Series 7 – Issuing Securities

 Sec. Act of ’33: Regulates new issues. A.k.a: paper act, full disclosure act, new issue act, truth in securities and prospectus act.
 Sec. Exchange Act of ’34: people act. Regulates secondary trading. Created the SEC. Amended in ’38 by the Maloney Act, which
created SROs (FINRA, MSRB, CBOE) to regulate its own members
Registration Statement
 Issuer must file with SEC a registration statement, part of it is the prospectus
 Must contain:
o Description of business
o Names and addresses of company officers and directors, their salaries and 5-year business history
o Amount of corporate securities officers and directors own and identification of 10%+ investors (insiders)
o Capitalization
o Use of proceeds
o Any legal proceedings
 Accuracy is responsibility of the issuer
 Must be signed by the CEO, CFO, CAO as well as a majority of the BoD
Cooling-off period
 After issuer files registration with the SEC, 20-day cooling off period begins
Filing Cooling-Off Period Effective Date Offering Period
 No sales can be ↓  No: sales solicitation, order taking, distribution ↓  Sales can be solicited
solicited of sales literature/ads with FINAL
 No prospectus can  Yes: indications of interest, prelim prospectus prospectus
circulate / red herring, tombstone ad (shows
anticipated gross proceeds)
 If any info is missing, the SEC issues a deficiency letter and the cooling-off period resumes when the issuer submits a corrected
registration statement. Therefore, the cooling-off period may last months. The SEC may issue a stop order which demands all
underwriting activity ceases, if requirements of ’33 have not been met or fraud is suspected
 Preliminary prospectus: no final price and effective date included
 Final prospectus: must accompany all sales confirmations. Access equals delivery.
 SEC review: SEC reviews prospectus for COMPLETENESS, does not guarantee disclosure’s accuracy nor does it APPROVE the
security
Aftermarket Sales & Prospectus
Required to send prospectus with confirmation for:
Exchange / Nasdaq OTC
IPO 25 days 90 days
Follow On None 40 days

Underwriting Process
 Issuer is responsible for: filinf registration statement with SEC, filing reg. statement with the states in which it intends to sell
securities (blue skying), and negotiates securities price and spread with underwriter
 Underwriters of nonexempt corporate securities are required to be FINRA members. US nonmember firms, like banks, cannot
participate as investment bankers in corporate issues, but they may in muni underwritings
 Split offering: combination of primary and secondary offering
 Shelf offering: a publicly traded company can register new issues without selling the entire issue at once. Once filed, the
registration is good for 2 years and allows the issuer to sell portions of a registered shelf offer over a 3-year period w/o having to
register again. A supplemental prospectus must be filed before each sale. Applies for both debt and equity offerings
 Private placement: no solicitation can be made to the general public. Except from registration requirements of ‘33
 Stabilizing price: syndicate member enter stabilizing bids at/below POP until the end of offering period to keep demand stable
o Stabilizing after an issue is sold out is not permitted. Syndicate penalty bid [?]
o Pegging/fixing: stabilization bid at a price higher than POP  illegal
 Underwriting agreement: between issuer and all underwriters
 Syndicate members sign a syndicate agreement/letter that describes the participant’s responsibilities and allocation of syndicate
profits
o Agreement among underwriters: details each underwriter’s commitment and liability. Designates synd. manager to
act on behalf of synd members, e.g. establishing offering price with issuer, timing, advertising, and making required
filings

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o Syndicate members take on financial liability and act on a principal capacity. Selling group members have no
financial liability and act as agents (they have no commitment to buy the securities)

Types of Underwriting Commitments

 Firm Commitment: underwriters commits to buy securities at a specified price and quantity range, terms detailed in LOI signed by
issuer and underwriter. Any losses from unsold securities are prorated among underwriting firms according to participation
o Market-out clause specifies conditions under which the offering may be cancelled
o Underwriters may suspend or cancel an offering if MAE occur
o Standby: when current stockholders do not exercise preemptive rights, the underwriter is standing by to purchase
whatever shares remain unsold from the rights offering
 Best efforts: underwriters acts as agent, not ppal, no commitment to buy (no risk)
o All-or-none (AON): in the meantime, proceeds are held in escrow
o Mini-max: Min and Max required by issuer to move forward. Frequently found in L.P. offerings. Proceeds held in
escrow pending final
Management Fee (10-20%)
Corporate Gross Spread
Underwriting Fee / Additional Takedown (20-30%) based on participation
Muni Spread Total Takedown
Concession (50-60%)
 Issuer gets underwriting proceeds = (POP x shares) – gross spread
 A member can grant discounts and concessions only to other FINRA member firms and foreign nonmember firms that are ineligible
for FINRA membership
 Spread varies by: commitment type (firm more expensive than best efforts); marketability; business (volatile stocks more
expensive than stable utility); and offering size (per share lower cost in large issuances)
Exempt Securities
 U.S Government securities
 Munis
 Commercial paper/B.A. <270 maturity
 Insurance policies and fixed annuities (not variable annuities, variable life insurance and variable universal life)
 National and state bank (not bank holding company)  they are filed with bank regulators
 Building and loan (S&L) securities
 Charitable, religious, educational and nonprofit association issues
 Interests in railroad equipment certificates
Exempt Transactions
 Reg A: small and medium offerings
o Tier 1: up to $20 mm in 12-month period (<$6 mm secondary). SEC and state review
o Tier 2: up to $50 mm in 12-month period (<$15 mm secondary) – investors must be qualified investors. SEC review
only.
o Filing of abbreviated notice of sale or offering circular with regional SEC and then provided to investors (48 hs before
confirmation of sale). Unaudited financial statement, annual, semi-annual and current reports
o Qualifies investor: investment can be greater of 10% of investor’s net worth or 10% net income
o SMEs only, excludes investment companies (PE, VC, HF)
 Reg D: private placements (restricted / unregistered offering)
o Accredited investors (individuals + institutions + officers/directors) + max 35 non-accredited investors
o Accredited individual investors: (i) $1 mm net worth (excl primary residence); or (ii) $200 k ($300 k married) annual
income 2 years + current year
o Unlimited capital can be raised
o Lettered/legend stock: investor signs that it will hold for investment for 6 months
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o Offering memorandum (Form D filed electronically)

o May advertise to accredited investors only. No general solicitations to any non-accredited investor
o Issuer must take reasonable steps to verify that all purchasers are accredited
 Rule 147: intrastate offerings
o State-level registration
o Issuer – ppal office and 80% assets or business or issuance proceeds in state
o Underwriters is a resident and has office in the state
o Investors – all residents; resale to nonresidents allowed only 6 months after purchase
o Offering circular
 Reg S: offerings outside U.S. (looks at residence, not citizenship) by U.S. or foreign issuers
o Not available to Mutual Funds and UITs
o Can be resold to US investors after 40 days for debt securities, 6 months for Equities reporting to SEC, 12 months
Equities non-SEC reporting
 Rule 144: sales by insiders and affiliates of control/restricted securities
o Control securities: owned by officers, directors and <10% shareholders
 10% limits adds up ownership by immediate family members
 No short sales / no short swing profits (<6 month hold)  profits must be returned
 Permitted to write calls against a long position if shares are unrestricted (note companies cannot
write calls against its own stock)
 Insiders/affiliates are subject to volume restrictions after 6-month holding period of restricted (reg D)
shares. Nonaffiliates can sell as they wish
 Any insider trading must be reported to SEC within 2 business days
o Restricted securities: those acquired not by registered public offering, i.e. private placement
o File Form 144 concurrently with sale of stock, effective for 90 days
 De minimis filing threshold: sales for <5,000 shars or $50,000 sales proceeds are permitted without form
144
 Compan must be reposrting 10K/10Q with SEC
o Volume limitations within 90-day effective period
 Greater of 1% outstanding shares or avg. weekly trading volume of most recent 4 weeks
o Rule 144 registration effectively registers the shares, so the buyers are not subject to any restriction if they choose
to resell

 Rule 144a
o Unregistered foreign securities to be sold to institutional investors in the U.S.
o Qualified Institutional Buyers (QIB) only: minimum $100 mm in assets
o No 6-month holding period
 Rule 145
o Requires companies going through reorg, reclassification (shifting ownership) or M&A send a proxy for stockholder
approval
o Rule 145 excludes shares resulting from stock splits/divid3eds from having to be registered with the SEC
Restricted Persons
 Restricted persons may not buy IPOs of common stock at POP (may buy additional issue offerings, debt securities, exempts
securities, convertibles, pref stock, investment company securities, BDCs, DPP and REITs)
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o Broker/dealers, employees and their insiders (>10% ownership)

o Portfolio managers (including anyone with the authority to buy/sell securities for a bank, savings, loan association,
insurance or investment company)
o Persons acting in fiduciary capacity to managing underwriters (attorneys, accountants, financial consultants)
o Immediate family members of the above (parents, parents-in0law, spouse, siblings and siblings-in-law, children and
children-in-law, and dependents). Aunts, uncles and grandparents are not immediate family members unless they
live in the same household
o If any of the above has less than 10% beneficial ownership of an account, that account may purchase IPO shares
 Spinning: practice of allocating hot IPO shares to individuals in a position to direct securities business to the firm (that’s why PM
are restricted)
 Before selling an IPO to an account, reps need to obtain a written representation letter from the account owner that they are
eligible to purchase in the IPO, within the 12-month period before the sale of the new issue and must be retained for at least 3
years following the new issue sale