Ch8: Issuing Securities

The … is the terms and conditions of the public offering and the agreement between the issuer and the underwriting manager formalized in a contract.

Underwriting Agreement

Under FINRA Rule …, …cannot purchase IPO shares

Rule 5130, restricted persons (broker‑dealers, their employees, portfolio managers, and certain immediate family members of the BDs)

Follow on (Seasoned) offering:

any subsequent offering of securities after the IPO to the public; may be primary (new shares), secondary (insider sales), or mixed

Primary follow‑on:

the issuer sells new shares after the IPO (→ raises capital)

Secondary follow‑on:

existing shareholders sell their shares (→ issuer raises no capital)

Primary offering →

whenever the company is creating new shares to sell and receiving all proceeds from the sale

Secondary offering →

whenever existing shareholders (ex. founders, executives, VC) are selling their shares and receiving the sale proceeds (no cash for company)

Split offering →

Both the company and existing shareholders sell shares looking to get out (ex. Split IPO = Company sells and VC exits)

In the quiet period, the issuer hires an underwriting bank with prepare the …(form)

Registration Statement (Form S-1)

The … occurs in pre‑registration when issuers …

bake-off, issuers interview banks to choose the lead underwriter

The underwriting spread is …, set …

the difference between the POP (public offering price) and the underwriting proceeds received by the issuer, set after the issuer signs the underwriting agreement and before the deal is marketed or priced

The syndicate is …, and they are/aren’t financially committed (liable) to underwrite the shares

The syndicate is the bookrunner (underwriter) and syndicate members, and they are financially committed (liable) to underwrite the shares

The … is contract that binds syndicate members to each other

Agreement Among Underwriters

Syndicate members act as … because they buy shares from the issuer and resell them; temporarily formed to distribute the new issue

principals

The … is the portion of the spread earned by syndicate members, not the full spread

total takedown is the portion of the underwriting spread (PoP - underwriting proceeds to issuer) earned by syndicate members

The selling group is …, and they help … and have/don’t have no financial commitment to the deal

The selling group is other firms that can come on board to assist with the distribution, and they help sell shares as an agent and have no financial commitment to the deal

The … is the amount paid to selling group members

selling concession

The cooling off period must be … long

minimum of 20 days long

When are IOIs and allocations done?

after the effective date, Indications of Interest are confirmed and shares allocated after the effective date, not in pre‑registration

Stabilization happens in public offerings. The managing underwriter may place stabilizing bids … to prevent … after the effective date.

at or below the offering price to prevent declines after the effective date

Insider: … status based on …

an officer, director, or anyone who owns more than 10% of a company’s voting securities, status based on position or ownership

Control person: … status based on…

an officer, director, or anyone who owns more than 10% of a company’s voting securities, status based on actual influence or control

Restricted persons include: …, and they are restricted from buying IPO shares

broker‑dealers, their employees, portfolio managers, and certain immediate family members of broker‑dealer employees, and they are prevented from buying IPO shares

Restricted stock holder:

anyone who owns unregistered stock acquired through a private transaction

Control stock holder:

any stock that an insider or affiliate holds, registered or unregistered

Control stock is defined by … (an insider or affiliate), not by ..

who owns the shares, not by whether the shares are registered

Restricted stock is defined by … (unregistered), and whoever owns…

how the shares were issued, and whoever owns unregistered stock is a restricted stock owner

Qualified Institutional Buyers: have

≥$100M in discretionary assets

Accredited investors include

1. Officers and directors of the issuer

2. Net worth of at least $1 million (excluding home)

3. Income of at least $200K ($300K if married) for at least the past 2 years

4. Institutional investors, charitable organizations, corporations, or partnerships with more than $5 million in assets

5. Registered investment companies (automatically accredited)

Passive investor:

someone who owns more than 5% of a company but does not seek control

Firm commitment:

corporate stocks and bonds, the underwriter purchases all shares from the issuer and resells them, taking full financial risk.

Best efforts:

corporate stocks and bonds, the underwriter acts only as an agent and sells as many shares as possible with no liability for unsold shares

All-or-none: corporate stocks and bonds, a

type of best-efforts deal where the entire offering must be sold or the deal is canceled and investor funds are returned from escrow.

Standby underwriting:

rights offerings, the underwriter agrees to purchase any unsubscribed shares, taking on firm‑commitment risk.

Shelf registration/ Rule 415:

corporate issuers, the issuer registers securities in advance and sells portions over time when market conditions are favorable, valid up to 3 years and not for IPOs

What is the name of the Rule for shelf registrations?

Rule 415

Rule 415 is

shelf registration

Rule 144:

sale of any control, unregistered, or restricted stock (all owned by insiders or unregistered stockholders)

Rules for sale of control stock under Rule _:

Rule 144: insiders can sell the greater of 1% of outstanding shares or the average weekly trading volume of the prior 4 weeks, per 90-day period. 

Rule 144 applies to who?

any insider or unregistered stockholder

Rules for sale of restricted stock under Rule _:

Restricted stock can only be resold if the issuer is current on it’s SEC filings, then after a holding period of 6 months for a reporting company or 12 months for a non-reporting company. Non-insider restricted stockholders can sell their unregistered shares freely and insiders have to follow volume limits of the greater of 1% outstanding shares or average weekly trading volume of the prior 4 weeks, per 90-day period

Insiders sell … stock. Restricted stockholders sell … stock.

Insiders sell control stock. Restricted stocholders sell unregistered stock.

Under Rule …, …stockholders can sell their unregistered shares … if they are a non-insider and follow volume limits (… or …, per …-day period) if they are an insider

under Rule 144, restricted stockholders can sell their unregistered shares freely if they are a non-insider and follow volume limits (greater of 1% outstanding shares or average weekly trading volume of the prior 4 weeks, per 90-day period) if they are an insider

Under Rule 144, … stock can only be resold if the issuer is …

under Rule 144, restricted stock can only be resold if the issuer is current on its SEC filings, then after a holding period of 6 months for a reporting company or 12 months for a non-reporting company

Restricted stock comes from…

Reg D (private placement), shares as compensation in a private company, acquiring directly from the company in non-public deal

Rule … allows the sale of … securities to … with no …, allowing any business to raise …but only by selling their shares to…

Rule 144A allows the sale of unregistered securities to QIBs (Qualified Institutional Buyers ≥$100M in discretionary assets) with no disclosure or prospectus required, allowing any business to raise unlimited capital as often as they want, but only by selling their shares to QIBs

Rule 144A →

sale of unregistered shares to just QIBs

Rule 145 treats certain … as sales of …, so requires …, for (3:) …, … and … but excludes … (like cash/stock dividends or splits)

Rule 145 treats certain major corporate actions as sales of securities, so requires registration, for (3:) reclassifications, mergers or consolidations, and transfers of assets (huge sales of assets to another company), but excludes ordinary actions like cash/stock dividends or splits

Rule 145 →

requires registration for major corporate events (reclassifications, M&A, and transferes of assets)

Rule 147 →

in-state businesses can raise unlimited capital as often as they want to in-state buyers, with restrictions for resale

Rule 147: an … can raise … amounts as often as … but only to … Resale guidelines are:

Rule 147: an in-state business (intrastate) can raise unlimited amounts as often as they want but only to in-state residents. Resale guidelines: in-state investors can immediately re-sell to other in state investors, resell to out of state investors after holding period of 6 months

Doing business in-state means at least one of the following is met:

80% of revenues, 80% of assets, 80% of your net proceeds will be used in-state, or the majority of employees are based in-state

Reg A →

exempts small and mid‑size issuers raising limited amounts of capital from full SEC registration

Reg S:

US issuers selling outside theUS, securities are offered exclusively to non‑U.S. investors and are exempt from SEC registration

Reg S →

US companies issuing only to investors outside the US, stocks are exempt from SEC registration

Reg D (…): done by …, securities are sold _ to … and up to … without …

private or public corporate issuers, securities are sold privately to accredited investors and up to 35 non-accredited investors without SEC registration.

Reg D →

private plaement, accredited investors and up to 35 non

PIPE deal: done by …, a … investment in … equity where … buy newly issued shares at a discount in a … transaction

public companies, a private investment in public equity where institutions buy newly issued shares at a discount in a private transaction.P

PIPE deal →

public companies issuing privately to institutions only at a discount

Competitive bid underwriting:

municipal bonds, underwriters submit sealed bids and the issuer awards the deal to the lowest interest cost bidder

Negotiated underwriting:

muni and corporate bonds, the issuer chooses an underwriter and negotiates terms rather than using competitive bidding

Private municipal placement:

municipal issuers, bonds are sold directly to a bank or institutional investor without a public underwriting

Official statement:

disclosure document for municipal bond offerings, similar to a prospectus but used for munis

Bond indenture:

the contract outlining covenants, trustee duties, and bondholder rights, but not the main disclosure document

Overselling an IPO and subsequently repurchasing the shares in the secondary market at a profit is the permitted use of the …, which allows underwriters to sell more shares than issued and cover the short position.

Overselling an IPO and subsequently repurchasing the shares in the secondary market at a profit is the permitted use of the over-allotment green shoe option, which allows underwriters to sell more shares than issued and cover the short position.

Publishing favorable research on a company’s bonds just prior to the effective date of an equity follow‑on offering is/isn’t permitted because …

Publishing favorable research on a company’s bonds just prior to the effective date of an equity follow‑on offering is permitted because research restrictions apply to equity offerings, not to bond research.

… is the prohibited act of tendering more shares in a tender offer than the investor actually owns, which violates the requirement to be net long the securities tendered.

Short tendering stock is the prohibited act of tendering more shares in a tender offer than the investor actually owns, which violates the requirement to be net long the securities tendered.