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Series 24 > Series 24 Chapter 2 Underwriting > Flashcards

Series 24 Chapter 2 Underwriting Flashcards

1
Q

What is a Follow on Offering?

A

When a company issues addition shares after IPO for the purpose of capital raising.

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2
Q

What is a Secondary offering?

A

When existing shareholders sell their shares to someone else and receive the proceeds.

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3
Q

What is a “split offering”?

What must the underwriter disclose?

A
  • When a company offer shares by the issuer and the balance is offered by shareholders.
  • Shares sold by company are newly created and are a primary offering.
  • Existing shares sold by officers of directors are a secondary offering.
  • Underwriters must disclose to a purchased to a portion of proceeds will be paid to selling shareholders and not the company.
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4
Q

Underwriting commitments

What is a firm commitment?

A
  • Syndicate agrees to purchase the entire issue and is responsible for any securities that are not sold.
  • The syndicate is firmly committing to sell all the shares.
  • If not all sold, it must absorb any unsold chairs
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5
Q

Underwriting commitment

What is a Best efforts form of underwriting?

A
  • Underwriter tries to place as much of the new offering as possible.
  • Any unsold shares get returned via sure
  • Acting in the capacity of an agent.
  • Not a principal for own account
  • Bona fide effort
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6
Q

What is the difference between a syndicate and a selling group?

A
  • Syndicate implies financial commitment
  • Sewing group is when the underwriter acts as a placement agent
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7
Q

Underwriting

What is an All or none?

A
  • Done if issuer needs a certain amount of money.
  • Also referred to as best efforts
  • Entire issue must be sold, or is canceled.
  • Underwriter acts as an agent
  • Anything that has been sold must be canceled and funds returned to prospective buyers.
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8
Q

Underwriting

What is a Mini maxi underwriting?

A

This is a type of all or nothing offering

  • A minimum amount must be sold.
  • Once past minimum more shares may be sold up to a maximum amount.
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9
Q

Underwriting

What is an Escrow account?

A
  • If broker-dealer is participating in a distribution other than firm commitment, must send funds to issuer or establishing account with an escrow agent.
  • Escrow agent holds the funds.
  • Escrow account ensures that money gets returned if the entire deal does not go through.
  • If deal successful, issuer receives the proceeds less underwriter fees from escrow account.
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10
Q

Underwriting

What is a Standby agreement?

A
  • Corporation wants to sell additional shares to the public, will do so under preemptive rights offering.
  • Current shareholders granted opportunity to purchase new issue before public does Shareholder may exercise or sell rights Syndicate agrees to purchase any unsubscribed shares from the rights offering
  • This is a form of a firm commitment basis.
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11
Q

What is the role of the syndicate manager?

A
  • Syndicate manager is the lead underwriter.
  • Other broker dealers are invited to participate Agreement as sold amongst participants. (syndicate agreement) Send the kids role is to guarantee (under right) for sale
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12
Q

What risk does the syndicate take on any firm commitment underwriting?

A
  • Any securities that are not sold must be bought by the syndicate members.
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13
Q

Underwriting

What is a selling group?

A
  • Syndicate will recruit other broker dealers to help a sale
  • Group of company is this called the selling group.
  • Selling group does not take on financial liability, act as placement agents
  • Unsold shares retained by the syndicate.
  • Broker-dealer must sign a selling group agreement which explains the relationship
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14
Q

Underwriting

How is the public offering price determined?

A
  • The syndicate members must all sell the shares at the same public offering price POP.
  • Only the syndicate manager can determine if a lower price should be allowed.
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15
Q

Underwriting

What is the underwriting spread?

A
  • The spread is the difference between the public offering price, and the amount of money that the issue or receipts.
  • The spread is shared by manager syndicate members and selling group.
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16
Q

Underwriting

Explain how the underwriting spread is distributed?

A
  • Portion of underwriting spread is paid to the managing underwriter (manager fee)
  • Syndicate expenses are paid out of manager fee.
  • Remainder of the spread is paid to the syndicate and or selling groups or chairs.
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17
Q

Underwriting

What is a green shoe?

A
  • A clause in underwriting agreement allows syndicate to sell more of an issue and was originally available.
  • Typically a clause is triggered by robust amount.
  • Usually allow underwriters to purchase up to 15% more shares that originally offered.
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18
Q

Underwriting

What is a market out clause?

A
  • If conditions change underwriter might be able to cancel agreement even if it is firm commitment class must be in place.
  • Typically requires an event that makes it impossible to sell the shares.
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19
Q

Underwriting

What is an at the market offering?

What is allowed to use this form of underwriting?

A
  • Issuers with existing shares can use in “at the market offering.”
  • Allows company to raise capital and issue shares over a period of time.
  • Does not have to be done all at once.
  • Offers flexibility to issuer.
  • Only allowed by companies that are eligible to use form S3 or F3 for registration.
  • Pricing based on secondary market value.
  • Security must be listed on exchange If not listed on secondary exchange must be offered in independent market.
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20
Q

Underwriting – new issue practices

Explain what a jump ball basis is?

A
  • Share allocation between syndicate firms is determined by the manager and noted in the syndicate agreement.
  • Shares can sometimes be over or under subscribed.

Syndicate uses an institutional pot in which shares will be available on a “jump ball” basis.

  • Process set aside shares for specific institutional clients.
  • Allows all members to complete for orders.
  • Institutions that receive allocations designate which underwriters are credit for the sale Managers often capped on amounts of credits they can earn.
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21
Q

Underwriting

What is manager Bill and deliver?

A
  • Manager will deliver the shares directly to the institutional client.
  • Often used when share allocation is determined on a jump ball basis.
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22
Q

Underwriting

Explain how fee retention works?

A
  • Often shares are presold to institutional clients.
  • The remainder are sold to retail clients from the underwriter.
  • Sales to retail clients generate a profit that goes to the member who made the sale.
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23
Q

Explain the FINRA regulations surrounding quotations or a security that is the subject of an IPO?

A
  • FINRA does not allow members to execute directly or indirectly in third market transactions trading on exchanges.
  • Prior to the security trading on its primary exchange.
  • Report of an opening transaction on the listing exchange is indication security is trading.
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24
Q

FINRA rules on securities distribution

When a new issue is being distributed, when must member firms file with FINRA (in oder to begin distributing the security)?

A
  • If the securities are registered**, required disclosures must be filed with FINRA no later than **one business day following the issuance registration statement with SEC.
  • If the issue is exempt from registration** disclosure must be filed with **FINRA at least 15 days prior to the anticipated offering.
  • FINRA must have no objections - Must be okay with underwriter’s compensation.
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25
Q

When member firms plan to distribute a new issue, what documents must be filed with FINRA for review?

A
  • Copies of the registration statement, offering memorandum, offering circular or other documents used to offer securities to the public.
  • Copies of proposed underwriting agreement among underwriters consulting agreement letter of intent escrow agreement
  • Copies of any pre-and post-amendments to the registration statement or other offering document
  • Copies of the final registration to clear effective by the SEC or equivalent.
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26
Q

What information must be managing underwriter file with FINRA, when a new issue is to be distributed?

A
  • Estimated maximum offering price estimated maximum underwriting discount or commission finders fees or any other type of compensation it may accrue to the underwriter.
  • Statement concerning the affiliation with any member firm or officer or director of the SUR or a beneficial owner of more than 5% of securities of issuer.
  • Detailed statement explaining any other arrangement entered into during the 180 day period prior to filing in the offering.
  • A statement demonstrating compliance with any exception to the definition of underwriting compensation.
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27
Q

What types of securities are not subject to FINRA filing requirements, for new issues

A
  • Securities offered by an issue or unsecured non-convertible debt with the term of at least four years.
  • Non convertible preferred stock rated by a nationally recognized statistical reading organization in one of its for highest rating categories.
  • Any securities are permitted to be registered with the SEC registration mission statements as three and offered through shelf registration. Offerings of securities by foreign private issuer and are under form F 10.
  • Exchange offers of securities were the securities to be issued or being acquired or listed on the NYSE, AMPX, or NASDAQ on the market.
  • Offerings of securities by church or other charitable institution that is exempt from SEC registration.
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28
Q

What offerings are exempt from the corporate financing roll, regarding filings for a new issue?

A
  • Securities exempt from SEC registration under regulation D (private placements) Mutual funds.
  • VA contract.
  • Municipal securities.
  • Tender offers.
  • Security is registered with the SEC in issued as a result of the merger or acquisition spin off that does not result in public ownership of the number firm
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29
Q

What things does FINRA look at when they review an underwriting agreement?

FINRA reviews all distributions in which a member firm is participating in to make sure compensation paid to the member firm is fair.

A
  • Does not pass judgment on merits of the issue or public offering price.
  • They look at:
    • Offering proceeds
    • Amount of risk assume by underwriters (firm commitment or best efforts.) IPL or secondary offering?
    • Type of security is being offered.
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30
Q

What does FINRA consider compensation?

A
  • Underwriting discount or commission reimbursement of expenses to the underwriter
  • Fees and expenses of the underwriters counsel
  • Finders fees
  • Wholesaler fees Financial consulting advisory fees
  • Any securities received as acting as a placement agent Special sales incentives Compensation in the form of being an advisor to the issuers Board of Directors Compensation in the form of a warrant or convertible security.
  • Fees for a qualified independent underwriter.
  • Compensation even if the offering was not completed
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31
Q

What does FINRA considered to be not underwriting compensation?

A

Not compensation

  • Reimbursement of issuer related expenses originally paid by the managing underwriter is not considered compensation.
  • Registration fees
  • Accounting fees
  • FINRA a filing fees
  • Prospectus printing costs.
32
Q

If an underwriter receives securities as a form of compensation, how long must today hold them?

A
  • Options and warrants can the exercise at any time.
  • Securities received must be held for a six-month period.
  • Underwriters options may not be issued the terms that are better than those that are offered at the general public.

Maximum life of an underwriter’s warrant is 60 months

33
Q

Explain the difference between a selling syndicate and a selling group?

A
  • Selling syndicate is a group distributing securities that imposes a financial commitment on its members.
  • The selling group is a group distribute securities that does not impose financial commitment on its members.
34
Q

Syndicate and selling groups

How are nonmembers treated during offering period?

Ability to join syndicate?

Suspended members?

A
  • A member at FINRA may not join with a nonmember in any syndicate or selling group.
  • A suspended member May not be invited to join a selling group or syndicate happening in the future.
  • If member firm is suspended subsequent to an underwriting they may not except delivery of previously allocated shares.
  • Suspended member is only allowed to purchase the securities at the full offer in price.
  • If it’s your stock to sign directly to the public and hired it’s on salesforce, a member for may not participate in anyway.
35
Q

Explain how selling concessions work for member firms?

A
  • Selling concessions and discounts for a public offering may only be granted to a broker dealer that is engaged in the investment banking or securities business.
  • Member firms may not sell securities at a discount to person whom they provide research services - but may sell securities at the public offering price
36
Q

What would be a conflict of interest for a member firm that is involved in the IPO of its own stock?

A
  • A conflict of interest exist if any of the following conditions apply in the member firms participating in a public offering:
  • Security certification but by the A conflict of interest exist if any of the following conditions apply in the member firms participating in a public offering:
  • Securities are to be issued by the member.
  • Issue or controls or is under the control of a member.
  • At least 5% of the net proceeds are intended to reduce or retire the balance of the loan extend it for the number.
37
Q

What is the definition of an affiliate?

A
  • Any entity that controls or is under Common control with the member.
  • Control equals having 10% or more of a common number for equity or subordinated debt. Or equals a right to 10% or more profits or losses of a partnership.
38
Q

A member firm is not permitted to participate in a public offering in which it has a conflict of interest unless the offering complies with which two conditions?

A

Public offering can be done with an existing conflict of interest if two things occur.

  • (1) Any conflicts must be prominently disclosed in the prospectus also one of the following three conditions
    • Must be member that is the primary party responsible for managing the offering
    • Does not have a conflict of interest or is not an affiliate of a member that has a conflict.
    • The security is being offered have a bona fide public market. Security is being offered are investment grade.
  • (2) A qualified independent underwriter must participate in the preparation of the offering documents.
    • A QIU is a firm that has service a miniature comanager and at least three public offerings of summer size in the last three years.
    • Any conflicts must be disclosed.
    • Member must inform FINRA when the offer is completed.

(One of the two conditions above must be met.)

39
Q

How is due diligence handled when a firm is issuing its own shares in the primary market?

A
  • Underwriters must conduct a diligence.
  • They cannot conduct a diligence on their own stock.
  • Self underwriting‘s require another broker dealer to do the due diligence, QIU.
40
Q

If there is a conflict of interest in a discretionary account how must it be handled?

A
  • If a member firms participating in a distribution of securities in which it has a conflict and it’s going to do so in a discretionary account the number for must attend prior written approval regarding the proposed transaction
41
Q

What is the syndicate settlement date?

A
  • Syndicate settlement that occurs when the issuer delivers the new mission securities to the account of the underwriting syndicate.
  • Syndicate managers have to provide member with an item my statement to make an expenses no later than 90 days following the syndicates settlement date.
42
Q

What does Regulation M cover?

A
  • Part of the act of 1934
  • Oversees the sales of new issues and follow-on offerings.
  • Restricts distribution participants such as underwriters and issuers from bidding up securities in the secondary market of a stock that is being offered in a distribution prevents bidding up price - manipulation.
  • Syndicate members and broker dealers are not allowed to buy or bid for subject security during restricted.
  • Some exceptions are permitted by SEC
    • Allowed to stabilize security
43
Q

Under rule 101 regulation M, what is the length of the restricted period?

A

5 days prior to pricing for most

1 days if 100,000 shares ADTV and $25m float

Begins day of solicitations materials for merger or exchange.

  • Regulation M covers the activity of broker-dealers and underwriters when a new issue is being marketed.
  • The restricted period usually begins five days prior to pricing or whenever the broker deal becomes a participant (which ever comes later).
  • If the subject security has average daily trading volume of at least 100,000 and the issue is public float is $25 million or more the five business day is one business day.
  • If the distribution is associated with the merger acquisition or exchange offer the restricted. It’s defined as the day the proxy solicitation materials are first sent to holders and ends on completion of the distribution
44
Q

Rule 101 regulation M

How does the rule apply to reference securities?

A
  • The limitation on purchases or bids applies not only to the subject security but also to a reference security that the subject security may be converted.
  • This could be a convertible bond.
  • (Common stock is a reference security for an offering or rights warrants or convertibles, opposite is not true.)
45
Q

Explain some of the exceptions to the rule 101 regulation M?

A

Sometimes there are exceptions to rule 101.

  • Transactions and securities typically exempt:
  • Government bonds muni bonds non-convertible investment grade debt and preferred stock.
  • Actively traded securities with average daily trading volume of at least $1 million and public flow of common stock is at least $150 million.
  • Odd lot transactions.
  • The exercise of the option, Warrent, right, or similar instrument trying to restricted. Regardless when It was acquired.
  • Unsolicited brokerage transactions and unsolicited purchases when acting as a principal.
  • Securities of domestic and foreign insurance eligible for an exemption from the securities act of 1933 under rule 144A - if sold to qualified institutional buyers and certain regulation as transactions.
  • Securities part of a basket strategy, security cannot be more than 5% of the basket, basket must contain at least 20 securities.
  • Unexpected bids and purchases that do not exceed 2% of the securities average daily trading volume are exempted from the rule if the broker-dealer maintains and forces written policies and procedures to prevent violations.
  • If an inadvertent transactions discovered subsequent the de minimus transactions are not exempted.
46
Q

Explain how regulation M and IPO allocations work?

A
  • Regulation M also pertains to IPOs.
  • Underwriters and broker dealers cannot influence the price prior to the completion of the distribution.
  • Influencing the aftermarket price of an IPO during the distribution is a manipulative act. Allocation decisions cannot be based off of a clients commitment to purchase additional shares in the secondary market.
  • Cannot allocate IPO shares based on a prearranged agreement to buy things in the aftermarket at specified prices.
  • This is called laddering.
47
Q

Explain rule 102?

A
  • Rule 102 oversees the activities of the issuer of the security.
  • The issuer cannot purchase or bid for a covered security (In a follow on offering) or introduce others to do so which may drive up the price.
48
Q

What are some exceptions to rule 102?

A

Rule 102 has to do with activities of issuers and securities

Because they are not financial intermediaries – different rules apply.

Issuers may not bid for or purchase the following:

  • Actively traded securities of the issuer or affiliate
  • Basket transactions involving a covered security
  • Inadvertent (de minimus) transactions
  • Unsolicited transactions executed through a broker dealer.
  • Issuers may also not receive research on the covered security
49
Q

Explain regulation M 103?

What does it aim to do?

What are some exceptions?

A
  • Market makers that or syndicate makers may impact market liquidity due to suspension of their normal activity as a result of rule 101.
  • Rule 103 permits distribution participants to continue marketing securities in the NASDAQ on a passive basis.
  • The market maker may enter a bid At a price that does not impact the market price.
  • The bids and purchases made by a passive market maker are limited by the highest independent bid.
  • Exceptions:
  • Passive market maker has daily purchase limit which is the greater of 30% of its average daily trading volume in the stock or 200 shares. It is OK to execute one final trade that in total may push you over the limit.
  • No trading for the rest of the day after that.
  • In a falling market when the last independent bid drops below that of the passive market maker the passive market maker may maintain its bid until the purchases have reached or exceeded the lesser of two times the minimum current size for that security or the passive market makers remaining daily limit.
50
Q

Explain regulation M rule 104?

A
  • Stabilizing is permitted to provide an orderly distribution of a new offering.
  • Stabilization is not permitted in and at the market offering (and offering of securities at other than a fixed price.)
51
Q

Explain how a stabilizing bid is entered under rule 104?

A
  • Only one participant in a distribution can enter a stabilizing bid.
  • Maximum price is the last independent sale price or the highest bid in the market.
  • For an IPO the bid may not be higher than the public offering price.
  • Application of the rule depends on when does the stabilizing begins: when the securities principal market is open or closed.
52
Q

Explain how stabilization (under Rule 104) of a new issue works when the market is open?

A
  • Stabilization can take place in any market at a price no higher than the last independent transaction in the principal market if:
  • The security has traded in the principal market on the day stabilizing is initiated or on the proceeding business day.
  • The current ask price in the principal market is equal to or greater than the last independent transaction price.
  • If neither conditions are satisfied stabilizing can’t be done in any market after the opening quotes in a principal market at a price higher than the highest current independent bid in the principal market
53
Q

Explain how stabilizing of a new issue works when the principal market is closed?

A

When the principal market for security is closed stabilization is generally limited to the lower of the price at which stabilizing could’ve been initiated in the principal market at its previous close or the last independent transaction or bid in the market on which stabilizing will be initiated

54
Q

Explain what a penalty bid is?

A
  • Penalty bid allows the managing underwriter to reclaim the selling concession from the syndicate member who’s customer bought a new issue and immediately sells it back to the syndicate at the stabilizing bid
55
Q

What must a syndicate manager do if it intends to impose a penalty bid?

A
  • The syndicate manager must provide written notice to FINRA If it intends to impose a penalty bed.
  • The notice must include the identity of the security The notice must include the date the member intends to impose the penalty.
56
Q

What must a syndicate manager do if they intend to engage in syndicate covering transactions?

A
  • Must also notify FINRA if the syndicate manager intends to engage in syndicate covering transactions under rule 104.
  • The notice must include the identity of the security
  • The notice must include the date the member intends to conduct syndicate short covering transactions.
57
Q

What is a syndicate covering transaction?

A
  • Syndicate covering transaction is the placing of a bid on behalf of the distributor or underwriting syndicate to reduce a short position created in connection with the offering.
  • Syndicate short positions arise from overallotments when syndicate members sell more than the number of shares being offered. T
  • This happens because some indications of interest might be withdrawn by customers.
  • In some cases the short position can be covered by syndicate stabilizing purchases.
  • In a rising market this could create losses for the underwriters.
  • It is possible to invoke a green shoe option.
    • Green shoe allows up to 15% more shares than originally registered on the same terms and at the same price as the original share the cover over allotments.
58
Q

Explain regulation M rule 105?

A

Route 105 attempts to prevent large corporations from shorting a security that is the subject of an offering and then purchased the offered security from the underwriter.

  • If the short sale was executed during the period five business days prior to the pricing of the offering and ending with the pricing of the issue. A person is prohibited from buying securities in a firm commitment underwriting (if that person sold short the security during the restricted period.)
  • A bona fide purchaser exemption exists person not aware of the offering or changes her mind to close up a short sale at least one business day prior to the day of the pricing and still purchase the offer at security
59
Q

Explain the fin rules regarding regulation M?

A

Member firm must submit certain forms to FINRA in connection with underwriting practices and SEC regulation M.

  • The managing underwriter may request an underwriting activity report from FINRA‘s corporate financing department.
  • Report will say if restricted period begins one day or five days prior to pricing
  • Also will say if security is exempt as an actively traded security.
  • For securities nonexempt manager must submit to NASDAQ market operations no later than the day prior to the commencement of the registered. A restricted Notification form.
  • Form will disclose whether the syndicate manager intends to use syndicate short covering transactions impose a penalty bed or place a stabilizing bed.
  • Must disclose the name of the security number of shares, timing, pricing, and managing underwriter.
60
Q

Explain quid pro quo allocations associated with new issues?

A
  • FINRA prohibits firms from doing or quod pro quo or kickbacks.
  • Firms may not allocate shares of a new issue especially those that are oversubscribed as a means of obtaining compensation that is excessive in relation to services provided.

They can’t allocate new issues to customers based on customers willingness to subscribe to other services that are fairly priced

61
Q

What does spinning refer to?

A
  • Spinning is allocating shares of a new issue to certain corporate decision makers.
  • Focuses on companies both public and non-public that may be considering an investment banking relationship with a member firm and includes executive officers and directors.
  • Essentially if there has been anything that would suggest there could be some kind of investment banking relationship, it is not allowed.
62
Q

What is flipping?

A

Flipping is defined as the sale of a new issue that occurs within the 30 days following its offer as an IPO.

  • Creates downward pressure on the price of the secure in the secondary market.
  • FINRA Prevents a member firm or anyone associated with the member firm from getting any kind of a commission or credit that was awarded via a transaction that was flipping a share. An exception to this rule is available if the managing director has assessed a penalty bid on the entire syndicate.
63
Q

Explain the rules associated with a market order and a new issue?

A
  • FINRA prohibits a member firms from accepting a market order for a new issue prior to the commencement of trading for that stock in the secondary market.
  • If a customer place is a market order for a new issue the price received by the customer could be much higher than the IPO price
64
Q

What kind of records must the syndicate manager maintain for any underwriter who will be stabilizing a new issue, affecting a syndicate short covering transaction, or implementing a penalty bit?

A

Syndicate Manager must maintain records of:

  • Percentage participation or commitment of each member of the syndicate
  • Name and address of members of the syndicate
  • Date when the penalty was in effect
  • Name and class of any security stabilized or involved with syndicate short covering Transaction Price date and time the transactions have taken place.
  • Each syndicate member must receive information from the manager in regards to the name date and time at which the first stabilizing purchase was executed in the time and stabilizing price was terminated.
  • Records must be kept for three years
  • If any of these kinds of transactions are done by a syndicate member, rather than the syndicate manager, the manager must be notified in three days.
65
Q

What is the new issue rule?

Who might be exempt from a new issue rule?

A

Any new issue securities should not be reserved for a member firms employees accounts or any other industry insiders.

  • A FINRA broker dealer should not sell a new issue into an account in which a restricted person as a beneficial interest.
  • An exemption exists for a limited broker-dealer segment that sells directly to investment company and variable contract securities.
  • This would be a person that only sells to mutual funds and was exempt.
66
Q

In order to sell a new issue into a member firms account, what must be done in advance?

A
  • Member must obtain representation from the account holder that the account is eligible to purchase new issues.
  • Representation from the account holder may be in the form of an affirmative statement that says the account is eligible.
  • For accounts that are held by banks form banks property or as investment advisors or other conduits. Firm cannot rely on oral statements.
  • Remember from that sells new machines must re-verify eligibility every 12 months and retain copies for at least three years.
67
Q

Explain prohibited sales of new issues?

A
  • Member firm or person associate member firm prohibited from Salina was shooter in the account in which he restricted person as a beneficial interest.
68
Q

What is a restricted person?

A

A member firms and associated person of the member firm Is:

  • Immediate family member of an employee of a member firm. (Siblings children parents siblings and lots and any other person who is materially supported by an employee of a member firm could be answered uncles or cousins.
  • The following conditions must apply:
    • Material support is more than 25% of persons income are living in the same household
    • The employees employed by the member frim that is selling new issue
    • Employee of the member firm has ability to control the allocation of the new issue.

Other restricted persons include:

  • Finders and fighting shares such as attorneys and accountants involved
  • Portfolio managers purchasing for their own account Person to own a broker-dealer – generally anyone who owns 10% or more of the brokerage firm
69
Q

Explain the anti-dilution exception for the new issue rule?

A
  • A restricted person is allowed to buy shares to maintain their control percentage.
  • You must’ve held the shares for at least one year. And you must hold them for an additional three months on the effective date.
70
Q

Explain general exemptions of member firms who may be restricted persons but are allowed to purchase a new issue?

A
  • Investment companies under the 1940 act
  • General or separate account insurance company
  • Common trust funds
  • An account in which the beneficial interest of all restricted persons does not exceed 10% of the account
  • Publicly traded entities other than a broker dealer or affiliates and engage in a public offering and shoes
  • Foreign investment companies
  • ERISA account statement local benefit plans Broker-dealer made purchase shares of a new issue if the offering is under subscribe
    • They may purchase if the public demand is not met.
71
Q

When can persons related to the issue or purchase a new issue?

A
  • Certain persons that are related to the issue or can purchase a new issue if the issue is specifically direct securities to them.
  • Parent company of an issuer
  • Subsidiary of an issuer
  • Employees and directors of an issuer
  • This exemption would allow a registered representative to purchase shares of an equity IPO in her employee broker dealer or the parent or subsidy of the broker dealer.
  • Will also allow family members.
72
Q

How must a control relationship be disclosed?

A
  • If a broker dealer that is controlled by a public company - has a customer that wants to buy stock of the public company, the broker dealer must notify the client of the relationship in writing.
73
Q

What is a direct participation program?

A
  • An investment that provides for flow through tax consequences (single level taxation) to the investors in the security.
  • Typically structured as a limited partnership, joint venture, subchapter S corporation.
74
Q

What kind of disclosure is needed for a broker-dealer to participate in a public offering of a direct participation program?

A

A member must investigate with a full disclosure has been made regarding items of compensation physical properties text aspects of financial condition experience of the sponsor risk factors.

  • Member firms must confirm investor suitability is included in the perspectives.
  • Members have reasonable grounds to believe that the client:Will be in a financial position to realize tax benefits of the program.
  • As the financial resources to assume the risk and lack of liquidity.
  • It’s all suitability standards
75
Q

What are the limits on compensation expenses for broker dealers that participate in a direct participation program?

A
  • Must be fair and reasonable
  • Maximum amount of compensation to underwriters may not exceed 10% of gross dollar amount of securities +.5% of the proceeds for the reimbursement of bona fide diligence expenses.
  • If sponsor is affiliated with a member district in the program offering expenses paid by the program may not exceed 15% of the proceeds received
76
Q

What is a limited partnership role up transaction?

A
  • It is one that involves a combination or reorganization of one or more limited partnerships.
  • Typically several partnerships are combined into one new entity Member firms can be compensated for soliciting events for tenders of customers who are investors partnerships And requires compensation be:
  • No more than 2% of the exchange value of newly created securities
  • Paid regardless of whether or not partners are reject proposal
  • Payable and equal amount regardless of whether the partners vote for or against the proposal
77
Q
A

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