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Flashcards in Issuing - Primary Market Deck (84):

-Addresses new issue securities and primary market
-Provides issuer info to customers
-Prevent securities sales fraud
-Oversees registration and exemptions of securities

Securities Act of 1933


-Another name for Securities Act of 1933
-Focuses on paper elements including REGISTRATION and PROSPECTUS

Paper Act


Form S1, Company wants to raise capital by issuing securities for first time

Must include:
-Description of issuer's business
-Shareholders of issuer stock including officers, underwriters and directors, control persons (10% shareholders)
-Biographical data on officers and directors
-Company's Capitalization
-Proposed usage of issuer's proceeds

Securities Registration Process


Disclosure document that ensures investors have enough information to make an informed investment decision



SEC issues deficiency letter to postpone issue or stop order to prohibit sale until fixed

Material Deficiencies in Registration Statement


If issue is an add-on offering, issuer qualifies for abbreviated registration statement



-When issuer files registration statement with SEC
-Underwriter prepares red herring (preliminary prospectus) which is distributed to generate Indication of Interest (IOI's)
-Distribute tombstone ads
-Sales cannot be made during this time
-Ends when SEC releases securities for sale to the public

Cooling-Off Period


-Issued during cooling-off period
-Also called Red Herring
-Has red border to indicate registration has been filed but not effective
-Not complete, no offering price, effective date, or date available to public
-Could have price range
-Cannot be marked on, must be pristine

Preliminary Prospectus


-Indication that investor might be interested in securities
-IOI is NOT a binding sale

Indication of Interest


-Limited announcement distributed during cooling-off period
-Contains price range, description of issue, members of syndicate

Tombstone Ad


New issues must be registered under state securities laws

Registration methods
-Notification (notice with the state)
-Coordination (in coordination with issuer's SEC registration)
-Qualification (issuer submits full registration statement and is qualified by the state)

Blue Skied


-Starts the cooling-off period when SEC reviews information
-Lasts minimum of 20 days
-If SEC finds deficiency in registration statement, period is frozen until fixed

Filing Date


-Ensures full and fair disclosure to potential investors
-Officers, directors, underwriter, syndicate members meet to review aspects of issue
-Determine if due diligence was exercised in all areas

Due Diligence


First date on which securities may be sold

Effective Date


-Must be given to all purchasers, even if they received a Red Herring
-Contains official price and effective date

Final Prospectus


-Proceeds of offering go to issuer
-Either IPO or APO

Primary Offering


-Includes pre-registration period, cooling-off period, and post-registration period
-Offering participants may not influence price of security
-No secondary market trading of security

Restricted Period


-Research cannot be published on offering company
-No public due diligence meetings or public analyst appearances
-40 day period for IPO
-10 day period for APO

Quiet Period


-Broker/Dealer that helps issuer sell securities to the public
-Also known as investment banker



-Contract with the issuer using document called underwriting agreement
-Responsible for keeping due diligence file
-Makes sure that proper disclosures have been made by the issuer
-Can invite broker/dealers to join in and form syndicate

Managing Underwriter


-Contract between issuer and managing underwriter
-Specifies terms and conditions under which underwriter may sell shares to public

Underwriting Agreement


-Team of broker dealers who sell securities to public on behalf of the issuer
-Sign agreement among underwriters (syndicate letter)



Syndicate Letter (Agreement Among Underwriters)

Syndicate Letter (Agreement Among Underwriters)


-Syndicate buys shares from issuer then reoffers to public
-Syndicate takes risk for unsold shares
-Unsold shares will be divided amongst members based on liability participation

Includes Standby Underwriting

Firm Commitment Underwriting


-Special type of firm commitment
-Associated with stock rights offerings
-Standby underwriter assures that shares offered through stock rights will be sold
-If unsold shares remain, standby underwriter purchases remaining shares from issuer

Standby Underwriting


-Best efforts given by syndicate on behalf of issuer
-Issuer must keep any unsold shares
-Issuer takes the risk
-Uses escrow account, money held by impartial third party

Two types
-All or None

Best Efforts Underwriting


Entire issue must be sold or the deal is canceled

-Sales proceeds held in escrow until all shares sold
-Once sold, escrow agent release the funds to the issuer and underwriter
-If not all sold, sales proceeds in escrow are refunded to investors

All or None Underwriting


-Specified minimum amount must be sold or it is canceled
-Escrow account holds sales proceeds until minimum is reached
-Once sold, escrow breaks up and funds are released
-Syndicate continues selling until shares depleted or selling period ends

Mini-Max Underwriting


-Additional broker/dealers allowed by syndicate to sell shares to public
-Must sign written agreement
-No liability for unsold shares

Selling Group


-Difference between Public Offering Price (POP) and what issuer receives
-Fairness judged by FINRA's Committee on Corporate Financing
-Managing Underwriter must filed documents with committee before effective date

-Manager's Fee
-Syndicate Fee
-Selling Concession

Underwriting Spread


-Managing underwriter receives fee for every share sold
-Smallest portion of spread
-Meant to reimburse managing underwriter for expenses and compensate for extra work (due diligence, liaison between issuer and syndicate members)

Manager's Fee


-Divided among syndicate members based on liability participation

Ex: Syndicate member liable for 20%, receives syndicate fee based on shares sold or 20% of offering

Syndicate Fee


-Largest component of spread
-Paid to syndicate or selling group member

Selling Concession


Shares given to syndicate members may not be transferable for a period of 180 days

Lockup Period


-Issuer sells shares to the public for the first time
-Underwriter examines pricing of similar companies to assess overall market conditions

IPO (Initial Public Offering)


-Broker/Dealers and registered persons are prohibited from buying the IPO from syndicate
-Shares must be offered to public

FINRA Rule 5130


-Fiduciaries for managing underwriters including accountants and attorneys
-Immediate family members (siblings, children, parents and in-laws)
-Person who owns more than 10% of portfolio an established portfolio

IPO Restricted Persons


Person who owns more than 10% of a portfolio that is buying IPO shares will be carved out of the purchase and divided up among other portfolio

Carve Out Provision


-Registered person's immediate family member who had sale directed towards them by issuer
-Registered persons qualified only to sell investment companies, variable products or direct participation programs

IPO Exempt Restricted Persons


-IPO purchasers must sign this to claim their non-restricted status every 12 months
-Accomplished with negative consent letter

Positive Affirmation


-Addresses conflicts of interest when issuer brings own shares to market
-Broker/Dealer must hire qualified independent underwriter
-Applies when broker/dealer is controlled by or controls company whose shares are being offered

FINRA Rule 5121


Must have done at least three offerings of at least 50% of this size in the last 3 years

Qualified Independent Underwriter


-Add On offering
-File S3
-Company has already gone through an IPO
-Publicly traded issuer offers more shares to the public

Additional Public Offering


-Called shelf offering because once filed, securities sit on shelf waiting to be sold
-Usually sold at current market price of outstanding shares
-Begins when issuer files registration statement with SEC which creates window of time for APO
-Window is 2 to 3 years

Shelf Offering


Has $700,000,000 of outstanding capitalization in secondary market

Well-Known Seasoned Issuer


-Has $75,000,000 of outstanding capitalization in secondary market
-Has not missed an interest or dividend payment interest or dividend payment in last 3 years

Seasoned Issuer


Must file a full S1 and only has a 2 year window

Unseasoned Issuer


-Exempts stock splits, changes in par value and stock dividends from registration filing

Rule 145


-When a publicly traded company separates one of its divisions into its own entity
-Finding comes from parent company by debt or equity position
-Could be sold to another entity



-Formal offer to existing shareholders to purchase stock at price above current market value
-Must remain open for minimum of 20 days
-If price changed, need additional 10 days
-Used in hostile takeovers

Tender Offer


Investor has ability to deliver shares

Net Long


-Security sales proceeds go to other party such as major shareholder or another corporation
-Either registered secondary offerings or Rule 144 trades

Secondary Offering


-Corporate officer sells previously unregistered shares to the public
-Proceeds go to officer, not corporation
-Can be combined with primary offering
-Employee exercises options and wants to sell stock in open market

Registered Secondary Offering


-Delivered in 25 days of the effective date
-OTC securites is 90 days after effective date for companies who haven't previously issued stock
-40 days if stock has been previously issued

Final Prospectus


-Issued by well known seasoned issuers (WKSI) distributing shares through add on, or subsequent primary offering

Free Writing Prospectus


-Places restrictions on market participants when associated with IPOs or APOs and subsequent primary offerings
-Participants cannot manipulate offering prices

Regulation M


-Underwriting Syndicate
-Selling Group Members
-Market Makers
-Insiders of issuing corporation

Regulation M Participants


Shareholder that owns 10% or more of issuer's stock



-Separation between investment banking and underwriting functions, trading and market making
-Investment bankers have sensitive information

Chinese Wall


-Period during which the offering participants are restricted from doing anything that could influence price

Restricted Period


-Average Daily Trading Volume exceeds $1 mil and public float is valued at $150 mil
-No restricted period because they are actively traded

Tier 1 Corporation


-Restricted period is one day prior to effective date
-$100k in average daiy trading volume
-$25 mil public float

Tier 2 Corporation


-Restricted period is 5 days prior to effective date

Tier 3 Corporation


-Underwriter on APO who is also market maker in underlying security during offering period
-Broker dealer can by and sell shares
-Cannot change inventory net purchase position by more than 30% of ADTV
-Meant to prevent underwriter from manipulating price of security

Passive Market Maker


-Position where investor borrows securities and sells them

Short Position


-Considered market manipulation
-Investors drive price down
-Cannot purchase shares below POP to cover short positions

APO Short Selling


-Underwriter places purchasing bid below POP on outstanding shares sold from primary offering
-Must be disclosed on prospectus
-Meant to stabilize share price from falling lower
-Meant to help syndicate continue selling primary offering shares



-Charged to syndicate or selling group member when customer sells shares back to underwriter at stabilizing bid
-Seller loses concession
-Disclosed in prospectus

Penalty Bid


-Cannot participate in roadshows for offering
-Restricted from publishing research on security during offering period
-Cannot talk to investment banking department without compliance or legal personnel
-Analyst must be separately managed and not compensated based on investment banking activity

Analyst Restrictions


-If analyst follows issuer on regular basis and produces research on issuer or sector
-Can publish research as long as issuer's security isn't highlighted
-Cannot publish research involving convertible bonds

Analyst Exceptions


-Government and agency
-Non profits
-Commercial Paper
-Issues of domestic banks and trust companies
-Issues of small business investment companies

Exempt Securities


-Rule 147 Intrastate Offerings
-Regulation A
-Regulation D

Exempt Offerings


-Intrastate Offering exemption
-80% of gross revenue derived from operation within one state
-80% of assets held in state
-80% of proceeds used to expand operations within state
-100% of purchasers are principal state residents
-Purchasers of stock hold it for 9 months

Rule 147


-Small issue or small dollar exemption
-Less than $5 mil during 12 month period
-If done by affiliated person, maximum amount to be raised is $1.5 mil in 12 months
-File A1 offering statement
-Offering circular sent to purchaser either 48 hours before purchase
-At time of purchase with 5 day right of recission
-Sales must be reported every 6 months to SEC

Regulation A


Enables investors to get money back if they change their minds

Right of Recission


Reduced legal fees and shorter document preparation time

Reg A Advantage


-Private Placement
-Buyers must be sophisticated
-Provided with offering memorandum
-Issuer must receive assurance that buyer will not make quick sale
-Cannot be sold to more than 35 nonaccreddited investors
-Cannot be advertised

Regulation D


-Financial institution
-Private business development company
Director or officer of issuer
-Individual with net worth $1 mil or annual income of $200k for past 2 years
-Married with $300 over two years

Accredited Investor


-Needed for nonaccredited investors
-Must not be associated with issuer unless by blood, marriage or adoption

Purchaser Representative


-Allows public resale of restricted and control securities
-Must be held at least 6 months or 1 year
-Adequate current info about issuer
-Trading volume limit of either 1% of outstanding shares or trading volume for the last 4 weeks
-Must be handled as routine trading transaction
-File notice of proposed sale

Rule 144


Notice filed with SEC If sale involves more than 5000 shares or if dollar amount is greater than $50,000 in 3 month period

Notice of Proposed Sale


Allows purchase of restricted stock outside of US by Qualified Institutional Buyer

Rule 144A


Has at least $100 million in assets under discretionary management

Qualified Insitutional Buyer


-Requires 1 year holding period of off shore sales dealing with restricted stock

Regulation S