1 - Capital Market Activities: Securities Registration, Underwriting, and Exemptions Flashcards Preview

Series 79 Top-Off Exam > 1 - Capital Market Activities: Securities Registration, Underwriting, and Exemptions > Flashcards

Flashcards in 1 - Capital Market Activities: Securities Registration, Underwriting, and Exemptions Deck (232)
Loading flashcards...
1
Q

Quiet period for a syndicate manager’s research analyst to initiate research following an IPO

A

10 days after the effective date

2
Q

Quiet period for a syndicate member’s research analyst following an IPO

A

10 days after the effective date

3
Q

Quiet period for a syndicate manager’s research analyst following an additional offering

A

3 days after the effective date

4
Q

SEC Form S-1

A

Long form registration statement, typically for IPOs

5
Q

SEC Form S-3

A

Short form registration statement, typically for follow-on offerings

6
Q

SEC Form S-4

A

Exchange offer registration statement, for mergers, acquisitions or refinancings

7
Q

SEC Form F-6

A

American Depository Receipt (ADR) registration statement

8
Q

SEC Form S-8

A

Registration statement for securities issued to employees through employee benefit plans

9
Q

SEC Form S-11

A

Registration statement for REITs

10
Q

Automatic Shelf Registration

A

Available only for Well-Known Seasoned Issuers (WKSIs). Effective immediately without SEC review.

11
Q

Definition of a shelf registration

A

Allows an issuer to sell securities on a delayed or continuous basis at various times and prices

12
Q

Definition of a Well Known Seasoned Issuer (WKSI)

A

Either has $700mm non-affiliate market cap or has issued $1bn in non-convertible debt over the last three years. Also must be an SEC filer for at least the previous year.

13
Q

Definition of a Seasoned Issuer

A

Minimum of $75mm non-affiliate market cap and must be an SEC filer for at least the previous year

14
Q

Definition of a Unseasoned Issuer

A

Has less than a $75mm non-affiliate market cap or has not been an SEC filer for at least one year

15
Q

Definition of a Non-Reporting Issuer

A

Issuer not required to file financial reports with the SEC. Example would be a private company registering an IPO.

16
Q

Definition of an Ineligible Issuer

A

Company which has been in bankruptcy within the last three years or is not current with their SEC filings; also blank check companies; shell companies and penny stock issuers

17
Q

Definition of a Blank Check Company

A

A company with no business plan and no immediate intention to use the proceeds, other than a potential future acquisition. Examples include Special Purpose Acquisition Companies (SPACs) and Business Development Companies (BDCs).

18
Q

Filing deadline for a schedule 8K

A

Within four business days of the event for all issuers

19
Q

Sarbanes-Oxley requirements for a public company Board of Directors

A

Majority of a company’s Board of Directors must be independent directors

20
Q

Sarbanes-Oxley requirements for a public company Audit Committee

A

All directors on a company’s audit committee must be independent directors, and the company must disclose if there is a financial expert on the audit committee

21
Q

Requirements for favorable tax treatment for REITs

A

Real Estate Investment Trusts must invest 75% of their assets in real estate and must pass through 90% of net income to investors to qualify for favorable tax treatment.

22
Q

General Partner in a Limited Partnership

A

Manages day-to-day operations, potentially has unlimited liability

23
Q

Limited Partner in a Limited Partnership

A

Silent partner, has limited liability

24
Q

Percentage of net investment income that a REIT must distribute to avoid corporate taxation

A

90%

25
Q

The minimum percentage of investment assets that a REIT must invest in real estate

A

75%

26
Q

The minimum percentage of gross income that a REIT must derive from rents or mortgage interest

A

75%

27
Q

Pools of real estate assets that pass through real estate income but not losses

A

REIT (Real Estate Investment Trust)

28
Q

Requires registration of new issues; regulates primary market activity

A

Securities Act of 1933

29
Q

Regulates secondary market activity; requires registration of broker-dealers

A

Securities Exchange Act of 1934

30
Q

Created the SEC

A

Securities Exchange Act of 1934

31
Q

Requires corporate bond issuers to appoint trustees to protect the interests of bondholders

A

Trust Indenture Act of 1939

32
Q

Protects customers from the bankruptcy or financial failure of broker-dealers

A

Securities Investor Protection Act

33
Q

Amends the Act of 1934 and specifies penalties for the use of non-public material information

A

Insider Trading and Fraud Enforcement Act of 1988

34
Q

Authorizes the regulation of credit to the Federal Reserve Board

A

Securities Act of 1934

35
Q

Prohibited the use of inside information in trading activity

A

Securities Act of 1934

36
Q

Regulates the exchanges and over-the-counter market

A

Securities Act of 1934

37
Q

Exempts U.S. government securities from registration requirements

A

Securities Act of 1933

38
Q

Requires the delivery of prospectuses for full and fair disclosure

A

Securities Act of 1933

39
Q

Prohibits fraudulent activity in underwriting and distributing new securities

A

Securities Act of 1933

40
Q

Disclosure document used to gather indications of interest during the cooling off period

A

Preliminary prospectus (red herring)

41
Q

The day that the SEC releases a new issue for sale

A

Effective date

42
Q

Securities that are exempt from the filing requirements of the Act of 1933

A

U.S. government, municipal bonds, fixed insurance products, national and state bank securities, non-profit securities, commercial paper and bankers acceptances with maturity of less than 270 days

43
Q

Exemption from registration requirements for corporate offerings of less than $5 million in a 12 month period

A

Regulation A

44
Q

Also known as a private placement exemption

A

Regulation D

45
Q

Exemption from registration requirements for securities that are sold only within the home state of the issuer

A

Rule 147 (Intrastate offering)

46
Q

The disclosure document that must be provided to investors in a Reg A offering

A

Offering circular

47
Q

The maximum number of accredited investors that can participate in a Reg D offering

A

Unlimited

48
Q

The maximum number of nonaccredited investors that can participate in a Reg D offering over $1mm

A

35

49
Q

The net worth and income criteria for an accredited investor under Regulation D

A

Net worth of $1,000,000 (exclusive of residence) and annual income of $200,000 or more ($300,000 jointly with spouse) in each of the two most recent years

50
Q

Regulates the sale of control and restricted securities

A

Rule 144

51
Q

Addresses the sale of nonregistered foreign and domestic securities to institutional investors

A

Rule 144A

52
Q

Holding period required before restricted securities can be sold

A

6 months

53
Q

Length of time a Form 144 filing covers

A

90 days

54
Q

When a Form 144 must be filed

A

Concurrent with the sale

55
Q

The amount of control securities that can be sold in a 90-day period under Rule 144

A

Greater of 1% of the total outstanding shares, or the average weekly trading volume of the preceding four weeks

56
Q

Securities owned by directors, officers, or persons who own or control 10% or more of an issuer’s voting stock

A

Control stock

57
Q

When Rule 144 holding periods no longer apply to unaffiliated investors

A

After 6 months

58
Q

Type of restriction that applies to sellers of control stock under Rule 144

A

Volume limits

59
Q

Provision of the Act of 1933 and 1934 Securities Acts that applies to all securities, including those that are exempt from registration

A

Antifraud

60
Q

Eligible for purchase of nonregistered foreign and domestic securities under Rule 144A

A

Qualified Institutional Buyers (QIBs)

61
Q

When securities registered under Rule 147 may be sold to a non-state resident

A

After 6 months after the last sale in the offering (Updated from 9 months for new rule effective 4/20/2017)

62
Q

Persons who are restricted from purchases of new issue securities under Rule 5130

A

FINRA member firms; employees of FINRA member firms, finders and fiduciaries; portfolio managers; persons owning 10% or more of member firm

63
Q

The type of new issue security to which the provisions of Rule 5130 apply

A

Common stock

64
Q

The percentage of income the issuer must receive in a state to be eligible for a Rule 147 registration

A

80%

65
Q

Subchapter C Corporation

A

Does not pass through gains and loses, can have an unlimited number of shareholders (including institutions)

66
Q

Subchapter S Corporation

A

Passes through all gains and losses to investors, can have a maximum of 100 shareholders (no institutional shareholders)

67
Q

Information required on the cover of a 10K or 10Q

A

Current stock price, market value of voting and non-voting shares, number of outstanding shares

68
Q

Information required about shareholders in a 10K

A

List of officers, directors, and 5% beneficial shareholders. This information is NOT required on a 10Q.

69
Q

Definition of a Large Accelerated Filer

A

$700mm non-affiliate market cap and has been an SEC filer for at least the previous year

70
Q

Definition of a Accelerated Filer

A

Between $75mm and $700 mm non-affiliate market cap and has been an SEC filer for at least one year

71
Q

Definition of a Non-Accelerated Filer

A

Non-Accelerated Filer - less than a $75mm non-affiliate market cap, or HAS NOT been an SEC filer for at least one year

72
Q

Definition of a Smaller Reporting Company

A

Less than a $75mm non-affiliate market cap or, for companies with illiquid stock, less than $50mm in annual revenues. Smaller reporting companies have fewer disclosure obligations.

73
Q

10K filing deadline for a Large Accelerated Filer

A

60 days after fiscal year end

74
Q

10K filing deadline for an Accelerated Filer

A

75 days after fiscal year end

75
Q

10K filing deadline for a Non-Accelerated Filer or a Smaller Reporting Company

A

90 days after fiscal year end

76
Q

10Q filing deadline for a Large Accelerated Filer

A

40 days after fiscal quarter end

77
Q

10Q filing deadline for an Accelerated Filer

A

40 days after fiscal quarter end

78
Q

10Q filing deadline for a Non-Accelerated Filer or a Smaller Reporting Company

A

45 days after fiscal quarter end

79
Q

Filing deadline for a PRE14A

A

PRE14A is a Preliminary Proxy, it is filed with the SEC at least 10 days before the definitive proxy is mailed to shareholders

80
Q

Filing deadline for a DEF14A

A

DEF14A is a Definitive Proxy, it is distributed to investors at least 20 days prior to the annual shareholders’ meeting

81
Q

Information required about shareholders in a Proxy Statement.

A

List of officers, directors, and 5% beneficial shareholders; amount of shares owned by each

82
Q

An offering of securities under Section 4(a)(5) of the Act of 1933 can only be sold to

A

Accredited investors

83
Q

An offering circular in a Regulation A offering must be received by purchasers at least

A

48 hours prior to confirmation of sale

84
Q

A Green Shoe clause allows the underwriters to request up to

A

15% additional shares from the issuer

85
Q

Form 147 must be filed with the SEC at least

A

10 business days prior to sale

86
Q

Under SEC Rule 501, an accredited investor is defined as an individual with net income of

A

$200,000 or more in each of the two most recent years; $300,000 if joint income with a spouse OR $1mm of net worth (excluding primary residence)

87
Q

Under the insider trading rules, a short swing profit is defined as a buy and sell within a

A

6 month period; the profit must be returned to the corporation

88
Q

The 6 month resale restriction applies to

A

Rule 147 offerings (Intrastate) (Updated from 9 months for new rule effective 4/20/2017)

89
Q

No filing is required under Rule 144 as long as the amount to be sold is 5,000 shares or less worth

A

$50,000 or less

90
Q

Access equals delivery refers to the

A

Electronic delivery of prospectuses

91
Q

Letters of intent in underwritings are signed by

A

The issuer and the managing underwriter

92
Q

Both all or none and mini-max offerings require that

A

An escrow account be set up for the deposit of customer money until the threshold is met

93
Q

Rule 504 is a Reg D offering not exceeding

A

$5 million (Updated for new rule change effective 1/2017)

94
Q

A seller can file Form 144 no more than

A

4 times a year or every 90 days

95
Q

Prospectus information can never be older than

A

16 months

96
Q

To sell restricted stock under Rule 144 the seller must have held stock, fully paid, for

A

6 months

97
Q

A firm selling 144 stock may contact customers who have expressed interest within the

A

Preceding 10 business days

98
Q

A member going public may direct the sale of its new issue to its employees. True or false?

A

TRUE

99
Q

TRUE of FALSE? An SEC registration statement requires that an issuer include both financial results & financial projections.

A

FALSE. Although an issuer is required to include audited financials, it is not required to include financial projections.

100
Q

In the sale of an IPO, the red herring must be delivered to investors

A

at least 48 hours prior to the trade confirmation.

101
Q

A post-effective amendment (i.e. sticker) can be used to make minor changes to the prospectus, such as

A

a change in price or number of shares sold. Re-filing of financials could not be done via a sticker.

102
Q

In a best efforts mini-max or a best efforts all-or-none, the entity holding customer funds in escrow is required to be a

A

Qualified Financial Institution (i.e. bank)

103
Q

A rights offering is typically followed by what kind of underwriting?

A

A standby underwriting, where a broker-dealer takes on shares not purchased by existing shareholders

104
Q

Describe a Greenshoe Clause

A

A Greenshoe allows the underwriter to increase the number of shares sold by up to 15% to satisfy demand

105
Q

Who is defined as a restricted person under FINRA Rule 5130?

A

FINRA members firms and their employees, finders and fiduciaries of the management underwriting, portfolio managers and family members of all those individuals.

106
Q

Under FINRA Rule 5130 dealing with IPOs, how often must a rep obtain a representation from a client that the individual is not a restricted person?

A

At least annually. The initial confirmation must be made via a positive affirmation letter whereas subsequent confirmations must be obtained via negative consent.

107
Q

Securities that are exempt from the filing requirements of the Act of 1933

A

U.S. government, municipal bonds, fixed insurance products, national and state bank securities, non-profit securities, commercial paper and bankers acceptances with maturity of less than 270 days

108
Q

Exemption from registration requirements for corporate offerings of less than $5 million in a 12 month period is known as a

A

Regulation A offering

109
Q

Also known as a private placement exemption

A

Regulation D

110
Q

Exemption from registration requirements for securities that are sold only within the issuer’s home state

A

Rule 147 (Intrastate)

111
Q

The disclosure document that must be provided to investors in a Reg A offering

A

Offering circular

112
Q

The maximum number of accredited investors that can participate in a Reg D offering

A

Unlimited

113
Q

The maximum number of unaccredited investors that can participate in a Reg D offering in excess of $1 million

A

35

114
Q

The net worth and income criteria for an accredited investor under Regulation D

A

Net worth of $1,000,000 (exclusive of residence) and annual income of $200,000 or more ($300,000 jointly with spouse) in each of the two most recent years

115
Q

Regulates the sale of control and restricted securities

A

Rule 144

116
Q

Addresses the sale of nonregistered foreign and domestic securities to institutional investors

A

Rule 144A

117
Q

Holding period required before restricted securities can be sold

A

6 months

118
Q

Length of time a Form 144 filing covers

A

90 days

119
Q

When a Form 144 must be filed

A

Concurrent with the sale

120
Q

When securities registered under Rule 147 may be sold to a non-state resident

A

After 6 months (Updated from 9 months for new rule effective 4/20/2017)

121
Q

Persons who are restricted from purchases of new issue securities under Rule 5130

A

FINRA member firms; employees of FINRA member firms, finders and fiduciaries; portfolio managers; persons owning 10% or more of member firm

122
Q

The type of new issue security to which the provisions of Rule 5130 apply

A

Initial Public Offering (IPO) of common stock

123
Q

All offering costs in a member firm’s private offering can not exceed

A

15% of the gross proceeds

124
Q

Information on underwriters’ compensation must be filed with FINRA no later than

A

1 business day after registration is filed with SEC

125
Q

Securities acquired by an underwriter in connection with an offering are subject to a holding period of at least

A

6 months

126
Q

Representation letters used to qualify customers to buy IPOs must be dated within

A

12 months prior to the purchase

127
Q

The Uniform Practice Code requires that corporate syndicates must be settled

A

within 90 days

128
Q

Securities purchased in standby purchase arrangements are restricted from resale for

A

3 months

129
Q

Annual compliance certification filed with FINRA must be signed by the firm’s

A

CEO

130
Q

Sales/offers are exempt from registration under Reg S if made to

A

non-U.S. residents

131
Q

A Commitment Committee decides if a member firm

A

should enter into underwriting agreement with an issuer

132
Q

If unforeseen events effect the investment merit of securities, a syndicate manager can invoke the

A

material adverse change (MAC) clause in the underwriting agreement

133
Q

Shelf registrations under Rule 415 are good for

A

3 years

134
Q

The 35 non-accredited investors in a Rule 506 offering must be

A

sophisticated.

135
Q

Private investment in a public equity is known as a

A

PIPE transaction

136
Q

Rule 105 of Regulation M prohibits firms from buying at the offering price to cover short positions that were established

A

within 5 business days of the effective date

137
Q

Rule 13D filing applies when more than

A

5% of an issuer’s equity is acquired by an unrelated entity with active intent

138
Q

Copies of 13D filings are sent to the

A

SEC, the issuer and the exchange where the security trades

139
Q

Form 3 must be filed within

A

10 business days of attaining insider status

140
Q

Form 4 must be filed within

A

2 days of changes in holdings

141
Q

For securities taken in trade, the price paid can be no higher than

A

highest independent bid

142
Q

Form 8K must be filed within

A

4 business days of a reportable event

143
Q

An entity that has 100 or fewer shareholders and allows the flow through of income and loss describes an

A

S Corporation

144
Q

U.S. citizens may purchase securities sold under a Reg S exemption as long as they

A

are living outside the U.S.

145
Q

The marketplace for 144A issues is conducted via

A

Portal

146
Q

Warrants acquired by underwriters are unreasonable compensation if they have a life of

A

more than 5 years

147
Q

A member going public may not sell its shares to discretionary accounts unless

A

it receives written approval from the customer

148
Q

The requirements for public companies filing reports with the SEC are covered under

A

Regulation S-K

149
Q

The form and content requirements for issuer financial statements are covered under

A

Regulation S-X

150
Q

An online recorded road show differs from a live road show in that

A

it must be filed with the SEC as a Free-Writing Prospectus.

151
Q

A primary offering and secondary offering are different in that

A

in a primary offering the company is selling shares whereas in a secondary offering a selling shareholder is selling shares.

152
Q

Are prospectus printing fees considered issuer expenses or syndicate expenses?

A

Bona fide issuer expense. Therefore, any reimbursement for these fees would not be considered compensation to the underwriter.

153
Q

Are blue sky fees considered issuer expenses or syndicate expenses?

A

Bona fide issuer expense. Therefore, any reimbursement for these fees would not be considered compensation to the underwriter.

154
Q

Are accounting fees considered issuer expenses or syndicate expenses?

A

Bona fide issuer expense. Therefore, any reimbursement for these fees would not be considered compensation to the underwriter.

155
Q

Is underwriter’s counsel considered issuer expense or syndicate expense?

A

Syndicate expense. Therefore, any payment by the issuer for the underwriter’s counsel would be considered compensation

156
Q

Under what circumstances are options paid as compensation to the underwriter prohibited?

A

Options as compensation are prohibited if the strike price is below the offering price or if the expiration is greater than five years.

157
Q

In what scenario can a family member of an employee of a FINRA member firm invest in an IPO?

A

Only if the family member does not live in the restricted person’s household, does not receive financial support from the person, and if the restricted person’s employer is not an underwriter.

158
Q

Under the rule dealing with securities offerings by FINRA members, define conflict of interest

A

A conflict of interest means the issuer is a broker-dealer, intends to become a broker dealer, or is 10% or more owned by the broker-dealer or its employees.

159
Q

What is the role of a QIU in a member offering?

A

A Qualified Independent Underwriter (QIU) must participate in the preparation of the registration statement and prospectus if there is a conflict of interest.

160
Q

Define a WKSI

A

$700mm non-affiliate market capitalization or has issued $1 billion in non-convertible debt in the last three years; eligible to use S-3 and F-3 for primary offerings.

161
Q

Define a seasoned issuer

A

$75mm non-affiliate market capitalization; eligible to use S-3 and F-3 for filing for primary offerings.

162
Q

Define an ineligible issuer

A

Asset-Backed securities, companies in bankruptcy in the last three years and blank check companies. Not current in SEC financial filings.

163
Q

When can a WKSI use a free-writing prospectus?

A

At any time

164
Q

When can a seasoned issuer use a free-writing prospectus?

A

Only after a registration statement has been filed.

165
Q

Under Sarbanes-Oxley, annual compliance certification must be signed by the firm’s

A

CEO and CFO

166
Q

Purpose of a Schedule 13D

A

A 13D is filed when an investor becomes a 5% beneficial shareholder with intent to influence the issuer

167
Q

Filing deadline for a Schedule 13D

A

Within 10 business days of the acquisition with the issuer, exchange and the SEC

168
Q

Purpose of a Schedule 13G

A

A 13G is filed when an investor becomes a 5% beneficial shareholder on a passive basis

169
Q

Filing deadline for a Schedule 13G

A

Within 45 days of calendar year end

170
Q

Purpose of a Schedule 13F

A

A 13F is a quarterly filing by Institutional Investment Managers to disclose long equity positions

171
Q

Filing deadline for a Schedule 13F

A

Within 45 days of quarter end

172
Q

Rule that permits advertising for intrastate offerings to extend beyond state borders

A

Rule 147A

173
Q

What was the purpose of the act of 1933?

A

The 1933 Act requires all securities to be registered with the SEC for public sale unless the security is exempt or sold in an exempt transaction. The purpose is to ensure full and fair disclosure of all material information to investors.

174
Q

The Act of 1933 requires what first step before any sales can take place of any new security?

A

The registration statement to be filed by the issuer with the SEC

175
Q

What is the period following the filing of the registration statement called?

A

20-day cooling off period

176
Q

What cannot occur during the 20 day cooling off period?

A

No sales or offers of the new issue security can occur

177
Q

What is permitted during the cooling-off period?

A

The following activities/marketing materials are permitted:

  1. Red herring (aka preliminary prospectus)
  2. Collection of indications of interest
  3. Tombstone ad
  4. Road shows
  5. Free Writing Prospectus
178
Q

What is the effective date?

A

This is the date the SEC permits sales to the public. It occurs once the underwriter has fully marketed the new issue securities to investors and know the price they want to sell for.

179
Q

What is the meaning of the registration being effective?

A

This means that the issue can legally be sold.

180
Q

What is the process of due diligence?

A

Due diligence is the process of gathering all information and ensuring that disclosures made by the issuer are both adequate and truthful.

181
Q

What is a shelf registration?

A

Shelf registration, also called rule 415, allows an issuer with previously registered securities with the SEC a three-year window to issue new securities without going through the re-filing process which can be expensive and time-consuming. A shelf can be used for both equity and debt securities, but not for an IPO.

182
Q

Which securities are exempt from the securities act of 1933?

A
  1. Government and Government Agency Securities
  2. Municipal Securities
  3. Commercial Bank Securities
  4. Commercial Paper with a maturity of 270 days or less
183
Q

Under Rule 147, how long does an investor have to wait before they can resell purchased securities outside the state of issuance?

A

Securities can be sold outside of the state in which they were issued six months following the sale being completed.

184
Q

What does the Act of 1934 require of corporate issuers with regarding reporting income and expenses?

A

The act of 1934 requires all issuers to file an annually audited 10-K with the SEC as well as quarterly 10-Q which is un-audited. It is intended that these reports are made public so that investors can make informed decisions.

185
Q

Under the act of 1934 what is the definition of an insider?

A

Any officer of the company, a director, member of the Board of Directors, or a greater than 10% shareholder of the company’s equity are all considered insiders.

186
Q

Under what conditions is a security exempt from the Act of ‘33 when it is offered only to the residents of a single state?

A

Under Rule 147, intrastate offerings are exempt from SEC registration if the following requirements are met:

The issuer must be incorporated in the state, all securities must be sold to state residents and one of the following criteria must be met:

  • 80% of the revenue comes from the state
  • 80% of the issuer’s assets are in that state
  • 80% of the proceeds of the offering must be used in that state, or
  • a majority of the employees must be located in the state.
187
Q

Under what conditions is a security exempt from the Act of ‘33 when it is offered only to the residents of a single state?

A

Under Rule 147, intrastate offerings are exempt from SEC registration if the following requirements are met:

The issuer must be incorporated in the state, all securities must be sold to state residents and one of the following criteria must be met:

  • 80% of the revenue comes from the state
  • 80% of the issuer’s assets are in that state
  • 80% of the proceeds of the offering must be used in that state, or
  • a majority of the employees must be located in the state.
188
Q

What was the purpose of the act of 1933?

A

The 1933 Act requires all securities to be registered with the SEC for public sale unless the security is exempt or sold in an exempt transaction. The purpose is to ensure full and fair disclosure of all material information to investors.

189
Q

What is another word for a preliminary prospectus?

A

Red Herring

190
Q

What is the use or purpose of a preliminary prospectus or Red Herring?

A

It is used by the syndicate to gauge interest in the new IPO during the cooling off period.

191
Q

Does the preliminary prospectus include an IPO price?

A

No

The preliminary prospectus will not have the final offering price (that is only included on the final prospectus). Instead, it will have a range of potential prices.

192
Q

Define:

Tombstone announcement

A

An advertisement or announcement that the lead manager places in a newspaper to with the basic details about the offering. A tombstone ad is allowed to be published during the cooling off period.

193
Q

Who is restricted from buying an IPO?

A

Restricted persons include:

  • Broker-dealers for their own accounts
  • The employees of broker-dealers
  • Finders and fiduciaries of the managing underwriter such as accountants or attorneys
  • Portfolio managers who are trying to purchase for their own personal accounts
  • Immediate family members of a restricted person (includes spouse, parents, siblings, children, and in-laws)
194
Q

What is a green shoe clause in underwriting?

A

The greenshoe clause allows the underwriters to increase the size of the deal and purchase up to 15% more shares from the issuer to satisfy demand. It can be exercised by the underwriters for up to three years after the effective date.

195
Q

Define:

Stabilizing bid

A

A bid that the lead underwriter is allowed to place once an IPO begins trading, to support the price of the IPO. The underwriters can never stabilize above the IPO price.

196
Q

Define:

tombstone ad

A

An advertisement published by theunderwriter with basic information about a new issue. They are allowed to be used during the cooling-off period.

197
Q

Define:

cooling-off period

A

The time period, typically 20 days, after a company files its registration statement with the SEC. During this period, the underwriter can market the new issue securities to investors, but cannot actually engage in sales.

198
Q

When is a “red herring” used?

A

After the initial filing and during the cooling-off period, the issuer can create a preliminary prospectus, or “red herring.” It is a way for broker dealers to gauge interest in the issue.

199
Q

What activities are permitted and prohibited during the cooling-off period?

A
  • Permitted
    • Collecting indications of interest
    • Publication of tombstone ads
    • Road shows
    • Free writing prospectus
    • Preliminary prospectus (aka red herring)
  • Prohibited
    • Sales
    • Orders
    • Money changing hands
200
Q

What are the role of the underwriters during the cooling-off period?

A

During the cooling-off period, the underwriter is engaged to market the transactions to potential investors and help determine the offering price of the securities.

201
Q

What is the intent of the SEC’s no approval clause printed on the first page of a prospectus?

A

Informing potential investors that the SEC is not guaranteeing the accuracy of prospectus information and is not recommending or approving the security in any way, thereby absolving the SEC of liability in the case fraudulent claims are made.

202
Q

What are the three types of firms in an underwriting syndicate?

A
  1. Syndicate manager
  2. Syndicate members
  3. Selling group
203
Q

How are the syndicate members distinct from the selling group?

A

Members of the syndicate put up their own capital to purchase the shares of the new issue and resell them to the public. Put differently, syndicate members have financial liability for unsold securities. Members of the selling group may assist in the distribution of shares by selling them to clients but none of their own capital is at risk.

204
Q

Define:

gross spread

A

The difference between what the syndicate pays the issuer for the shares versus the public offering price that the issuer sells the shares to the public for. This difference is the gross profit for the syndicate.

205
Q

Define:

management fee

A

The component of the gross spread that is paid to the syndicate manager for taking on their lead role in the syndicate. The fee is paid to the manager for every single share in the deal.

206
Q

Define:

underwriter fee

A

The compensation received by the syndicate manager or syndicate member for taking on risk for a share as a part of an underwriting. The amount is based on each firm’s allocations.

207
Q

What are the two types of underwriting committments?

A

Firm commitment and best efforts

208
Q

What is the defining element of a firm commitment?

A

In a firm committment, the underwriter will purchase shares from the issuer and resell them to the public. Whatever the underwriter cannot resell, they own. Therefore, in a firm committment the underwriter takes on financial liability for any unsold shares.

209
Q

Does a best efforts offerings have more or less for the underwriter than a firm commitment ?

A

Less, because the underwriter has no financial liability for the shares. They solely act as agents.

210
Q

What are the two types of best efforts underwriting?

A

All-or-none and a mini-max deal. In an all-or-none, the underwriter must sell 100% of the shares or else the deal is cancelled. In a mini-max, the underwriter must sell a minimum threshold of shares or else the deal is cancelled.

211
Q

Which securities are exempt from SEC registration?

A
  • US Government and Goverment Agency securities
  • Municipal securities
  • Commercial paper with a maximum maturity of 270 days
  • Commercial bank seecurities
212
Q

In an intrastate offering, what percentage of the securities must be sold to state residents?

A

Under Rule 147, 100% of the securities must be sold to state residents. Those state residents can resell within the state immediately, but must wait six months to resell outside of the state.

213
Q

What two types of stock are subject to Rule 144?

A
  1. Restricted Stock: stock that has never been SEC registered
  2. Control Stock: stock owned by a corporate insider
214
Q

Under Rule 144, what is the maximum amount of control stock that an insider can sell over a 90-day period?

A

Over any 90-day period, an insider can sell the greater of 1% of the company’s outstanding shares or the average weekly trading volume over the past four weeks preceding the sale.

215
Q

Define:

accredited investor

A

A sophisticated investor that is permitted to freely invest in private placements. It includes:

  1. officers and directors of the issuer,
  2. Institutional investors
  3. Individuals with a net worth of at least $1 million exluding their primary residence or those with annual income of $200,000 for the past two years ($300,00 for married couples)
216
Q

Define:

affiliated person

A

A corporate insider, meaning an officer, director, or greater than 10% shareholder.

217
Q

Define:

best efforts offering

A

A type of underwriting committment where the syndicate acts an agent and has no financial liability for any unsold shares.

218
Q

Define:

control stock

A

Stock that is owned by a corporate insider.

219
Q

Define:

effective date

A

The date the SEC clears new issue securities for public sale.

220
Q

Define:

exempt securities

A

Securities that can be sold to the public without having to be registered with the SEC. This includes:

  1. US Government and Government Agency securities
  2. Municipal bonds
  3. Commercial paper with a maximum maturity of 270 days
  4. Commercial bank securities
221
Q

Define:

firm commitment offering

A

A type of underwriting committment in which the syndicates purchases the shares from the issuer and looks to resell them to the public. Any shares that the syndicate cannot resell to the public, they will own, and therefore they have risk for any unsold shares.

222
Q

Define:

indications of interest

A

Non-binding indications placed by potential investors during the cooling-off period that indicates that they may be interested in purchasing the new issue security.

223
Q

Define:

insider

A

An officer, director, or greater than 10% shareholder.

224
Q

Define:

intrastate offering

A

Securities sold under Rule 147. In this type of offering, because the securities are only sold within a single state, SEC registration is not required.

225
Q

Define:

lead underwriter

A

The investment bank with the lead responsibility for underwriting a new issue. They will put together a syndicate of other banks if necessary and manage each step of the process from filing to offering.

226
Q

Define:

mini-max underwriting

A

A best efforts underwriting where the deal will only occur if the underwriter can sell a minimum threshold of securities.

227
Q

Define:

Regulation A

A

An exempt transaction for small issuances that allows a company to raise up to $50 million publicly over a 12-month period without having to go through the full SEC registration process.

228
Q

Define:

Regulation D

A

An exemption from SEC registration for private placement transactions, which can be sold to an unlimited number of accredited, but no more than 35 nonaccredited investors.

229
Q

Define:

Rule 144

A

Permits the sale of restricted stock and control stock.

230
Q

Define:

Rule 144A

A

An exemption from SEC registration which allows qualified institutional buyers to freely trade private placements among themselves.

231
Q

Define:

selling concession

A

The component of the underwriting spread received by the firm that sells that particular share.

232
Q

Define:

underwriting agreement

A

The binding contract between the issuer and syndicate manager detailing the terms in an underwriting.