Securities Underwriting

Question 1

Securities Act of 1933

Answer 1

regulates new issues of corporate securities. An issuer of corporate securities must provide full and fair disclosure about itself and the offering. Included in this act are rules to prevent fraud and deception.

Question 2

Securities Exchange Act of 1934

Answer 2

enacted to protect investors by regulating the over-the-counter (OTC) market and exchanges, such as the New York Stock Exchange

The extension of credit in margin accounts (see Chapter 12) Transactions by insiders Customer accounts Trading activities

Question 3

Trust Indenture Act:Me

Answer 3

This act was originally known as the Trust Indenture Act of 1939 and prohibited bond issues valued at more than $5 million from being offered to investors without an indenture. The $5 million was subsequently raised to $50 million. A trust indenture is a written agreement that protects investors by disclosing the particulars of the issue (coupon

part of the Trust Indenture Act, all companies must hire a trustee who’s responsible for protecting the rights of bondholders.

Question 4

Registration Statement

Answer 4

Also known as Schedule A. Must be filed by companies issuing securities.

Schedule B is municipalities issuing mostly bonds.

Question 5

Funded Debt

Question 6

Floating Debt

Question 7

Shelf Registration

Answer 7

allows issuers to sell securities that were previously registered with the SEC without additional permission.

Lasts up to 3 years.

Question 8

Cooling off Period

Answer 8

Lasts 20 Days after registration statement submitted (Filing Date)

Question 9

Indications of Interest

Answer 9

Before selling stocks, or bonds. Not binding. Can change mind. Can be done during cooling off period.

Question 10

Tombstone Ad

Answer 10

Advertisement of security for sale

Question 11

Preliminary Prospectus

Answer 11

Underwriters and selling group members use the preliminary prospectus to obtain indications of interest from prospective customers. The preliminary prospectus must be made available to all customers who are interested in the new issue during the cooling-off period.

Question 12

Due-Dilegence Meeting

Answer 12

This meeting is required by law. During this meeting, the underwriter provides information about the issue and what the issuer will use the proceeds of the sale for.

Question 13

Blue Sky Laws

Answer 13

state laws that apply to securities offerings and sales — say that to sell a security to a customer, the broker–dealer (brokerage firm), the registered representative, and the security must be registered in the customer’s home state

Question 14

Notification (Registration Filing)

Answer 14

Companies that previously sold securities in a state can renew their previous application.

Question 15

Coordination

Answer 15

This method involves registering with the SEC and states at the same time.

Question 16

Qualification

Answer 16

Companies use this registration method for securities that are exempt from federal (SEC) registration but require registration with the states

Question 17

Investment Banking Firm

Answer 17

An investment banking firm is an institution (a broker–dealer) that’s in the business of helping issuers raise money

Question 18

Underwriter

Answer 18

is a broker–dealer that helps the issuer bring new securities to the public. They take the financial risk and therefore receive an extra fee for taking that risk. Underwriters purchase the securities from the issuer and sell them to the public

Question 19

Syndicate

Answer 19

When an issue is too large for one firm to handle, the syndicate manager (managing underwriter) forms a syndicate to help sell the securities and relieve some of the financial burden on the managing underwriter. Each syndicate member is responsible for selling a portion of the securities to the public.

Question 20

Managing (lead) Underwriter

Answer 20

the firm that’s responsible for putting together a syndicate and dealing directly with the issuer.

Question 21

Selling Groups

Answer 21

These members are brokerage firms that aren’t part of the syndicate. Selling group members help distribute shares to the public but don’t make a financial commitment

Question 22

Negotiated Offering

Answer 22

Corporations that pick their underwriter.

Question 23

Competitive Offering

Answer 23

Because municipal general obligation (GO) bonds are backed by the taxes of the people in the community, the issuers are most likely to choose a competitive offering (bidding process) to ensure that they’re getting the best deal for taxpayers.

Question 24

Firm Commitment Underwriting

Answer 24

In a firm-commitment underwriting, the lead underwriter and syndicate members (other underwriters who may be helping in the sale of the securities) agree to purchase all the securities that remain unsold after the offering. In this case, the underwriter assumes all the financial risk.

Question 25

Stand By - Firm Commitment

Answer 25

A standby underwriter signs an agreement with the issuer to purchase any stock not purchased by the public if and when an issuer has a rights offering

Question 26

Best Efforts Underwriting

Answer 26

the issuer has the right to cancel the offering or take back some of the unsold securities, depending on the type of offering: All or None Mini-max: A mini-max offering is one in which a specified minimum number of securities must be sold for the deal to remain in effect. If that minimum threshold is reached, the issuer will take back any securities that remain unsold.

Question 27

Preliminary Prospectus (Red Herring)

Question 28

Final Prospectus

Answer 28

The final offering price The underwriters’ spread (the profit the underwriters make per share) The delivery date (when the securities will be available)

Question 29

Statement of Additional Information

Answer 29

provides more detailed information about the fund’s operation that may be useful to some investors. A statement of additional information is also known as Part B of a fund’s registration statement.

Question 30

Registrar

Answer 30

The registrar is an independent financial institution that works along with a company’s transfer agent to maintain a record of stock and bond owners.

Question 31

Transfer Agent

Answer 31

a person or institution that maintains records of a corporation’s stock and bond owners (much like a registrar) but also cancels and issues certificates as well as distributes dividends.

Question 32

Initial Public Offering (IPO)

Answer 32

final prospectus needs to be available to all purchasers for 90 days after the effective date.

Question 33

Primary Offering

Answer 33

final prospectus has to be available to all purchasers of the primary offering for 25 days after the effective date for all issuers whose securities are already listed on an exchange

Question 34

Secondary Offering

Question 35

Exempt Securities

Answer 35

Securities issued by the U.S. government or federal agencies Municipal securities (local government bonds or notes) Securities issued by banks, savings institutions, and credit unions Public utility stocks or bonds Securities issued by religious, educational, or not-for-profit organizations Notes, bills of exchange, bankers’ acceptances, and commercial paper (unsecured corporate debt securities with an initial maturity of 270 days or less) Insurance policies and fixed annuity

Question 36

Intra-state Offering

Answer 36

naturally, an offering of securities within one state. For such an offering to be exempt from SEC registration, the company must be incorporated in the state in which it’s selling securities; 80 percent of its business has to be within the state; and it may sell securities only to residents of the state.

Question 37

Regulation A Offerings

Answer 37

An offering of securities worth $20 million or less (Tier 1) or $75 million or less (Tier 2) within a 12-month period is Regulation A. Exempt from full registration requirements

Question 38

Regulation D Offerings

Answer 38

Also known as a private placement (private securities offering), a Regulation D offering is an offering to no more than 35 unaccredited investors per year.

Question 39

Accredited Investor

Question 40

Rule 144

Answer 40

covers the sale of restricted, unregistered, and control securities (stock owned by directors, officers, or other people who own 10 percent or more of the issuer’s voting stock).

Question 41

Shelf Registration

Answer 41

3 years to sell registered securities.

Question 42

Commercial Paper

Answer 42

Unsecured corporate debt with initial maturity dates of 270 days, or less.