Investment Banking chapter 5

Question 1

Offering- Primary Distribution

Answer 1

Primary shares cannot be purchased on margin.
Distribution of authorized but previously unissued shares to the public.

Question 2

Secondary Distribution

Answer 2

redistribution of a large block of securities held by a few owners. Secondary share may be purchased on margin

Chinese Wall- AKA information barriers

Question 3

Fees for a new issue / components of a spread

Answer 3

managers fee
U/W compensation or retention
selling concession
reallowance

Question 4

Factors that determine the amount of the spread

Answer 4

Size of the issue
Type of security
Financial strength of the issuer
Type of commitment made by the investment banker

Question 5

Underwriting procedures

Answer 5

How to determine the managing underwriter.
Negotiated Bidding – used for corporate equity issues / one company involved
Competitive bidding- used for certain issues / everything else

Question 6

Underwriter Responsibilities

Answer 6

Forming the underwriting syndicate and selling groups
Running the books and keeping the syndicate records
Establishes the underwriter’s retention
Allocating the issue among the syndicate and selling
Stabilizes the issue

Question 7

Firm commitment (dealer)

Answer 7

The syndicate buys the entire issue and resells it to the public
Greatest risk, due to underwriters could end up with all the unsold shares
Firm acts as a dealer

Question 8

Stand-by (dealer)

Answer 8

Underwriter agrees to purchase and distribute any part of an issue not purchased by stockholders who received pre-emptive
Used only with rights offering, the firm acts as a dealer

Question 9

Best Effort

Answer 9

Underwriting group acts as an agent in trying to distribute the new issue to the public
It does not buy or take the securities in its inventory.

Question 10

All or None

Answer 10

The issue is canceled unless it can be completely sold to the public. Always an escrow account established. Acts an agent

Question 11

Tombstone Ads

Answer 11

1. only form of advertising permitted to announce the new issue
2. not required to file with the SEC or FINRA
3. contain names of the issuer, managing underwriter, and the amount of the issue
4. can only contain statements of fact, no solicitation
5. must indicate where a prospectus can be contained
6. do not show selling group members
7. do show the public offering price

Question 12

FINRA Rule 5130

Answer 12

Covers restrictions on the purchase and sale of initial equity public offering(IPOs) by restricted persons and their immediate family members