Underwriting and team players

Question 1

Who is the issuer?

Answer 1

✅ The company, corporation, or local (municipal) government that issues a security (issue)

Question 2

What does the corporate charter represent?

Answer 2

✅ Also known as the bylaws, is a document filed with the SEC and in the home state that lists the company founders by name, location and type of business. This document also includes the number of registered shares available.

Question 3

What is the Securities act of 1933?

Answer 3

✅ Law also known as the ‘truth in securities act’ or ‘rightful disclosure act’ regulates new securities entering into the market.

Question 4

What is the Securities exchange act of 1934?

Answer 4

✅ Law establishing the SEC and adding regulation to secondary markets (OTC) such as the NYSE, also added rules around credit extensions for margin accounts, insider trading, and customer accounts/ trading activities.

Question 5

What is the Trust indenture act of 1939?

Answer 5

✅ Law requiring issuers to assign a trustee that upholds shareholder rights and requires a legal document called trust indenture be provided to investors that have 50 million (was 5 million in the beginning) or more. This document must include Coupon rate, maturity date, and the collateral.

Question 6

Name at least 5 items required on a registration statement.

Answer 6

✅ The issuers name, address, and type of business.
✅ The company article of incorporation
✅ Names and addresses of underwriters, commissioners, and discounts they receive from the sale directly or indirectly.
✅ Price of security offered to the public
✅Names and addresses of all company control personnel such as; officers, directors, and anyone that owns more than 10 percent of the corporations securities, and how much they hold.
✅ The estimated net proceeds of the sale and what they will be used for including property or other businesses to be purchased.
✅ Company capitalization (all financial related debt and equity)
✅ Complete financial statements (balance sheets and income)
✅ Any legal proceedings against the company
✅ Any net proceeds derived from previously sold securities in the last two years
✅ Names and addresses of the attorneys who vouched for legality of the issue
✅ Any agreements or indentures that may affect the securities being offered

Question 7

What is the registration statement?

Answer 7

✅ The registration statement is the company/corporation/governments application to the SEC for new securities

Question 8

What are the two items that a corporation/municipal gov needs to submit to the SEC to register a new issue?

Answer 8

✅ A registration statement and prospectus material

Question 9

What is Schedule A?

Answer 9

✅ All CORPORATE information required on the registration statement that is submitted to the SEC for new issues

Question 10

What is Schedule B?

Answer 10

✅ All MUNICIPAL information required on the registration statement that is submitted to the SEC for new issues

Question 11

What is SEC Rule 415?

Answer 11

✅ This refers to shelf registration - an Issuer can sell additional securities that were registered within the last 3 years without the need to re apply.

Question 12

What is the cool off period after registering a new security with the SEC?

Answer 12

✅ 20-day period in which the SEC reviews registration statement and prospectuses.

Question 13

What is the effective date of registration?

Answer 13

✅ The date the SEC clears a security for sale to the public!

Question 14

What is a deficiency letter?

Answer 14

✅ Letter provided to Issuer of new security if registration statement/prospectuses require amendments.

Question 15

Does the SEC approve issues?

Answer 15

✅ No, they only clear it to go on sale, no regulatory authority can approve an issue.

Question 16

What is the “No approval clause”?

Answer 16

✅ When a security is unlawfully presented as “approved” by the SEC.

Question 17

What is a tombstone ad?

Answer 17

✅ The ONLY “advertisement” an issuer may put out to the public during the cooldown period. Must include facts such as name of issuer, type of security, number of shares available, underwriters name and may or may not include price.
✅Must Include disclaimer indicating the ad is NOT solicitation or offer to sell.
✅Usually includes how to get prospectus.

Question 18

What is the due diligence meeting?

Answer 18

✅ Meeting required by law that is held prior to Registration Date in which the Issuer answers questions regarding the issue and what they plan to do with the capital. Meeting is led by managing (lead) underwriter and attended by Syndicate (members/desk), brokers, analysts, selling groups, and institutions.

Question 19

When is the latest a syndicate member can back out of underwriting agreement?

Answer 19

✅Towards the end of the cool off period (near due diligence meeting time), negative market conditions can be assumed if syndicate members back out.

Question 20

What are “blue skies” laws?

Answer 20

✅ State laws governing securities offerings and sales
✅ Each state has its own blue-sky laws
✅ The brokerage firm (broker dealer), the representative, and security must all be registered in the buyers home state.
✅ Blue sky laws are overseen by states securities regulator
✅ Issuer must apply with each state individually if they want their security sold there.

Question 21

What are the three methods of registration securities with the states?

Answer 21

✅ Notification - easiest way to register, companies that previously sold securities in the state can renew their previous application.
✅ Coordination - registration with SEC and states at the same time, the SEC aids in meeting each states blue sky laws by notifying each state in which the security will be sold, standard for IPOs (Initial Public Offerings)
✅ Qualification - Used to register exempt securities (exempt- not required to register with SEC) must meet with state administrators.

Question 22

❓What is the role of the Investment banking firm?

Answer 22

✅ Brains of the operation, a firm (broker-dealer) that aids issuer in pricing a security, raising money, and provides advice for mergers, acquisitions, and corporate restructures. Usually becomes underwriter.

Question 23

❓What is the role of the Selling group?

Answer 23

✅ brokerage firms not part of the syndicate that get the opportunity to sell shares of the security. They do not purchase shares from the issuer thus their financial commitment is lesser, they make less on each sale.

Question 24

❓What is the role of the Underwriter?

Answer 24

✅ (broker-dealer) that helps issuer bring new securities to the public. Underwriters purchase securities from the issuer to sell to the public for profit. They take the financial risk therefore receive an extra fee.

Question 25

❓What is the role of the Syndicate?

Answer 25

✅ group of firms responsible for selling a portion of the securities to the public. Lead by managing underwriter (syndicate manager).

Question 26

❓What is the role of the Managing (lead) underwriter?

Answer 26

✅ brokerage firm responsible for putting together a syndicate and dealing directly with the issuer. Managing underwriter (firm) receive compensation for each share sold.

Question 27

❓What is the Underwriting agreement?

Answer 27

✅ The contract signed prior to the sale of the securities, by managing (lead) underwriter (brokerage) and issuer (company), detailing the sale of the securities to the public.

Question 28

❓What are three methods of distribution outlined in an underwriting agreement?

Answer 28

✅ Firm commitment - Lead underwriter and syndicate members agree to purchase all remaining unsold securities, assuming all financial risk and becoming the dealer. ✅ Standby - lead underwriter and syndicate agree to purchase any remaining shares not sold to the public ONLY if issuer has a rights offering. ✅ Best efforts - Underwriter agrees to sell all shares to the public through its best efforts. Issuer keeps the rights to cancel the offering or take back some of the unsold securities. Best efforts distribution requires the shareholder is informed their sale might be canceled, purchaser money is held in escrow account until deal is met or sale is cancelled.

Question 29

❓What is a 'Bona fide offering'?

Answer 29

✅ Broker must act with utmost commercial honor, by upholding just and equitable trade principals. Shares sold must be at public price. Firms CAN'T hold back any securities for themselves, associates, family members, industry insiders, portfolio managers, and so on.

Question 30

❓What is ALL or NONE and MINI-MAX in relation to the methods of distribution?

Answer 30

✅ This type of agreements fall under the Best Efforts distribution agreement. ✅ All or None-in a (AON) agreement, all shares must be sold by due date, or money is returned to investors. ✅ Mini-max- a minimum number of shares must be sold to not cancel deal, if threshold met, shares can continue to be sold to maximum amount. Any unsold shares go back to the issuer.

Question 31

❓What is the Preliminary prospectus?

Answer 31

✅ Also known as RED HERRING, a Document filed alongside the registration statement (with SEC) detailing facts about the issuer(company) and issue (security. DOES NOT include the final public offering price (POP) or effective date (first date issue w be sold). Must be made available to potential investors.

Question 32

❓What is the Final prospectus?

Answer 32

✅ Final legal document prepared near end of cool off period that includes the final offer price, the underwriters spread (profit made for each sale), and delivery date (when security will be made available)

Question 33

❓What is ‘part B’ in regard to the registration statement?

Answer 33

✅ Refers to a statement of additional information (SAI) that covers the funds operation details. This is submitted alongside the registration statement. Usually for mutual fund (open-end) securities.

Question 34

❓What is the role of the ‘Registrant’?

Answer 34

✅ Independent financial institution that ensures the number of stock/bonds issued to shareholders does not exceed their registered amount within the companies' charter (bilaws). Works alongside transfer agent to keep track of ownership.

Question 35

❓What is the role of the ‘Transfer agent'?

Answer 35

✅ Individual that maintains a corporations ownership records, cancels/issues certificates, and is in charge of dividend payments.

Question 36

❓ What is an 'unlisted IPO'?

Answer 36

✅ initial public offering securities not listed on an exchange or Nasdaq.

Question 37

❓How long after the effective date must a prospectus be made available to purchasers of IPO-NMS registered securities?

Answer 37

✅ 25 days after effective date

Question 38

❓How long after the effective date must a prospectus be made available to purchasers of unlisted IPOs?

Answer 38

✅ 90 days after effective date

Question 39

❓What is an ‘Exempt security’?

Answer 39

✅ Securities not required to register through the SEC (unregistered security) because issuer is of high credit worthiness or because the issuer is regulated by another government body.

Question 40

❓What is an Exempt transaction?

Answer 40

✅ Securities not required to register through the SEC (unregistered security) due to the nature of the sale, .

Question 41

❓What is intrastate offerings (rule 147)?

Answer 41

✅ Exempt security due to the nature of the transaction. ✅ Intrastate offering includes the 80% rule in which 80% of corporate assets, revenue, or money raised MUST be used/within state. ✅ At least 50% of the staff must be in state. ✅ Securities must be registered at state level and will only be offered within the state.

Question 42

❓What is a Regulation A (Reg A, Regulation A+, Reg A+) security?

Answer 42

✅ Exempt security due to the nature of the transaction. ✅ An offering of securities with 20 million or less (Tier 1), 75 million or less (Tier 2) within 12-month period. ✅ Exempt from FULL registration but the company must still submit an abbreviated (simplified) registration statement.

Question 43

❓What is regulation D (Reg D) security?

Answer 43

✅ Exempt security due to the nature of the transaction. ✅ Also known as private placements (private securities offerings) ✅ (Limited) Offering to no more than 35 unaccredited investors per year. ✅ Can raise any amount of money but must stay within investor limits. ✅ Reg D securities sales fall under rule 144.

Question 44

❓What are examples of an accredited investor?

Answer 44

✅ Use the mnemonic: “BIG MONEY CLUB” 🔹 B – Banks & Financial Institutions (Banks, Insurance Companies, Pension Funds) 🔹 I – Insiders (Officers, Directors, 10%+ Shareholders & Family) 🔹 G – Government & Registered Reps (SEC-Registered Reps – Series 7, 65, 66, 82) 🔹 M – Millionaires ($1M+ Net Worth, Excluding Primary Residence) 🔹 O – Organizations & Corporations ($5M+ Net Worth) 🔹 N – Net Income High Earners ($200K Solo / $300K Joint for 2+ Years) 🔹 E – Employees of Private Funds (Hedge Funds, Private Equity) 🔹 Y – Yes, Even LLCs & Family Offices ($5M+ Managed Assets) 🔹 C – Companies Raising Capital Privately (Rural Business Investment Companies) 🔹 L – Limited Liability Companies (LLCs) ($5M+ Assets) 🔹 U – Ultra-High Net Worth Individuals & Entities 🔹 B – Big Money Family Offices ($5M+ Managed Assets) 📌 Key Concept: Accredited investors are those with high net worth, financial expertise, or insider access, allowing them to invest in private placements and hedge funds.

Question 45

❓What is ‘Rule 144 (Resale of Restricted Stock)’?

Answer 45

✅ Rule covering the sale of restricted stock such as private placements, unregistered and controlled securities ✅ Sellers must own security for at least 6 months and can only sell limited quantities. ✅ Limit is either 1% of outstanding shares or the average weekly trading volume of the last 4 weeks, whichever is higher. ✅ Formula 1- multiply outstanding stock by .01 ✅ Formula 2- add last 4 weeks of volume and divide by 4.

Question 46

❓Who is considered a control person?

Answer 46

✅ Officer, director, or any owner of 10% or more of a issuers (corporations) voting stock.

Question 47

❓If an investor is not accredited or institutional, what type of investor are they?

Answer 47

✅ Retail - private investor that purchase for their own.

Question 48

❓ What securities are exempt from SEC registration?

Answer 48

✅ Use the mnemonic: “U.S. G-MAN C” 1️⃣ U.S. → U.S. Government Securities (T-Bills, T-Notes, T-Bonds) 2️⃣ G → Government Municipals (Local & State Bonds) 3️⃣ M → Money Market Instruments (Commercial Paper, Bankers’ Acceptances – short-term corporate debt under 270 days) 4️⃣ A → Agencies & Banks (Bank securities, Savings Institutions, Credit Unions) 5️⃣ N → Nonprofits (Religious, Educational, & Charitable Organizations) 6️⃣ C → Commercial Insurance & Fixed Annuities 📌 Key Concept: These securities are exempt because their issuers are highly creditworthy or already regulated by another government body.

Question 49

❓What is Rule 144A (Institutional Sales)?

Answer 49

(Institutional Sales) → Large institutions can trade unregistered securities among themselves.