1. Chapter 9 The Securities Act of 1933 & Underwriting Equity Securities

2. New Issue Marketplace, Investment Banking, Types of Underwritings Corporations issue securities to raise capital. New issues much be registered with SEC. Securities offered to public for first time are called Initial Public Offerings, or IPO. If new issue represents additional securities issued by a corporation that is already public, it is called a secondary public offering or SPO. Two types of SPO offerings are: 1.Registered secondary offerings- existing shareholders sell stock to the public and receive proceeds themselves. 2.Combined offerings- proceeds of SPO shared between original shareholders and issuer

3. New Issue Marketplace, Investment Banking, Types of Underwritings Continued An underwriter is a broker-dealer that helps corporations and municipalities raise capital by marketing their stock or bond offerings. Underwriters buy stock or bonds offered and than resell them to the public.

4. New Issue Marketplace, Investment Banking, Types of Underwritings Continued Types of underwritings 1.Firm commitment-underwriters purchase the entire issue and assume any securities that are not sold 2.Standby Agreements-current shareholders have first right to new issue, if they don’t purchase all of new issue, the underwriter will purchase any of the new issue that isn’t sold. 3.Best Efforts-Issuer agrees to have underwriter return any of the new issue that isn’t sold. 4.All or None-corporation agrees to new issue only if all of securities are sold. If all aren’t sold, any that were sold will be returned to issuer and its like the offer didn’t happen.

5. New Issue Marketplace, Investment Banking, Types of Underwritings Continued The syndicate-group of investment banks that agree to market issue together. Normally one of the group will operate as the manager. Underwriting spread-compensates syndicate and selling group. Difference between amounts paid by investors and amounts forwarded to issuer. The selling group includes broker-dealers that have no financial liability, but earn part of underwriting spread.

6. New Issue Marketplace, Investment Banking, Types of Underwritings Continued Types of underwriting accounts 1.Eastern account- each member of syndicate responsible for specific percentage of unsold balances, regardless of how much that member sold. 2.Western account- If member has sold it’s agreed upon percentage of the issue, member isn’t responsible for any unsold balance.

7. New Issue Marketplace, Investment Banking, Types of Underwritings Continued Sales of hot issues- new issue that is oversubscribed and trades at premium. Some restrictions as to who underwriter can sell hot issue securities to. Free riding- withholding part of hot issue for own account when there are unfulfilled public orders. Can cause investing public to lose confidence in equity system.

8. New Issue Marketplace, Investment Banking, Types of Underwritings Continued Green shoe clause- hot issues may include clause whereby member firm can buy additional shares not to exceed 15% from the issuer. Stabilization- to prevent precipitous decline of undersubscribed issues; managing underwriter buys securities at or below IPO price.

9. Securities Act of 1933, The Registration Process, Tombstone Advertisements, & Blue-sky laws Securities Act of 1933 designed to provide information to purchasers of new securities regarding issuer & prevent fraud in the sale of securities in the primary market. SEC responsible for enforcement of act. Issuers required to register securities with SEC if mails or interstate commerce used to market & provide purchasers with prospectus informing potential purchasers of details.

10. Securities Act of 1933, The Registration Process, Tombstone Advertisements, & Blue-sky laws Continued No approval clause- Front page of prospectus has statement that SEC doesn’t pass on adequacy or accuracy of prospectus. Filing date- day SEC receives registration statement. Cooling off period- 20 day period after SEC receives registration statement and they review information.

11. Securities Act of 1933, The Registration Process, Tombstone Advertisements, & Blue-sky laws Continued Registration Statement Includes: 1.Description of issuers business 2.Shareholdings of senior officers, directors, and underwriters, and identification of people holding at least 10% of issuers securities. 3.Biographical data of officers and directors 4.Issuers capitalization raised in offerings 5.Specific uses of proceeds of issuance 6.Certified financial statements

12. Securities Act of 1933, The Registration Process, Tombstone Advertisements, & Blue-sky laws Continued Deficiency letter- SEC postpones effective date of registration due to material deficiencies in registration. Stop order- prohibits sale of securities. Investors can sue officers, directors, principals, & underwriters if registration has material omissions, errors, or misrepresentations of facts.

13. Securities Act of 1933, The Registration Process, Tombstone Advertisements, & Blue-sky laws Continued Red Herring- issued by SEC during 20 day cooling off period that registration filed but not yet effective. Red herring may have a range of prices, but not a specific price; and no orders can be accepted, but a general sense of interest in offering can be obtained.

14. Securities Act of 1933, The Registration Process, Tombstone Advertisements, & Blue-sky laws Continued Tombstone Advertisement- syndicate runs advertisement in fincl. periodicals. Managing member of sydicates name on top, other syndicate members listed alphabetically by size of participation. Due diligence meeting- just prior to final prospectus, underwriter, accountant, attorney, officers, and syndicate members meet to discuss due diligence in respect to federal and state laws.

15. Securities Act of 1933, The Registration Process, Tombstone Advertisements, & Blue-sky laws Continued Final prospectus must be distributed to any customers for 25 days from the effective date; listing effective and final offering price. Registered Representatives cannot highlight any part of the final prospectus, as this could be interpreted that highlighted information is more important than non-highlighted.

16. Securities Act of 1933, The Registration Process, Tombstone Advertisements, & Blue-sky laws Continued

17. Exempt securities, Rules144,145,&147, Regulations A & D Securities Exempted from 1933 Act 1.US Govnmt & GSA 2.Municipal Securities 3.Non-Profit 4.Short term corporate debt 5.Securities of domestic banks & trusts 6.Securities issued by small business investment companies 7.All securities are subject to anti-fraud provisions of act, even when otherwise exempted

18. Exempt securities, Rules144,145,&147, Regulations A & D Continued Rule 147- exemption permitted to securities sold within the borders of one state, provided instruments of interstate commerce not used to sell the offering. Rule 147 also has to have; 1.80% gross revenues derived from that state 2.80% of companies assets located in state 3.80% of proceeds of offering expand facilities in state 4.100% of purchasers are principal residents of state

19. Exempt securities, Rules144,145,&147, Regulations A & D Continued Regulation A- new issues of $5,000,000 and less sold over 12 month period exempt, except, filing offering statement with SEC & offering circular needs to be provided to prospective purchasers. Advantages are lower legal and filing fees.

20. Exempt securities, Rules144,145,&147, Regulations A & D Continued Regulation D- exempts corporation from registration if; 1.Issuer believes buyer is sophisticated investor. 2.Buyer has access to same information normally found in prospectus. 3.Issuer assured in writer buyer not interested in quickly reselling securities. 4.Securities not sold to more than 35 non-accredited investors. Accredited investors fincl institution or private business development company. Accredited investors also include individuals who have net worth of $1,000,000 and gross income of $200,00 for each of last two years.

21. Exempt securities, Rules144,145,&147, Regulations A & D Continued Rule 144 Restricted stock- not registered and typically acquired through private placement. Control stock- acquired by associated person, for instance a director.