The securities Act of 1933 regulates
Primary (new issue) market activities
The securities Act of 1934 regulates
Secondary (trading) market activities. Regulated the trading of existing securities in the secondary market.
What agency is the Ultimate Enforcer of federal securities laws?
The SEC (securities and Exchange Commission. Given broad power to regulate the financial markets and to establish accounting standards to provide cleared insight into the business of publicly traded corporations. Created to level the playing field by crea
Is the SEC part of the Federal Government?
Yes it is, to create a balance the SEC delegated the supervision of the day to day transaction to self regulatory organizations called SRO's which would be financed and operated by member firms.
What is the primary purpose of an SRO?
To regulate the activities of its members through the creation and enforcement of industry rules. Violators would be fined and or forced to leave the organization, but not imprisoned. The SEC does not have police powers
Does the SRO's have police powers?
NO
Do SRO's have the power to imprison rule breakers?
NO
Where does FINRA maintain jurisdiction over?
Trading done on the floor of an exchange and regulates OTC trades.
What is the securities act of 1933?
There was a lack of new information given to new investors regarding new issues in the primary market. This act is designed to provide new issues investors with full and fair disclosure. This act put the onus on the issuer to provide investors with accura
The 1933 securities act requires issuers looking to sell securities to the public are generally required to ?
register (file) their securities for sale with the SEC. This requirement is also satisfied through providing a document called a registration statement which provides extensive background. In order to sell a security, it must be registered with the SEC un
Why would some issuers avoid registration? (exempt issuer)
Examples of exempt issuers include: U.S. Treasury, which is viewed as unlikely to default or attempt to defraud the public. in other cases, the securities being sold are of such a short maturity. it would not be practical to register.
Are exempt issuers required to file a registration statement with the SEC?
N, they are EXEMPT!
Must a non-exempt issuer file a registration statement the SEC?
YES, the are NON-EXEMPT!
What is the sale of a new securities by an issuer called?
Primary distribution. The proceeds from a primary distribution provide new capital to the issuer. The first time a corporation sells its stock to the public, the primary offering is known as an initial public offering or IPO
The sale of new securities is a primary offering but not
Not an IPO which is the initial public offering for newer rapidly growing companies.
What are the four types of firm underwritings?
Firm Commitment Underwriting
Firm Commitment
Best Efforts
All-or-none
Mini-max
Define Firm Commitment Underwriting
(Principal / Dealer capacity)
Stand buy Underwriting may take place and equals to the same commitment as Firm Commitment
Type of underwriting / Underwriter acts as / Unsold shares are / Will sale be canceled if minimum
The Underwriter is acting as the Principal :Unsold shares are retained by the underwriter. : will the sale be canceled if minimum amount is not sold--No
The firm purchases all of the securities being sold by the issuer, and then resells them to investors
Define Best Effort Underwriting
(Agent Broker-No risk)
Type of underwriting / Underwriter acts as / Unsold shares are / Will sale be canceled if minimum amount is not sold?
The Underwriter is acting as the Agent : Unsold shares are returned to the issuer : will the sale be canceled if minimum amount is not sold--No
The underwriter may sell as many shares as their best efforts and may return the unsold shares back to the issu
Define All or None Underwriting
Type of underwriting / Underwriter acts as / Unsold shares are / Will sale be canceled if minimum amount is not sold?
The Underwriter is acting as the Agent : Unsold shares are returned to the issuer : will the sale be canceled if minimum amount is not sold--No
Define Mini-max Underwriting
Type of underwriting / Underwriter acts as / Unsold shares are / Will sale be canceled if minimum amount is not sold?
The Underwriter is acting as the Agent : Unsold shares are returned to the issuer : will the sale be canceled if minimum amount is not sold--No
Agents (brokers) are:
Middlemen who do not take risk
Principals (dealers) are:
They purchase shares for inventory and take risk
Which of the following does the securities act or 1933 regulate?
A. Primary market distributions
B. Secondary market transactions
A The securities Act of 1933 regulates primary market distributions. The securities and Exchange act of 1934 regulates secondary market trading
Which of the following types of underwritings involve the greatest financial risk for syndicate ( underwriters) members?
A. Best efforts
B. Firm commitments
B In a firm commitment underwriting arrangement, the members of the syndicate agree to purchase the entire offering from the issuer and resell it to investors. Unlike best efforts arrangements, this syndicate may not return unsold shares to the issuer in
ABC Corporation recently sold new shares to the public through a group of underwriters. The offering was contingent upon the underwriters selling at least 1,500,000 shares. As it turned out, demand was brisk and 2,000,000 shares were actually sold. This w
A In a mini-max underwriting, the underwriters must sell a specific minimum number of shares or the offering is canceled. However, if the minimum is met, the underwriters may continue to sell shares up to a preset maximum amount.
All or none
Agent or principle
Agents : If all of the securities for sale in an all or none underwriting are not sold, the offering is canceled and the shares are returned to the issuer. The underwriters do not buy the shares for their own accounts, and are therefore acting as agents,
Firm commitment
agent or principle
Principle : In a firm commitment underwriting, the underwriters buy the shares from the issuer and resell them to investors. the underwriters are acting as principals since they are purchasing the shares from the issuer for their own account and risk
Best efforts
agent or principle
Agent : In a best efforts underwriting, the underwriters attempt to sell as many shares as possible. Unsold shares are returned to the issuer: the underwriters are not required to purchase them for their own accounts. Therefore, they are acting as the iss
Mini-Max
agent or principle
Agent : In a mini-max offering, the underwriters must sell a set minimum amount or the offering will be canceled. the underwriters are not required to buy the shares for their own accounts, and are therefore acting as agents, not principals.
Which of the following types of underwriting are canceled if the entire issue is not sold?
A. Mini-Max
B. All or none
B : In a mini-max offering, the underwriting will be canceled if a certain preset minimum amount is not sold, although sales may continue past the minimum to a preset maximum. in an all or none offering, the underwriting will be canceled unless the entire
Underwriters acting together are called a ______ group
Syndicate (only for a firm commitment deal)
What are the three parts of the underwriting process?
The Securities Act of 1933
The preregistration period
The cooling off period
The post-registration period
What happens during the pre-registration period?
The issuing company obtains advice from the investment banker underwriting the offering regarding the structure and timing of the new issue. The underwriter also assists in the preparation of the registration statements that will be filed with the SEC.
What is the purpose of the registration statement?
To provide potential investors with all material (relevant) information about the offering, including:
Background information on the business
Proposed amount of funds to be raised
Proposed price per share
Intended use of proceeds (funds raised in the offe
Is prospecting allowed during pre-registration?
No, underwriters and its RR's are not allowed to prospect for potential purchasers, or even discuss the new offering with clients. However, once the registration statement is close to being filed, the underwriter may seek out other broker - dealers to joi
When is the filing date?
The filing date is the end of the pre-registration period, the date the registration statement is filed with the SEC. This is also the beginning of the next period, the cooling off period (waiting).
When and what is the cooling off period?
Occurs after the pre-registration period and the filing date. This is a waiting period and the offering may not yet be sold. The SEC has 20 days to review paperwork for errors. After this period is the effective date and the post registration period.
What is the red herring?
This is known as prospecting during the cooling off period. They may provide investors with a summary of the registration statement called the preliminary prospectus, which is filed with the SEC as part of the registration statement. The preliminary prosp
What s the red herring also called?
The preliminary prospectus
Does the SEC confirm the content of the registration statement?
the no approval clause
No, The SEC does not confirm this information and does not vouch for the adequacy or accuracy of the information contained within the prospectus via the "no approval clause
Can the issuer or underwriter state or imply that the SEC has approved the offering?
No, neither the issuer nor the underwriters can state or imply that the SEC's review of the registration statement means the Commission "approved" the offering. The SEC does not vouch for the accuracy of the information found in any prospectus.
State the Underwriting process in order
(The issuing company and underwriting prepare the registration statement) The pre-registration period, the filing date, the cooling off period (the red herring, the effective date, and the post registration period (confirmation of sale)
Can the prospectus be modified or altered?
No, RR's must provide this document in its complete and unadulterated form to any customer inquiring about the new issue. (remember that all mutual fund sales are new issues) RR's are prohibited from altering this legal document in any way. the following
What is a tombstone ad?
This is the only exception of "advertisement" during the cooling off period. a simple ad describing the nature of the offering and the syndicate members, from whom a prospectus may be obtained.
May contain only basic information:
The name of the issuer
Th
During the cooling off period, RR's may collect the names of customers who would like to buy the new issue, but this does not constitute a sale: what is this know as?
Indicators of interest, non binding, May not accept a deposit nor hold places or spots in line or guarantee an allocation.
What should the RR do if they receive a check for a deposit during the cooling off period?
RR's may not accept any part of the purchase price from the customer during the waiting period. the firm will return any money sent in by customers during the cooling off period if the funds were meant as a deposit on the new offering.
What is a due diligence meeting and who should attend?
The syndicate's (underwriters) will have a du diligence meeting to ensure that all members are apprised of the key facts and to review for accuracy since anyone who is involved may be held accountable regarding the information found within the prospectus.
When does the effective date begin?
When the SEC has no further comments on the registration statement, it will set an effective date for the issue. It also marks the point at which the Syndicate will price the offering by setting the public offering price (POP). The Post-registration perio
When does the Post-Registration date begin?
As of the effective date, the post-registration period begins. May complete sales of the new offering as RR's contact customers who previously gave indications of interest (ioi) in order to confirm sales.
What about the secondary market regarding a new offering?
Some investors who have purchased the new offering will immediately resell their securities to other investors within the secondary market. This secondary market sale would occur at the prevailing market price which may b higher or lower then the POP whic
Who are exempt from issuing with the SEC?
U.S. Government (Tbills, notes, bonds)
U.S. government agencies (GNMA, FNMA, SLMA securities)
Municipal issuers, state and local gov
Nonprofit or religious organizations
Are there any exceptions from the anti-fraud provisions of the securities Act of 1933?
NO
What is the general rule or amount of days to be exempt and who falls under this?
(short term securities)
An original maturity of 270 days, and commercial paper and bankers acceptance are exempt under this provision
Who falls under the provisions under REG-D?
Non public (private) offerings or the exempt must file under REG-D. REG-D offerings may not be sold to more than 35 non-accredited purchasers. However, there is no limit on the number of accredited investors who may purchase the offering. Accredited inves
Are REG-D offerings allowed to trade within the secondary market?
NO, these exceptions may not be sold in the second market keep in mind commercial paper
What are securities not covered by blue sky laws?
fixed annuities, traditional whole life insurance, term life insurance, universal life insurance, and endowments
What are the securities that are covered under blue sky laws?
stocks, bond, variable annuities, variable life insurance, variable universal life insurance, investment companies
Under FINRAS IPO rule, a brokerage firm's employees are________ from buying shares of an initial public offering of equity securities at the _______
prohibited : POP (public offering price)
Can the syndicate purchase stock in the secondary market just offered in the primary market?
Yes, this may be allowed although only when the secondary market is selling below the POP price in the primary market. This is known as stabilization.
The syndicate may not purchase stock in the secondary market at a price that exceeds the POP. Stabilizat
A preliminary prospectus is also known as a
A. Blue horseshoe
B. Red Haring
B The preliminary prospectus is also known as the red herring
Indications of interest (IOI's) are binding on the consumer
A. True
B. False
B Indications of Interest are not binding on the customer or the RR. No sales can be made until the deal is declared effective.
Which of the following securities would be exempt from the registration requirements under the 1933 Act?
A. U.S. treasury Securities
B. Treasury Stock
A All securities issued by the federal government or its agencies are exempt from registration. The U.S. Government does not issue stock. Treasury Stock is an accounting term used for shares of tock that a corporation has repurchased.
Blue Skying refers to
A. State registration
B. Federal Registration
A Blue Skying an issue refers to state registration. The states utilize a form of model law called the Uniform Securities Act when developing their registration procedures.
Which of the following products is subject to registration requirements under the uniform securities act?
A. Fixed annuities
B. Variable annuities
B Only securities must be registered under the USA. All variable products are considered to be securities.
An underwriter may not allocate shares on IPO to which of the following groups?
A. Employees of the issuer
B. Employees of another broker-dealer
B Underwriters may not allocate shares of a hot issue to either their own employees or those of another firm. Employees of the issuer are permitted to buy stock but may be subject to certain restriction on resale.