Series 79, Chapter 12 - Syndicate Settlement & Syndicate Regulations

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What does the SEC consider when asked to accelerate a registration's effective date?

Has the issuer submitted all required information? Has the syndicate taken "reasonable steps" to inform the public of the offering terms through a preliminary prospectus (red herring)? (12-367)

T/F: If a corporation is issuing securities in connection with a merger on which the shareholders must vote, a prospectus must be delivered to each shareholder prior to their vote

TRUE (12-368)

Purchase agreement

Same as underwriter agreement, sets terms between managing underwriter and issuer. (12-368)

Purchase group agreement

Same as "agreement among underwriters", "master underwriting agreement", or "syndicate contract" establishes lead underwriter, gives managing underwriter authority to allocate shares among the group, and describes responsibilities and liabilities of each member of the group. (12-368)

FINRA Corporate Finance Rule

regulates underwriting terms of most public offerings conducted by member firms, including shelf offerings. Requires managing underwriter to file registration statement and underwriting agreements with FINRA's corporate finance department within one day of filing with SEC and receive the department's opinion of "no objection" in order to proceed. (12-369)

T/F: FINRA reviews any item of value being traded between an issuer and underwriter to determine if compensation is fair.

TRUE (12-369)

Items of value

underwriting spread, reimbursement for underwriter's counsel (typically deducted from underwriting fee), finder's fees, securities credited to the underwriter's investment account, or right of first refusal for future transactions. (12-370)

Prohibited compensation for an underwriting

FINRA prohibits (1) fees from underwriter to issuer to reimburse for overhead, (2) granting of right of first refusal more than 3 years out, (3) warrants/options/convertible securities exercisable more than 5 years from effective date or with a strike price below the offering price, or (4) any stock greater than 1% of the offering without a 180 day lock-up. (12-371)

T/F: An issuer may distribute publicly available information at a road show, such as company profiles, press releases, and recent financial results without registration.

FALSE, any information handed out (other than the red herring) is considered a free writing prospectus and is subject to filing requirements. (12-371)

T/F: An issuer cannot give any statements at a road show with details that go beyond what is provided in the red herring.

TRUE (12-371)

T/F: Any account of a road show presentation published or distributed by the media can constitute a free writing prospectus.

TRUE (12-371)

How can a public corporation continue to communicate as normal with the public during the public offering period?

They must stick to normal format/content, not make any forward projections (whether or not the projections are related to the offering), they cannot mention the offering or terms, and they may not speculate on whether or when a registration may become effective. (12-371)

FINRA Rule 5151

Prohibits any member engaged in a fixed price offering from selling securities to a related person at a discount. (12-373)

T/F: If a broker dealer has a control relationship with an issuer, the dealer must disclose this in writing at the time that shares are offered to an investor.

FALSE (The broker dealer must notify in WRITING at the time of the offer, but provide written disclosure by transaction close). (12-376)

T/F: Research analysts are prohibited from communicating with customers in the presence of investment bankers or reps of the security's issuer.

TRUE (12-376)

Research Blackout Periods

NYSE Rule 472 that prohibits analysts employed by syndicate managers from issuing research reports or engaging in public appearances for the securities immediately following the registration effective date. (12-377)

Research Blackout period, Syndicate manager

40 days after effective date for an IPO, and 10 days after effective date for follow-on. (12-377)

Research Blackout Period, Underwriter/Syndicate Member or Selling Group Member

25 days after effective date for IPO, no blackout period for follow-on offerings. (12-377)

What step should be taken to ensure each attendee at the road show presentation receives a red herring?

Prepare a signature log and have each attendee sign for receipt of the red herring. (12-378)

Under SEC Rule 15c1-8 a broker dealer is not allowed to claim that securities are offered "at-the-market" unless which conditions exist?

There must be a clear public market, that is not made exclusively by the broker-dealer. (12-378)

Under what circumstances may state securities commissioners bring enforcement actions for transactions in Federal Covered Securities?

For fraud, deceit, or unlawful conduct, under antifraud provisions of state law. (12-378)

Under NASD Rule 2711, a research analyst who participates in a non-deal road show is not allowed to communicate with customers (a) about equity securities, (b) about the merits of the issuer, (c) in the presence of investment bankers or representatives of the issuer, (d) using electronic or graphic media for support.

C (12-378)

For an IPO, the "blackout period" for managers or co-managers as prescribed by NYSE Rule 472 is for what period of time?

40 days from the effective date. (12-378)

Regulation M

SEC Regulation preventing manipulative conduct by persons with an interest in the outcome of a securities offering. Covers underwriters, issuers, and selling security holders. (12-380)

Reg M, Rule 101

Prohibits underwriters and other persons participating in a distribution from purchasing (or inducing others to purchase) a security subject to distribution. (12-380)

Reg M, Rule 102 applies to. . .

Activities by the issuer or selling shareholders. (12-380)

Reg M, Rule 103 applies to. . .

Nasdaq passive market making (12-380)

Reg M, Rule 104 applies to. . .

Stabilization activities. (12-380)

Reg M, Rule 105 applies to. . .

Short selling in connection with a public offering. (12-380)

Reg M, Rule 101 restricted period

FOR ACTIVELY TRADED SECURITIES - no restricted period, FOR MODERATELY TRADED SECURITIES - restricted period goes from 1 business day before determination of offer price to whenever that person's participation in the distribution ends, FOR ALL OTHERS - begins 5 business days before the price is determined and ends when that person's participation is completed. (12-381)

Determination of Actively traded securities under Reg M, Rule 101

Average Daily Trading Volume of at least $1M and public float of at least $150M. (12-380)

Determination of moderately traded securities (my term) under Reg M, Rule 101

Average Daily Trading Volume of at least $100K and public float of at least $25M. (12-380)

Activities not prohibited by Reg M, Rule 101

(1) publishing research/recommendations, (2) Odd-lot transactions, (3) Exercising options, warrants, rights, conversions, (4) unsolicited transactions, (5) basket transactions of 20+ securities in which the covered security is <=5% of basket value, (6) certain de minimis transactions, (7) Rule 144A transactions with QIBs. (12-380)

FINRA notification requirements re Reg M

Underwriter must notify FINRA with respect to Rules 102, 102: (1) length/starting date of restricted period, no later than the business day before the first trading session of the applicable restricted period, (2) pricing of the distribution, security and symbol, shares offered, and offering price, no later than the close of business the next day following pricing, (3) cancellation or postponement of any distribution for which prior notification has been made, must be done immediately. (12-382)

T/F: If a firm is an underwriter for a given offering and ALSO a Nasdaq market maker for that security may continue to make a market in that security during the restricted period.

TRUE (under reg m, rule 103). (12-382)

What limitations are placed on a Nasdaq passive market maker during the Regulation M restricted period?

(1) The market maker may not bid higher than the highest independent bid, (2) the market maker's NET PURCHASES (buys - sales) in the security may not exceed the greater of 200 shares OR 30% of the MM's avg daily volume in the security during the full 2 calendar months preceding registration. (3) The MM must notify FINRA in advance of their intention to engage in passive market making. (12-383)

Stabilization agent

The firm that stabilizes on behalf of the underwriting syndicate. (12-383)

Limitations to stabilization bids

(1) priority must be given to an independent bidder at the same price, regardless of size, (2) only 1 stabilization bid can be entered at a time, (3) the stabilization agent cannot bid on the stock in addition to the stabilization bid, (4) Prior regulatory notice must have been given that the entity is engaged in stabilizing. (12-383)

Stablization bid price

The LOWER of (1) the public offering price, OR (2) the highest bid in the open market. (12-384)

Penalty Bid

imposed against a syndicate member if shares allotted to them are flipped. The syndicate member forfeits all concessions and the broker involved in the trade is not paid. (12-384)

Record keeping requirements for stabilization and penalty bids

Syndicate manager must maintain records for THREE years of: (1) the name an class of security stabilized or subject to penalty bid, (2) the price, date, and time at which the stabilizing purchase was affected and whether penalties were assessed, (3) the names/addresses of syndicate members and selling group, (4)the commitments of each member of group, (5) dates when any penalty bid was in effect. (12-385)

T/F: Under Regulation M, Rule 105 it is prohibited for ANYONE from purchasing a security in a public offering and simultaneously selling it short.

TRUE (12-385)

According to Reg M Rules 101 and 102, FINRA must receive notification from offering participants (select two) (I) for listed securities only, (II) for listed and unlisted securities, (III) only if a restricted period applies, (IV) whether or not a restricted period applies

II, IV (12-386)

Who is responsible for notifying FINRA of the restricted period in the distribution of securities?

The managing underwriter. (12-386)

All of the following statements regarding Reg M Rules 101 and 102 are true, EXCEPT (a) required notices must be in writing, (b) offering documents must accompany the notice, (c) if no restricted period applies for an actively traded security, notice must generally be made 1 business day prior to the pricing of the distribution, (d) notice of an applicable restricted period and the basis for the determination is required no later than the business day prior to the 1st complete trading session of the applicable restricted period.

B (12-386)

Restricted periods under Rule 101 and 102 of Reg M apply to purchases by (select 2) (I) issuers, (II) accredited investors, (III) distribution participants, (IV) institutional buyers

I, III (12-386)

According to Reg M, FINRA notice is required in all of the following circumstances EXCEPT (a) determination of the applicable restricted period for a new offering of securities, (b) determination of the price of a security for which a restricted period applies, (c)intention of an OTC market maker that is participating in the distribution to withdraw its quotes, (d) intention of the underwriters to conduct penalty bids or syndicate covering transactions.

C (12-386)

According to FINRA Rule 11880, how long does the syndicate manager have to settle all syndicate accounts?

90 days following syndicate settlement date. (12-388)

Syndicate account

formed by members of the selling syndicate for the purpose of purchasing and distributing the corporate securities of the public offering. (12-388)

Syndicate settlement date

the date on which corporate securities of a public offering are delivered by the issuer to the syndicate members. (12-388)

Organizing and offering expenses that FINRA pays special attention to in reviewing DPP&unlisted REIT organization and offering expenses

(1) bond fide issuer expenses, (2) underwriting compensation, (3) due diligence expenses connected to the offering. (12-389)

Limitation on Organizing and Offering Expenses for a DPP or unlisted REIT under FINRA Rule 2810

15% of gross offering proceeds, 10% of which may be underwriting compensation. (12-389)

Underwriting compensation

all types of compensation, from any source, paid to underwriters, broker-dealers, or their affiliates. Limited to 10% in a DPP or unlisted REIT offering. (12-390)

T/F: A registered person is employed by the issuer. Their compensation counts against the 10% underwriting compensation limit for a DPP or Unlisted REIT.

TRUE (12-390)

Limit on non-accountable underwriting expenses in a DPP or unlisted REIT offering

limited to 3% of offering proceeds. (12-390)

When are liquidity disclosures required?

In a DPP offering in which the sponsor has previously offered a program in which a goal was to liquidate the program within a given period, or by a given date. The prospectus must disclose whether these programs met the state liquidity goals. (12-391)

A willful attempt by a broker-dealer to support the price of a security by interfering with fair market operations is referred to as. . .

market manipulation. (12-392)

In the event the lead bookrunner of a follow-on offering seeks to exercise an overallotment option, at what point is the distribution deemed complete?

After the securities have been distributed and trading restrictions terminated. (12-392)

The conducting of a roadshow in connection with an IPO would be considered a . . .

special selling effort. (Drafting and distributing a prospectus, making sales calls, and conducting a roadshow are all considered special selling efforts by the SEC). (12-392)

Which of the following can influence the length of the blackout period during which an analyst employed by a participant in an underwriting may not issue research reports or engage in public appearances? (select all that apply) (I)Whether the opinion is favorable or unfavorable, (II) whether the participant is a manager/co-manager, (III)Whether the issue is an IPO or follow-on

II, III (12-392)

Under FINRA Rule 2060, under what circumstance may fiduciaries use information about the ownership of securities to solicit purchases, sales, or exchanges?

Only at the request of the issuer. (12-392)

Which of the following are "fiduciaries" covered under FINRA Rule 2060's restrictions on using information about the ownership of an issuer's securities to solicit transactions? (select 2) (I) Broker Dealers, (II) Transfer Agents, (III) Investors, (IV) Trustee

II, IV (12-393)

An underwriter plans to offer a DPP to a select group of sophisticated investors. Prior to participating in the offering, the underwriter must file specified information with FINRA and

receive a "no objections" opinion from FINRA. (12-393)

In an offering for a DPP, fees paid to transfer agents and fees paid for legal and accounting services are examples of

bona fide issuer expenses. (12-393)

In a DPP, which of the following types of compensation paid to brokers are included in "underwriter compensation"? (select all that apply) (I)Sales commissions, (II) non-transaction compensation for clerical or ministerial functions, (III) Referral fees paid, (IV) continuing fees and trail commissions

I, III, IV. (12-393)

Under FINRA Rule 5141, members who participate in fixed price syndicates are not allowed to offer another member (a) An over-allocation of shares, without prior disclosure, (b) selective communication of material information, (c) a reduced offer price below the public offering price, (d) A fixed share price during the waiting period.

C (FINRA Rule 5141 requires transactions between members in a fixed price syndicate to be made only at the public offering price, until the offering is terminated.) (12-393)

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