UNIT 1

Question 1

What’s the primary market?

Answer 1

Where securities are sold by the issuer—a corporation or a government—to the investing public in what are known as issuer transactions.

Question 2

Who receives the proceeds of the sale?

Answer 2

The issuer of the securities receives the proceeds generated by the sale of the securities in the primary market.

Question 3

What’s the secondary market?

Answer 3

where securities trade between investors. Another term for these markets is capital markets.

Question 4

How do companies raise capital?

Answer 4

Through IPO’s. The first time an issuer distributes securities to the public, it is called an initial public offering (IPO).

Question 5

How many types of public offerings are there?

Answer 5

There’s Initial Public Offerings (IPO) or Additional Public Offering (APO) / Follow On Offerings

Question 6

What’s an APO?

Answer 6

Additional Public Offering or Follow On Offering, is a process through which a publicly-traded company raises additional capital by issuing and selling new shares of its stock

Question 7

What’s a syndicate?

Answer 7

Temporary alliance formed by professionals to handle a large transaction that would be impossible to execute individually.

Question 8

What’s a selling group?

Answer 8

Includes the brokers, dealers, and other financial firms collectively involved with the selling or marketing of new or second-issued securities

Question 9

Who’s normally the issuer?

Answer 9

Corporations
U.S. Government and Municipalities which are exempt from registration

Question 10

What’s an underwriter?

Answer 10

Any party, usually a member of a financial organization, that evaluates and assumes, for a fee, another party’s risk in mortgages, insurance, loans, or investments

Question 11

What are the types of underwriting offers?

Answer 11

Firm Commitment: Syndicate purchased shares from the issuer
Best Efforts: Syndicate agrees to do it’s best to sell shares

Question 12

Who are the investors of the primary market

Answer 12

Institutional Investors:
- Banks
- Other broker-dealers
-Nonretail

Retail Investors
- Average investor
- Not savvy
- Requires full disclosure of risk

Accredited Investors
- Institutional Investors
- Insiders and Issuers
- Income/ net worth

Question 13

Which are the underwriting phases?

Answer 13

• Files registration statement
• Cooling - Off Period
• Effective date

Question 14

Which are the allowed and non allowed activities during the cooling off period?

Answer 14

Allowed
- Distribute preliminary prospectus
- Publish tombstone advertisements
- Gather indications of interest

Not allowed
- Offer securities for sale
- Distribute final prospectus
- Disseminate sales literature
- Take orders
- Accept postdated checks

Question 15

What does the Securities Act of 1933 States?

Answer 15

is to require full and fair disclosure in connection with the sale of securities to the public. The act requires that a new issue, unless specifically exempted from the act, be registered with the SEC before public sale.

Question 16

Which Institutions are exempt from registration?

Answer 16

• US Gov and Agencies
• Municipalities
• Charities and Religious Entities
• Banks and common carriers
  Exempt maturities
• Commercial Paper
• Banker’s acceptance
• Short term Corp Debt
• Fixed annuities

Question 17

What is Regulation A?

Answer 17

Provides two offering tiers for small- and medium-sized companies that allow the companies to raise capital in amounts substantially more than the $5 million previously allowed under this rule:

Tier 1. Securities offerings up to $20 million in a 12-month period will be allowed in Tier 1. Of the $20 million, no more than $6 million can be sold on behalf of existing selling shareholders (similar to a combination offering covered earlier).

Tier 2. Securities offerings up to $75 million in a 12-month period will be allowed in Tier 2. Of the $75 million, no more than $22.5 million can be sold on behalf of existing selling shareholders.

Question 18

What’s rule 147?

Answer 18

Under Rule 147, offerings that take place entirely in one state are exempt from registration when the issuer has its principal office (headquarters) in the state and all purchasers are residents of the state.

In addition, the company must meet one of the following criteria.

It receives at least 80% of its income in the state.
At least 80% of the issuer’s assets are located within the state.
At least 80% of the offering proceeds are used within the state.
The majority of the company’s employees work in the state.

Question 19

What’s Regulation D: Exempt Transactions (Private Placements) Under Rule 506(b)?

Answer 19

The SEC does not require registration of an offering under Regulation D as long as there are no more than 35 nonaccredited investors. There is no limit to the number of accredited investors that may invest in the private placement.

Purchasers in private placements must have access to the same type of information they would receive if the securities were being sold under prospectus in a registered offering. The amount of capital that can be raised is unlimited.

A private placement investor must sign a letter stating that they intend to hold the stock for investment purposes only. Private placement stock is called lettered stock due to this investment letter. The certificate may bear a legend indicating that it cannot be transferred without registration or exemption; therefore, private placement stock is also called legend stock.

Question 20

What is the cooling off period?

Answer 20

The cooling-off period lasts for a minimum of 20 calendar days, though the period is often longer. If the SEC finds that the registration statement needs revision or expansion, the SEC may suspend the review and issue a deficiency letter to the issuer of the securities.

Question 21

What’s a tombstone advertisement?

Answer 21

Certain types of advertisements relating to a new issue are allowed to run before the effective date. These are known as tombstone ads because of the bare-bones, minimum information provided. Tombstone ads are an announcement and description of the securities to be offered.

Question 21

What’s a preliminary prospectus / red hearing?

Answer 21

The preliminary prospectus, or red herring, can be used as a prospecting tool, allowing issuers and underwriters to gauge investor interest and gather indications of interest

Question 22

What happens during the cooling off period?

Answer 22

• Indications of interest may be gathered
• Due diligence takes place
• State registration requirements (blue-sky filings) are addressed.
• The release (or effective) date is reached.

Question 23

How does the SEC disclaimer reads?

Answer 23

“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.”

Question 23

Primary market transactions

Answer 23

If the issuer of the security is receiving the funds from an offering, it is a primary market transaction. Whether an IPO, APO, or something else, if the issuer is getting the money, it is a primary offering.

Question 24

How does issuing a new security by shelf offering works?

Answer 24

an issuer who is already a publicly traded company can register new securities without selling any of the shares until later. For securities offered via a shelf registration, a supplemental prospectus must be filed with the SEC before each sale.

Question 24

General Solicitations and Advertising Private Placements Under Rule 506(c)

Answer 24

All purchasers of the advertised securities must be accredited investors, or the business must reasonably believe that the investors are accredited investors at the time of the sale. In other words, while businesses may sell to up to 35 nonaccredited investors, in order to solicit or advertise, all purchasers must be accredited.

The business must take reasonable steps to verify that all purchasers are accredited, considering background, relevant facts (such as reported income), and particular circumstances of each purchaser.

Sometimes it is difficult to identify private placement stock in a question because of the many terms that can be used to describe it. Recognize that all of the following terms are synonymous with private placement stock:

Restricted (because it must be held for a six-month period)
Unregistered (no registration statement on file with the SEC)
Letter stock (investor agreed to terms by signing an investment letter)
Legend stock (a special inscription on the stock certificate indicates restricted transfer)

Question 25

What type of offering is an investment banker that sells to public of behalf of the issuer

Answer 25

IPO - best effort

Question 26

What type of offering is an underwriter that sells IPO shares from its own inventory

Answer 26

Firm commitment

Question 27

What type of offering is ABC Corp Selling 15,000,000 in bonds

Answer 27

Reg A Tier 1

Question 28

What type of offering is BuyStuff, Inc., selling 45,000,000 in preferred stock

Answer 28

Reg A Tier 2

Question 29

Sierra Verde Coffe offers shares exclusively to residents of its home state

Answer 29

Rule 147 Offering

Question 30

Lil’ Gym Corp offers shares exclusively to accredited investors

Answer 30

Private Placement

Question 31

What’s an exchange?

Answer 31

Operate as auction markets where stocks listed on the exchanges are traded. regulated under the Securities Exchange Act of 1934. The Act of 1934 created the SEC and gave it the authority to regulate securities exchanges and the OTC market.

Question 32

Why are there secondary markets?

Answer 32

Because they provide liquidity to investors. A security that is easily sold (liquidated) is said to be very liquid, or to have little liquidity risk. Treasury bills and stocks listed on exchanges are examples of securities that are very liquid. Limited partnership units are usually extremely difficult to liquidate and are called illiquid.

In the primary markets, the seller is always the issuer; in the secondary markets, the seller is never the issuer. Investors sell securities in the secondary markets and keep the money for their own use.

Question 33

What’s a DMM?

Answer 33

The designated market maker (DMM) (sometimes called a specialist) is the member that acts as the dealer on the floor for a specific security. The DMM maintains an inventory of the security and guarantees liquidity. The DMM is responsible for maintaining a “fair and orderly” market in the assigned security.

Question 34

What’s a Floor Broker?

Answer 34

Floor brokers represent their firm and their firm’s clients on the floor. If your customer places a trade that will execute on an exchange, a floor broker will handle it.

Question 35

What’s a Two-Dollar Broker?

Answer 35

If the floor brokers become overwhelmed by trades, they enlist the services of the two-dollar brokers. These members place trades for the floor brokers and receive a fee for performing the service.

Question 36

What’s a Floor Trader?

Answer 36

The floor traders (also registered floor traders, FTs, or RFTs) are members that buy and sell on the floor for their firm’s accounts (not outside customers). They help maintain liquidity on the exchange.

Question 37

What’s the order flow of an exchange?

Answer 37

1) Customer A
2) ABC Broker-dealer
3) Floor Broker
4) DMM
5) XYZ Broker-dealer
6) Customer B

Question 38

What’s the OTC Market?

Answer 38

The OTC market trades unlisted stocks, as well as most bonds, including municipal bonds and Treasury debt that trades in the secondary markets.

OTC trading occurs between market makers in a decentralized electronic market. There is no physical location or “floor” in the OTC market.

Question 39

What’s the third market?

Answer 39

or Nasdaq Intermarket, a trading market in which exchange-listed securities are traded in the OTC market. BDs registered as OTC market makers in listed securities can do transactions in the third market.