days, 10-Q - 40 days, and 8-K for 4 days), Accelerated filers (10-K for 75 days, 10-Q - 40 days, 8-K - 4 days), Non-accelerated filer (10-K - 90 days, 10-Q - 45 days), Smaller reporting companies (10-K - 90 days, 45, 4)

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29
Q

PRE14A

A

Preliminary proxy statement - lists lots of stuff including any director who did not attend 75% of meetings; Not on proxyvoting record of board members

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30
Q

DEF14A

A

Definitive Proxy statement - always requried - goes to shareholders and SEC
PRE14A is filed 10 days before def Proxy to shareholders, DEF14A is filed 20 days prior to annual meeting

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31
Q

Sarbanes Oxley

A

10K - CEO, CFO, must certify
10Q - Any member of senior management
Certification says CEO has read the document, document contains accurate description of company; Must disclose off balance sheet liabilities

SOX also says that board of directors must consist primarily of independent directors (not employed by company) and AUDIT committee must consist entirely of independent directions (NYSE & NASDAQ requries to hava financial expert on audit committee)

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32
Q

SOX prohibits…

A

Personal loans to company executives; Also requires (section 404) for CEO to certify firm’s internal controls for financial reporting. *ok to reimburse for home office expense

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33
Q

Schedule 13-E

A

Going private

34
Q

Form 3

A

When an investor becomes and insider; must be filed wihting 10 days of becoming an insider*

35
Q

Form 4

A

Any time an insider trades stock on open market within 2 days of transaction*

36
Q

Form 5

A

Filing requirements - Filed annually for any change in owernship not via the open market (receiving shares as comp)45 days of fiscal year end

37
Q

Prohibitions for insiders

A

Can’t sell stock short, Can’t write uncovered calls, can’t engage in short swing profits (6 months or less), can’t use personal information for inside gain

38
Q

Schedule 13D

A

Any time an investor becomes a 5% shareholder wiht some intent to influence (activist investor); Filing deadline wihtin 10 days of transaction wi issuer,k SEC, and exchange where security trades. Must disclsoe their intent - Change in 1% or more from previous (3 Investors own 3% of company each, agreement to vote same way - must file a 13 D!”

39
Q

Schedule 13G

A

5% shareholders with no intent to influence issuer (passive investor)must be signed within 45 days of fiscal year end

40
Q

Schedule 13F

A

Institutional investment managers - managing portfolio of $100mm due within 45 days of every quarter Investor must disclose all of its long equity positions

**To identify large shareholders - 13D
To review other holdings - 13F*

41
Q

Selecting an Underwriter

A

Bake off, Competitive bid (Based solely on price), Syndicate manager and Issuer sign the Underwriting agreement

42
Q

Types of underwriting commitments

A

Firm Commitment - (firm purchase all securities and sells to public - responsible for anything outstanding), Standby (shares are issued to existing shareholders, firm will take on any that weren’t claimed), Best Efforts (Act as an agent wi no liability for unsold shares), All or none (must sell all securities or deal is done - funds held in escrow), Mini-max(Underwriter must sell min amount or entire deal is canceled - funds held in escrow)

43
Q

MAC clause

A

Material adverse change - specifrices a series of material adverse events - Underwriter can kill the deal for these - criminal indictment against company, etc.

44
Q

Syndicate Desk

A

Not the syndicate’s desk primary responsibility to prepare prospectus

45
Q

Breakdown of spread

A

Syndicate manager gets 100% (managers fee (20%) + Underwriting fee (20%) + selling concession fee (60%)), Syndicate members are entitled to 80%, Selling concession / Selling group are entitled to 60%

46
Q

Overallotment

A

Oversubscription (upsize price, increase allotment), Green shoe clause (increase the size of the offering by 15% can be exercised up to 30 days after the effective date)

47
Q

Syndicate expenses

A

Always reduce the underwriting fee; Don’t reduce manager fee or selling concession!!!

48
Q

IPO Secondary market

A

Prior to trading limit orders only thing that can be accepted

49
Q

Important notes

A
  • **After an IPO when can security trade away from the exhcange? AFter stock has traded on the exchange*
  • doing a follow on offering when 35% of the stock is held by institutional investors** block trade RISK
50
Q

IPO expense reimbursement

A

Payment for bona-fide expenses is not considered compensation
Issuer pays for syndicate expense is considered compensation (underwriters’ counsel, tombstone Ads)

51
Q

FINRA Rule 5130

A

Restricted persons can’t invest in IPO’s -
These include: FINRA member firms and their employees, finders and fiduciaries of the managing underwriter; family member of restricted person
Permitted purchasers - family can invest if they work for the firm, if restricted person owns no more than 10% - Standby agreements - broker dealer can invest if they agree to do so before the effective date and no one else wants the shares and they agree to hold the shares for 3 months.

52
Q

Important Note

A

Issuer wants to hire its own subsidiary to underwrite its IPO - OK but must also hire QIU

53
Q

Regulation M

A

Market Maker activities during syndication; Rule applied to both subject and reference securities. Can’t bid up the stock or take steps to do so

54
Q

Regulation M restricted period

A

Begins 5 Days before determination of offer price
Begins 1 day (ADTV at least 100k, publicfloat at least 25 mm)
Actively traded securities - no restricted period (ADTV at least $1mm, public float at least $150mm)

Rule also applies during M&A deals. Restricted period begins the day proxy material are sent to shareholders

55
Q

Regulation M - allowable activities

A

dissemination fo researhc reports, brokerage transactions, exercise of any right, warrant, option, or conversion privilege, Bona fide basket transactions, Rule 144A transactions

56
Q

Greenshoe

A

No disclosure requirements, within 30 days of effective date and aboove offer price can exercise the shoe.

57
Q

Summary of Regulation M

A

1- Underwriting converts, the the rule applies to the stock
2- M&A restricted period begins when proxy sent to shareholders
3- Exercising the Shoe

58
Q

Which of following isn’t required to be registered with SEC?

A

US gov’t, muni bonds, commercial paper, commercial bank securities, eurodollars / eurobonds - ETFs, ADRs, need to be registered

59
Q

Act of 33 Exempt Transactions - Reg A

A

Reg A - for small business (less than 5mm in 12 month period can avoid full registration)

60
Q

Act of 33 Exempt Transactions - Rule 147

A

Sell inone state and avoid SEC registration
80% of revenues from the state, 80% of offering proceeds are used in state, 80% of issuer’s assets are in the state; Only to state residents (entire issue) resale to non-residents only 9 months after sale

61
Q

Act of 33 Exempt Transactions - Regulation S

A

Offerings outside the U.S. (US company selling overseas) - US residents can’t purchase the securities, every investor must have an overseas address; After seasoning periods (40-days for debt, 6 months and rule 144 for equities) securities can be purchased in the US. Sold on off shore exchanges.

62
Q

Act of 33 Exempt Transactions - Private Placement

A

Sections 4(2) & 4(6) of 33 Act - registration not required because no public offering; Investors should expect to see information that is substantially similar to public offering - should receive a PPM; every investor has to be sophisticated

63
Q

Act of 33 Exempt Transactions - Reg D

A

Safe harbor
Accredited investors (assumed to be sophisticated) includes officers and directors, insitutional investors, individual investors (200,000 in income past two years, $1mm in networth, $300k if married, 1 mm in net worth)
Non-accredited investors may need purchaser representative (become sophisticated)

64
Q

Act of 33 Exempt Transactions - Reg D cont

A

Private placement up to $1mm (Rule 504) - Unlimited number of non-accredited investors
Private placement in excess of $1mm (rules 505/506) <= 35 non-accredited investors

65
Q

Act of 33 Exempt Transactions - Rule 144

A

Permits the sale of restricted stock as well as Reg S overseas issuance to states
Permits the sale of control stock (stock issued by a corporate insider…corporate insider has volume restrictions over 90 day period) Insider must file form 144 to sell shares and has up to the date of sale to file* Volume limits greater of 1% of the oustanding shares or average reported weekly trading volume during the 4 weeks preceding the sale** (once every 90 days)

66
Q

Reps and Warranties about a business

A

Required in an all stock transaction

67
Q

Reps and Warranties

A

Need to be true in all material respects

68
Q

Organization and Offering expenses

A

with Direct Participation Program there are three components: bona fide issuer expense, underwriting compensation, and due diligence expenses connected to the offering

69
Q

Data Room

A

SEC officials are not granted access to the data room

70
Q

NASD 2711 and NYSE Rule 472

A

A non-equity research may only evaluate an analysts report prior to publication to ensure factual accuracy

71
Q

FINRA rule book

A

Must provide access if asked. Can be electronically if agreeable to the customer

72
Q

power to create bankruptcy laws

A

Congress

73
Q

Firm to begin business as a broker dealer

A
  • appropriately qualified persons
  • must have filed form BD
  • satisfied state requirements
  • become an SRO and member of SIPC
  • Registration with SEC
74
Q

Stabilizing post IPO

A

Under Regulation M Rule 104, an underwriter can stabilize a new issue no higher than the most recent transaction price or the best independent bid, whichever is greater.

75
Q

M&A announcement

A

Under SEC Rule 425, communications regarding a business combination transaction may be distributed to the public but are defined as a prospectus and must be filed with the SEC no later than the date of first use.

76
Q

Bond Call schedule

A

A call schedule as defined in a bond’s indenture lists each call date of an existing issue and the corresponding price at which the issue can be called. A bond’s call schedule and call prices depend on its term and coupon. They are typically set at four years (“Non call-4” or “NC-4”) for a seven/eight-year fixed rate bond and five years (“NC-5”) for a ten-year fixed rate bond.

77
Q

lagging indicators

A

Lagging economic factors change after the economy has already begun to follow a particular pattern or trend. Examples of lagging indicators include:
• Interest rates, particularly the prime rate, which is a key bank lending rate that is often used as a reference rate of interest for credit cards and other loan rates
• unemployment rates
• corporate profits
• labor cost per unit of output

78
Q

Breakup Fee

A

The Termination Provisions of the Definitive Agreement detail the circumstances under which one party may terminate the agreement rather than complete the deal. In some circumstances, one party may owe a termination fee (“breakup fee”) to the other party. Examples include:
• if the seller terminates the deal to take a better offer, the seller pays a breakup fee to the buyer
• if the seller terminates because the buyer cannot come up with financing, the buyer may owe a breakup fee to the seller
The circumstances under which one party may terminate the agreement are clearly defined. Business trends do not typically constitute grounds for termination and receipt of a break-up fee post-signing.

79
Q

misappropriation of information

A

Misappropriation occurs when persons steal information from their employer and trade on that information in any stock, not just their employer’s stock. The misappropriation theory broadens the liability for misuse of inside information and is illegal.

80
Q

Suitability rule

A

For non-institutional clients, the only type of transaction in which customer suitability information is not required is in money market mutual funds.

81
Q

Regulation A

A

Regulation A permits exemptions for issuers of no more than $5 million in a 12 month period. Issuers must provide an offering circular for disclosure to potential buyers. Issuers are not required to file an S-1 registration statement, which is the full-blown registration statement required for non-exempt offerings.

82
Q

Leading indicators

A 
Leading indicators change before the economy starts to follow a particular pattern or trend. Leading economic indicators include:
• Bond yields
• building permits (new private housing)
• industrial production rates
• money supply
• S&P 500
• average of weekly unemployment insurance claims
• changes in business inventories

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