chapter 11

what is the primary market

the market where new securities are sold for the first time and issuer receives the proceeds

what is the secondary market

the market where investors trade existing securities with each other

who receives the money in the primary market

the issuer

who receives the money in the secondary market

the selling investor

what is an issuer

a company, organization, or government that raises capital by selling securities

what is an underwriter

an investment bank hired to help plan, market and sell new securities

give examples of underwriters

goldman sachs, morgan stanley, JP morgan

what is a syndicate

a group of investment banks that come together to sell a new securities offering

who manages the syndicate

the lead underwriter

what does the SEC do

regulates securities markets, protects investors, and requires registration of most new issues

what is an IPO

the first public sale of a company’s stock

does the SEC approve whether an investment is good

no, the SEC requires disclosure but does not guarantee the quality or safety of an investment

what is a firm commitment underwriting

The underwriter buys the entire issue from the issuer. It assumes the risk of any unsold securities

who bears the risk in a firm commitment

the underwriter

a firm commitment is also known as what

a principal (dealer) transaction

why is a firm commitment called a principal transaction

because the underwriter owns the securities (inventory)

what is a best efforts underwriting

The underwriter agrees only to use its best efforts to sell the offering, with no guarantee

who bears the risk in a best efforts offering

the issuer bears the risk of unsold securities.

best efforts is also known as what

an agency transaction

why is a best efforts underwriting called an agency transaction

because the underwriter act only as a middleman and never owns the securities

what is a mini-max underwriting

a best efforts offering requiring a minimum number of shares to be sold before the offering proceeds

what is an all-or-none underwriting

a best efforts offering in which all securities must be sold or the offering is canceled and the proceeds are returned to investors.

which underwriting commitment usually has higher fees

firm commitment, because the underwriter assumes greater risk

what is an IPO

the first public sale of a company’s securities

what is an APO (follow-on offering)

an additional public sale of newly issued shares after the IPO

who receives the proceeds in an IPO

the Issuer

who receives the proceeds in an APO

the issuer

who receives the proceeds in a secondary offering

the selling shareholder

what is private placement

a sale of securities to a limited group of private investors rather than the general public sale

what is PIPE

A private investment in public equity - a private sale of securities by a public company to accredited investors, typically at a discount to the current market price.

why do PIPE offerings usually include a lock up period

to prevent immediate resale and help protect the market price

who typically participates in PIPE offerings

accredited investors and institutions

what does the securities act of 1933 regulate

the primary market (new issues of securities)

what is the main purpose of the securities act of 1933

to protect investors by requiring full and fair disclosure when new securities are offered

does the SEC approve investments under the securities act of 1933

no, the sec requires disclosure but does not approve or guarantee investments

what is disclosure

providing investors with all material information needed to make an investment decision

what is a non-exempt security

a security that must be registered under the securities act of 1933 and comply with its disclosure requirements.

what is an exempt security

a security that is exempt from certain registration requirements

what begins the 20 day cooling off period

filing the registration statement with the SEC

what is the SEC reviewing during the cooling off period

whether the registration statement is complete and contains the required disclosures

does the sec approve investments

no

does the sec guarantee investments

No

what is another name for the preliminary prospectus

red herring

what 3 activities are allowed during the cooling off period

• distribute the preliminary prospectus

• accept indications of interest

• publish a tombstone advertisement (only facts)

what 4 activities are prohibited during cool off period

• selling securities

• recommending securities

• advertising the securities

• accepting deposits

are indications of interest binding

no, neither the investor nor the underwriter is obligation

what is a tombstone advertisement

a factual notice about a new issue that is only permitted advertising during the cool off period

what happens if the registration statement is incomplete

the sec issues a deficiency letter, and the registration process pauses until the missing information is provided

what is the effective date

the first day securities may legally be sold to the public after the SEC has approved the registration statement.

what does the SEC review before declaring an issue effective

whether the registration statement is complete

what is FINRA rule 5130

A rule prohibiting restricted persons from purchasing Common Stock IPO’s to protect against conflicts of interest and ensure fair access.

who are restricted persons under FINRA rule 5130

• finra member firms

• their employees

  • and their immediate family

what is the rule of 1

• oneup (parents)

• one down ( children)

• one over (siblings, spouse)

• including in-laws

does Rule 5130 apply to preferred stock IPOS

no- only common stock

when can an investment club purchase a common stock IPO

when restricted persons own 10% or less

what price do IPO investors pay

Public offering Price (POP)

what is EDGAR

the SEC’s electronic data gathering, analysis, and retreival database

can a prospectus be altered before being delivered

no it must be delivers in its original form

what are the two types of exemptions under the securities act of 1933

exempt securities

exempt transactions

which securities are always exempt from SEC registration

• government securities

• most insurance company securities

• bank securities

• non-profit securities

• commercial paper

• bankers acceptances

• railroad ETC’s

which insurance product is NOT exempt

variable annuity

which bank related securities are NOT exempt

bank holding company securities

what is regulation A+

a small dollar exempt offering of up to $75 M using an offering circular instead of a prospectus

what is regulation D

private placement

how many accredited investors may participate in regulation D

unlimited

how many non-accredited investors may participate in regulation D

35

what is rule 147

an intrastate offering exemption for securities sold entirely within one state

what is the 80% rule

80% of revenues, assets, and offering proceeds must be tied to the state where the offering occurs

What are blue sky laws

state securities laws enforced by the state adminstrator

what are the 3 state registration methods

• filing

• coordination

• qualification

what is restricted stock

unregistered stock that must generally be held for 6 months before resale

what is an affiliate

an officer, director, or 10% shareholder (including combined immediate family ownership)

why does Rule 144 restrict affiliates

to prevent insiders from flooding the market with large stock sales

what is the holding period for restricited stock

6 months

what is the dribble rule

Affiliates may sell only the greater of 1% of outstanding shares or the 4-week average trading volume, generally up to 4 times per year

if an affiliate owns restricted stock, which rules apply

both the restricted stock holding period and the control stock volume limits

when is form 144 filed

before selling - when there is an intent to sell more than 5000 shares or 50,000 worth within 90 days of restricted stock or control stock.

what triggers form 144

intent to sell, not the actual sale

when is form 4 filed

Within 2 business days after an insider (affiliate) completes a trade

who files form 4

affiliates (insiders) reporting actual changes in beneficial ownership

what is a QIB

a Qualified Institutional Buyer with at least 100 million in investable assets

what does rule 144A show

sales of restricted or control stock to a QIB without the normal rule 144 holding period or volume limitations

which problem does control stock address

the seller is an insider (affiliate)

what is shelf registration

SEC rule 415, allowing issuers to register securities now and sell them later when market conditions are favorable

how long can securities remain “on the shelf”

3 years

after completing the missing information, how sson may securities be offered

48 hours / 2 days

why do companies use shelf registration

to quickly take advantage of favorable market conditions without waiting through the normal 20 day cooling off period

what is a stabilizing big

a purchase by the lead underwriter to support the price of a newly issued security after its IPO

why are stabilizing bids unique

they are the only legal form of market manipulation

can a stabilizing bid be placed above the POP

NO it must be at or below the POP

who may place a stabilizing bid

only the lead underwriter, and only one stabilizing bid may exist at a time

what is a penalty bid

the syndicate member must give up its selling concessing if IPO shares it sold are quickly resold and repurchased during stabilization

what is the primary market

Where new securities are sold by the issuer to raise capital

what is the secondary market

where investors buy and sell existing securities with each other

in an agency transaction who owns the securities

another investor - the firm simply matches buyer and seller

how does an agency broker get paid

commissionin

in a principal transaction, who owns the securities

the firm (market maker)

How does a principal (market maker) make money

through mark ups and mark downs

what is a market maker

a firm acting in a principal capacity that buys and sells securities from its own inventory

what is a mark up

the amount added when a dealer sells inventory to a customer