Issuing Securities

  1. The Securities Act of 1933
    • -Regulates new issues of corporate securities sold to the public & requires securities issuers to provide enough information for investors to make fully informed buying decisions (ensures that the investing public is fully informed about a security and its issuing company when teh security is first sold in the primary market)
    • -Information must be filed with the SEC and published in a prospectus
    • -Prohibits any fraudulent activity in connection with the underwriting and issuing of all securities
    • -Also referred to as the Paper Act, Full Disclosure Act, New Issues Act, Truth in Securities Act, and Prospectus Act
  2. The Securities Exchange Act of 1934
    • -Addresses secondary trading of securities, personnel involved in secondary trading, and fraudulent trading practices
    • -Created teh SEC to oversee the industry
    • -Amended by the Maloney Act
  3. The Maloney Act of 1938
    • -Amended the Securties Exchange Act of 1934
    • -Provides for the establishment of self-regulatory bodies to help police the industry, each SRO such as FINRA, MSRB, and CBOE regulates its own members
  4. How the 1933 Act protects investors who buy new issues
    • 1)Requiring registration of new issues that are to be distributed interstate
    • 2)Requiring an issuer to provide full and fair disclosure about itself and the offering
    • 3)Requiring an issuer to make available all material information necessary for an investor to judge the issue's merit
    • 4)Regulating the underwriting and distribution of primary and secondary issues
    • 5)Providing criminal penalties for fraud in the issuance of new securities
  5. Registration Statement
    • -Issuer must file a registration statement with the SEC disclosing material information about the issue
    • -Part of the statement is a prospectus, which must be provided to all purchasers of the new issue
    • -Registration Statement must contain:
    • 1)Description of the issuer's business
    • 2)The names and addresses of company officers and directors, their salaries, and a 5-year business history of each
    • 3)The amount of corporate securities company officers and directors own and id of investors who own 10% or more of the company
    • 4)Company's capitalization, including its equity and debt
    • 5)Description of how the proceeds will be used
    • 6)Whether the company is involved in any legal proceedings
  6. Cooling-Off Period
    After filing a registration statement with the SEC, a 20-day cooling off period begins

    If it finds the registration statement needs revision or expansion, the SEC may suspend the review and issue a dificiency letter and the 20-day cooling-off period resumes when the issuer submits a corrected registration statement

    A stop order (stops all underwriting activities) may be issued if the requirements of the 1933 Act have not been met, or if fraud is suspected
  7. Phases of an underwriting
    • 1)Prior to the filing of the registration statement, no sales can be solicited and no prospectus can circulate
    • 2)Issuer files registration statement with SEC
    • 4)Cooling-Off Period
    • 3)No one can solicit sales during hte cooling-off period, but indications of interest can be solicited with a red herring (preliminary prospectus) and tombstone advertisments may be published
    • 4)Effective Date-offering period may begin
    • 5)Sales can now be solicited, but the firm must use a final prospectus
  8. Preliminary Prospectus (Red Herring)
    Can be used as a prospecting tool, allowing underwriters and selling group members to gauge investor interest and gather indications of interest

    • 2 Items missing from the preliminary prospectus:
    • 1)Public Offering Price
    • 2)Effective Date
  9. Tombstone Advertisements
    Shows the anticipated gross proceeds of the issue; a final prospectus will show both the gross and net proceeds to the issuer
  10. Advertising a New Issue
    Advertising and Sales Literature Include: any notice, circular, advertisment, letter, or other communication published or transmitted to any person

    during the cooling off period, the only advertising that is allowed is tombstone advertisements (simple statement of facts regarding the issue)
  11. Due Dilligence
    Near the end of the cooling-off period, the underwriter holds a due dilligence meeting

    The preliminary studies, investigations, research, meetings, and compilation of information about a corporation and a proposed new issue

    • Investment Bankers must:
    • 1)Examine the use of the proceeds
    • 2)Perform financial analysis and feasibility studies
    • 3)Determine the company's stability
    • 4)Determine whether the risk is reasonable
  12. Final Prospectus
    Issued once the registration statement becomes effective

    Amends the preliminary prospectus and adds information, including the final offering price and the underwriting spread

    • Must preced or accompany all sales confirmations and must include:
    • 1)Description of the offering
    • 2)Offering Price
    • 3)Selling Discounts
    • 4)Offering Date
    • 5)Use of the Proceeds
    • 6)Description of the underwriting, but not the actual contract
    • 7)Statement of the possibility that the issue's price may be stabilized
    • 8)History of the business
    • 9)Risks to the purchasers
    • 10)Description of management
    • 11)Material financial information
    • 12)Legal opinion concerning the formation of the corporation
    • 13)SEC disclaimer
  13. SEC Review
    • -Examines prospectus for completeness
    • -Does not guarantee accuracy, nor does it approve of the security
    • -Front of every prospectus must contain a clearly printed SEC disclaimer
  14. Aftermarket Sales by Prospectus
    In certain offerings, a final prospectus must be delivered by all members to buyers in teh secondary market for a specified time following the effective date - termed prospectus delivery requirement period
  15. Prospectus Delivery Requirement Period
    • For Initial Public Offerings (IPOs), this period is:
    • 1)90 Days if the security is to be quoted in the Pink Sheets or over the OTCBB (non-Nasdaq)
    • 2)25 Days if the security is to be listed on an exchange or quoted over Nasdaq

    • For additional issue offerings:
    • 1)If the security is listed or quoted over Nasdaq, a prospectus must be delivered only in connection with purchases at teh public offering price
    • 2)If the security is non-Nasdaq, the prospectus delivery requirement period is 40 days
  16. Underwriting Process
    Underwriter = broker/dealer specializing in investment banking and the distribution of new issues; often advises the issuer regarding the best financing mechanism (equity and debt) in light of current market conditions and tax considerations

    Normally forms an underwriting syndicate, a group of BDs to assist in the distribution of the new issue
  17. Investment Banking
    • A securities BD that underwrites new issues and functions include the following:
    • 1)Advising corporations on teh best ways to raise long-term capital
    • 2)Raising capital for issuers by distributing new securities
    • 3)Buying securities from issuers and reselling them to the public
    • 4)Distributing large blocks of stock to the public and to institutions
    • 5)Helping issuers comply with securities laws
  18. Participants in a corporate new issue - The Issuer
    • Responsible For:
    • 1)filing the registration statement with the SEC
    • 2)filing a registration statement with the states in which it intends to sell securities (blue skying the issue)
    • 3)negotiating the securities' price and the amount of the spread with the underwriter
  19. Participants in a corporate new issue - The Underwriter
    • Assists with registration and distribution of the new securities and may advise the corporate issuer on the best ways to raise capital - considerations include:
    • 1)Stocks or Bonds: Debt financing comprises the bulk of corporate financing
    • *If bonds are currently selling with a high coupon rate - the company may choose to issue stock
    • *Determing the cheapest cost of capital is a very important role of teh investment bank
    • 2)Tax Consequences
    • *Interest a corporation pays on bonds is tax deductible
    • *Cash dividends to stockholders are paid out of after-tax profits
    • 3)Money Market Financing
    • *Money market instruments are short-term financing mechanisms, typically one year and less
    • 4)Capital Marketing Financing
    • *Capital markets represent long-term financing for secured bonds, debentures, and preferred or common stock
    • *These securities require registration and sale by prospectus
  20. New Issues
    -Composed of companies going public by selling common stock to the public for the first time in an Initial Public Offering (IPO)
  21. Additional Issues
    Made up of new securities issued by companies that are already publicly owned
  22. Primary Offering
    Proceeds of the underwriting go to the issuing corporation
  23. Secondary Offering
    One or more major stockholders in the corporation are selling all or a major portion of their holdings

    Underwriting proceeds are paid to the stockholders rather than to the corporation
  24. Split Offering (Combined Distribution)
    Combination of Primary and Secondary offerings

    Corporation issues a portion of the stock offered, and existing shareholders offer the balance
  25. Shelf Offering (Rule 415)
    Issuer who is already a publicly traded company can register new securities without selling the entire issue at once

    Issuer can sell portions of a registered shelf offering over a 3 year period without having to reregister the security, but a supplemental prospectus must be filed before each sale

    Shelf registrations can be used for both equity and debt offerings
  26. Public Offering
    Securities are sold to the investing public through one or more broker/dealers
  27. Private Placement
    Issuing company (usually with help of investment bank) sells securities to private investors as opposed to the general public

    When issuer privately places securities with investors, there can be no solicitation of the general public

    Private placements are generally exempt from the registration requirements of the Securities Act of 1933
  28. Underwriting Sequence
    • 1)Forming the Syndicate
    • 2)Pricing the New Issue of Publicly Traded Securities
    • 3)Stabilizing Price
  29. Forming the Syndicate
    In competitive bidding: syndicate is assembled first, and the syndicate members work together to arrive at the bid

    In negotiated bidding: syndicate may be formed after the issuer and underwriting manager have negotiated the terms of the offering
  30. Pricing the New Issue of Publicly Traded Securities
    • Variables Considered:
    • 1)Indications of interest from the underwriter's book
    • 2)Prevailing market conditions, including recent offerings & the price of similar new issues
    • 3)Price that the syndicate members will accept
    • 4)Price-to-Earnings (PE) ratios of similar companies and the company's most recent earnings report
    • 5)Company's dividend payment record & financial health
    • 6)Company's debt ratio
  31. Selling Group Formation
    Act as agents with no commitment to buy securities

    Enlisted by the underwriting syndicate to help distribute the securities
  32. Firm Commitment Underwriting
    Underwriter takes on the financial risk because the securities are purchased from the issuer. Because of this risk, the underwriter is acting in the principal capacity.
  33. Best Efforts Underwriting
    Calls for the broker to buy securities from the issuer as agent, not as principal - this means that the underwriter is not committed and is therefore not at risk. The underwriter sells as much as possible, without liability for what cannot be sold.
  34. All or None Underwriting
    Issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell al of teh shares or cancel the underwriting

    Because of the uncertainty over the outcome of an AON offering, any funds collected from the investors during the offering period must be held in escrow pending final disposition of the underwriting

    Brokers engaged in AON distribution are prohibited from deceiving investors by stating that all of the securities in the underwriting have been sold if that is not the case
  35. Mini-Max Offering
    Best Efforts Underwriting with a floor and a ceiling on the dollar amount of securities the issuer is willing to sell

    Most frequently found in Limited Partnership program offerings, and funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting
  36. Standby Offering
    A type of firm commitment offering involving unexercised preemptive rights
  37. Underwriting Compensation
    • Price the issuer receives = Underwriting Proceeds
    • Price the investors pay = POP (Public Offering Price)
    • Underwriting Spread = Difference between the 2 prices, consists of:
    • 1)Manager's Fee - for negotiating teh deal and managing the underwriting and distribution process
    • 2)Underwriting Fee - for assuming the risk of buying securities from the issuer without assurance that the securities can be resold
    • 3)Selling Concession - for placing the securities with investors
  38. Exempt Issuers & Securities (from the 1933 Act)
    Because of the issuer's level of creditworthiness or because another govt regulatory agency has jurisdiction over the issuer

    • 1)US Govt Securities
    • 2)Municipal Bonds
    • 3)Commercial paper and banker's acceptances that have maturities less than 270 days
    • 4)Insurance policies and fixed annuity contracts (but not variable annuities)
    • 5)National and state bank securities (not bank holding company)
    • 6)Building & loan securities
    • 7)Charitable, religious, educational, and nonprofit association issues

    *Banks are exempted from SEC registration of their securities because they file information on new issues with bank regulators and make it available to investors
  39. Exempt Transactions
    • May qualify for exemption from the registration statement and prospectus requirements of 1933 Act under one of the following exclusionary provisions:
    • 1)Regulation A: Corporate offerings of less than $5 Million
    • 2)Regulation D: Private Placements
    • 3)Rule 147: Securities offered and sold exclusively intrastate
    • 4)Other exempt transactions, including Rule 144, Rule 144a, and Rule 145
  40. Regulation A - Small Offerings
    Permits issuers to raise up to $5 million in a 12-month period without full registration

    • -Allows small company access to the capital market to raise a small amount of money without incurring prohibitive costs
    • -Issuer files an abbreviated notice of sale or offering circular with the regional SEC office - investors are provided with this vs. the full prospectus
  41. Regulation D - Private Placements
    • SEC does not require registration of an offering if it is privately placed with:
    • 1)Accredited investors that do not need SEC protection
    • 2)Maximum of 35 (nonaccredited) investors

    Private placement investor must sign a letter stating that he intends to hold the stock for investment purposes only, and is referred to as lettered stock due to this investment letter (also may bear a legend and may also be referred to as legend stock)

    • The following terms are all synonymous with Private Placement Stock:
    • 1)Restricted
    • 2)Unregistered
    • 3)Letter Stock
    • 4)Legend Stock
  42. Rule 147 - Intrastate Offerings
    • Offerings that take place entirely in one state are exempt from registration when:
    • 1)Issuer has its principal office and receives at least 80% of its income in the state
    • 2)At least 80% of the issuer's assets are located within the state
    • 3)At least 80% of the offering proceeds are used within the state
    • 4)The BD acting as underwriter is a resident of the state and has an office in the state
    • 5)All purchasers are residents of the state

    *Purchasers of intrastate issue may not resell the stock to any resident of another state for at least 9 months after the last sale
  43. Rule 144
    Regulates the sale of control and restricted securities, stipulating the holding period, quantity limitations, manner of sale, and filing procedures

    Control Security = owned by directors, officers, or persons who own or control 10% or more of the issuer's voting stock
  44. Restricted Securities
    Those acquired through some means other than a registered public offering

    A security purchased in a private placement is a restricted security

    • Restricted securities may not be sold until they have been fully paid for 6 months - in any 90 day period, an investor may sell the greater of:
    • *1% of the total outstanding shares of teh same class at the time of the sale
    • *The average weekly trading volume in the stock over the past 4 weeks on all exchanges or as reported through Nasdaq

    • **Review Chart on Page 339 for further clarification
  45. Answering Rule 144 Questions
    • Look for 2 things:
    • 1)What kind of stock is being sold (Restricted or Control)
    • 2)Who is selling it? (Insider or Noninsider)

    • *Only restricted stock has a holding period
    • *Control stock (unless it is restricted) can be sold immediately, but volume limits apply
  46. Rule 144a
    • -Allows nonregistered foreign and domestic securities to be sold to certain institutional investors in the US without holding period requirements
    • -To qualify for this exemption, the buyer must be a qualified institutional buyer (QIB - $100 M in assets)
  47. Rule 145
    Intended to protect stockholders of any company that proposes to reorganize its ownership structure, acquire another company, or merge with another company

    Any such proposition requires stockholder approval

    Stockholders must be sent a full disclosure document (a proxy statement) to inform them of the proposition
  48. Transactions covered by Rule 145
    • 1)Reclassification - when 1 class of securities is to be exchanged internally for another class in a way that shifts ownership control
    • 2)Merger or Consolidation - when stockholders in a target company are offered securities in another company in exchange for the surrender of stock
    • 3)Transfer of Assets - when all or some of one company's business assets are exchanged for another company's securities; stockholders thus solicited are being asked to approve their company's dissolution

    *Specifically excludes stock splits or stock dividend from having to be registered with the SEC
  49. FINRA Rule 5130
    • Designed to protect the integrity of the public offering process, ensuring that:
    • 1)Members make a bona fide public offering of securities at the POP
    • 2)Members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to the member
    • 3)Industry insiders, such as members and their associated persons, do not take advantage of their insider status to gain access to new issues for their own benefit at teh expense of public customers
Card Set
Issuing Securities
Issuing Securities