SIE Essentials Chapter 5

Securities Act of 1933

Governs new issues of corporate securities; requires full and fair disclosure

Securities Exchange Act of 1934

• Created the SEC

• Regulates the secondary market (securities exchanges and over-the-counter trading)

• Margin lending, insider tranasaction, customer accounts and trading activity in general

Trust Indenture Act

Requires bond issues over $50 Million to be sold with a written trust indenture that states:

• Coupon rate, maturity, collateral

• And also requires issuer to appoint a trustee to protect bond holders

Corporate charter (bylaws)

Are filed in a company’s home state

• Lists the founders, business type, location, and number of authorized shares

Registration statement

• Filed with the SEC before public sale of securities

• Discloses:

  • Issuer’s general business

  • Officers/directors, financials

  • Use of proceeds and underwriting arrangement

  
  

*Note the List of Disclosures is Schedule A for corporations; Schedue B applies to municipal issuers

Shelf Registration (SEC Rule 415)

Lets an issuer register securities once with the SEC, then sell them over time without re-registering each time

• They have up to 3 years to sell

Cooling off period

The 20 day window after filing during which the SEC reviews the registration statement before the issue can be sold

Effective date

The date at the end of the cooling off period when an issue is cleared for sale

Deficiency letter (stop order)

Issued by the SEC when a registration statement is incomplete or misleading, this halts registration until the prospective issuer fixes it

No Approval Clause

The SEC only clears an issue for sale (it doesn’t approve it, and claiming that it approves it is actually illegal)

Indications of Interest

Are non-binding expressions of interest gathered from potential investors during the cooling off period

Tombstone advertisement

The only ad permitted during the cooling off period:

It announces (but doesn’t offer) a new issue and must disclaim that its not a solicitiation

Due diligence meeting

A required meeting near the end of the cooling off period, Where the underwriter briefs the syndicate and selling group members about the offering

Blue sky laws

State securities laws requiring the broker dealer and the security issuer to all be registered in the customer’s home state

Methods of registering for state laws

Notification: State registration method for companies renewing registration which have previously registered before

Coordination: Where someone registers with the SEC and the states simultaneously (this is usually used for IPOs)

Qualification: State registration method for securities exempt from SEC registration but still needing state registration

Underwriting Team

Investment Banking Firm: Advises issues on raising capital, M&As and is usually the managing underwriter

Underwriter: Is the broker dealer that buys securites from the issuer and resells them to the public, but they take on this financial risk for a monetary fee

Syndicate: A group of underwriters formed to share the risk and workload of a large issue

Managing (lead) underwriter: The firm responsible for forming the syndicate and dealing directly with the issuer

Selling group: Broker Dealers who help distribute shares but commit none of their own capital to purchase them

Types of Offerings

Negotiated offering: Issuer picks the underwriter directly (typical for corporate issues and municipal revenue bonds)

Competitive offering: Underwriters bid for the business (typical for municipal GO bonds, so taxpayers get the best deal)

Types of underwriting

Firm commitment underwriting: Underwriter agrees to buy the entire issue (meaning they absorb the risk of unsold shares)

Standby underwriting: underwriter agrees to buy any shares left over from a rights offering

Best efforts underwriting: The underwriter agrees only to try their best to sell the issue, unsold shares of the issue go back to the issuer

All-or-none (AON): A best efforts offering thats cancelled (funds returned) unless every security is sold by the deadline

Mini-max offering: A best-efforts offering with a minimum threshold that must be hit for the deal to proceed

Preliminary prospectus (red herring)

Contains most facts about the issue except for final price and effective date

• It has red-ink disclaimer on its cover

Final prospectus

Legal document with the final offering price, underwriters spread, delivery date

*Must be available to all purchasers

Registrar

Makes sure outstanding shares never exceed what’s authorized in the charter

Transfer agent

Maintains ownership records, cancels/issues certificates and distributes dividends

Types of Securities offerings

Initial public offering (IPO): The first time an issuer sells stock to the public

Primary offering: Any sale of new securities by an issuer (IPO or later seasoned-equity offerings)

Secondary offering: Sale of already outstanding shares

Split (combined) offering: Mixture of primary (new) and secondary (outstanding) shares in one offering

Exempt Securities from SEC Registration

Exempt Securities: US government/securities, municipal securities, bank securities, public utility securities, nonprofit securities, religious securities, fixed annuities, and commercial paper

Intrastate offering: If revenue or offering proceeds are tied to 1 state and more than 50% of employees work there [All buyers must be state residents and this still requires state registration]

Exempt Transactions (security is exempt if sold in this way)

Regulation A

Regulation D

Rule 147 (Intrastate transactions)

Regulation A (Exempt Transaction)

Regulation A: offerings of $20 M or $75M or less per 12-month period [exempt but requires a simplified filing]

Regulation D (Exempt transaction)

Regulation D (private placement): Exempt offerings to no more than 35 unaccreddited investors per year, unlimted money can be raised, but unaccredited partcipation is limited to 35 per year

Accredited investors: Can be sold unregistered securities

Rule 144

Rule 144: Allows holders of unregistered securities to sell shares if they’ve held them for at least 6 months though they can only sell the greater of 1% of outstanding shares, 4-week average weekly trading volume

Rule 144A: Lets unregistered securities to be resold to qualified instituional buyers (QIB) with no holding period capped

Form 4

Must be filed within 2 business days of a change of an affiliate’s common stock position

Control shares

are shares held by an affiliate (insider)

Volume limitations apply over 90 days

Restricted shares

are unregistered shares which must be held at least for 6 months prior to sale

Form 144

Must be filed by control stock/affiliate when they intended to sell restricted or control stock within 90 days

• When they intend to sell stock greater than $50,000 in value

Rule 144A

QIB is an instiution with $100 Million+ in investable assets

QIB are not bound to Rule 144 restrictions of volume or holding period