SIE (Training Consultants v3.5, 2025): Ch. 5, Investment Banking, Sec. 3 - Underwriting Procedures

How does a corporation choose its managing underwriter?

Through negotiated or competitive bidding.

When is negotiated bidding used?

Negotiated bidding is typically used for corporate equity issues.

When is competitive bidding used?

Competitive bidding is typically used for certain debt issues.

What are the key responsibilities of a managing underwriter?

Form the syndicate and selling groups, maintain records, allocate the issue, set underwriter's retention, and stabilize the issue if needed.

What is the Agreement Among Underwriters?

An agreement between the managing underwriter and syndicate members that defines liability.

What is an Eastern Agreement?

An agreement with undivided liability (severally and jointly).

What is a Western Agreement?

An agreement with divided liability (severally but not jointly).

What is a Firm Commitment underwriting?

The underwriters buy the full issue and resell it to the public, assuming full risk.

What is a Stand-By Agreement?

The underwriter agrees to purchase any unsubscribed shares in a rights offering.

What is a Best Efforts Agreement?

The underwriter acts as an agent and tries to sell the securities without taking them into inventory.

What is an All or None Agreement?

The offering is canceled unless all shares are sold; requires escrow.

What is a Market-Out Clause?

A clause that allows underwriters to back out due to adverse developments in the market.

Who files the registration statement with the SEC?

The managing underwriter files it on behalf of the issuer.

What is included in a registration statement?

Full disclosure of relevant company and offering facts, but not the prospectus.

What does the SEC do with the registration statement?

The SEC reviews for completeness but does not approve or disapprove.

What are Form S-1 and F-1 used for?

Full registration for domestic (S-1) or foreign (F-1) IPOs.

What are Form S-3 and F-3 used for?

Short-form registration for follow-on offerings (domestic: S-3, foreign: F-3).

What is the 20-day cooling-off period?

The minimum waiting period before an offering can go effective.

What happens during the cooling-off period?

The selling group is formed, Blue Sky laws are applied, and a due diligence meeting is held.

What is a Red Herring?

A preliminary prospectus used to gather indications of interest during the cooling-off period.

What can’t be done with a Red Herring?

Sales cannot be confirmed, no alterations allowed, cannot be sent with research, and cannot show final price.

Who must receive the final prospectus and when?

All customers who purchase the issue, no later than with their purchase confirmation.

What is "Access Equals Delivery"?

If the prospectus is online via EDGAR, access equals delivery.

How long must a prospectus be delivered after the effective date?

90 days for OTC (unlisted) and 25 days for listed offerings.

What are violations of the Securities Act of 1933?

Altering a prospectus, using sales lit with a Red Herring, accepting orders before the effective date, misstatements in final prospectus.

What is a Free Writing Prospectus (FWP)?

Written communication used to offer securities after registration filing; must be filed promptly with the SEC.

Managing Underwriter

The broker-dealer chosen by the issuer to handle the distribution of a new issue, responsible for forming the syndicate, maintaining records, and stabilizing the issue.

Eastern Agreement

An underwriting agreement where liability is shared jointly and severally (undivided liability).

Western Agreement

An underwriting agreement where liability is divided among underwriters (several but not joint liability).

Firm Commitment

An agreement where the underwriter buys the entire issue and resells it to the public, assuming full financial risk.

Stand-By Agreement

The underwriter agrees to buy any shares not purchased by existing shareholders in a rights offering.

Best Efforts Agreement

The underwriter acts as an agent and does not buy the securities but tries to sell them to the public.

All or None Agreement

The entire issue must be sold or the deal is canceled; typically includes an escrow account.

Market-Out Clause

Allows underwriters to be released from the agreement if material adverse conditions occur.

Registration Statement

Filed with the SEC by the managing underwriter; contains all relevant facts but is not sent to investors.

Red Herring

A preliminary prospectus used during the 20-day cooling-off period to gauge interest but cannot confirm sales.

20-Day Cooling-Off Period

Minimum SEC waiting period before a registration becomes effective; marketing but not sales occur.

Due Diligence Meeting

Held near the end of the cooling-off period to review the offering and ensure proper disclosure.

Blue Sky Laws

State-level registration or qualification of securities for lawful sale within each state.

Public Offering Price

The price at which a new security is sold to the public.

Final Prospectus

The official document investors receive when purchasing a new issue; includes final price, disclosures, and legal statements.

Access Equals Delivery

SEC rule stating that online access to the prospectus (via EDGAR) satisfies delivery requirements.

Prospectus Delivery Requirement

Applies to firms for 90 days after OTC offerings and 25 days for listed securities.

S-1 Form

Full registration statement for domestic issuers filing IPOs.

F-1 Form

Full registration for foreign-based issuers making an initial public offering.

S-3 Form

Short-form registration for follow-on offerings by qualified domestic issuers.

F-3 Form

Short-form registration for follow-on offerings by qualified foreign issuers.

Free Writing Prospectus (FWP)

Any written communication used after filing a registration statement to offer securities; must be filed with the SEC.

Securities Act of 1933

Federal law requiring registration and full disclosure for new securities offerings; prohibits fraud and misstatements.

How long must broker-dealers wait before extending margin on a new issue?

30 days after the syndicate closing date.

What type of orders can be accepted between the filing date and effective date of a registration?

Only unsolicited orders.

What can firms send in response to an unsolicited order before the effective date?

A preliminary prospectus (Red Herring).

What is a Tombstone Ad?

A legal announcement of a new issue that includes basic factual details, but no solicitation.

Are Tombstone Ads required to be filed with the SEC or FINRA before publication?

No.

What information must a Tombstone Ad include?

Issuer name, managing underwriter, amount of the issue, public offering price, and where to obtain a prospectus.

Can Tombstone Ads show selling group members?

No.

Can Tombstone Ads show the public offering price?

Yes.

What is a Quiet Period?

A period after an offering during which no research reports may be published by underwriters.

How long is the Quiet Period after an IPO?

10 calendar days.

How long is the Quiet Period after a secondary offering?

3 calendar days.

Are Quiet Periods required for IPOs of Emerging Growth Companies under the JOBS Act?

No, the JOBS Act eliminates them.

What can research analysts do under the JOBS Act regarding IPOs of Emerging Growth Companies?

Attend meetings, ask questions, and publish research reports before and after the IPO.

Can research analysts solicit investment banking business during IPOs under the JOBS Act?

No, they may not solicit investment banking business.

Who can issuers or broker-dealers contact before filing a registration under the JOBS Act?

Qualified Institutional Buyers (QIBs) and Accredited Investors (AIs).

What can issuers and broker-dealers discuss with QIBs and AIs before filing?

Investor interest in the upcoming offering.

30-Day Margin Rule

Broker-dealers must wait 30 days after syndicate closing before extending credit (margin) on a new issue.

Unsolicited Order

An order placed by a client without prior solicitation; may be accepted between registration filing and effective date.

Preliminary Prospectus

A document sent in response to interest during the cooling-off period, not a confirmation or an offer.

Tombstone Ad

A legal notice announcing a new issue, allowed during the cooling-off period but may not include solicitations.

Quiet Period

A period after an offering during which member firms cannot publish research reports on the offering issuer.

10-Day Quiet Period

Applies to IPOs, during which research cannot be published by the manager/co-manager.

3-Day Quiet Period

Applies to secondary offerings, during which research cannot be published.

Emerging Growth Company

A company with less than $1.07 billion in annual revenue that receives relaxed IPO rules under the JOBS Act.

Research Analyst (JOBS Act)

May participate in meetings and publish reports before and after the IPO without violating SEC rules.

JOBS Act

Legislation that permits communication with QIBs and Accredited Investors before filing a registration statement.

Qualified Institutional Buyer (QIB)

A large institutional investor allowed to receive pre-filing communications under the JOBS Act.

Accredited Investor (AI)

An investor meeting certain income or net worth thresholds, permitted to receive pre-filing communications.