Issuing Securities Flashcards Preview

The most common type of underwriting, where the syndicate buys all the shares from the issuer and looks to resell them to the public. Whatever the underwriters cannot resell, they own and therefore they have financial liability for the securities.

A legal document that must be provided to all investors in a new issue no later than the settlement date of the transaction. It includes all material information about the business as well as the public offering price.

A written or graphic communication that is used by the issuer during the cooling-off period in addition to its registration statement. The purpose of it is to allow the issuer to provide new and ongoing information to the public during the registration process without having to completely redo its registration statement or preliminary prospectus.

A type of offering in which an already public company sells additional shares to the public

The first orders received after a municipal bond syndicate has been awarded the business, but prior to each syndicate member receiving its allocation of bonds. The proceeds from these orders are allocated to all members of the syndicate based on their pro rata participation in the account.

Also referred to as affiliates, these are defined as officers, directors, and shareholders of greater than 10% of a company.

A type of offering in which a company sells stock to the public for the first time.

In a syndicate, the lead underwriter, which is responsible for organizing the syndicate and being the primary liaison with the issuer. Typically, the managing underwriter takes on the largest allocation of securities, meaning it has the most risk in the transaction.

A component of the underwriting spread that compensates the syndicate manager for its lead role in the process. It is the smallest component of the spread.

Notices that must be made to investors by municipal issuers within 10 business days of any material event that may impact the issuer’s financial condition.

The process of one company purchasing or merging with another.

The last orders to be filled in a municipal bond underwriting, as they are placed by members of the syndicate for their own inventory or related accounts.

A type of best efforts underwriting in which, if the underwriter is unable to sell a minimum amount of shares within a certain time period, the entire deal will be cancelled.

A process during which an issuer selects an underwriter based on a variety of factors, including price, sector expertise, and rapport.

A type of investor who does not meet the asset or net-worth requirements of an accredited investor and therefore can only invest in certain types of private placements. For larger deals, there is a maximum of 35 non-accredited investors all of whom must be sophisticated or have a purchaser representative who is a professional that can help them evaluate the deal.

A type of offering in which the company creates brand new shares to sell and receives all the proceeds.

The marketplace where new-issue securities are sold to the public in order to raise capital for the issuer.

The first orders received even before a municipal bond syndicate has been awarded the business and the terms of the deal have been finalized. These customers have top priority in getting their orders filled, and the proceeds from these orders are allocated to all members of the syndicate based on their pro rata participation in the account.

Sometimes referred to as a red herring,a document that is provided to potential investors by the underwriters during the cooling-off period in order to market the deal. It contains all material information about the issuer, but does not contain the public offering price, as that is yet to be decided.

The time period before a company files its registration statement with the SEC. During this period, there can be no marketing of the securities or sales to the public.

The order in which a municipal bond syndicate must allocate bonds to investors. The standard order priority is:

1. presale orders,
2. group orders,
3. designated orders, and
4. member orders.

An exemption from the requirements of the ‘33 Act that allows a company to raise new capital privately without having to register the shares with the SEC. In order to be eligible, the company must meet all the requirements of Regulation D.

A professional, such as an attorney or financial adviser, who can be used by non-accredited investors so that they may be considered sophisticated, therefore allowing them to be eligible to invest in a private placement.

Defined as an institution managing a securities portfolio of at least $100 million or a broker-dealer managing a securities portfolio of at least $10 million. Under Rule 144A, QIBs can freely trade private placements among themselves.

A document that must be filed with the SEC by an issuer in order for the issuer to register securities for public sale. It contains all material information about the company as well as the securities being issued.

An exemption from the requirements of the ‘33 Act that allows a company to raise new capital privately without having to register the shares with the SEC. These offerings must be direct-ed to accredited investors (e.g., high-net-worth individuals or institutional investors), and typically there can only be a limited number of non-accredited investors.

Defined by FINRA Rule 5130, an individual or entity that is generally prohibited from purchasing an IPO of common stock. Restricted persons include:

1. FINRA member firms and their employees;
2. the attorneys and accountants of the managing underwriter;
3. portfolio managers for their personal investment accounts; and
4. immediate family members of restricted persons.

Stock that has never been SEC registered (e.g., private placement shares). Under Rule 144, if an investor holds restricted stock for six months (one year for companies not subject to SEC-reporting requirements), the investor is free to resell the shares into the public market, assuming the issuer is a public company.

Typically run by the issuer and syndicate manager, this is where these parties travel around to major cities to meet with prospective investors and market the new-issue securities.

An SEC rule that defines the conditions under which control stock (shares held by insiders) and restricted stock (shares that have never been SEC registered) can be resold.

An exemption from the requirements of the ‘33 Act that allows qualified institutional buyers (QIBs) to freely trade private placements among themselves. QIBs are institutions that are managing a securities portfolio of at least $100 million or broker-dealers managing a securities portfolio of at least $10 million.

An SEC rule that states that whenever a company proposes to reclassify its ownership, acquire another business, or merge with another company that new securities are being issued and therefore the securities must be registered and shareholders are entitled to a prospectus.

Provides an exemption from the requirements of the ‘33 Act that allows a company to sell securities in its home state and avoid SEC registration. To be eligible, a company must have its principal place of business in the state and meet one of the following requirements:

1. at least 80% of the assets must be located in the state;
2. at least 80% of the revenue must come from doing business in the state;
3. at least 80% of offering proceeds must be used in the state; or
4. a majority of the em-ployees must be located in the state.

Additionally, all purchasers of securities must be state residents who cannot resell outside the state for six months.

A type of offering in which shareholders sell existing shares of the company and receive all the proceeds. In this situation, no new shares are created by the company and therefore the company receives no proceeds.

Sometimes referred to as the Truth in Securities Act, a federal law that requires all new securities to be registered with the SEC unless the security is exempt or sold through an exempt transaction. The goal of this act is to prohibit fraud in the sale of securities to the public while ensuring that investors receive full material disclosures about the securities.

A document signed by the syndicate manager and selling group firms that engages the selling group firms to act as agents on the deal.

A component of the underwriting spread that compensates the syndicate manager, members, or selling group firms for actually selling the shares. It is the largest component of the spread.

A firm that is contracted as part of an underwriting to help market and sell the securities without taking on any financial risk.

A type of registration statement that can be used by certain large companies in a follow-on offering allowing them to pre-register securities and sell them at a later date up to three years in the future. It provides issuers additional flexibility to raise capital quickly when market conditions are most favorable.

A combination of a primary and secondary offering, where the company creates shares and receives some of the proceeds and shareholders sell existing shares and receive some of the proceeds.

Allows the syndicate manager to bid on new-issue securities in the open market to prevent a decline in price. The manager can never bid above the public offering price.

A type of firm commitment that is used in conjunction with a rights offering. In case current shareholders decide not to maintain their proportionate ownership in the company and purchase the additional shares being issued, there is an underwriter standing by to purchase any shares that are not subscribed to in the offering and that will then look to resell those shares to the public. Whatever underwriters cannot resell, they own.

A group of investment banks that work together in order to help an issuer market and sell securities to the public. The benefit of having a syndicate compared to one sole underwriter is that it allows for risk-sharing.

Investment banks that work in connection with the syndicate manager in an underwriting. Similar to the manager, they assume risk, as they are allocated securities and responsible for reselling the securities to the public. Whatever they cannot resell, they own.

An offer by the issuer or an outside investor to purchase at least 5% of a company’s common stock directly from the company’s shareholders.

basic deal announcement that is permitted to be published by the underwriters during the cooling-off period. It can only contain factual information about the issuance, such as the names of the issuer and underwriter and a description of the issuer’s business.

The portion of the spread received by a syndicate member if they are allocated a share and also sell that share themselves. It is calculated as the underwriting fee plus the selling concession.

An investment bank that works with an issuer to help the issuer market and sell securities to the public.

The contract executed between the issuer and the lead underwriter detailing the terms and conditions of the offering.

A component of the underwriting spread that compensates the syndicate manager and syndicate members based on their allocations. Essentially, it compensates the manager and members for taking on the risk for the securities.

The compensation that the syndicate receives in an underwriting. It is calculated as the difference between what the underwriters pay the issuer compared to the public offering price that investors pay for the shares.

The 1933 Act requires all securities to be registered with the SEC for public sale unless the security is exempt or sold in an exempt transaction. The purpose is to ensure full and fair disclosure of all material information to investors.

The registration statement to be filed by the issuer with the SEC

20-day cooling off period

No sales or offers of the new issue security can occur

The following activities/marketing materials are permitted:

1. Red herring (aka preliminary prospectus)
2. Collection of indications of interest
3. Tombstone ad
4. Road shows
5. Free Writing Prospectus

This is the date the SEC permits sales to the public. It occurs once the underwriter has fully marketed the new issue securities to investors and know the price they want to sell for.

This means that the issue can legally be sold.

Due diligence is the process of gathering all information and ensuring that disclosures made by the issuer are both adequate and truthful.

Shelf registration, also called rule 415, allows an issuer with previously registered securities with the SEC a three-year window to issue new securities without going through the re-filing process which can be expensive and time-consuming. A shelf can be used for both equity and debt securities, but not for an IPO.

1. Government and Government Agency Securities
2. Municipal Securities
3. Commercial Bank Securities
4. Commercial Paper with a maturity of 270 days or less

Securities can be sold outside of the state in which they were issued six months following the sale being completed.

Any officer of the company, a director, member of the Board of Directors, or a greater than 10% shareholder of the company’s equity are all considered insiders.

Under Rule 147, intrastate offerings are exempt from SEC registration if the following requirements are met:

The issuer must be incorporated in the state, all securities must be sold to state residents and one of the following criteria must be met:

• 80% of the revenue comes from the state
• 80% of the issuer’s assets are in that state
• 80% of the proceeds of the offering must be used in that state, or
• a majority of the employees must be located in the state.

Red Herring

It is used by the syndicate to gauge interest in the new IPO during the cooling off period.

No

An advertisement or announcement that the lead manager places in a newspaper to with the basic details about the offering. A tombstone ad is allowed to be published during the cooling off period.

Restricted persons include:

• Broker-dealers for their own accounts
• The employees of broker-dealers
• Finders and fiduciaries of the managing underwriter such as accountants or attorneys
• Portfolio managers who are trying to purchase for their own personal accounts
• Immediate family members of a restricted person (includes spouse, parents, siblings, children, and in-laws)

The greenshoe clause allows the underwriters to increase the size of the deal and purchase up to 15% more shares from the issuer to satisfy demand. It can be exercised by the underwriters for up to three years after the effective date.

A bid that the lead underwriter is allowed to place once an IPO begins trading, to support the price of the IPO. The underwriters can never stabilize above the IPO price.

1. Pre-registration period
2. Cooling-off period
3. Post-effective period

No. The SEC neither approves nor disapproves of the filing, only reviews it for appropriate disclosures such that an investor can make an informed decision about the company.

A tender offer is an offer by the issuer or an outside investor to purchase at least 5% of the company’s stock directly from the company’s shareholders. As a shareholder, you can only tender shares you own. Therefore, in this example, the investor could tender the 1,000 shares owned. It is prohibited for an investor to short into a tender (sell more shares then they actually own).

The Secondary Market

The third market is where exchange-listed securities trade over-the-counter.

The fourth market are when securities are traded directly between institutional investors without the services of a broker-dealer. Generally. these trades are conducted on ECNs.

A long position

A short position

1. Syndicate manager
2. Syndicate members
3. Selling group

Members of the syndicate put up their own capital to purchase the shares of the new issue and resell them to the public. Put differently, syndicate members have financial liability for unsold securities. Members of the selling group may assist in the distribution of shares by selling them to clients but none of their own capital is at risk.

Follow-on offering

A primary offering. In a primary offering, the issuer creates brand new shares to sell and receives the proceeds for those shares.

A secondary offering. In a secondary offering, shareholders are reselling existing shares and receiving the proceeds for those sales.

Firm commitment and best efforts

In a firm committment, the underwriter will purchase shares from the issuer and resell them to the public. Whatever the underwriter cannot resell, they own. Therefore, in a firm committment the underwriter takes on financial liability for any unsold shares.

Less, because the underwriter has no financial liability for the shares. They solely act as agents.

All-or-none and a mini-max deal. In an all-or-none, the underwriter must sell 100% of the shares or else the deal is cancelled. In a mini-max, the underwriter must sell a minimum threshold of shares or else the deal is cancelled.

Follow-on