NASDAQ Investment Banking

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  1. Investment Banking -

    C Corp -
    • - a taxable entity
    • - limited liability
    • - double taxation of dividends
    • - unlimited number of shareholders
    • - can issue senior securities ( bonds, preferred stock)
  2. S corp -
    • - limited to 100 INDIVIDUALS as shareholders
    • - limited liability
    • - pass through (disregarded entity)
    • - cannot issue senior securities
  3. LLC Limited Liability Corporation -
    • - unlimited owners (members)
    • - pass through (disregarded entity)
    • - limited liability
    • - cannot issue senior securities
  4. Limited Partnerships
    • - a general partner with unlimited liability and at least one limited partner, which has liability limited to loss of their investment
    • - pass/flow through taxation
    • - MLP - Master Limited Partnerships are LP's that trade on exchanges
  5. Process:
    - structure of the deal is outlined and agreed to
    - a letter of intent is signed between the issuing company and the investment banker that is the lead underwriter or deal manager
    • - letter of intent includes:
    • - type of security
    • - size of the issue
    • - total par value (value of the face amount of securities to be issued)
    • - Estimated Pubic Offering Price
    • - Estimated Interest Rate
    • - Underwriter's Spread
    • - Underwriter's commitment Type (i.e., Firm, best efforts, best efforts all or none, etc)
  6. Types of Commitment:

    Firm - the lead underwriter for the offering assumes risk of the deal not being well received and essentially the issuer is selling the securities to the underwriter and the underwriter losses if the price drops, etc.

    Best Efforts - the underwriter acts as an agent for the issuing firm.  if the public doesn't relish the offered securities, the invesmtne banker IB still gets paid and the issuer just doesn't get as much proceeds as they had planned
    Best Effort All or None - often used for startup companies, if only part of the deal is sold to the public, then the whole issue is cancelled.  Customer's funds are deposited into a bank escrow and not released until the deal is done or cancelled

    Best Efforts Mini-Maxi - Similar to an All or Nothing - if at least the Minimum amount is sold to the public, then the deal is on and the IB continues selling during the offering period up the the Maximum issue quantity is reached (if reached).

    Firm Commitment Stand-By - used when a corporation wants to issue additional shares to existing shareholders.  If all the rights to purchase are exercised, then the firm doesn't have any stock left over to sell, but is some existing shareholders do not exercise their rights to buy additional stock, then an IB firm stands by ready to buy that leftover stock and sell it to the public.  The IB is on the hook to by all the leftover shares (the firm commitment) and is at risk is the share price falls
  7. Another term of the letter of intent is whether it is a negotiated or competitive bid underwriting.

    Negotiated - usually corporate debt - the price/yield/quantities are all negotiated between the issuer and the IB
    Competitive underwriting - usually municipal - the quantity and maturities are all defined by teh issuer and then various IB's bid on the yields they will pay, the lowed yield (lowest interest cost) wins and that IB gets to handle and sell the bonds/preferred stock to their customers.
  8. Syndicate Formation -
    once the lead underwriter (MANAGER) has set up the deal, it will decide whether it wants all the profit and risk from the deal for itself or if it will spread it around to other IB firms by forming a group or syndicate
    The formal agreement is called the "Agreement Among Underwriters" or "Syndicate Agreement"

    The manager/leader gets to choose the nubmer and amount of securities each member in teh syndicate group receives.

    The lead manager is responsible for due diligence

    due diligence is a requirement of the 1933 Securities Act, which regulates the sale of non-exempt securities.

    Commitment Committee - a committee formed to help complete teh due diligence for any member firm of the syndicate group.

    Management Fee - the manager or lead underwriter, runs the syndicate "account" and determiens compensation for each member.
  9. Syndicate selling responsibility types:

    - Western and Eastern

    - Western -- Divided as to selling responsibility and liability

    - Eastern -- Undivided as to selling responsibility and liability
    Western - usually corporate underwritings, there is sufficient risk that each syndicate member wants to be limited in their liability

    Eastern - muni underwritings mostly
  10. Syndicate members are the ones that hire the selling group participants
  11. Spread (gross profit) -

    underwriter's concession - the syndicate's member's profit

    selling concession - what the selling group's profit

    typically the largest portion of the spread

    if another firm not in the syndicate or selling group wants to take down some of the issue and resell it, often they will receive a discount, called a REALLOWANCE, usually an 1/8th -
    - this would be Non-member Profit
    there can be other forms of compensation to the syndicate - stock, warrants, rights, options, reimbursement of expenses by the issuer.
  12. Process steps:
    - letter of intent is signed
    - non-exempt issues have to comply with securities act of 1933
    - registration statement is filed with SEC, called the S-1, once filed,
    - 20-day cooling off period starts, if S-1 is amended, then 20-day cooling off restarts
    - state registration (blue sky) laws are complied with
    • - preliminary prospectus is prepared - "red herring"
    • - indications of interest are obtained
    • - if the "bottom" falls out of the market, then the syndicate members can opt out of the issue by envocing the "market out" clause in the underwriting agreement.
    • - prior to the registration period being effective (when the final price is determined), there can be no orders taken, no advertising, no sales of the issue
    • - the registration becomes effective when the final price is determined (after the 20 day cooling off period), then the prospectus is finalized and the issue can be sold
    • - on the day the issue is first sold, the manager will put a "tombstone" announcement in that day's newspaper.
    • - tombstone is not advertising
    • - tombstone may contain: name of issue, date of sale, type and size of teh issue, the public offereing price and the names of the syndicate members (BUT NOT THE SELLING GROUP MEMBERS)
    • - lead manager is at top of firms named on tombstone
    • - Prospteus sent at or prior to confirmaton of sale
    • - delivered to all purchasers for the 90 day period after effective date - if any shares are resold during this period, those purchasers must also obtain a prospectus
    • - after 90 days, the 10Q has had to be filed so there is public info available, therefore the prospectus is no longer needed and probably out of date
    • - if this is the first offering from an issuer, then the prospectus has to be delivered for 90 days
    • - if this is a subsequent offer, then only 40 days delivery requirement
    • - 25 day prospectus delivery for exchange listed and NASDAQ listed issues
  13. Spread is disclosed in prospectus

    Maximum life of syndicate is 90 days, FINRA rule
    - if the prospectus has to be amended after the effective date, then the lead underwriter has to notify the SEC, which will determine if a "STOP ORDER" would have to be issued.  if issued, the sale of the securities must be stopped.
  14. Trading in the Secondary Market

    - the underwriters sell the issue in the "primary" market, once it is trading, it is trading in the "secondary" market
    - "Hot" issues - oversubscribed offering
  15. Persons restricted from buying IPOs
    - FINRA member firms, officers, employees and immediate family
    - fiduciaries to FINRA member firms - i.e., outside lawyers, accountants, 
    - portfolio managers - i.e., mutual fund managers - CAN BUY FOR THEIR FUNDS - JUST NOT FOR THEMSELVES PERSONALLY
    - passive owners of broker-dealers, like an ex-wife of a B/D owner who has some of the B/D as part of her settlement
    Green Shoe clause - oversold, up to 15% over the total

    No Green Shoe clause - any overselling has to be covered by syndicate members buying the shares in the open market - THERE ARE LIMITS ON THIS

    Penalty bid clause and stabilizing bid - used to help an issue that may need a little help
  16. Piggybacking officers pre-public offering shares onto a public offering

    - a "combined primary and secondary distribution"

    - "seasoned equity offering" - when issuer wants to sell more of an already trading issue.
    • Shelf registration Rule 415 - blanket registrationstatement on file  
    • - no 20 day cooling off period
    • - effective for 3 years
    • - used for debt and preferred stock mostly
    • - issue is sold under a Prospectus Supplement, mshorter than a full prospectus
  17. Chapter 6, section 2 - '33 Act and its Rules
    - primary market - hyping of new issues was blamed for the crash and so new issue issuance was tamed.

    - secondary market - really regulated more by the '34 act rather than the '33
  18. Trust Indenture Act of 1939 - passed to safeguard investors of corporate bonds
  19. Investment Company Act of 40
    investment companies, and other similar vehicles (unit trusts).
  20. Securities Investors Protection Act - SIPC
  21. 1975-
    • - updated securities regulations
    • - setup National Market System NMS for trading
  22. 1988
    • Insider Trading Act (milkin?)
    • expanded liabiility of prosecution to not only the tippee, but also the tipper
  23. Sarbanes-Oxley
    • - massive increase in regulations of public companies
    • - an attempt to increase corporate accountability
  24. 33 Act in more detail:
    • - required detailed prospectus
    • - prohibited buying new issues on margin
    • - applies to non-exempt securities only
    • - issuer must file "S-1" prior to selling any of the issue
    • - Small Businesses - revenuses less than $25E6 and less than $25E6 public float, can file a simplified form, either SB-1 or SB-2, SB-1 if no more than $10 million have ever been issued in a 12 month period, otherwise, have to use a SB-2
  25. Form F-3
    used to register a foreign issue
  26. Form F-6
    used to set up an ADR
  27. Registration statement (S-1) requirements:
    • - description of business
    • - uses of the proceeds
    • - officers and directors, bio and ownership
    • - historical audited financial statements
    • - legal issues
    • - risks
    • - proposed price of issue and underwriting spread
    • - copy of proposed prospectus
  28. After S-1 is filed
    • - 20 day cooling off period
    • - SEC reviewed filing for "full and fair disclosure"
    • - requires any deficiencies to be corrected before statement is effective
  29. 20 day cooling offer period
    Disallowed - selling, advertising, recommendations of the issue, soliciting orders

    Allowed - indications of interest, distribute preliminary prospective "red herring"
  30. After the 20 day cooling off period is the "Effective Date"
    Effective date - when the issue is priced and the final prospectus is made available
  31. Prospectus must be delivered prior to confirmation
    • if prospectus is found to be in error:
    • - prior to effectiveness - SEC issues "Stop Order" suspending effectiveness, can only be issued after 15 days notice

    - if after effective date - SEC may issue STOP order or reset the effective date, so that red herrings can be amended

    - ACT of 1933 - omission or misstatement of material fact in S-1 or prospectus is FRAUD and is unseveral and joint - so all involved can be charged with criminal activity -> hence they do DUE DILIGENCE
  32. Exempt issues - sought because the costs of this is enormous
    - exempt transactions - U.S. government issues are exempt
  33. - section 4 - exempt transactions -
    section 4(2) - general private placement exemption - the details of these exemptions are fleshed out by regulation D, A and 144

    Reg D - private placements can be sold to an unlimited number of "accredited investors" - basically either a wealthy individual or institution with at least $5 million assets available for investments.

    Rule 144A - QIB's

    Qualified Client (defined as hedge fund rule in '40 Act) is an account opened with at least $1E6 of customer funds by a customer with at least a net worth of $2E6.  Such a large investor, while not given a specific exemption/safe harbor under Reg. D or Rule 144A, would probably qualify as being able to fend for itself under section 4(2).

    - issuers can't purchase private placement

    - section 4(6) - exemption for offers of $5 million Max ONLY to ACCREDITED INVESTORS, no advertising allowed
  34. Exempt Issues
    • - direct obligations of U.S. government
    • - obligations of agencies of U.S. government
    • - municipal obligations
    • - Foreign government obligations
    • - Banker's Acceptance and Commercial Paper with maturities 270 days or less
    • - Insurance company offerings as long as non-variable.  Variable issues requlated by the states, predate '33 act
    • - bank issues, covered by state laws that pre-date '33
    • - common carrier (railroads, trucking) covered by Interstate Commerce laws which predate '33
    • - Issues of Benevolent organizations (non-profit corporations such as farmer's cooperatives)
    • - Issues of Small Business Investment Companies (SBICs)
  35. Offering a non-exempt security requires
    • - a prospectus
    • - unless it can qualify for an exempt transaction - so, you can buy a non-exempt security w/o a prospectus if the transaction can meet an exemption
  36. Exempt transactions -
    - intrastate offerings (Rule 147)
    - private placements (Rule D)
    - certain trades of securities defined under Rull 144
    - private placements sold only to institutional investors Rule 144A
    - transactions between private parties
    - transactions outside the U.S. to non-U.S. residents under Regulation S
    • Rule 147 - Intrastate Exemption - as long as everything is within one state, the federal government has no authority
    • - 100% of issue sold in one state
    • - issuer must be a resident of that state:
    • --- 80% of the assets of corp have to be in state
    • --- 80% of sales revenue have to be instate
    • --- 80% of the proceeds of the offering have to be in that state
    • --- issuer has to be incorporated with home office in that state
    • --- 9 - month resale restriction to only residents of that state

    Form 147 must be filed 10 days prior to effective date

    All state regulations - Blue Sky - have to be filed just like any interstate offering
  37. Regulation D - exemption - SEC rules 501-506

    - still have to comply with all state Blue Sky rules
    • - max of 35 "non-accredited" investors, unlimited number of accredited investors
    • - accredited investor defined in rule 501 as meeting ONE of these:
    • --- net worth of >1E6 exclusive of residence
    • --- has net income of:
    • ---- individual - 200k for 2 years
    • ---- married - $300k for 2 years
    • ---- and expected to continue
    • --- officer or director of issue
    • --- financial institutions with over $5E6 in assets
    • --- non-profits with over $5E6 in assets - like endowments and pension plans
    • - no dollar limit or limit on the number of units sold
    • - even the non-accredited investors must be "sophisticated" - but no financial risk assessment is included
    • - no prospectus - instead an "Offering Circular"
  38. Rule 504 - up to $1E6 - don't have to include proceeds in offering cirular - BUT CANNOT BE A BLANK CHECK to company

    Rule 505 - up to $5E6 - offering circular has to include specific items like certified financial statements, BUT THE 35 NON-ACCREDITED DO NOT HAVE TO BE SOPHISTICATED

    Rule 506 - unlimited dollar amount offerings - 35 NonAcc must be sophisticated, all the finanical items of rule505 plus more detailed financials.  If restrict to accredited only, CAN ADVERTISE
    in all these rules, investors receive certificates with a legend on them restricting sale or transfer without registration or some other exemption.
  39. issuer must ensure that investors are accredited or sophisticated
    - usually by requiring them to sign an "investment letter"
    - if purchaser can't evaluate this on their own, they can hire a PURCHASER representative to eveluate it for them for a fee.  Registered reps can only be purchaser representative for a blood relation
  40. since these stocks are not registered, tehy have a restriction or legend on the back of the certificate
    therefore called

    "restricted" or "legend" stock
  41. resale options for restricted stock:
    1) private sale - w/o use of broker
    2) managed secondary offering - the securities can be registered with the SEC and then sold - very expensive
    3) Rule 144 exemption
    private sale - use Form D to claim private sale exemption

    - Online Private offerings through the use of a "web front"  - i.e., use Reg D exemption - but potential investor has to complete questionaire and broker firm can evaluate if accredited and if so, can give them a password to the offering site


    • New Reg D. process for raising fund rapidly - PIPE - Private Investment in Public Equity)
    • - public company needs money fast - doesn't have time to go through full SEC registration even for shelf offering - so they sell private securities to an accredited investor, who gives them the cash and they sell them at a discount to the market value - then the company gets them registered and the investor sells for a profit.

    - allows small amount of non-registered sotck to be sold if now the issuer has registered their stock
    • Holder can sell the stock if:
    • - issuer has registered shares outstanding and is current with SEC filings
    • - Seller files Form 144 - notice of intent to sell, form filed prior to or at the sale of the security
    • - seller has held the stock, full paid, for 6 months or longer, if used as collateral or a put option is purchased on the security, the ownership time is on hold or "TOLLED" for that period

    - can only sell every 90 days or up to four times a year

    • - maximum amount each sale can be is the greater of:
    • -- 1% of outstanding shares of company
    • -- 4 week average volume preceding the sale

    - "Dribble Rule" - if there are no trading volumes published, then have to go with the 1% of outstanding shares limit

    - CONTROL STOCK - can also be sold under Rule 144 - stock held by officer or director, 10% shareholder or affiliated person (wife of officer), subject to Dribble Rule, but no 6 month holding period

    - SMALL SALE EXEMPTION - $50,000/5,000 every 90 days, or less can be sold w/o filing

    - Sale through Rule 144 automatically REGISTERS these shares

    - B/D's must act at AGENTs in 144 sales - unless they are a bona fide market maker in the stock - quotes for 12 of previous 30 days with no more than 4 consecutive days w/o a quote

    - B/D's can't solicit people to buy shares sold from 144 holders

    - 10 day RECONTACT allowed - no solicitation to handle 144 sales is permitted, but if a rep is contacted about sale of 144 stock, and nothing happends, then rep can call that person back w/in 10 days to attempt to reconnect

    - if a brokerage contacted another firm about a 144 sale and nothing happened, they can call back within 60 days

    - if restricted security holder held issue for 6 months, fully paid, and has been NOT AFFILIATED for 3 months, then the 144 limitations are lifted - can sell unlimited shares

    - if charity acquired by gift 144 stock, then it still has to wait 6 months to sell

    - if death of holder results in the estate aquiring shares, the shares are automatically assumed to have been held for 6 months and can be sold w/o limits
    - for large institutional private placement trades - at least $100E6 invested on a discretionary basis
    -Qualified Institutional Buyer (QIB)
    - can buy unregistered securities fromissuers or broker dealers DIRECTLY, usually sold in blocks of $500,000 or larger.
    - ALLOWS QIB TO QIB SALES! of unregistered securities
    - trades take place on a special trading system, PORTAL - owned by NASDAQ and FINRA member firms

    - there is more dollar volume in 144A than registered offerings in teh U.S.
  44. Other exemptions -

    - private offerings

    - Regulation S - outSide the non-U.S. citizens are exempt, but U.S. citizens living outside the U.S. can purchase these securities
    regulation S sales are reported on Form 8K
  45. SEC rule Regulation A -
    originally in '33 Act to ease registration requirements for smaller companies It applies to issuers wanting to sell up to $5E6 within 12 month period
    - basically obsolete after the liberal private placement rule was issued, but still tested

    Regulation A consists of rules 261-263.

    Maximum of $5E6 with max of $1.5E6 from affiliates.

    Abbreviated S-1, called an S-1A must be filed with SEC 20 days prior to effective date.

    Prelimiary offering circular can be used prior to effective date.

    PUrchasers need to get offering circular 48 hours prior to confirmation of sale

    all purchasers in first 90 days have to receive offering circular.

    Other rules - if an offering is cancelled after the S-1A is filed, then the SEC has to be notified and the reason for the cancellation has to be provided.

    any sales literature used has to be filed with SEC when first published

    "TEST THE WATERS" - unique part of Reg A - lets an issuer use general solicitation and advertising to determine if there is enough interest to warrant filing and producing the offering circular.

    JOBS - Jumpstart Our Business Startups - revise Rev. A up to $50E6
  46. Rule 415 - Shelf Registration 3-Yr registration

    - no cooling off period, only includes securities reasonably expected to be sold within the next 3 years.

    Issuer files Form S-3 - good for three years
    - issuer must have been public for 1 year and have minimum of $75E6 market cap

    - cheaper, faster and effective in only 2 days, allows issuers to time the market

    - Add on offerings only

    - Seasoned issuers can do Primary offerings, Unseasoned issuers must do add-on's - usually through PIPE

    - the official prospectus is good for three years, but each new offering has to have a prospectus supplement

    - can update teh prospectus info if it is older than 9 months - no information in prospectus can be older than 16 months

  47. Rule 405 - Streamlines the shelf registration process for teh Well Known Seasoned issers - WKSI's
    - WKSI - > $700E6 mkt cap or > $1B in senior securities issued within the last 3 years

    - cannot be used for IPO's

    - 405 makes teh registration immediate, a reduced scope of the base prospectus, and use Form S-3 ASR, automatic shelf registration

    - no limit to types or amounts of securiites issued.

    - pay-as-you-go payment of registration fees

    - 3 year shelf registration

    - Access Equals Delivery - electronic availability of prospectus instead of required delivery - ONLY PERMITTED WHERE FIRM KNOWS CUSTOMER HAS INTERNET ACCESS

    - much more latitude allowed in prospectus writing and construciton - "Free Writing Prospectus" - webinar, recorded electronic road-shows, e-mails, faxes, term sheets

    - Graphic communications - videotape/dvd, e-mail, websites

    - These Free Writing Prospectus (FWP) must be filed with SEC onDay of First Use

    - FWP still held to '33 standard of no misstatement or omission of material fact.

    • - Any Third Party Research about about a 405 offering is considered a FWP and therefore has to be filed with the SEC
    • --- if prepared with knowledge/sponsorship of issuer, has to be filed on or before first use
    • --- if prepared without knowledge or support of issuer, then issuer has 4 days to file with SEC after becoming aware of teh article/report

    - Live Road Show is neither graphic or FWP and therefore doesn't require SEC filing

    - ATM or Natural Offerings - "At The Market" or "Natural Offerings" are issued in small amounts at teh market price.  Less expensive way to raise cash than PIPE, but can take 2-3 years.

    • Any "Bad Boys" are ineligible for WKSI status; example:
    • -- not current in SEC filings
    • -- were blank check, shell company or penny stock issuers in last 3 years,
    • -- Limited partnerships done on a best efforts basis (firm committments are okay)
    • -- filed for bankruptcy in teh last 3 years
    • -- denied registration or subject of a stop order in last 3 years.

    Rule 405 cannot be used by Investment Companies or Asset-backed Issuers

    There is a list of companies that are allowed to be WKSI's but do not meet the rules of the 405.
  48. Other SEC rules on underwriting

    - "gun jumping" - prohibited activites during the cooling off period/prior to effective date of registration
    Rule 134 - underwriter can't advertise during 20 day cooling off except for Tombstone Ad, usually done on the day of effective registration

    • Tombstone includes:
    • name of issuer and type of business
    • type of offering
    • size of offering
    • estimated public offering price
    • names of underwriters

    And disclaimer that it can only be sold by prospectus

    • Rule 135 - The issuer has limits on what they can say also (prior to effective date). 
    • Name of Issuer
    • Type of Security offered
    • Size and terms of offering
    • anticipate time of offering
    • Brief statement of manner and purpose of offering

    Rule 137 - prohibits recommending convertible issues by any member of the underwriting group.  Can't pay another firm to do this either

    Rule 138 - allows recommending the common stock if underwriting a NON-CONVERTIBLE issue. 

    Rule 139 - a firm can recommend an issue it is underwriting if the issue is a add-on issue and their recommendation is part of a regularly scheduled newsletter or communciation and the opinion has been issued before teh underwrtingn and is not more positive than prior issues.

    If the issuer is able to use Rule 405, then a FWP is available for them also under Rule 139

    • Safe-harbor for issuers that are already reporting -
    • Rule 168 - allows them to keep doing reporting that they've been doing like they usually do and protects them for "forward-looking" statements.

    For issuers that are IPO'ing, they have not been reporting, so there is a similar safe harbor rule, but there is no forward-looking statement protection.  This is Rule 169
  49. Rules related to registration for securities

    Rule 174 - This is the prospectus delivery rule.
    25 days if exchange listed IPO or add-on
    40 days if non-exchange listed add-on
    90 days if non-exchange listed IPO
    Electronic delivery - Access equals Delivery - firm must have reasonable reason to believe client has internet access.

    NOT available for investment company prospectus delivery since the SEC thinks mfund buyers are probably unable to use the internet.

    Who is liable for completeness and accuracy of the prospectus?  Any and all

    Suits allegeing omission or error in prospectus must be brought within 2 years of discovery and within 5 years of effective date.  Damages is the difference in price less income recived.

    Civil penalties if the error or omission was unintentional.

    Criminal penalties if teh error or omission is deemed to have been willful.  $10k fine and 5 years for each offence.
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NASDAQ Investment Banking
2015-09-30 23:37:35

chapter 6, section 1
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