Issuing Securities Flashcards
Primary Market, Underwriting New Issues, Underwriting Exemptions (90 cards)
1
Q
Two ways someone may become an investor
A
they can purchase a security from the issuer in the primary market, or
they can purchase a security from another investor who is ready to sell in the secondary market
2
Q
- where corporations sell their stocks and bonds to the public to raise money (capital)
- governments sell bonds to the public to raise capital in this market
- where securities are born
A
primary market
3
Q
Securities Act of 1933
A
- sets most of the rules for primary markets
- act requires full and fair disclosure, so that all investors have complete and accurate information
- requires all new issues register with SEC before sale, unless exempt
4
Q
fill in the blank
All investors in a corporate issue must receive a detailed disclosure document, known as a _ , before the sale.
A
prospectus
5
Q
A prospectus is
A
detailed disclosure document that contains the material (significant) information an investor needs to make an informed investment decision
6
Q
Investors in municipal issues receive an _ , which has much of the same information as a prospectus.
A
official statement
7
Q
Corporations sell securities when they have a long-term need to pay for
A
expansion, mergers and acquisitions, and debt reduction
8
Q
- pay for major projects, like building a bridge,
- pay for ongoing expenses, or
- replace a higher interest debt with a lower interest debt
A
primary purpose for governments to issue debt securities
9
Q
- another term for participants of the primary market
- natural person (a human being) or a legal entity, like a corporation or a government per securities law
A
person
10
Q
True or False) Any natural person or legal entity that can enter into a contract is a person.
A
True
11
Q
a type of broker-dealer (also called an investment banker) that works with an issuer to bring its securities to the market and sell them to the investing public
A
underwriter
12
Q
syndicate
A
a temporary group formed by BDs and other underwriters for the purpose of raising capital
13
Q
Investors in the primary market may be categorized into three groups:
A
institutional, retail, and accredited
14
Q
- a person that pools money to purchase securities and other investment assets
- may include banks, mutual funds, hedge funds, and employee benefit plans
A
institutional investor
15
Q
Fill in the blank: _ may best be described as institutional buyers that own and invest a minimum of $100 million in securities.
A
qualified institutional buyers (QIBs)
16
Q
retail investor
A
- investing their own assets
- tend to be less knowledgeable than institutional investors
- higher transparency and disclosure expectations for sales
17
Q
subset of investors made up of all institutional investors and certain retail investors
A
accredited investors
18
Q
financial criteria for accredited investors
A
- Have an income of $200,000 or more in the past two years and are expected to meet that criteria in the current year ($300,000 for married couples or joint account holders), or,
- have a net worth of $1 million or more (not including equity in the primary residence)
19
Q
Insiders of the security’s issuer (officers, board members, major stockholders) are categorized as
A
accredited investors.
20
Q
Though the SEC has the flexibility to reevaluate certifications or designations, holders in good standing of Series 7, Series 65, and Series 82 licenses are considered _.
A
accredited investors
21
Q
Regulation D of the Securities Act of 1933 regarding accredited investors
A
states that the accredited investor will have a higher sophistication level than the average retail investor and will not need the same level of protection
22
Q
Natural persons who qualify based on certain professional certifications, designations, or other credentials issued by an accredited educational institution
A
accredited investors
23
Q
- advise municipalities on the issuing of municipal bonds and other types of municipal securities
- work under a contract with municipality
- MAY NOT be compensated for underwriting (sales) advice
A
Municipal advisors
24
Q
True or False) Municipal advisors may assist in some of the underwriting functions, such as preparing the official notice.
A
True: Municipal advisors may assist in some of the underwriting functions, however, they may not be compensated as part of the underwriting (sale) of any issue they provide advice on.
25
How are securities generally offered to the public in the primary market?
initial public offering (IPO) or an additional public offering (APO)
26
An APO may be called
a *follow-on offering* or a *subsequent public offering*
27
When an issuer sells securities for the first time (stocks or bonds that have never been traded on the market), this is referred to as an
initial public offering
28
APO
additional public offering: when an issuer sells more shares of a security that has already been sold to the public in the past to help raise capital
29
the underwriting agreement
when issuers enter into an agreement with underwriters
30
what are the two types of underwriting agreements?
best efforts agreement or firm commitment agreement
31
True or false) Syndicates are not very common in large firm commitment underwritings.
**False**: Syndicates are much more common in firm commitment underwriting because of the capital commitment and risk. Forming a syndicate spreads the risk and rewards among several BDs to lessen financial strain.
32
What is Firm Commitment Underwriting?
A type of underwriting where the underwriter buys the entire issue of securities from the issuer and assumes full financial responsibility.
33
True or False: In Best Efforts Underwriting, the underwriter guarantees the sale of all securities.
False
34
Fill in the blank: In Firm Commitment Underwriting, the underwriter takes on the risk of __________ if the securities do not sell.
losses
35
What is the primary difference between Firm Commitment and Best Efforts underwriting?
The level of risk assumed by the underwriter.
36
Multiple Choice: Which type of underwriting allows the issuer to retain some risk if the securities are not sold? A) Firm Commitment B) Best Efforts
B) Best Efforts
37
In which underwriting method does the underwriter typically receive a higher fee?
Firm Commitment Underwriting
38
True or False: Best Efforts Underwriting is more favorable to the issuer than Firm Commitment Underwriting.
**False**: Under best efforts underwriting, the underwriter sells the issuer's securities to the public as an agent (a go-between for buyers). Money from the issuer is held in escrow by the underwriter and released when the deal closes, and the investors get their securities.
39
What is a potential disadvantage of Best Efforts Underwriting for an issuer?
The issuer may not raise the full amount of capital needed.
40
Fill in the blank: In Firm Commitment Underwriting, the underwriter is obligated to purchase the entire issue, regardless of __________.
demand
41
Short Answer: What is a common scenario where Best Efforts Underwriting might be used?
When the issuer is a smaller company or startup with less predictable demand for their securities.
42
* **all or non (AON)**- the underwriting agreement states that the underwriter must sell **all** the securities offered or cancel the underwriting OR,
* **Mini-max**: underwriting agreement states that the underwriter must sell a minimum amount of the securities offered or cancel the underwriting
*Both options require underwriter to hold investor funds in escrow for predetermined period.*
two types of best efforts underwritings contingencies
43
The main purpose of the Securities Act of 1933 is to **protect the investing public** who buy new issues by
* requiring registration of new issues (unless exempt under the act),
* requiring an issuer to provide full and fair disclosure about itself and the offering,
* requiring an issuer to make available all material information necessary for an investor to judge the issue's merit,
* regulating the underwriting and distribution of primary issues, and
* providing criminal penalties for fraud in the issuance of new securities.
44
**True or False**) When a security does not fall under one of the exemptions to registration, it is considered nonexempt and the issue must be registered with the SEC.
**True**) When you see *nonexempt*, you know that the issue must register with the SEC.
45
1. filing of a registration statement with the SEC
2. cooling-off period
3. effective date (release date), offering period may begin
three stages of underwriting required per Securities Act of 1933
46
Form S-1
| stage I
- registration statement required of SEC
- includes material information about issue and issuer
- also includes issuer's business, owners, financial health, and intended use of money
- underwriters often assist in preparation
| registration/registration statement
47
- lasts for a minimum of **20 calendar days** (though may be longer)
- SEC reviews registration statement during this time
- SEC may suspend the review and issue deficiency letter
- 20 day period resumes after issuer corrects registration statement
cooling-off period (stage II)
48
* This is also called the *release date*.
* This ends the cooling-off period.
* final prospectus becomes available to investors
Effective Date (stage III)
49
**True or False**) The SEC *releases* or *allows* new issues to be sold, however; they never use the word *approve*.
**True**: The final prospectus includes an SEC disclaimer stating that the SEC does not approve, disapprove, or make any representations about the security.
50
preliminary prospectus
- may be delivered during the cooling-off period
- delivered to investors who are interested in the offering
- WILL NOT provide information on POP
- also called the red herring
51
What activities may take place during the cooling-off period?
- publishing of tombstone advertisement
- preliminary prospectus may be delivered
- indications of interest may be gathered
- due diligence or suitability work by underwriters and selling groups
- state registration (blue-sky laws)
52
* No offer to sell may be made.
* No money may be collected. No payment may be made.
* No promise to buy is accepted.
* No promise to sell may be made.
Activities that **may not** take place during the cooling-off period
53
Issuers whose issues are exempt from registration include
* the U.S. government,
* agencies of the U.S. government,
* municipalities,
* national- and state-registered banks,
* building and loan associations (B&Ls) and savings and loan associations (S&Ls),
* charitable, religious, educational, and not-for-profit organizations, and
* common carriers (railroads are the most common example).
54
A debt security **exempt** from registration is
short-term debt issues that are 270 days or less from issue to maturity, including **commercial paper** and **banker's acceptances**.
55
True or False) Fixed life insurance policies and fixed annuities are exempt from security registration.
**True**: Most insurance policies are not securities. However, variable life and variable annuities are funded by separate accounts that ARE securities. **Variable products MUST register**.
56
Though national and state registered bank issues are exempt, securities issued by a bank's _ are NOT exempt.
holding company;
*Common shares and CDs issued by FNB of Bigtown are exempt but, FNB Holding Company, Inc. securities are NOT exempt.*
57
put into place to ease the requirements for small- and medium-sized companies to raise capital
Regulation A of the Securities Act of 1933
58
- offerings up to $20 million in 12 month period
- no more than $6 million of the $20 million can be sold on behalf of existing shareholders
- offering must be reviewed by individual states AND SEC
- must file Form 1-A
Regulation A, Tier 1
59
Regulation A, Tier 2
- offerings up to $75 million in a 12 month period
- of the $75 million, no more than $22.5 million can be sold on behalf of existing selling shareholders
- offerings are subject to SEC review only
60
What is a critical difference between investors of Tier 1 and Tier 2 of Regulation A?
Offerings under both tiers are open to the public, and general solicitation (advertising) is permitted for both tiers. However, **tier 2 investors must be qualified investors**.
61
* Be an accredited investor as defined in Rule 501 of Regulation D.
* Limit the investment to a maximum of the greater of 10% of the investor's net worth, or 10% of the investor's net income per offering.
* Self-certification allowed, no formal filings required.
Two ways to qualify as qualified investor under Tier 2
62
Investment limits under Tier 1
Tier 1 has no investment limits.
63
Rule 147: The Intrastate Offering Rule
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
64
Issuer's exempt under Rule 147 must meet at least one of the four 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.
65
True or False) Securities issued under Rule 147 may be sold to nonresidents without restrictions.
**False**: Securities sold under Rule 147 MAY NOT be sold to nonresidents for six months after the initial purchase.
66
Similarities of Rule 506(b) and Rule 506(c)
- investments must be bought for the investors own purpose
- securities purchased MAY NOT be sold for six months after purchase
- shares considered 'lettered stock' or 'legend stock'
67
What is Regulation D of the Securities Act of 1933 primarily concerned with?
Regulation D is primarily concerned with providing exemptions from the registration requirements for certain *private placements* of securities.
68
True or False: Rule 506(b) allows issuers to generally solicit or advertise their securities.
False: Rule 506(b) prohibits general solicitation and advertising.
69
Fill in the blank: Under **Rule 506(c)**, issuers are allowed to engage in ________ to market their securities.
general solicitation
70
What is the maximum number of non-accredited investors allowed in a Rule 506(b) offering?
Up to 35 non-accredited investors.
71
Which rule under Regulation D allows for general solicitation: 506(b) or 506(c)?
Rule 506(c) allows for general solicitation.
72
Fill in the blank: In a _ , issuers may sell a new issue under Regulation D by filing a Form D with the SEC.
private placement
73
Investors in **private placements** agree that they are buying the security for
their own investment purposes.
74
Fill in the blank: The disclosure document for securities sold in **exempt transactions** is called _ . The disclosure document is not called a prospectus, but it has most of the same information.
an *offering circular* or a *notice of sale*
75
A private placement may have an unlimited number of what type of investors?
Private placements may have as many **accredited investors** as they can convince to invest in the offer.
76
True or False: During the cooling-off period, an underwriter may gather binding indications of interest.
**False**: There are no *binding* indications of interest. Indications of interest are nonbinding.
77
Through a _ , an issuer who is already a publically traded company can register new securities without selling any of the shares until later or waiting to sell a portion of the shares. Securities sold under this method must have a supplemental prospectus filed with the SEC before each sale.
shelf offering
78
another term for an underwriter BD that works with issuers to bring securities to market
investment banker
79
If an issuer offers shares to the public through an IPO then, years later, raises capital through a follow-on offering, both offerings may be considered _.
primary offerings, because only the issuer received proceeds
80
refers to the regulatory framework that allows issuers to satisfy their delivery obligations for prospectuses by making them accessible online. This guideline eliminates the need for physical delivery of a prospectus.
The *access equals delivery* rule
81
What is the SEC disclaimer regarding securities?
These securities have not been approved or disapproved, nor have any representations been made about the accuracy or the adequacy of the information
## Footnote
This disclaimer is mandated by the Securities and Exchange Commission (SEC) to be included in the final prospectus.
82
What does SEC stand for?
Securities and Exchange Commission
## Footnote
The SEC is a U.S. government agency responsible for regulating the securities industry and protecting investors.
83
Where must the SEC disclaimer be included?
In the final prospectus
## Footnote
The final prospectus is a formal document that provides details about an investment offering to the public.
84
True or False: The SEC represents the accuracy of the information in the final prospectus.
False
## Footnote
The SEC disclaimer explicitly states that no representations are made about the accuracy or adequacy of the information.
85
What is the time between the registration filing date with the SEC and the effective date called?
Cooling-off period
## Footnote
The cooling-off period is a specific timeframe in the securities registration process.
86
What can be distributed during the cooling-off period?
Preliminary prospectus
## Footnote
A preliminary prospectus is used to gauge investor interest.
87
True or False: During the cooling-off period, offers to sell securities can be made.
False
## Footnote
No offers to sell securities can be made during this period.
88
What type of advertising can be used during the cooling-off period?
Tombstone ad
## Footnote
A tombstone ad is a type of advertisement that provides basic information about a security offering.
89
Fill in the blank: During the cooling-off period, no _______ to purchase the securities can be taken.
orders
## Footnote
This restriction applies to ensure compliance with regulatory standards.
90
What type of sales literature is prohibited during the cooling-off period?
Sales and advertising literature specific to the securities
## Footnote
This restriction is in place to avoid premature marketing of the securities.
