Chapter 13 Flashcards

Question

What are underwriters NOT permitted to do during the cooling off period?

Answer 1

* Accept payment for the issue in advance * Sell the new issue

Answer 2

False, the document may NOT be altered in any way, including highlighting or underlining UNLESS the changes are filed w/ the SEC.

Answer 3

In addition to SEC requirements, issuers must adhere to blue-sky laws. State securities laws are established under the *Uniform Securities Act.* ## Footnote * States require that RRs and BDs be registered in the state they do business.

Answer 4

1. Notification/filing: Submitting an application requesting approval to issue securities in a state. *Some states don't allow this method.* 2. Coordination: This form is completed simultaneously w/ federal registration and becomes effective simultaneously. 3. Qualification: Meeting the requirements of the state and then becomes effective at the discretion of the State's Administrator.

Answer 5

The date at which the cooling off period ends and the post-effective period begins. The effective date is generally 20 days after the filing or the last amendment in response to a deficiency letter. ## Footnote * If a written request is received from the issuer, the effective date can be accelerated. * This is 20 days, NOT business days

Answer 6

The POP is set by the morning of the effective date and at this point the underwriters can begin to sell the issue. A final prospectus MUST be delivered no later than the time the sale is confirmed. ## Footnote * Issuers are allowed to send the prospectus electronically. * Purchasers MUST receive a final propsectus even if they've received a preliminary propsectus.

Answer 7

A process created by the JOBS Act that allows small businesses to raise capital over the internet. This way individuals can invest in startups. There is a limit to the amount that individuals can invest based on their income due to suitability concerns. The BD and funding portal MUST be registered w/ the SEC and FINRA.

Answer 8

Non-listed IPO = 90 days Non-listed follow on offering = 40 days IPO listed on the NYSE or the NASDAQ = 25 days NYSE-listed or NASDAQ-listed follow on offering = no requirement ## Footnote * When a new issue is sold to the public, a prospectus must be given to all potential purchasers. In addition, dealers that sell the securities in the aftermarket are required to provide a copy of the prospectus even if they were not involved in the original distribution.

Answer 9

Statutory prospectus= The full length document FWP = A shortened version of the prospectus.

Answer 10

FINRA BD member firms MUST make new issue offerings to the public and CANNOT withhold shares for themselves, the accounts of their employees, or the accounts of any industry insiders. ## Footnote * An exemption exists that allows personnel of a limited BD to buy shares of a new issue. * New issues include all IPOs.

Answer 11

* Secondary offerings * All debt offerings * Pvt. offerings * Preferred stock and rights offerings. * Investment company offerings * Exempt securities as defined under the Securities Act of 1933 * REITs * DPPs

Answer 12

Member firms must obtain verification from an account holder or any authorized party for the account that states that the account is eligible to purchase new issues in accordance with the New Issue Rule before distributing a new issue to that account. | Verification can be written OR electronic, but NOT oral ## Footnote * Member firms must re-affirm every 12 months and keep records for 3 years

Answer 13

* Member firms and employees * An immediate family member of an employee IF (1) the immediate family member lives w/ the employee or contributes to 25% of their combined total income, (2) the employee is selling the new issue to an immediate family member, OR (3) the employee has the ability to control the allocation of the new issue * Finders and fiduciairies (ex: Lawyers, accountants, etc.) involved in the offering * PMs purchasing for their own account. * Persons who own >= 10% of a BD.

Answer 14

* An investment company registered under the IA Act of 1940 * The general or separate acccount of an insurance company * A common trust fund * An account in which the beneficial interest of all restricted persons doesn’t exceed 10% of the account. * Publicly traded entities, other than a broker-dealer or its affiliates, that engage in the public offering of new issues. * Foreign investment companies. * ERISA accounts.

Answer 15

True, they can keep if for themselves, but they CANNOT sell shares of an undersubscribed issue to a restricted person. ## Footnote * The rule also contains an anti-dilution provision that allows restricted persons who already own shares of the security to purchase shares of a new issue, but only if doing so will keep their equity interest at the same level. Under this provision, the buyer must have owned the shares for at least one year prior to the offering and the new shares may not be resold for three months following the effective date

Answer 16

* U.S. Treasuries and Agencies * Munis * Securities issued by non-profit organizations * Commercial paper * Securities issued by domestic bank and trust companies * Securities issued by small business investment companies ## Footnote * These securities are NOT exempt from antifraud provisions- meaning the issuer can still be prosecuted if there's fraud.

Answer 17

if an issuer offers a new issue of securities valued at <= $75mm sold over a 12-month period, the offering is exempt under the Act of '33. This issuer must still provide an offering statement w/ the SEC and an offering circular to prospective purchasers. Reg A Tier 1: Sales of up to $20mm are permitted within a 12-month period. Of that amount, no more than $6mm may be sold on behalf of selling shareholders. These offerings are still subject to SEC and blue-sky reviews. Reg A Tier 2: Sales of up to $75mm are permitted within a 12-month period. Of that amount, no more than $22.5mm may be sold on behalf of selling shareholders. These offering are subejct to SEC review, but NOT blue-sky review. Tier 2 has stricter continuing disclosure requirements. ## Footnote * Advantages of conducting a Regulation A offering rather than a full registration include lower legal and filing fees and a shorter time needed to prepare documents. * Current SEC reporting companies may NOT use Reg A * Both U.S. and Canadian companies are eligable for Reg A offerings. * Reg A offerings may be for either equity or debt issuances.

Answer 18

If a company is conducting an offering and only selling to in-state customers, it is exempt from SEC filing. This has become outdated now and Rule 147A is in effect. Rule 147A is a continuation of Rule 147. Rule 147A says that offers can be made out-of-state but the sales themselves MUST be made in-state. Rule 147A also allows firms who are incorporated outside of the state to qualify as long as the state in which they're conducting the offering is their principal state of business. ## Footnote * The issuer must reasonably believe that the purchaser is in-state. The issuer MUST receive written representation for the purchaser as to their residency. * Resales to persons who reside outside of the state in which the offering is conducted are restricted for a period of six months from the date of the sale by the issuer to the purchaser. A legend requirement applies to this. * For an issuer to sell securities in a state, it must have its principal office or principal place of business in that state and satisfy one of four “doing business” requirements.

Answer 19

An agreement that restricts pre-IPO investors (venture capitals, pvt. placement investors, etc.) from selling their shares for a certain period of time (usually 6 months). ## Footnote * Shares subject to a lock-up agreement will carry a restrictive legend that’s printed across the face of the certificate to indicate that the securities have not been registered with the SEC and are not eligible for resale unless the legend is removed. In many cases, the removal of the legend is accomplished under SEC Rule 144.

Answer 20

1. At least 80% of the firm's consolidated gross revenues are derived in the state. 2. At least 80% of the firm's assets are in the state 3. At least 80% of the net proceeds are intended to be used by the issuer in the state 4. A majority of the issuer's employees are located in the state

Answer 21

Allows pvt. placements to be sold w/o SEC registration.

Answer 22

* The buyer is sophisticated * A pvt. placement memorandum is given to the investor w/ all the same info a prospectus would include. * The issuer must ensure the buyer doesn't intend to quickly sell the securities. This is usually accomplished through an *investor letter (lock-up agreement).* * The securities are sold to no more than 35 non-accredited investors. ## Footnote * Each non-accredited investor must appoint a purchaser representative who has expertise in financial and business matters.

Answer 23

1. Banks, large tax-exempt plans, or pvt. business development companies 2. Directors, executive officers, or GPs of the issuer 3. Individuals w/ a net worth of at least $1mm, OR have a gross income of $200k ($300k combined for married couples) for each of the past 2 years w/ the anticipation that this level will continue.

Answer 24

Regulates the sale of restricted and control securities.

Answer 25

Restricted securities= Unregistered securities that are usually acquired through a pvt. placement. Control securities= Registered securities acquired by control persons in the secondary market.

Answer 26

* Officers/directors * Insiders (people w/ more than 10% ownership) and their immediate family members.

Answer 27

1. Current public info: Public info must be available about the issuer. 2. Holding period: Buyers of restricted securities must hold the stock for 6 months from the time the securities were paid for in full (not margin). This rule does NOT apply to control securities. 3. Notice of sale: When someone wants to sell restricted or control securities, they must fill out Form 144 at the time the order is place w/ the BD. If the securities aren't sold within 90 days, an amended Form 144 must be filed. 4. Volume limitations: the max. amt. of securities of an exchange-listed firm that CAN be sold over any 90-day period is the greater of 1% of the total shares outstanding OR the avg. weekly trading volume during the 4 weeks preceding the filing 5. Manner of sale: The BD invovled in the Rule 144 sales can do so through brokers’ transactions or through transactions that are made directly with market makers. ## Footnote * Affiliates of the issuer must comply w/ all 5, but sellers who are non-affiliates must only comply w/ #1 and #2. * To qualify as a non-affiliate, a person must not be an affiliate of the issuer at the time of sale and must not have been an affiliate during the preceding three months. * An exemption from #3 exists if the amount of the sale doesn’t exceed 5,000 shares and the aggregate dollar value of the sale doesn’t exceed $50,000. * For over-the-counter (non-listed) equities, the maximum that may be sold is 1% of the total shares outstanding.

Answer 28

Transactions being made on an agency basis only. No solicitation. However, the BD can make an inquiry in either of 2 cases: 1. If the customer gave unsolicited interest within the preceeding 10 business days. 2. If another broker has indicated an interest in the security within the preceeding 60 business days.

Answer 29

Restricted securities are allowed to be sold to QIBs w/o the conditions of Rule 144. | The buyer must be a QIB, NOT the seller. ## Footnote * Under Rule 144A, issuers must provide owners and any prospective buyers w/ current financial info. This disclosure requirement doesn’t apply to issuers that are reporting companies under the Exchange Act of 1934, foreign private issuers that are exempt from Exchange Act reporting, or certain foreign governments

Answer 30

1. Bank trusts, insurance company, restricted investment firm, small business development company, pvt. and public pension plans, RIAs, and corporations/partnerships/trusts/certain non-profits. 2. The buyer must be purchasing for their own account or the account of another QIB 3. The buyer must own and invest at least $100mm of securities of issuers that are NOT affiliated w/ the buyer. | Under no circumstance is an individual a QIB. ## Footnote * BDs are considered QIBs if they own and invest $10mm of securities of issuers that are not affiliated with the dealer or if they act in a riskless principal capacity for other QIBs.

Answer 31

* Securities that are of the same class as those listed on the NYSE or Nasdaq. * Securities issued by mutual funds.

Answer 32

Considers certain securities reclassifications as sales: * An issuer that substitutes one security for another. * A merger or consoldiation where securites of one corporation are exchanged for the securities of another. * A transfer of assets from one corporation to another. ## Footnote * Stock splits, reverse stock splits, and changes in par value are NOT subject to Rule 145.

Answer 33

A U.S. company may issue an unlimited # of securities outside of the country w/o filing any documentation with the SEC. Also, there are no restrictions as to the type of non-U.S. investors who may buy the security. Only a non-US person may qualify for Reg S. | To qualify for Reg S, the transaction must take place offshore

Answer 34

A transaction where no offer is made to a person in the U.S. AND Either (1) at the time the buy order is originated the buyer is outside the U.S. (2) the transaction is executed through the facilities of a designated offshore securities market.

Answer 35

Investors may immediately sell Reg S securities through an offshore securities market. Investors who wish to sell Reg S securities in the U.S. must wait 40 days for debt securities and 1 year for equity securities.

Answer 36

* The member firm is also the issuer of securities * The issuer is under control of the member firm * At least 5% of the net proceeds, not incl. the underwriting compensation, are intended to reduce or retire the balance of a loan extended by the member firm

Answer 37

Any individual or entity that is under control of a member firm.

Answer 38

Having ownership of >=10% of the common equity, preferred equity, or sub. debt of another entity OR having a right to 10% or more of the profits or losses of a partnership.

Answer 39

When the same person or entity controls 2 or more entities.

Answer 40

False, a member firm cannot participate in a public offering where there is a conflict of interest unless there is a qualified independent underwriter AND at least one of these 3 conditions are met: 1. The member firm primarily responsible for managing the offering may NOT have a conflict of interest or be affiliated w/ a member firm that has a conflict of interest 2. The securities offered must have a bona fide public market 3. If they're debt securities, they must be investment-grade.

Answer 41

When an underwriter is selling their own stock or the stock of an affiliate, they must use a qualified independent underwriter who DOESN'T have any conflicts of interest A QIU must have served on a similar underwriting in terms of size and type during the preceeding 3 years. ## Footnote * If a QIU is used, there must be a prominent disclosure in the prospectus or offering document to explain the conflicts of interest and a statement indicating the name and the role of the qualified independent underwriter.

Answer 42

If a BD is controlled by a public company, and has a customer that wants to purchase stock of the company that controls the BD, the BD must disclose the control relationship prior to accepting the order. If the initial disclosure was verbal, then written disclosure must be provided prior to settlement. If the control relationship involves a discrentionary account, then written permission must be obtained prior to each transaction.

Answer 43

When performing an IPO or follow on offering, if the offering is oversubscribed meaning there is signficant demand, this clause allows underwriters 30 days to request from the issuer to be able to buy additional shares- a max. of 15%) to meet demand.

Answer 44

False, the Securities Act of 1933. Although the Securities Act of 1934 does have some provisions.

Answer 45

Prevents underwriters and issuers from bidding for or making secondary market purchases of a stock for a certain period of time around the effective date. This prevents upward price manipulation before the pricing of the deal. ## Footnote * There are special circumstance where the SEC will allow the underwriter or the issuer to bid but it's rare- for example, when demand is VERY low.

Answer 46

The only form of price manipulation allowed by the SEC. This rule allows underwriters to intervene in the secondary market by placing a bid at or below the POP in order to offset supply issues caused by a lack of demand and thus the price immediately declining. ## Footnote * The prospectus must disclose if stabilization was used.

Answer 47

When the manging underwriter looks to reclaim a selling concession from a syndicate member. Prior to imposing a penalty bid, the managing underwriter must provide FINRA w/ written notice of the security's identity and symbol AND the date the member firm intends to impose the penalty bid.

Answer 48

The SRO for firms that deal in munis offerings. Munis are not subject to the registration and prospectus requirements of the Securities Act of 1933. | Munis are still subject to antifraud requirements

Answer 49

First, the issuance of GO bonds requires voter approval since they're backed by taxes. Second, a GO issue is usually subject to debt limitations that are placed by a referendum or statute. | A municipality CANNOT issue bonds in excess of its debt limit (ceiling)

Answer 50

Voter approval not required. A feasiblity study must be performed for a revenue bond. Once this is performed, an underwriter is hired.

Answer 51

Negotiated sale= When an issuer selects an underwriter, and the coupon rate, call provisions, etc. are decided during the negotiation process. This is common for revenue bonds. Competitive sale= When an issuer invites interested underwriters to compete against one another by submitting bids for the issue. The underwriter w/ the best bid gets awarded the bonds. This is common for GO bonds.

Answer 52

Divided account= When each member of the syndicate is responsible for a certain % of the issue. If the member sells its share of the issue, it's not responsible for any of the unsold balance. Undivided account= When each member is responsible for a certain % of the unsold balance, regardless of how much that individual member sells.

Answer 53

The set of prices or coupon rates for each maturity at which new securities are offered to the public by an underwriting syndicate after they've been purchased from the issuer.

Answer 54

The difference between the price the underwriter pays to the issuer for the bonds and the price the underwriter receives from the public after selling the bonds. ## Footnote * A portion of this spread goes to syndicate expenses and syndicate manager fees.

Answer 55

The underwriting spread, net of syndicate expenses and syndicate manager fees. The total takedown is divided into 2 parts: *the additional takedown* and the *concession*. If a syndicate member uses the services of a selling group to sell bonds, the syndicate member is entitled to only the additional takedown portion, with the concession going to the selling group.

Answer 56

1. Presale orders: Orders placed before the syndicate is even awarded the issue by the issuer. 2. Group net orders: Orders where the profit is shared by all members of the syndicate. 3. Designated orders: Orders where the profit is directed to the BD who was designated by the customer. 4. Member orders: Orders where only one member earns the total takedown. ## Footnote * The purpose of the priority is to give the maximum benefit to the entire syndicate versus any one particular member. * The priority of orders is not in the official statement but must be given to the customer is asked. * The syndicate manager CAN change the priority of interests if it's in the syndicates best interest.

Answer 57

A document provided in a competitive sale that contains essential info that an underwriter needs to submit a bid (coupon rate, size of the bid, etc.)

Answer 58

Every muni offering must provide customers w/ a legal opinion that's written by a recognized bond counsel to tesitify to the validity and tax-exempt status of the issue. ## Footnote * An unqualified legal opinion means everything is good to go.

Answer 59

The MSRB's database where issuers and and underwriters can upload certain documents. EMMA provides free public info about muni issues that's easy for non-investors to understand.

Answer 60

The date the issuer delivers the bonds to the underwriter. New issues of munis usually settle within 30 days of the bonds being awarded to the underwriter.

Answer 61

For new issues, accrued interest is calculated from the dated date since there was no previous interest payment. The first interest payment on a new issue may be for a period that’s different from the normal six-month period. If it’s for more than six months, it’s a long coupon; however, if it’s for less than six months, it’s a short coupon.

Answer 62

False, the official statement MUST be sent to the purchaser of every muni transaction, regardless of primary or secondary offering. ## Footnote * Each customer who purchases bonds at the time of the new issuance must be provided with a final confirmation and a copy of the official statement by no later than the settlement date

Answer 63

* The amount of underwriting spread * The amount received as a fee by the BD * The initial reoffering price for every maturity in the offering.

Chapter 13 Flashcards

(90 cards)