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Chapter 3--upload Flashcards

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1
Q

What is the primary purpose of the Securities Act of 1933?

A

To require full and fair disclosure of all material facts in connection with the sale of securities to the public

This act emerged after the stock market crash of 1929 to combat widespread fraud in securities issuance.

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2
Q

What must be delivered to investors at or before the purchase of newly issued securities under the Securities Act of 1933?

A

A prospectus

This requirement applies unless the security is exempt from registration.

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3
Q

What are some nicknames for the Securities Act of 1933?

A
  • Prospectus Act
  • Truth in Securities Act
  • Paper Act
  • Full and Fair Disclosure Act

All these names emphasize the act’s focus on providing sufficient information about publicly traded securities.

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4
Q

True or false: The Securities Act of 1933 applies to all securities sold in interstate commerce.

A

TRUE

The act’s requirements apply if the U.S. mail or other means of interstate commerce are used.

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5
Q

What are exempt securities under the Securities Act of 1933?

A
  • U.S. government and agency securities
  • Municipal securities
  • Commercial paper
  • Banker’s acceptances
  • Securities issued by public-purpose nonprofits under IRS Code 501(c)(3)

These securities do not require registration with the SEC prior to public sale.

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6
Q

What is an example of a nonexempt security?

A
  • Common stock
  • Preferred stock
  • Corporate bonds
  • ADRs
  • Mutual funds

Nonexempt securities must register under the Securities Act unless they qualify for an exemption.

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7
Q

What are some exempt transactions under the Securities Act of 1933?

A
  • Regulation A offerings
  • Rule 147 offerings
  • Regulation D offerings
  • Rule 144
  • Rule 145 transactions
  • Regulation S transactions

These transactions do not require a prospectus and have reduced registration requirements.

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8
Q

What does SEC Rule 145 exempt?

A
  • Stock splits
  • Stock dividends
  • Changes in par value of existing shares

Certain corporate reorganizations may still require registration.

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9
Q

What is the Rule 147 exemption?

A

An exemption for intrastate offerings

Issuers must register their securities with the state and ensure purchasers are bona fide residents of that state.

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10
Q

What are the conditions for a distribution to qualify as an intrastate offering?

A
  • Offered exclusively to state residents
  • Principal residence of purchasers must be in the state
  • At least 80% of issuer’s gross revenue must be from operations within the state
  • At least 80% of proceeds used for business within the state
  • At least 80% of issuer’s assets located within the state
  • Majority of employees based in the state

The issuer must file Form 147 with the SEC at least 10 business days before the offering.

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11
Q

What is SEC Rule 147A?

A

An exemption similar to Rule 147 but allows offers to out-of-state residents

Purchases are still limited to in-state residents.

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12
Q

What are the two tiers of SEC Regulation A?

A
  • Tier I: Up to $20 million
  • Tier II: Up to $75 million

Tier I is subject to state and SEC review, while Tier II allows for broader capital raising with fewer restrictions.

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13
Q

What is a SPAC?

A

Special Purpose Acquisition Company

A type of blank check company created for acquiring other companies.

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14
Q

What does EDGAR stand for?

A

Electronic Data Gathering, Analysis, and Retrieval system

It automates the collection and indexing of forms submitted to the SEC.

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15
Q

What is a key feature of Regulation A offerings?

A

General public solicitation is permitted

Issuers can raise funds through various channels, including social media.

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16
Q

What are the investment limits for Tier 2 investors in Regulation A?

A

Maximum of the greater of 10% of their net worth or 10% of their net income per offering

This applies unless the offering is listed on a registered stock exchange.

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17
Q

What is required for Tier 2 issuers in terms of financial statements?

A

Must provide two years of audited financial statements

Tier 1 requires reviewed financials, not audited.

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18
Q

What is the ongoing disclosure requirement for Tier 1 issuers?

A

No ongoing disclosure requirement

Tier 2 issuers must file annual and semiannual reports.

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19
Q

What types of companies cannot use Regulation A to raise capital?

A
  • Investment companies
  • Private equity funds
  • Venture funds
  • Hedge funds
  • SPACs

These entities are excluded from using Regulation A for capital raising.

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20
Q

What is the purpose of Regulation A?

A

To raise capital

Regulation A requires issuers to deliver a preliminary offering circular to prospective purchasers at least 48 hours in advance of sale.

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21
Q

Under the Securities Act of 1933, what must nonexempt securities do?

A
  • Be registered with the SEC
  • Conform to an exemption provided by Regulation D

Regulation D provides specific exemptions for private placements.

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22
Q

What is a private placement?

A

Selling securities by a publicly traded or privately held company

A company can raise capital through a private placement under Rule 506(b) without regard to dollar size.

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23
Q

What is required before a broker-dealer signs a placement agreement under Rule 506(b)?

A

A preexisting, substantive relationship with a potential investor

No solicitations may be made under Rule 506(6).

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24
Q

True or false: Firms that fail to satisfy exemption requirements will be deemed to have sold unregistered securities.

A

TRUE

This violation includes breaching FINRA’s Rule 2010 covering standards of commercial honor.

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25
Define an **accredited investor** according to Rule 501 of Regulation D.
* Institution (investment company, corporation, bank, pension fund) * Individual with annual income of $200,000 or more * Individual and spouse with combined income of $300,000 or more * Individual or joint account with net worth of $1 million or more * Officer or director of the issuer * Individual holding Series 7, 65, or 82 * Organization with assets exceeding $5 million ## Footnote An accredited investor is someone who meets specific financial criteria set by the SEC.
26
What is a **nonaccredited investor**?
An investor who does not meet the definitions of an accredited investor ## Footnote Nonaccredited investors must be sophisticated and can use a purchaser representative.
27
How is the count of **nonaccredited investors** determined?
* A corporation or partnership counts as one purchaser * Relatives or spouses at the same address are excluded * Trusts or estates with over 50% interest are excluded ## Footnote Each owner of an entity organized for acquiring securities will be counted separately.
28
What must all prospective investors receive before confirmation of sale in a private placement offering?
A copy of the offering circular ## Footnote This is also known as the private placement memorandum.
29
What does **Rule 506** prohibit regarding general solicitation?
General solicitation and advertising ## Footnote This rule requires a preexisting relationship with all persons solicited.
30
What does **Rule 506(c)** allow regarding general solicitation?
Permits general solicitation if certain conditions are satisfied ## Footnote All purchasers must be accredited investors, and the issuer must verify their status.
31
What is the maximum dollar amount for a **Rule 504 offering**?
$10 million ## Footnote There are no limitations on the number of purchasers in a Rule 504 offering.
32
What is a key distinction of **Rule 504** compared to Rule 506?
No requirement for purchasers to meet suitability or sophistication standards ## Footnote Bad actors are prohibited from participating in Rule 504 offerings.
33
What section of the **Securities Act of 1933** allows companies to offer and sell securities exempt from registration requirements?
Section 4(a)(6) ## Footnote This section is part of Regulation Crowdfunding.
34
Under **Regulation Crowdfunding**, what is the maximum aggregate amount a company can raise?
$5 million ## Footnote This amount can be raised within a 12-month period.
35
What must be filed with the SEC when using **Regulation Crowdfunding**?
Form C ## Footnote This includes two years of financial statements and progress reports.
36
True or false: Securities purchased in a crowdfunding transaction can be resold immediately.
FALSE ## Footnote Securities generally cannot be resold for one year.
37
What is required for a member firm offering its own securities in a **private placement**?
File a copy of the private placement memorandum (PPM) with FINRA ## Footnote This is required before providing a PPM to any prospective retail investor.
38
What must a member firm do if there are amendments to the **PPM**?
Submit amendments within 10 calendar days ## Footnote This applies to any changes made to the PPM or term sheet.
39
What does **FINRA Rule 5123** require from member firms selling securities in a nonpublic offering?
Submit a copy of any offering document within 15 calendar days ## Footnote This includes private placement memoranda and term sheets.
40
What is the purpose of the **Filer Form**?
To submit documents for private placements of securities ## Footnote It is accessible in the FINRA Firm Gateway.
41
What must a firm do if it intends to use offering proceeds to make loans to executives?
Conduct a reasonable investigation of the offering ## Footnote This includes reviewing the intended use of the proceeds.
42
What is the holding period for securities purchased under **Regulation S**?
Six months for reporting companies, one year for non-reporting companies ## Footnote Debt securities have a holding period of 40 days.
43
What is the main difference between **Regulation D** and **Regulation S**?
Regulation D is for domestic sales; Regulation S is for foreign sales ## Footnote Regulation S applies to U.S. issuers selling to non-U.S. residents.
44
What are **control securities**?
Securities owned by affiliates of the issuer ## Footnote This includes directors, executive officers, and significant shareholders.
45
What is the holding period for **restricted securities** under Rule 144?
Six months ## Footnote After this period, affiliates are subject to volume restrictions.
46
What are the volume limits for selling under **Rule 144**?
* 1% of total outstanding shares * Average weekly trading volume over the past four weeks ## Footnote Canadian exchanges are not considered national securities exchanges.
47
What must be filed concurrently with the sale of stock under **Rule 144**?
Form 144 ## Footnote This filing is valid for 90 days.
48
What is the **de minimis filing threshold** for affiliates under Rule 144?
Sales not exceeding 5,000 shares or $50,000 in proceeds ## Footnote These sales are permitted without filing Form 144.
49
What restrictions apply to **insiders** under Rule 144?
Cannot enter short sales or speculative options transactions ## Footnote Profits from sales held for less than six months must be returned to the company.
50
What is required for a broker-dealer when selling **control shares**?
Sales must be executed as agency transactions ## Footnote Active solicitation of buyers is prohibited.
51
What is the holding period for restricted stock held by an estate?
Exempt from holding period requirements ## Footnote Volume limitations of Rule 144 do not apply.
52
What is the **holding period** for restricted stock unless the holder is the estate of a deceased person?
six months ## Footnote Restricted stock held by an estate is exempt from both the holding period requirements and the volume limitations of Rule 144.
53
True or false: There is a holding period on **registered control stock**.
FALSE ## Footnote There is no holding period on registered control stock, but volume limits always apply.
54
Rule 144 transactions should be agency-only unless the firm is a _______ or block positioner in the stock.
registered market maker ## Footnote This ensures compliance with trading regulations.
55
Callbacks are allowed to customers who indicated interest within the past _______ business days.
10 ## Footnote Additionally, callbacks can be made to firms that indicated interest within the past 60 calendar days.
56
Insiders are prohibited from taking **short-swing profits** and cannot engage in _______ positions.
short naked options ## Footnote Insiders can write calls against a long stock position, but corporations cannot write calls against their own stock.
57
Rule 144A provides a safe harbor for a person other than an issuer with a large position in debt or equity securities seeking an exemption from _______.
registration burdens ## Footnote This allows for the resale of securities without being considered an underwriter.
58
What is a **qualified institutional buyer (QIB)**?
An institution with a securities portfolio valued at $100 million or more
59
Rule 144A permits transactions in offerings of _______.
* debt * convertible debt * preferred securities * common stock by nonreporting issuers ## Footnote This includes offerings by foreign issuers that do not want to be subject to U.S. reporting requirements.
60
True or false: QIBs can trade unregistered securities with each other without concern for a holding period and volume restrictions.
TRUE ## Footnote Rule 144A provides a limited exemption for secondary market trading of unregistered securities among QIBs.
61
Foreign securities transactions reported on a foreign exchange are not required to be reported on any _______.
U.S.-based trade reporting mechanism ## Footnote Trades in NMS and OTC equity securities must be reported within 10 seconds.
62
What is the **Hart-Scott-Rodino Act (HSR)**?
An amendment to the antitrust laws requiring parties to file information on proposed acquisitions or mergers with the FTC and DOJ ## Footnote A 30-day waiting period ensues during which the FTC reviews the transaction for antitrust violations.
63
The filing requirement under HSR is triggered only if the value of the transaction exceeds certain _______.
dollar thresholds ## Footnote These thresholds are adjusted upward over time.
64
Regulation M-A provides guidelines for companies involved in _______.
tender offers and mergers and acquisitions ## Footnote It requires a summary term sheet to be provided to investors as part of the disclosure process.
65
What is **Regulation M-A** part of?
Regulation S-K ## Footnote It defines rules for all financial reports filed with the SEC.
66
What must a **cash tender offer** remain open for at least?
20 business days ## Footnote This applies from the date the tender offer statement is filed and disseminated.
67
What must the target company provide within **10 business days** of a tender offer announcement?
* Statement accepting or rejecting the offer * Statement expressing no opinion * Statement expressing inability to take a position ## Footnote The statement must outline the reasons for the position taken.
68
True or false: An entity making a **tender offer** can buy shares in the open market.
FALSE ## Footnote The entity can only purchase shares that are tendered by shareholders.
69
What is a **partial tender offer**?
An offer to buy some, not all, of the stock in a publicly traded company for a price above fair market value ## Footnote This may be an effort to effect a hostile takeover or a company looking to buy back its own stock.
70
What does the **Short Tender Rule** allow shareholders to do?
Tender shares only to the extent of their net long position ## Footnote This means they can only tender shares they actually own.
71
If a customer is long 4,000 shares and short 1,000 shares, how many shares can they tender?
3,000 shares ## Footnote This is the net long position.
72
What must be placed in **escrow** from a public offering by a member firm?
All proceeds from the offering ## Footnote The member firm must perform a net capital computation demonstrating compliance.
73
What is the role of an **Independent Qualified Underwriter**?
To assist with due diligence and prepare the registration form and prospectus ## Footnote This is required to avoid conflicts of interest during an IPO.
74
What must registered representatives ensure when recommending the purchase of their employer's stock?
All buyers are suitable ## Footnote Records of each suitability determination must be maintained for three years.
75
What is considered **unfair or unreasonable compensation** by FINRA?
* Options or warrants exercisable below the public offering price * Options or warrants with a life of more than five years * Freely transferable stock received by underwriters ## Footnote These items are scrutinized to ensure fairness in compensation.
76
What does **Rule 5190** require members to examine?
Each offering to determine if it is a 'distribution' under Regulation M ## Footnote This applies to covered exchange-listed securities or OTC equity securities.
77
What is a **bought deal**?
A firm commitment by the underwriter who purchases the securities without pre-marketing effort ## Footnote This is usually done for a well-known seasoned issuer (WKSI).
78
What does the **Securities Exchange Act of 1934** primarily aim to curb?
Abuse in the secondary (trading) markets ## Footnote It led to the creation of the SEC to regulate securities trading.
79
What is required from publicly traded issuers under the **Securities Exchange Act of 1934**?
To file financial and operational reports with the SEC ## Footnote This ensures transparency and accountability in the markets.
80
What does the **Securities Act of 1933** regulate?
Activities involving new issues or the primary market ## Footnote This includes registration, prospectus requirements, and underwriting.
81
What does the **Securities Exchange Act of 1934** regulate?
Activities involving the trading of securities or the secondary market ## Footnote This includes rules for insider trading and secondary market trading activity.
82
What are the **types of underwritings** mentioned?
* Primary Offerings * Secondary Offerings * Additional Issue Market * Split Offerings * Shelf Registration * At-the-Market Offerings * Negotiated Underwritings * Competitive Underwritings * Alternative Public Offerings (APO) * Pre-IPO Placement * Standby Underwritings ## Footnote Each type has distinct characteristics and purposes in the securities market.
83
What is a **primary offering**?
Proceeds go to the issuer ## Footnote A corporation increases its capitalization by selling stock, either new or previously authorized but unissued.
84
What is a **secondary offering**?
Proceeds go to selling stockholders ## Footnote This occurs when major stockholders sell a significant portion of their holdings.
85
What is a **shelf registration** under Rule 415?
Permits issuers to quickly raise money when needed ## Footnote It allows companies to take down securities from the shelf without SEC review when market conditions are favorable.
86
What is an **at-the-market offering**?
Additional issue offering with no fixed offering price ## Footnote Shares are sold at the market price when the offering is effective.
87
What is a **firm commitment** in underwriting?
Underwriter contracts to buy securities from the issuer ## Footnote The underwriter assumes the risk of unsold securities.
88
What is a **best efforts underwriting**?
Underwriter acts as an agent, not as principal ## Footnote They use their best efforts to sell the issue but are not at risk for unsold securities.
89
What is an **all-or-none offering**?
Offering is canceled if all securities are not sold ## Footnote This type of offering requires complete sale within a specified time frame.
90
What is a **mini-max offering**?
A form of best efforts offering with a floor and ceiling on shares ## Footnote The offering is effective if the floor amount is sold within a prescribed time.
91
What is a **standby underwriting**?
Underwriter agrees to buy all shares not subscribed by current stockholders ## Footnote This protects the proportional ownership interest of existing stockholders.
92
What is an **Alternative Public Offering (APO)**?
A reverse takeover where a private company merges with a public company ## Footnote This allows the private company to avoid extensive regulatory review.
93
What is a **pre-IPO placement**?
Portion of an IPO placed with private investors before the IPO ## Footnote This assures sufficient funding before the public offering.
94
What is a **split offering**?
Combination of a primary and secondary offering ## Footnote Some stock is issued by the corporation, while the rest is offered by existing stockholders.
95
What is the role of the **underwriter engagement**?
Engage an investment banker to review and recommend underwriting structure ## Footnote The banker issues a letter of intent defining basic terms and risks.
96
What happens if an event affects the investment merit of securities after signing the letter of intent?
The underwriter may withdraw from its commitment ## Footnote This is invoked through the 'market-out clause' in the letter.
97
What does the **letter of intent** address regarding risks?
* Risks the underwriter is willing to assume * Risks assumed by the issuer * Event risks affecting investment merit ## Footnote The underwriter never assumes the risk of events affecting the investment merit of the securities after signing the letter of intent but before registration is effective.
98
What is a **market-out clause**?
A clause allowing the underwriter to withdraw from commitment if adverse events occur ## Footnote It is not required by any rule but is considered prudent for underwriters to have one.
99
Under SEC Rule 3a4-l, what conditions must be met for a corporate issuer to use its **employees** to help sell the issue?
* Employees not subject to statutory disqualification * Not compensated based on sales * Not associated with any broker-dealer ## Footnote This rule typically applies to small offerings.
100
What is the role of the **managing underwriter**?
Negotiates with the issuer and forms a syndicate ## Footnote The managing underwriter is often referred to as the statutory or lead underwriter.
101
What must the **syndicate manager** notify Nasdaq of by 6:45 pm the night before an IPO?
The **public offering price (POP)** ## Footnote The POP will be the first bid during the 15-minute quotation period.
102
What is the purpose of the **selling group** in an underwriting?
To broaden distribution channels without assuming risk ## Footnote Selling group firms act solely as agents in the distribution of the new issue.
103
What does the **agreement among underwriters (AAU)** detail?
* Participation of each syndicate member * Manager's fee * Liability for unsold securities * Shares trading at a premium ## Footnote This agreement is signed by all syndicate members.
104
What is the **green shoe clause**?
Allows syndicate to sell up to 15% more shares than initially registered ## Footnote Must be disclosed in both the registration statement and the prospectus.
105
What is a **concession** in underwriting?
The amount of gross profit made by selling group members for each share sold ## Footnote Expressed in cents per share.
106
What is a **reallowance**?
Compensation earned by a firm selling a new issue to a non-member of the underwriting group ## Footnote Generally one-half of the concession.
107
What are the **three major components** of the underwriting spread?
* Manager's fee * Underwriting fee * Selling concession ## Footnote The spread is the difference between the price to the issuer and the public offering price.
108
In a $10 million IPO with a $.65 underwriting spread, what is the **syndicate manager's fee** if it is $.12 per share?
$120,000 ## Footnote This fee is typically the smallest portion of the spread.
109
What happens if the syndicate cannot sell all the securities purchased from the issuer?
Liability for unsold securities accrues to each syndicate member ## Footnote This liability is based on the terms outlined in the agreement among underwriters.
110
True or false: Syndicate members can withhold shares of an IPO in their own accounts.
FALSE ## Footnote Members must make a bona fide public offering.
111
What is **Regulation M-A** part of?
Regulation S-K ## Footnote It defines rules for all financial reports filed with the SEC.
112
What must a **cash tender offer** remain open for at least?
20 business days ## Footnote This applies from the date the tender offer statement is filed and disseminated.
113
What must the target company provide within **10 business days** of a tender offer announcement?
* Statement accepting or rejecting the offer * Statement expressing no opinion * Statement expressing inability to take a position ## Footnote The statement must outline the reasons for the position taken.
114
True or false: An entity making a **tender offer** can buy shares in the open market.
FALSE ## Footnote The entity can only purchase shares that are tendered by shareholders.
115
What is a **partial tender offer**?
An offer to buy some, not all, of the stock in a publicly traded company for a price above fair market value ## Footnote This may be an effort to effect a hostile takeover or a company looking to buy back its own stock.
116
What does the **Short Tender Rule** allow shareholders to do?
Tender shares only to the extent of their net long position ## Footnote This means they can only tender shares they actually own.
117
If a customer is long 4,000 shares and short 1,000 shares, how many shares can they tender?
3,000 shares ## Footnote This is the net long position.
118
What must be placed in **escrow** from a public offering by a member firm?
All proceeds from the offering ## Footnote The member firm must perform a net capital computation demonstrating compliance.
119
What is the role of an **Independent Qualified Underwriter**?
To assist with due diligence and prepare the registration form and prospectus ## Footnote This is required to avoid conflicts of interest during an IPO.
120
What must registered representatives ensure when recommending the purchase of their employer's stock?
All buyers are suitable ## Footnote Records of each suitability determination must be maintained for three years.
121
What is considered **unfair or unreasonable compensation** by FINRA?
* Options or warrants exercisable below the public offering price * Options or warrants with a life of more than five years * Freely transferable stock received by underwriters ## Footnote These items are scrutinized to ensure fairness in compensation.
122
What does **Rule 5190** require members to examine?
Each offering to determine if it is a 'distribution' under Regulation M ## Footnote This applies to covered exchange-listed securities or OTC equity securities.
123
What is a **bought deal**?
A firm commitment by the underwriter who purchases the securities without pre-marketing effort ## Footnote This is usually done for a well-known seasoned issuer (WKSI).
124
What does the **Securities Exchange Act of 1934** primarily aim to curb?
Abuse in the secondary (trading) markets ## Footnote It led to the creation of the SEC to regulate securities trading.
125
What is required from publicly traded issuers under the **Securities Exchange Act of 1934**?
To file financial and operational reports with the SEC ## Footnote This ensures transparency and accountability in the markets.
126
What does the **Securities Act of 1933** regulate?
Activities involving new issues or the primary market ## Footnote This includes registration, prospectus requirements, and underwriting.
127
What does the **Securities Exchange Act of 1934** regulate?
Activities involving the trading of securities or the secondary market ## Footnote This includes rules for insider trading and secondary market trading activity.
128
What are the **types of underwritings** mentioned?
* Primary Offerings * Secondary Offerings * Additional Issue Market * Split Offerings * Shelf Registration * At-the-Market Offerings * Negotiated Underwritings * Competitive Underwritings * Alternative Public Offerings (APO) * Pre-IPO Placement * Standby Underwritings ## Footnote Each type has distinct characteristics and purposes in the securities market.
129
What is a **primary offering**?
Proceeds go to the issuer ## Footnote A corporation increases its capitalization by selling stock, either new or previously authorized but unissued.
130
What is a **secondary offering**?
Proceeds go to selling stockholders ## Footnote This occurs when major stockholders sell a significant portion of their holdings.
131
What is a **shelf registration** under Rule 415?
Permits issuers to quickly raise money when needed ## Footnote It allows companies to take down securities from the shelf without SEC review when market conditions are favorable.
132
What is an **at-the-market offering**?
Additional issue offering with no fixed offering price ## Footnote Shares are sold at the market price when the offering is effective.
133
What is a **firm commitment** in underwriting?
Underwriter contracts to buy securities from the issuer ## Footnote The underwriter assumes the risk of unsold securities.
134
What is a **best efforts underwriting**?
Underwriter acts as an agent, not as principal ## Footnote They use their best efforts to sell the issue but are not at risk for unsold securities.
135
What is an **all-or-none offering**?
Offering is canceled if all securities are not sold ## Footnote This type of offering requires complete sale within a specified time frame.
136
What is a **mini-max offering**?
A form of best efforts offering with a floor and ceiling on shares ## Footnote The offering is effective if the floor amount is sold within a prescribed time.
137
What is a **standby underwriting**?
Underwriter agrees to buy all shares not subscribed by current stockholders ## Footnote This protects the proportional ownership interest of existing stockholders.
138
What is an **Alternative Public Offering (APO)**?
A reverse takeover where a private company merges with a public company ## Footnote This allows the private company to avoid extensive regulatory review.
139
What is a **pre-IPO placement**?
Portion of an IPO placed with private investors before the IPO ## Footnote This assures sufficient funding before the public offering.
140
What is a **split offering**?
Combination of a primary and secondary offering ## Footnote Some stock is issued by the corporation, while the rest is offered by existing stockholders.
141
What is the role of the **underwriter engagement**?
Engage an investment banker to review and recommend underwriting structure ## Footnote The banker issues a letter of intent defining basic terms and risks.
142
What happens if an event affects the investment merit of securities after signing the letter of intent?
The underwriter may withdraw from its commitment ## Footnote This is invoked through the 'market-out clause' in the letter.
143
What does the **letter of intent** address regarding risks?
* Risks the underwriter is willing to assume * Risks assumed by the issuer * Event risks affecting investment merit ## Footnote The underwriter never assumes the risk of events affecting the investment merit of the securities after signing the letter of intent but before registration is effective.
144
What is a **market-out clause**?
A clause allowing the underwriter to withdraw from commitment if adverse events occur ## Footnote It is not required by any rule but is considered prudent for underwriters to have one.
145
Under SEC Rule 3a4-l, what conditions must be met for a corporate issuer to use its **employees** to help sell the issue?
* Employees not subject to statutory disqualification * Not compensated based on sales * Not associated with any broker-dealer ## Footnote This rule typically applies to small offerings.
146
What is the role of the **managing underwriter**?
Negotiates with the issuer and forms a syndicate ## Footnote The managing underwriter is often referred to as the statutory or lead underwriter.
147
What must the **syndicate manager** notify Nasdaq of by 6:45 pm the night before an IPO?
The **public offering price (POP)** ## Footnote The POP will be the first bid during the 15-minute quotation period.
148
What is the purpose of the **selling group** in an underwriting?
To broaden distribution channels without assuming risk ## Footnote Selling group firms act solely as agents in the distribution of the new issue.
149
What does the **agreement among underwriters (AAU)** detail?
* Participation of each syndicate member * Manager's fee * Liability for unsold securities * Shares trading at a premium ## Footnote This agreement is signed by all syndicate members.
150
What is the **green shoe clause**?
Allows syndicate to sell up to 15% more shares than initially registered ## Footnote Must be disclosed in both the registration statement and the prospectus.
151
What is a **concession** in underwriting?
The amount of gross profit made by selling group members for each share sold ## Footnote Expressed in cents per share.
152
What is a **reallowance**?
Compensation earned by a firm selling a new issue to a non-member of the underwriting group ## Footnote Generally one-half of the concession.
153
What are the **three major components** of the underwriting spread?
* Manager's fee * Underwriting fee * Selling concession ## Footnote The spread is the difference between the price to the issuer and the public offering price.
154
In a $10 million IPO with a $.65 underwriting spread, what is the **syndicate manager's fee** if it is $.12 per share?
$120,000 ## Footnote This fee is typically the smallest portion of the spread.
155
What happens if the syndicate cannot sell all the securities purchased from the issuer?
Liability for unsold securities accrues to each syndicate member ## Footnote This liability is based on the terms outlined in the agreement among underwriters.
156
True or false: Syndicate members can withhold shares of an IPO in their own accounts.
FALSE ## Footnote Members must make a bona fide public offering.
157
What is the purpose of filing the **SEC registration form**?
To initiate an SEC review for full and fair disclosure of all material facts ## Footnote This is a customer-protection mechanism under the 1933 Act.
158
What are the **registration forms** used for different types of issuers?
* Form S-1: First-time issuers * Form F-6: ADRs * Form S-11: REITs * Form 20-F: Foreign private issuers ## Footnote These forms are used to register new issues of securities with the SEC.
159
What constitutes a **material fact** in a registration statement?
* Detailed business description * Audited financial statements * Anticipated use of proceeds * Biographical data of officers and directors * Risk factors * Dividend policy * Proposed price and underwriting spread ## Footnote Material facts are essential for investors to make informed decisions.
160
True or false: The SEC **approves** the offering after reviewing the registration statement.
FALSE ## Footnote The SEC authorizes the offering to go forward but does not approve it.
161
What is the **waiting (cooling-off) period**?
Time during which the SEC reviews the registration statement for full and fair disclosure ## Footnote No sales can occur during this period.
162
What is a **preliminary prospectus** also known as?
Red herring ## Footnote It is called this because its cover page is red, indicating it is not a final document.
163
What must a **final prospectus** include?
Final pricing and a formal underwriting agreement ## Footnote It must be provided to all buyers at or before confirmation of sale.
164
What are **forward-looking statements**?
Statements predicting future events based on estimates and expectations ## Footnote They are inherently uncertain and subject to various risks.
165
What does **Regulation S-K** require from issuers?
* File various forms * Prepare projections and exhibits * Disclose qualifications of outside reviewers ## Footnote It establishes guidelines for disclosures in registration statements.
166
What is the **civil liability** for signing a registration statement?
Potential liability for damages due to omissions or misstatements ## Footnote Lawsuits must be filed within two years of discovery but no later than five years.
167
What is the **Uniform Securities Act (USA)**?
State law requiring registration of securities in each state unless exempt ## Footnote It provides exemptions for certain government-issued debts.
168
What are the **methods for state registration** of securities under the USA?
* Notice filing * Coordination * Qualification ## Footnote These methods help issuers comply with state regulations.
169
What are the **two methods** for securities issuers to register their securities in a state?
* Notice filing * Coordination * Qualification ## Footnote These methods include a special method for certain federal covered securities.
170
What does **Notice Filing** allow states to do regarding federal covered securities?
Collect filing fees ## Footnote Federal covered securities are exempt from state registration but may require notice filings.
171
What is the **most common form of registration** for securities that are not federal covered?
Coordination ## Footnote Coordination is used when a registration statement has been filed with the SEC.
172
What is the **Qualification** method of registration used for?
* First-time issuers registering in one state * Existing issuers increasing the number of states for sales ## Footnote It has the most difficult filing requirements.
173
Name three types of **exempt securities** from formal registration with a state.
* U.S. government and municipal issues * Securities issued or guaranteed by a foreign government * Federal covered securities ## Footnote Exemptions may still require informal notice filings.
174
True or false: All state registrations for firms and agents are valid for **one year** from the effective date.
TRUE ## Footnote Registrations must be renewed annually by paying the appropriate fee.
175
What is the **prospectus delivery requirement period** for securities listed on an exchange?
25 days ## Footnote This period follows the effective date of the registration statement.
176
What is a **free writing prospectus (FWP)**?
An offer to sell or solicitation of an offer to buy securities ## Footnote FWPs must be filed with the SEC on the day of first use.
177
What must be included in a **tombstone advertisement** under Rule 134?
* Name of the issuer * Type of security being offered * Number of shares to be sold * Public offering price * Names of syndicate members ## Footnote Tombstone ads are limited in scope and do not qualify as full disclosure documents.
178
What does **SEC Rule 137** allow broker-dealers to do?
Publish research on new issues if not participating in underwriting ## Footnote The recommendation must be published in the normal course of business.
179
What is the requirement for **Rule 138** regarding research reports?
Allows publication on nonequivalent securities by underwriters ## Footnote This applies to securities that are not similar to the security being underwritten.
180
What does **Rule 139** allow during additional issue offerings?
Research can be published by distribution participants ## Footnote This applies if the security is actively traded and meets specific conditions.
181
What are the **four primary classes** of issuers defined by the SEC?
* Well-known seasoned issuers (WKSIs) * Seasoned issuers * Unseasoned issuers * Non-reporting issuers ## Footnote Each class has varying degrees of flexibility in offering securities.
182
What does the **access equals delivery** model under SEC Rule 172 allow?
Electronic access to count as delivery of prospectuses ## Footnote This model reflects the impact of internet communications on prospectus delivery.
183
What is a **FWP** in the context of securities?
An offer to sell or a solicitation of an offer to buy securities that are the subject of a registration statement ## Footnote All FWPs must be filed with the SEC on the day of first use.
184
What does the **access equals delivery** model for prospectus delivery imply?
Electronic access counts as delivery; a final prospectus is considered delivered if filed with the SEC ## Footnote Anyone can view the prospectus on the SEC's website.
185
Under the **access equals delivery** rule, what must underwriters provide investors after an offering closes?
A notice that they bought securities in a registered offering ## Footnote This applies to aftermarket prospectus delivery obligations.
186
What are some characteristics of **ineligible issuers** according to the SEC?
* Not current in financial reporting * Blank check or shell companies * Filed for bankruptcy in the past three years * Subject to a stop order under the Securities Act of 1933 ## Footnote These issuers are largely excluded from offering reforms.
187
What is the purpose of **FINRA Rules 5130 and 5131**?
To protect the integrity of the public offering process ## Footnote Ensures members make bona fide public offerings at the public offering price.
188
What does **Rule 5130** prohibit?
Selling a new issue to accounts with beneficial owners who are restricted persons ## Footnote Restricted persons include member firms, employees, and their immediate family members.
189
Define **restricted persons** under Rule 5130.
* Member firms * Employees of members * Finders and fiduciaries * Portfolio managers * Individuals owning 10% or more of a member firm ## Footnote Immediate family members of these individuals are also restricted.
190
What is **spinning** in the context of IPOs?
Allocating highly sought-after IPO shares to individuals who can direct business to the firm ## Footnote This practice is prohibited under Rule 5131.
191
What is the **de minimis provision** in Rule 5131?
Allows a restricted person to participate in new equity issues if their beneficial interest does not exceed 10% ## Footnote This applies to collective investment accounts.
192
What must a member obtain before selling a new equity issue to an account?
A representation from the account owner that the account is eligible to purchase at the POP ## Footnote Representations must be obtained within 12 months before the sale.
193
What is a **standby purchaser**?
An individual or firm that would otherwise be restricted from buying at the public offering price ## Footnote Sales to standby purchasers are not subject to Rule 5130 if certain conditions are met.
194
What is a **tie-in arrangement**?
An arrangement requiring a customer to buy shares in the secondary market to purchase shares of a new issue at the POP ## Footnote This practice is considered fraud and is strictly prohibited.
195
What does the **Reduced Pricing Prohibition** entail?
Members cannot offer discounts from the public offering price to anyone other than syndicate members ## Footnote This requirement applies until the offering is terminated.
196
What must happen to customer checks subscribing to a new issue under **FINRA Rule 5121**?
They must be placed in an escrow account ## Footnote If capital requirements are not met, the offering must be canceled.
197
What does **FINRA Rule 5150** require regarding fairness opinions?
Specific disclosures related to conflicts of interest in mergers, acquisitions, or asset purchases ## Footnote Fairness opinions assess whether the consideration offered in a transaction is fair.
198
What specific disclosures does **FINRA Rule 5150** require regarding **fairness opinions**?
* Disclosure of financial advisory roles * Disclosure of material relationships * Verification of information supplied * Approval by a fairness committee * View on compensation fairness ## Footnote Fairness opinions assess whether the consideration in a transaction is fair and require specific disclosures to manage conflicts of interest.
199
What are the **required reports** for a publicly traded issuer under the **Securities Exchange Act of 1934**?
* Form 10-K * Form 10-Q * Form 8-K ## Footnote These reports ensure transparency and compliance with SEC regulations.
200
When must a corporate insider file **Form 3** and **Form 4**?
* Form 3: Initial report * Form 4: Subsequent reports ## Footnote Corporate insiders must report changes in their holdings to the SEC.
201
What is **Schedule 13D** used for?
To report more than 5% ownership in an issuer ## Footnote It includes intentions to seek control of the issuer and must be filed with the SEC.
202
What is the purpose of **Form 13F**?
Filed by institutional investment managers with discretion over $100 million ## Footnote It requires disclosure of holdings in Section 13(f) securities.
203
What triggers the filing of **Schedule 13E-3**?
Going private events such as mergers or tender offers ## Footnote It requires disclosures and the use of independent financial advisors.
204
What is the **quiet period** in relation to securities offerings?
* 10 calendar days post-IPO * 3 calendar days post-secondary offering ## Footnote During this time, firms cannot publish research or make public appearances regarding the subject company.
205
What must be disclosed in **research reports** according to FINRA rules?
* Market price at report date * Market maker status * Control relationships * Financial interests * Past management roles ## Footnote These disclosures enhance objectivity and transparency in investment analysis.
206
True or false: **Investment banking personnel** can influence research analysts' compensation.
FALSE ## Footnote Rules prohibit such influence to maintain analyst objectivity.
207
What must a member provide when offering **investment analysis tools**?
* Description of criteria and methodology * Statement of variability in results * Description of investment universe * Hypothetical nature of outcomes ## Footnote These requirements ensure transparency and proper usage of the tools.
208
What actions are required of broker-dealers in **research reports**?
* Explain rating systems * Document investment banking client percentages * Disclose compensation ties to investment banking revenues ## Footnote These actions ensure that customers are informed about potential conflicts of interest.
209
What must analysts disclose regarding their **compensation**?
Whether their compensation is tied to the firm's investment banking revenues ## Footnote This disclosure is crucial for maintaining transparency in research reports.
210
Research reports must disclose if the firm has received fees for **investment banking services** from a company that is the subject of the report within the last _______.
12 months ## Footnote This includes managing or co-managing a public offering for the company.
211
True or false: Analysts can trade any security inconsistent with their most recent **research report** recommendation.
FALSE ## Footnote Analysts and their household members are prohibited from such trading unless under defined financial hardship circumstances.
212
What are the two prohibited trading activities for analysts and their households?
* Trading on knowledge of the content or timing of a research report before intended recipients have acted * Trading against the analyst's most recent recommendation ## Footnote Exceptions may apply under financial hardship circumstances.
213
If a member firm intends to **terminate its research coverage**, what must it do?
* Provide notice of coverage termination to the company * Publish a final research report comparable to prior reports * Include a final recommendation or rating ## Footnote If not practical, the firm must disclose its rationale for termination.
214
Define a **third-party research report**.
A research report produced by someone other than a member ## Footnote This contrasts with an independent third-party research report, which has no affiliation with the member.
215
What must member firms do before distributing **third-party research**?
Review the research to ensure it is reliable, objective, and truthful ## Footnote Third-party research must be labeled as such.
216
When distributing **independent third-party research**, what supervisory review requirements are eliminated?
* Principal pre-approval * Inclusion of research disclosures ## Footnote This applies when the research is provided upon request or through the member's website.
217
True or false: An issuer can pay an independent third party to prepare a research report without disclosure.
FALSE ## Footnote Disclosure of payment is required.
218
What does **Regulation AC** require from analysts in research reports?
* A statement certifying that views expressed reflect the analyst's personal views * A statement indicating whether compensation is related to views in the report ## Footnote Firms must maintain records of public appearances by analysts.
219
What must a member firm file with FINRA within 10 business days of the end of each calendar quarter?
Written reports describing each internal investigation initiated in the previous quarter ## Footnote Reports must include details such as the date, status, and resolution of investigations.
220
If a violation of the **1934 Securities Exchange Act** is uncovered, what must the firm do?
File a written report detailing the investigation within five business days of completion ## Footnote This report must include results, any internal disciplinary action, and referrals to regulatory authorities.
Series 24 Flashcard
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