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Series 7 > Primary Markets > Flashcards

Primary Markets Flashcards

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1
Q

What is a primary offering?

A

Proceeds go to the issuer (e.g., IPOs, additional offerings)

A primary offering refers to the initial sale of securities by the issuer to raise capital.

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2
Q

What is treasury stock resale?

A

Not a primary offering, even though the company gets the proceeds (shares were previously issued)

Treasury stock resale involves selling shares that were already issued and are being resold by the company.

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3
Q

What do underwriters analyze during due diligence?

A

Use of proceeds, financials, feasibility, overall risk

This analysis is crucial for assessing the viability of the offering and its potential success.

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4
Q

What are the primary functions of an investment bank (underwriter)?

A

Advise on raising capital, raise capital by buying and reselling securities, distribute stock, ensure compliance with securities laws

Investment banks play a critical role in the capital markets by facilitating securities transactions.

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5
Q

What is the role of a syndicate manager/underwriting manager?

A

Leads underwriting process, negotiates terms, directs due diligence, signs underwriting agreement

The syndicate manager is responsible for coordinating the efforts of the underwriting team.

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6
Q

Who must corporate underwriters be members of?

A

FINRA

FINRA stands for the Financial Industry Regulatory Authority, which oversees brokerage firms and exchange markets.

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7
Q

Who must municipal underwriters be members of?

A

MSRB

MSRB stands for the Municipal Securities Rulemaking Board, which regulates the municipal securities market.

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8
Q

What is firm commitment underwriting?

A

Underwriters buy and resell securities; assume full financial risk

In firm commitment underwriting, the underwriter guarantees the issuer a specific amount of money.

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9
Q

What is negotiated underwriting?

A

Terms negotiated between issuer and underwriter

This type of underwriting allows for flexibility in pricing and fees.

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10
Q

What is competitive bid underwriting used for?

A

Used for GO bonds; underwriters submit bids, issuer selects lowest net interest cost (NIC)

GO bonds are general obligation bonds backed by the full faith and credit of the issuing government.

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11
Q

What does NIC stand for and how is it calculated?

A

NIC = total interest paid / total proceeds

NIC provides a basic rate calculation for evaluating the cost of borrowing.

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12
Q

What is true interest cost (TIC)?

A

Adjusts for time value of money; weights earlier payments more

TIC is a more comprehensive measure that reflects the actual cost of borrowing over time.

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13
Q

What is standby underwriting?

A

A firm commitment unique to rights offerings; underwriter agrees to purchase all unsubscribed shares at subscription price

This type of underwriting ensures that the issuer can raise the desired capital from a rights offering.

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14
Q

What is best efforts underwriting?

A

Underwriter sells as much of the issue as possible without financial liability

The underwriter acts purely as an agent and does not guarantee the sale of all securities.

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15
Q

What is all-or-none (AON) underwriting?

A

The deal proceeds only if all securities are sold; otherwise, it’s canceled

Investor funds must be held in escrow, and misleading investors about full sales is prohibited.

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16
Q

What is mini-max underwriting?

A

A form of best efforts underwriting with defined minimum and maximum amount

The offering only proceeds if the minimum is raised, and funds are held in escrow during the offering period.

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17
Q

What do selling group members act as?

A

Agents, not principals (no financial liability)

Selling group members help distribute the securities but do not assume financial risk.

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18
Q

What is included in a selling group agreement?

A

POP and allocation, concession, payment terms, legal limitations on liability

The selling group agreement outlines the terms of the relationship between the underwriter and selling group members.

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19
Q

What is the financial liability of syndicate members?

A

Act as principals and assume financial liability for unsold securities

Syndicate members are at risk for any securities that are not sold.

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20
Q

What is the financial liability of selling group members?

A

Act as agents with no financial risk and no obligation to purchase securities

Selling group members facilitate sales but do not risk their own capital.

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21
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A
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22
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23
Q

What does the primary market refer to?

A

The sale of securities to the investing public in issuer transactions

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24
Q

What is the most common example of a primary market transaction?

A

Initial public offering (IPO)

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25
Can an issuer have more than one primary offering?
Yes, open-end investment companies can issue new shares daily
26
What is a follow-on offering also known as?
Additional primary offering (APO)
27
How can you identify a primary offering?
If the funds go to the issuer, it is a primary offering
28
Is the resale of treasury stock considered a primary offering?
No, because those shares were previously owned
29
What is the secondary market?
The market where all further buying and selling takes place after a new issue
30
Who are the main participants in a new issue?
The issuer and the broker-dealer acting as the underwriter
31
What must the issuer do unless exempt from registration?
File a registration statement with the SEC
32
What does the SEC review in the registration statement?
Sufficiency of investment information
33
What is due diligence in the context of underwriting?
Preliminary studies and investigations about a corporation and a proposed new issue
34
What must investment bankers examine as part of the due diligence process?
* The use of the proceeds * Perform financial analysis and feasibility studies * Determine the company's stability * Determine whether the risk is reasonable
35
What is an underwriter?
A broker-dealer specializing in investment banking and underwriting new issues
36
What is the role of the underwriting manager?
Directs the underwriting process and signs the underwriting agreement
37
What is a syndicate in underwriting?
A group of underwriters formed to purchase and offer a new issue of municipal securities
38
What is a firm commitment offering?
All syndicate members commit to purchase from the issuer and distribute an agreed amount of the issue
39
What is the difference between negotiated and competitive bid underwriting?
Negotiated underwriting involves negotiation of terms, while competitive bid is based on bids for the lowest net interest cost
40
What does net interest cost (NIC) measure?
The comparison of bids based on the amount of proceeds and total coupon interest paid
41
What is the financial liability of syndicate members?
Syndicate members take on financial liability; selling group members do not
42
What is a best efforts arrangement?
The underwriter acts as an agent without financial liability for unsold shares
43
What is an all-or-none (AON) underwriting?
An agreement that requires the underwriter to sell all shares or cancel the underwriting
44
What is a mini-max offering?
A best efforts underwriting with a minimum and maximum dollar amount for the securities offered
45
What must be held in escrow during an AON distribution?
Any funds collected from investors
46
What is a standby underwriter?
An underwriter that agrees to buy all unsold shares in a corporate rights offering
47
What is the difference between Western and Eastern accounts in syndicates?
Western accounts are divided; Eastern accounts are undivided
48
What do syndicate letters include?
* Each member firm's level of participation * Priority of order allocation * Duration of the syndicate account * Appointment of managers as agents * Fee for managing underwriter
49
What is an undivided account in underwriting?
An account where each underwriter is allocated a portion of the issue and is responsible for unsold bonds after distribution.
50
What is the key phrase to remember the difference between Western and Eastern accounts?
"The continental divide is in the West."
51
In a Western account, what is the liability of an underwriter if its entire allocation is sold?
No remaining liability.
52
In an Eastern account, how is the unsold amount allocated among syndicate members?
Based on their initial participation.
53
What is the liability for a syndicate member with a 10% commitment in an Eastern account if $1 million is unsold?
$100,000.
54
What is the purpose of a syndicate presenting a bid to the issuer?
To win the right to represent the new issue in the primary market.
55
What is the process called for establishing the reoffering yield for each maturity?
Writing the scale.
56
What is a competitive bid in underwriting?
A firm commitment to sell all the bonds.
57
What must be disclosed to syndicate members in advance?
Fees to be paid to a clearing agency and the syndicate manager.
58
What does the issuer consider when awarding the municipal bond issue?
The lowest NIC or true interest cost to the issuer.
59
What is the maximum length of time for a syndicate account to exist?
30 calendar days.
60
What is the difference between the price the syndicate pays the issuer and the reoffering price called?
The spread.
61
What is the syndicate manager's fee in relation to the spread?
Typically the smallest component.
62
What remains after subtracting the management fee from the spread?
Total takedown.
63
What is a selling concession?
Compensation for each bond sold by firms in the selling group.
64
What is a reallowance in the context of bond sales?
A small discount offered to firms not in the syndicate for bond purchases.
65
How is the allocation of municipal bond orders typically prioritized?
Presale, Group Net, Designated, Member.
66
What type of order takes priority before the syndicate wins the bid?
Presale order.
67
What is a group net order?
An order entered after the bid is awarded that benefits all syndicate members.
68
What type of order has the lowest priority in the allocation process?
Member and member-related order.
69
What does the acronym PGDM stand for in order allocation priority?
Presale, Group, Designated, Member.
70
71
What is the primary purpose of the Securities Act of 1933?
To require issuers of new securities to file registration statements with the SEC to provide complete and accurate information to investors ## Footnote The act emphasizes full and fair disclosure through a prospectus.
72
What are nonexempt issues in the context of the Securities Act of 1933?
New securities that are subject to the act's registration requirements ## Footnote Exempt securities are not subject to these requirements.
73
Which entities are considered exempt issuers under the Securities Act of 1933?
* The U.S. government * U.S. municipalities and territories * Nonprofit religious, educational, and charitable organizations * Banks and savings and loans * Public utilities and common carriers regulated by state or federal bodies
74
What types of securities are exempt from the Securities Act of 1933?
* Commercial paper (maturity less than 270 days) * Bankers' acceptances (maturity less than 270 days) * Securities acquired in private placements (Regulation D)
75
What are blue-sky laws?
State securities laws that require the registration of securities, broker-dealers, and registered representatives ## Footnote They ensure compliance with state-specific regulations.
76
What are the three methods an issuer can use to blue sky an issue?
* Qualification * Coordination * Notice filing
77
What is the cooling-off period in the registration process?
A waiting period after filing a registration statement during which the SEC reviews the statement ## Footnote The SEC can issue a stop order if the statement is incomplete.
78
What is a red herring in the context of securities registration?
A preliminary prospectus used to gauge investor reactions during the waiting period ## Footnote It must indicate that the registration statement has been filed but is not yet effective.
79
True or False: Sales of public offering securities are allowed during the waiting period.
False ## Footnote SEC rules prohibit sales until the final prospectus is available.
80
What information is included in a tombstone advertisement?
* Name of issuer * Type of security * Underwriter * Price * Effective date of sale
81
What factors are considered when pricing new issues of publicly traded securities?
* Indications of interest * Prevailing market conditions * Price that syndicate members will accept * Price-to-earnings (P/E) ratios * Company's financial health and debt ratio
82
What is the role of FINRA regarding underwriting spreads?
To review underwritings to determine if the compensation earned by underwriters is fair and reasonable ## Footnote Various factors influence the amount of the spread.
83
What must the final prospectus include?
* Description of the offering * Offering price * Selling discounts * Use of proceeds * Management description * Risks to purchasers
84
What does the SEC disclaimer in a prospectus state?
The securities have not been approved or disapproved by the SEC, nor has the SEC passed judgment on the investment merit ## Footnote Misrepresentation of SEC approval is a criminal offense.
85
What is a Summary Prospectus under SEC Rule 498?
A standardized summary of key information found in a mutual fund's statutory prospectus ## Footnote It allows investors to purchase shares or request a full prospectus.
86
What additional information can investors request beyond the prospectus?
Statement of Additional Information (SAI) ## Footnote The SAI provides expanded discussions on fund history and policies.
87
What are the characteristics of bonds covered under the Trust Indenture Act of 1939?
* Issue size of more than $50 million within 12 months * Maturity of nine months or more * Offered interstate
88
What is the purpose of the Trust Indenture Act of 1939?
To protect bondholders by requiring issuers to appoint a trustee to ensure compliance with covenants ## Footnote The trustee acts solely for the benefit of the bondholders.
89
What is Regulation A?
A framework for small and medium corporate offerings under the JOBS Act allowing capital raising without full registration.
90
What are the two tiers of offerings under Regulation A?
* Tier 1: Up to $20 million in a 12-month period * Tier 2: Up to $75 million in a 12-month period
91
What is the maximum amount that can be sold on behalf of existing selling shareholders in Tier 1?
$6 million
92
What is required for Tier 2 offerings under Regulation A?
Audited financial statements and rigorous disclosure to the SEC
93
What defines an accredited investor under SEC Rule 501?
Investors who meet specific financial criteria, including net worth and income thresholds.
94
What is the maximum investment limit for Tier 2 investors who are not accredited?
The greater of 10% of the investor's net worth or 10% of the investor's net income per offering.
95
What is the purpose of Regulation D?
To facilitate capital formation through private placements exempt from SEC registration.
96
What are the two sections of Rule 506 under Regulation D?
* 506(b): Allows unlimited accredited investors and up to 35 nonaccredited investors without advertising * 506(c): Allows advertising but requires all purchasers to be accredited investors
97
What disqualifies an issuer from using Rule 506?
Bad actor provisions, such as convictions for securities fraud.
98
What is the definition of private placement stock?
Stock sold in private placements, often referred to as lettered or legend stock.
99
What must an issuer file with the SEC when issuing securities under Regulation D?
Form D electronically within 15 days after the first sale.
100
What are the key components of Rule 147 for intrastate offerings?
* Issuer's principal office in the state * 80% of income or assets in the state * Majority of employees in the state * All purchasers are state residents
101
What is Regulation S?
Excludes offers and sales made outside the U.S. from SEC registration requirements.
102
What is the holding period for securities under Regulation S?
Six months or one year, depending on the issuer's reporting status.
103
What is the purpose of the JOBS Act?
To ease capital raising requirements for small and medium-sized companies.
104
What is a primary feature of Regulation A+?
It allows general solicitation for offerings.
105
Fill in the blank: Securities offered and sold exclusively intrastate are covered under _______.
Rule 147
106
True or False: Regulation D allows for unlimited dollar amounts in private placements.
True
107
What must purchasers of an intrastate issue do before reselling the stock?
Wait at least six months after the purchase.
108
What does the term 'lettered stock' refer to?
Private placement stock that requires an investment letter from the purchaser.
109
What is the significance of the term 'legend stock'?
It indicates that the stock cannot be transferred without registration or exemption.
110
What is required of U.S. citizens residing outside the U.S. regarding securities under Regulation S?
They can purchase securities offered outside the U.S.
111
What is the annual income threshold for an individual to be considered an accredited investor?
$200,000 in each of the two most recent years
112
What is the threshold for net worth to qualify as an accredited investor?
Exceeds $1 million, excluding the primary residence
113
What is the filing requirement for issuers under Regulation D?
File Form D within 15 days of the first sale
114
What does Rule 415 of Regulation C permit issuers to do?
Raise money quickly in the capital markets when needed or when market conditions are favorable.
115
What is a shelf registration statement?
A filing with the SEC that allows a company to sell securities over a period without immediate intention to sell.
116
How long is a shelf registration statement effective?
Two years, with a possible extension to three years for well-known issuers.
117
What is an example scenario for using a shelf registration?
A company wants to sell $300 million of notes but waits for favorable market interest rates.
118
What does Rule 144 regulate?
The sale of control and restricted securities.
119
Who qualifies as control persons under Rule 144?
Directors, officers, or persons owning at least 10% of the issuer's voting stock.
120
What are restricted securities?
Securities acquired through means other than a registered public offering.
121
What is the holding period for restricted securities under Rule 144?
Six months fully paid.
122
What are the volume restrictions for selling restricted stock?
The greater of 1% of total outstanding shares or the average weekly trading volume over the past four weeks.
123
What is the de minimis exemption under Rule 144?
Form 144 need not be filed if 5,000 or fewer shares are sold or if the dollar amount is $50,000 or less.
124
What happens to shares sold under Rule 144?
They are effectively registered, allowing buyers to resell without restrictions.
125
What are the two key considerations when encountering a Rule 144 question?
The type of stock being sold (restricted or control) and who is selling it (insider or noninsider).
126
What is a short-swing profit?
Profit made by an affiliate selling control stock without holding it for at least six months.
127
What does Rule 144A allow?
Nonregistered foreign and domestic securities to be sold to qualified institutional buyers without holding period requirements.
128
What is the minimum investment requirement for a qualified institutional buyer (QIB)?
$100 million invested on a discretionary basis.
129
What is the purpose of FINRA Rule 5130?
To protect the integrity of the public offering process.
130
What does the rule prohibit regarding restricted persons?
Selling a new issue to accounts where restricted persons are beneficial owners.
131
Who qualifies as restricted persons under FINRA Rule 5130?
* Member firms * Employees of member firms * Finders and fiduciaries acting for the managing underwriter * Portfolio managers * Anyone owning 10% or more of a member firm
132
What is the de minimis exemption under FINRA Rule 5130?
Restricted persons can have an interest in an account purchasing new equity issues as long as their beneficial interests do not exceed 10%.
133
What is spinning in the context of IPO shares?
Allocating highly sought-after IPO shares to individuals who can direct business to the firm.
134
What must representatives obtain before selling an IPO?
A written representation from account owners that the account is eligible to purchase the new issue at the public offering price.
135
What is the difference between spinning and spoofing?
Spinning allocates shares to influence future business, while spoofing involves entering and canceling orders to manipulate the market.

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