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Series 24 > Series 24: Chapter 1 > Flashcards

Series 24: Chapter 1 Flashcards

Public & Private Markets

1
Q

What does the act of ‘33 cover?

A

Primary market / New issues
Ensure public has full and fair disclosure
Requirements for issuers

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2
Q

What does the act of ‘34 cover?

A

Secondary market regulation
(NYSE & NASDAQ)
Established SEC

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3
Q

What does the investment company act of ‘40 cover?

A

Companies that are formed to pool investors money

Also covers firms that are giving investment advice

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4
Q

What does the Maloney Act cover?

A

Created non-exchange SRO’s (NASD was created to oversee the OTC, over the counter market.)

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5
Q

What is FINRA?

A

FINRA was created in 2007 from merger of NYSE and NASD.

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6
Q

Explain a REIT as a type of issuer?

What “tests” must it pass?

A

Raise capital, invest proceeds into real-estate related investments and mortgages.

Must pass the test:
75% of gross income from real-estate related activity
95% of gross income come from real estate or dividend and interest (no more than 5% from non real-estate.)
Must be established as a trust
Must distribute 90% of income

Year 2:
100 shareholders
Five or fewer cannot be more than 50% owners of common stock in last half of year

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7
Q

What is a non traded REIT?

A

Does not trade on exchange.
limited liquidity
not suitable for all

B/D’s selling non-traded REIT’s must provide valuations within 18 mos. to shareholders.

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8
Q

What is an ADR?

A

Represent a claim on a foreign security.
Shares held by US banks abroad by a depository bank that issues the ADR.
Allows company to raise money in the U.S. also pay dividends in USD.
ADR owners do not have same dividend rights, also have some f/x risk.

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9
Q

What is the difference between sponsored and unsponsored ADR?

A

Sponsored: company issuing the underlying common stock sponsors.
Unsponsored: company does not pay for cost associated with ADR (and trades in the OTC market.)

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10
Q

What are structure products?

A

Derivatives that may be linked to something else.
Typically built around a fixed income note and a derivative product.
Note usually pays regular interest, the derivative determines the payoff.
Type of corporate debt
Not bank deposits
Not insured by FDIC.

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11
Q

What are Reverse Convertible Securities?

A

Short-term notes issued by banks and b/d’s which pay above market rate coupon.
Buyer receives a higher than market coupon, but may receive an unrelated asset at maturity. (Buyer could have asset put to them at a price below current market value, less principal received.)
Not suitable for those seeking safety of principal.

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12
Q

What is an SEC reporting company?

A

An issuer is a reporting company if listed on an exchange.

Any other publicly traded corporation with aum over $10m and more than 500 shareholders.

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13
Q 
Explain the following types of investors:
Institutional
Qualified Institutional Buyer
Hedge Funds
P/E Firm
A

Instl: Bank, Insurance, RIA or +50m
QIB: 3 part test - Insurance, RIA, Pensions, Corp. + Purchasing for own account or other QIB + Buyer must own +100m.
Hedge Funds: accredited investor only, risky, no SEC filing.
P/E: take equity positions, LBO’s exit strategy exists.

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14
Q

Financing Transactions:

Public vs. Private

A

Public: access to more $, but more regulatory filings (under 33 act.)

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15
Q

Financing Transactions:

IPO vs. Follow-on

A

IPO: initial share to public

Follow on: additional shares of common stock sold to public

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16
Q

Financing Transactions:

PIPE (Private investment public equity)

A

Broker Dealer helps issuer with a private placement of restricted shares to a small group of accredited investors. (Usually not a good sign - dilution & difficul tot raise capital.)

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17
Q

What is objective of 33 act?

A

Prevent fraud with new issuance by requiring investors to be in formed with relevant information to make informed investment decision. Filed with SEC.
Requires filing of a registgration statement (prospectus)

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18
Q 
Explain the following SEC registration forms:
S-1
S-3
S-4
S-8
A

S-1: Basic registration that most co’s use for an IPO (F-3 is for foreign co.’s)
S-3: Short form of registration: must have $75 in common equity (not missed an preferred or bond payments)
S-4: Used when securities are being offered as a result of a merger, acquisition, etc
S-8: Registration of securities offered through retirement plans.

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19
Q

Explain the steps do the registration process?

A 
Registration statement (prospectus) must be provided tro all purchasers of new issues.
5 copies of the preliminary prospectus must be provided  for the registration process.
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20
Q

What must an issuer file for a new IPO?

A

New issue requires form S-1.
Includes red herring (preliminary prospectus)
An amendment must be filed if financials are outdated or there is a change to business model.

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21
Q

What will require an S-1 to be ammended?
What will create a delay / what won’t?
When does a registration statement become effective?
How is the final amendment handled?

A

If material information is added / altered an amended filing is required
Stale or outdated data
Change in the # of share offered
Material change to issuer business or directors
Will not be a delay in registration if:
Statement is for issuing additional shares of same share class
New registration statement registers additional securities at no more than 20% of maximum offering price included in prior registration statement.
Registration statement effective 20th day after the filing date.
(New amendments “reset” the clock.”)
Final amandement is usually an accelerated amendment (so as to not wait 20 days)
Final amendment must be requested by at least 2nd business day before requested effective date.
Oral request must be followed by a letter.

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22
Q

What is contained in the final prospectus (during the filing for an IPO?)

A

Offering Price
Underwriting spread
Underwriter allocation
Underwriter discounts
Proceeds to issuer
Final price must be included in the final prospectus (ok if it is different than price listed in red herring) to avoid amendment.
If the price changes by +/- 20% you have 15 days following the effective date , otherwise the information must be added to the post-effective document.

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23
Q

What must the registration statement contain (per the act of ‘33?)

A

Character of issuer’s business
balance sheet not older than 90 days
Financial statements showing profit & loss for latest fiscal yr end and two preceding fiscal years
amount of capitalization and use of the proceeds of the same
Monies paid to affiliated persons or business of the issuers
shareholdings of senior officers, directors & those holding 10% of more

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24
Q

Explain the “Pre-Registration / Pre-Filling Period.”

A

Period when issuer prepares registration statement w/help of underwriters. Underwriters may not discuss with client before the actual filing date. “quiet period”

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25
Q

Explain the due diligence process of the registration process?

A

Final meeting held by underwriters and issuer to ensure all information is correct prior to issuance of final prospectus

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26
Q

What is the waiting period during registration process?

A

Cooling off period
When SEC reviews materials for factual accuracy
Underwriters cannot sell during this period or accept $
Are allowed to discuss
Provide red herring
Record names of potential interest

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27
Q

What are Blue Sky Laws

A

Designed to protect investors from fraudulent offerings

Regulation at the state level

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28
Q

What is the effective date?

A

Represents the end of the cooling off period and beginning of post effective period.

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29
Q

what is the post effective date?

A

Offering price is set morning of effective date - when sales may begin
final prospectus must be used
If a new co issuing first time - must send preliminary prospectus 48 hours in advance

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30
Q

What is a stop order?

A

Material information becomes available following effective date but prior to completion of offering.
SEC can issue a stop order - requires all activity to cease.

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31
Q

What is gun jumping?

A

Violating the terms prior to the filing of the registration statement.

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32
Q

Explain the prospectus delivery requirements?

A

Dealer selling in secondary market - must provide customer prospectus if new securities of that class were sold by an issuer under registration statement

If issuer already has publicly traded securities outstanding - prospectus must be delivered for 40 days, for IPO 90 days,

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33
Q

Explain the requirements for dealers to offer a prospectus for the following companies

Non-reporting / will be listed
Non-reporting / will be listed / Not IPO
Non-reporting / will be listed / IPO
Reporting / currently listed

A

25 days
40 days
90 days
aftermarket prospectus requirement does not apply

34
Q

What is a lock up period

A

Period when pre-IPO holders such as management, Venture Capitalists and other insiders cannot sell shares following an IPO is trading aftermarket. s

35
Q

Explain SEC Rule 3a4-1

A 
Pertains to employees of the issuer selling the security.
Ok to do if:
not receiving compensation
associated with broker dealer
not subject to disqualification
AND (meets one the the 3 below)
sells to financial institutions 
person has other primary job at firm
person prepares written communications approved by officers but does not solicit potential investors.
36
Q

What does the Trust Indenture Act of 1939 cover?

A

New Issue of Corporate Bonds (not muni or govt.)
Issuer > 10m in corp bonds must have an indenture between issuer and trustee (usually a bank) who acts on behalf of bondholders.

37
Q

What is covered in a a bond’s indenture?

A

Covenants

Process for handling issuer defaults

38
Q

Explain the categories of the following issuers:

Well Known Seasoned Investor

A

WKSI: files reports under 12(a) of 15(d) of ‘34 act
and: eligible to file under form S3 or F3 foreign
within 60 days issuer must have: $700m in common equity outstanding or $1b in aggregate principal accumulated over last 3 years.

39
Q

Explain the categories of the following issuers:

Majority Owned Subsidiary

A

Majority-owned subsidiary of a well known seasoned issuer qualifies as as well know seasoned issuer in connection with the offer and sale of its own securities if:

Securities are non convertible, other than common equity (and parent guarantees)
Securities are guarantees of non convertible, other than common equity
Securities are non convertible investment grade

40
Q

What is a Free Writing Prospectus

A

Available to be used by seasoned investors
Offer to sell or solicitation of an offer to buy in form of written communication.
Used with registration statement - not in lieu of

41
Q

Explain the categories of the following issuers:

Seasoned Issuer

A

Can register securities under form S3 or F3 for foreign for primary offering

42
Q

Explain the categories of the following issuers:

Unseasoned Issuer

A

File reports under Section 13 or 15d of 1934 act

but does not meet minimum for a primary offering of its securities.

43
Q

Explain the categories of the following issuers:

Non-reporting Issuer

A

Not required to file reports under Section 13 or 15d of 1934 act

44
Q

Explain the categories of the following issuers:

Ineligible Issuer

A

Not permitted to use a Free Writing Prospectus

45
Q 
Explain the Filing Form and Requirements for:
WKSI
Seasoned Issuer
Unseasoned Issuer
Non reporting Issuer
A

WKSI: S-3, $700m float or $1b public debt issuance last 3 yrs

Seasoned: S-3, at least $75m public float

Unseasoned: S-1, less than $75m public float

Non-reporting: S-1, N/A

46
Q

Explain “Shelf Registration”

A

Rule 415:
Securities may be offered on a delayed or continuous basis for the purpose of:
Employee Benefit Plans
To be issued upon conversion of other securities
In connection with business transactions

May be used for 3 yrs after initial effective date

47
Q

What is an “at the market offering”?

A

Securities sold at prevailing market rate directly to secondary market via designated broker dealer.
Issuer may use shelf registration
Issuer has to be S-3 or F-3 eligible
If b/d is participating in primary or secondary distribution security that is not allowed to trade on national securities exchange may not represent in “at the market” (Can’t make a market and and then offer ‘at the market” when you control the market.)

48
Q

What is a prospectus?

A

Any notice, circular, prospectus, advertisement, letter or communication (written or broadcast) that offers a security for sale.
(Unless it is a tombstone: price, underwriters and where prospectus can be obtained.)

49
Q

What is a Free Writing Prospectus””

A

Statutory prospectus is provided to purchasers of new issues
A FWP is a document that does not meet terms of the statutory prospectus
Any written the constitutes and offer to buy or sell a security (usually) after the registration has been filed.
Only eligible issuers are able to use FWP
Examples:
Press releases
E-mails
Term sheets
Marketing materials.

A FWP may be used by a WKSI prior to the final prospectus.

50
Q 
When can a FWP be used by the following: 
WKSI: 
Seasoned Issuer
Unseasoned Issuer
Non-Reporting Issuer
A

WKSI: Anytime / Reference delivery
Seasoned Issuer: Post filling / Reference delivery
Unseasoned: Post filling / Preceded by or delivery w/statutory prospectus
Non-Reporting: Post filing / Preceded by or delivery w/statutory prospectus

51
Q 
Explain the types of offering mediums:
Written
Oral
Research report
Internal Syndicate Memorandum

During cooling off period

A

Written: print, broadcast, radio
Oral: told real-time
Research report: could be 33 act violation
Internal Syndicate: not allowed to be shared with clients

Cooling off period: b/d’s allowed to discuss securities but not in writing unless via preliminary prospectus (period between filing date and effective date)

52
Q

What does Rule 134 cover?

A

Communication that is not a prospectus:
Allows for publication of simple advertisement describing basic features of a new issue.
So basic - not considered and ad.
Also called a tombstone.

53
Q

What does Rule 135 cover?

A

Issuer can publish a notice concerning an offering of securities that contains only limited information.
Not need be filed with SEC.
Must have legend that does not contain an offer to sell securities.
Contains very basic information

54
Q

What does Rule 135a cover?

A

Covers advertising for mutual funds.
If not an offer - does not need to be accompanied by a prospectus

Information on options markets

55
Q

What some Gun Jumping Safe Harbors?

A

Related to IPO’s
Permitted activity allowed during “quiet” or cooling offer periods
1. regularly released factual information
2. “sort of” regularly released factual information
3. Forward looking statements made in good faith

Non reporting issuers

56
Q

How are Electronic Roadshows treated when “live” vs. recorded?

A

“Live”: treated as a communication
Recorded: written - and commentary can be considered a free writing prospectus

A non-reporting issuer must file the electronic road show with the SEC.

57
Q

What does Regulation S-K cover?

A

S-K is part of disclosure system.
Establishes disclosure requirements for registration statements that are filed under ‘33 and ‘34 act.
Also governs forward looking projections made by company management.
Management must have a reasonable basis for projections
Mgmt can use prior projections to help make point
Full and Fair disclosure of both favorable and unfavorable elements
Mgmt may resume or discontinue operations.

MUST disclose # of Board of Director meetings held annually (all)
MUST include directors who missed 75% of meetings

58
Q

What must be disclosed when a rating agency has a different rating than the registrants?

A

Registrant must include the rating from the NSRO if it differs from their own disclosed rating

59
Q

What does regulation S-X cover?

A

Establishes the form and content for financial statements.

Also requires attestation by independent accountant.

60
Q

When do financial statements come stale during the registration process.

A

Financial statements used in a registration period become stale and require an amendment if:
older than 135 days (or)
older than 130 days for WKSI or seasoned investor

61
Q

Explain communication related liability (Section 11 of 1933 act.)

A

Focuses on false information act.
All people signing the registration statement can he held accountable, director/partner at firm when signed, accountant or certifier, underwriter of security.

62
Q

Which Securities are Exempt from the Registration Process?

A

US Govt & Agencies
Muni’s
Securities issued by non-profit
Short-term corporate issues (Less than 270 days - CP)
Securities issued by banks and trusts (not bank holding co.’s though)
Securities issued through small business investment companies.

63
Q

Explain Rule 147 and 147a

A

Registration Exemption

147: Allows for registration exemption when securities are offered for sale only in to in state investors.
Became outdated: resulted in 147a

147a: Allows for offers to be made to out of state investors, but only in-state are eligible to buy.

State is determined by principal place of business

64
Q

What are the “new” requirements under 147 / 147a

A

If a company changes its principal place of business it will not be able to do another in state offering for 6 months in new state.

Considered doing business as meeting 1 of 4:
80% gross revenues in state
80% of consolidate assets
80% of net proceeds
Majority of issuers employees are based in the state.

Issuer must have reasonable belief that buyer is in state.

Resales to out of state can only happen after 6 mos.

65
Q 
Explain Regulation A and A+
Max offering size
Tim period
Max Amt offered by existing shareholders
Req'd audited financial statements
A

Deal with registration exemption:
Reg A Reg A+ Tier 1 Reg A+ Tier 2
$5 m $20m $50m
12 mos 12 mos 12 mos
$1.5m $6m $15m
No No Yes

Companies do not have to file a registration statement but do still have to file a a Form 1-A offering statement if they wish to make any oral or written communication.

Offering statement is qualified on the 20th calendar day after filing with SEC (assuming no delays)

66
Q

When may a preliminary offering circular be used?

A

After filing with SEC but before qualification, preliminary circular can be used if it contains virtually all the same information as the final (except price).

Preliminary or Final offering circular must be sent 48 hours prior to mailing the confirmation of the sale.

67
Q

What does testing the waters allow an issuer to do?

A

Solicit interest before filing an offering statement with the SEC.
Firm may use general solicitation and advertising.
Issuer may not accept money until SEC signs off on final offering statement.

68
Q

How are private placements handled in the registration process?

A

Private placements do not need to be registered.

69
Q

For a private placement explain the following:

  1. Placement agent
  2. Placement agent agreement
  3. Engagement letter
  4. Teaser
  5. Term Sheet
  6. Confidentiality agreement
  7. Subscription Agreement
A
  1. B/D that finds institutional investors
  2. agreement and terms b/w issuer and placement agent
  3. agreement b/w issuer and placement agent
  4. Private Placement Memorandum (PPM) shared to clients - basic info
  5. Basic information on securities being offered.
  6. Potential investor must sign to see PPM
  7. Sales contract for the investor to sign knowing the are aware of what they are buying, etc.
70
Q

Private Placement Exemption:

Section 4(2)

A

Section of 1933 act:
Registration exemption for securities that do not involve a public offering.
No form of public communication can be used.

71
Q

Private Placement Exemption:

Section 4(5)

A 
Section of 1933 act: 
Registration exemption for securities if following are met:
amount of offering < $5m
no advertising or public solicitation
Only sold to accredited investors
72
Q

Private Placement Exemption:

Regulation D

504
506(b)
506(c)

A

Registration exemption for securities if following are met:
Short form (Not registration statement)
Exemption from filing registration if conditions are met:
For D must be filed at least 15 days after first sale
Issuer is allowed to sell up to $5m in 12-mos without regard to sophistication
No Disclosure statement required

504
Three types of issuers allowed:
Company subject to SEC reporting guidelines
Investment Company
Development Stage Company (blank check co.)

506(b)
Offerings over $5m
Unlimited # of accredited and 35 non-accredited allowed to participate in offering. (must be able to evaluate risks and merits of investment.)

506(c)
Unlimited capital raise
Company can use general solicitation or advertising
Securities are referred to as restricted
Sales may be made only to accredited investors

73
Q

What is defined as an accredited investor?

A 
Financial Institution
Director or general partner of issuer
Individual who meets either test:
net worth of at least $1m
Gross income for each of last two years of $200k ($300k with spouse.)
74
Q

What does rule 144A cover?

A

Permits sales of restricted security to qualified institutional buyers. (QIB)
If same class of security is listed on exchange, not eligible for exemption.
Securities offered by RIAs are ineligible.
Created to provide more liquidity

QIB

75
Q

What does Regulation S Cover

A

Exemption for registration of securities sold to investors outside the U.S.
Do not need to be registered in U.S.
Offshore transaction.
Not sold to a U.S. person
Debt can be re-sold to U.S. person after 40 day holding period
Equity can be re-sold to U.S. person after 1 year

76
Q

Explain FINRA Rule 1522

A

Private placement where member firm issues securities and does placement on own behalf.
Firm must provide a term sheet or PPM and must file this with FINRA Corporate Financing Department

Two types of exemptions
Type of buyer: institutional / QIB under guideline of 144A
Type of Security:
Exempt securities, variable contracts, commodities, equity and credit derivatives

77
Q

Explain FINRA Rule 5123

A

Member firms that sell an issuer’s private placement, must file a copy of the Private Placement Memorandum / Term sheet with FINRA.
Must be done within 15 days of first sale.
If no documents filed, FINRA must also be notified.

78
Q

Selling unregistered securities

A

Can only be done if owner finds an exemption

79
Q

What is Rule 144

A

Rule 144 allows the resale of unregistered securities by someone who purchased them.
Also covers the resale of control stock.

Rule 144 allows people to resell their unregistered securities after they complete form 144

Must meet certain criteria:
Information must be available
Holding period must be 6 mos. or 12 mos. (non-reporting co.)

Deceased persons have no holding period.
Control stock has no holding period
Restricted stock has holding period.

If a person has been an unaffiliated for 3 mos with co and held security for at least 12 mos, they may sell security without complying with 144.

80
Q

What is Rule 145?

A

Covers types of reclassifications as sales that are subject to prospectus and registration requirements of 33 act.

Relassificaiton of 1 security to another
A merger or consolidation of one corp for another
Transfer of assets from one firm to another.

Filing is required for all transactions above.

Not requires for stock split, change in par value, reverse stock split.

Series 24 (3 decks)

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