Types of Financing Transactions

• Public offering is more time consuming and expensive
• Private offerings are quicker, but securities can’t be publicly placed

Primary Offering

• Proceeds go to the company. Company is raising the money.

Secondary Offering

• Securities are being sold by shareholders. Proceeds go to shareholders. 

It can also be mixed ^^

Underwriting Commitments

Additional Underwriting Issues

• Shelf Registration
  • Gives certain issuers the flexibility of selling new issues on a delayed or continuous basis
  • May be permitted for up to three years
  • Issuer and underwriter can adjust the terms of the offering to reflect the market conditions at the time of the sale
• Market-Out Clause
  • Provides the underwriter with the ability to cancel the agreement
  • Based on events that make marketing the issue difficult or impossible
    • Reasons are limited and disclosed in the clause
  • Ex: Accounting Scandal (material adverse event)

The Primary Market

• Issuer
  • Needs capital
  • Hires underwriter
• Underwriting manager (Investment Banker)
  • Facilitates distribution
  • Assumes liability that varies with offering type
  • Signs Underwriting Agreement with issuer
• Syndicate Members (syndicate: group of B/Ds to do the underwriting)
  • Broker Dealers assisting in selling and sharing liability
  • Signs Syndicate Agreement with manager (agreement amongst broker dealers)
• Selling Group
  • Broker dealers accepting no liability, assist in sales only
  • Signs Selling Agreement with manager

The Underwriting Spread

• The difference between Public Offering Price an investor pays and how much goes to the issuer
• We can see how that $1 spread is split up

• Concession: Selling Concession. Anyone who sells. Selling groups, syndicate members, etc…

Distribution of the Spread

• Underwriter purchases from issuer at $13 and sells at the POP of $14

• Manager will always get a cut

Check the participants that may have liability for unsold portions of a new issue

• Managing underwriter
• Syndicate member
• Selling group

For a new offering, identify how the underwriting spread is distributed for sales that are credited to the different market participants

Securities Act of 1933

• Regulates the primary or new issue market
• Scope of the law
  • To provide for “full and fair disclosure”
  • Prospectus must precede or accompany any solicitation of a new issue (no marking or highlighting)
  • SEC “no approval clause”
• Requires SEC registration of new issues
  • Registration exemptions are provided to issuers of certain securities and specific types of transactions
• Liability
  • Unconditional for issuers regarding information to investors
  • Conditional for the underwriters that are required to perform:
    • Reasonable investigation
    • “Due Diligence” 

The Registration Process

• Pre-Registration Period
  • Document preparation and due diligence begins
  • Registration statement is completed
  • B/Ds and RRs (registered reps) may have no communication with the public
• Cooling-Off Period
  • File the registration statement with the SEC
  • Issuer distributes preliminary prospectus (Red Herring)
  • “Blue Sky” the issue
    • State security laws
  • Final due diligence meeting held
• Post Registration Period
  • Effective date
  • Sales confirmed and Final Prospectus delivered
  • Must contain the SEC no-approval clause 

After-Market Prospectus Requirements

• Distributions participants that sell securities in the after-market must provide purchasers with a copy of the prospectus for a specific period from the effective date

• The more public information available about the company, the shorter the period the rule applies

Types of Prospectuses

• A prospectus is any communication, written or broadcast, that offers a security for sale
• Statutory Prospectus
  • Condensed form of the registration statement that provides detailed information on the offering
• Preliminary Prospectus
  • Also referred to as the Red Herring; used during the cooling of period
    • Omits the offering price, underwriting and dealer discounts, and proceeds to the issuer
    • Once final offering price is set, a final statutory prospectus is filed
• Summary Prospectus
  • Short-form prospectus typically used for mutual fund offerings
    • Investor must be informed of statutory prospectus
• Free Writing Prospectus
  • Any communication that does not meet the standards of a statutoryprospectus
    • Includes a legend recommending that investors read the statutory prospectus
      • Examples: offering term sheets, emails, press releases, and marketing materials 

Read each situation and determine the period in the registration process to which it applies

• Blue Sky the offering
  • Cooling-off period
• No communication with the public
  • Pre-registration period
• Deliver red herring to prospective purchasers
  • Cooling-off period
• Sales confirmed and prospectus delivered
  • Post-registration period 

Match the prospectus with correct description

• Summary prospectus
  • Short-form prospectus (mutual funds)
• Free writing prospectus
  • Offering term sheets, emails, press releases, and marketing material
• Red herring
  • Preliminary prospectus
• Statutory prospectus
  • Condensed form of the registration statement with offering price and effective date

Exempt Securities

• The following securities are exempt from SEC registration
  • US Government and Agency securities (Fannie Mae)
  • Municipal securities
  • Securities issued by banks
  • Securities issued by non-profit organizations
  • Short-term corporate debt; maturities not exceeding 270 days
    • Also called commercial paper
  • Securities issued by Small Business Investment Companies
• All remain subject to antifraud provisions of the Act

Exempt Transactions

• Regulation D – Private Placement
  • A sale of securities directly to “accredited” investors and/or to a limited number of non-accredited investors
  • Unlimited numbers of accredited investors
    • Officers/director of the issuer
    • Institutions
    • Individuals who have met a financial test:
      • Net worth of $1M (excludes primary residence)
      • OR
      • Annual Income of: $200k in each of the last two years
        • $300,000 for married couples
  • No more than 35 non-accredited investors

Regulation D – Private Placement

• Purchaser Representative (no specific qualifications)
  • Appointed by a non-accredited investor to evaluate the risks and merits of an offering
  • May not be an officer, director, or greater than a 10% owner of issuer, unless related to the investor 
• Private placement memorandum (disclosure document)
  • Not required if all investors are accredited
  • Required for all investors if any non-accredited investors are included
  • Includes the use of proceeds, suitability standards, and financials

Rule 144

• Permits the sale of restricted and control stock
• Restricted Stock
  • Unregistered stock that’s acquired through a private placement or as compensation for senior executives of an issuer
• Control (Affiliated) stock
  • Registered stock that’s part of an issuer’s public float and purchased in the open market by officers, directors, or greater than 10% shareholders of the issuer 
• If either restricted or control stock is being sold, the SEC must be notified
  • Form 144 filed by the time the sell order is placed

Rule 144A

• Provides an exemption for restricted securities that are sold to Qualified Institutional Buyers (QIBs)
  • QIB is defined as an institution that has at least $100 million under management
  • 144A securities may be equity or debt securities which are offered by domestic or foreign issuers
  • However, if securities of the same class are listed on an exchange, they are ineligible for 144A exemption
  • Typically used for corporate debt offerings
• Remember, QIBs are institutions, NOT individuals 

Rule 145

• This rule regulates the reclassification of one security into a new security
• Reclassifications are generally considered sales and subject to registration and prospectus requirements
• Subject to Rule 145
  • Substitutions for one security for another
  • Securities that are a result of a merger/acquisition
  • Securities issued after a transfer of assets from one corporation to another
• Not Subject to Rule 145
  • Stock splits
  • Reverse stock splits
  • Changes in par value

Rule 147 and 147A

• Intrastate Offering
• Provides an exemption for the sale of securities to residents of one state if:
  • The corporation has its principal place of business in the state and meets any one of the following four requirements:
    • 80% of the assets located
    • 80% of the revenues generated
    • 80% of the proceeds used, or
    • A majority of issuer’s employees are based in the state
  • Resales to non-residents are prohibited for six months from the end of the distribution

Identify whether the statement applies to Rule 147 or Regulation D

• Investors must be residents of one state
  • Rule 147 intrastate offering
• Sales are limited to a maximum number of non-accredited investors
  • Regulation D (35)
• Non-residents cannot purchase stock for six months after the last sale of the offering
  • Rule 147
• An offering memorandum is the disclosure document
  • Regulation D (private placement memorandum)

Matching:

• Rule 144
  • Sale of restricted and control stock
• Rule 144A
  • Qualified institutional buyers (QIB)
• Rule 145
  • Reclassifications of securities

Issuing G.O. and Revenue Bonds

• Municipal debt issues are exempt from the registration and prospectus requirements 
• Issuing General Obligation (GO) Bonds
  • Usually requires voter approval
  • Subject to debt limitations placed on the municipality which limits its ability to add debt above its debt ceiling
• Issuing Revenue Bonds
  • Doesn’t require voter approval since they’re backed by fees that are paid for use of the facility or service
  • A consultant is hired to produce a feasibility study

Selecting an Underwriter

• There are two different methods that a municipality may use when selecting its underwriter
• Competitive Sale
  • Notice of Sale advertises the offering to underwriters
    • The Notice is prepared by the issuer
    • Contains relevant details about the issue
  • Issuer is inviting underwriters to submit sealed bids
    • Underwriting generally awarded to lowest bid
• Negotiated Sale
  • Issuer appoints its managing underwriter
  • Both issuer and underwriter “negotiate” terms of the deal
• Municipal Advisor – typically employed by a municipality to assist in selecting an underwriter 

Municipal Documents / Information

• Official Statement
  • Used by municipal issuers as a disclosure document
  • Not required, though
• Legal Opinion
  • Prepared by Bond Counsel which renders its opinions as to:
    • Issuer’s legal, valid, and enforceable obligation
    • Tax exempt status of the issue
  • Does NOT give an opinion on credit rating. That’s the rating agency
• New Issue Confirmations
  • Provided to purchasers, along with a copy of the official statement, by no later than settlement date
• Committee on Uniform Securities Identification Procedures
  • Underwriters are expected to apply for CUSIP numbers that are used to identify unique securities (e.g., by maturity)

Electronic Municipal Market Access (EMMA)

• MSRB website used by issuers and underwriters to submit documents
• Electronic Access
  • Provides electronic public access to information about the municipal market
    • Trade activity
    • Market statistics
• Documents
  • Various documents:
    • Pre-sale documents
    • Official statements
    • Continuing disclosures
• Plan Info
  • Includes 529 Plan information