NASDAQ Investment Banking

• - a taxable entity
• - limited liability
• - double taxation of dividends
• - unlimited number of shareholders
• - can issue senior securities ( bonds, preferred stock)

• - limited to 100 INDIVIDUALS as shareholders
• - limited liability
• - pass through (disregarded entity)
• - cannot issue senior securities

• - unlimited owners (members)
• - pass through (disregarded entity)
• - limited liability
• - cannot issue senior securities

• - 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

• - 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)

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

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.

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.

Western - usually corporate underwritings, there is sufficient risk that each syndicate member wants to be limited in their liability

Eastern - muni underwritings mostly

there can be other forms of compensation to the syndicate - stock, warrants, rights, options, reimbursement of expenses by the issuer.

• - 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

- 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.

- "Hot" issues - oversubscribed offering

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

• 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

- 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

investment companies, and other similar vehicles (unit trusts).

1970

• - updated securities regulations
• - setup National Market System NMS for trading

• Insider Trading Act (milkin?)
• expanded liabiility of prosecution to not only the tippee, but also the tipper

• - massive increase in regulations of public companies
• - an attempt to increase corporate accountability

• - 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

used to register a foreign issue

used to set up an ADR

• - 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

• - 20 day cooling off period
• - SEC reviewed filing for "full and fair disclosure"
• - requires any deficiencies to be corrected before statement is effective

Disallowed - selling, advertising, recommendations of the issue, soliciting orders

Allowed - indications of interest, distribute preliminary prospective "red herring"

Effective date - when the issue is priced and the final prospectus is made available

• 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

- exempt transactions - U.S. government issues are exempt

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

• - 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)

• - 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

• 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

• - 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"

in all these rules, investors receive certificates with a legend on them restricting sale or transfer without registration or some other exemption.

therefore called

"restricted" or "legend" stock

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

NO ONE CAN SELF ACCREDITATION

• 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.

• 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

- 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.

regulation S sales are reported on Form 8K

- 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

- 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

- 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.

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
• CANNOT INCLUDE NAME OF UNDERWRITERS

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

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.