Known as the Paper Act
Regulates New Issues
Enacted to prevent Fraud in the sale of securities
New issues must register with the SEC (unless exempt)
Filing date: Registration Statement filed with the SEC
20-day cooling-off period: gives SEC time to review the Registration Statement
What is an Issuer?
- Any person who issues or proposes to issue a
security - That means any entity that develops, registers,
and sells securities to investors for the purpose of financing its operations - Corporations
- U.S. government and its agencies
- State and local governments
What is a Non-issuer?
- Any person who is not the issuer
- Broker/dealer
- Agent
Registration Statement (S-1)
Must be filed with the SEC and contains the following:
- Describes the
Issuers business - Shareholdings of
Officers, Directors, and Insiders - Biographical data
on officers and directors - Issuers
capitalization (financial statements) - Proposed usage of
the issues proceeds
The SEC may issue a:
- Deficiency letter
- Stop order
Prospectus
Must contain a disclosure on the front cover
These securities have not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed on the accuracy or adequacy of this prospectus. No state has approved or disapproved this offering. Any representation to the contrary is a criminal offense.
Section 1
Prospectus or N1-A summary prospectus
Must be furnished to every person to whom the company offers the securities
Section 2
Statements of additional information (SAI)
Does not need to be made with every purchaser of the securities, however must be made available upon request
The prospectus must include:
A description of the offering
The offering price
Selling discounts
The offering date
Use of the proceeds
Description of the underwriting method, but not the contract
Statement of the possibility that the issuer’s price may be stabilized
A history of the business
Risks to the purchasers
Description of the management
Material financial statements
A legal opinion concerning the formation of the corporation
SEC disclaimer
An SEC review (due diligence meeting findings)
Registration timeline:
Prior to registration:
No sales may be solicited and no prospectus may circulate
Day 1 Filing date of the registration statement with the SEC
20 day cooling off period begins
Tombstone ad may be published in financial periodicals
Red herring prospectus is used to gauge buyer’s interest
No solicitations may be made
Due diligence meeting is held
Day 30 Effective date of registration statement
Sales can now be solicited
Final prospectus is used
Day 55 Final prospectus is delivered to investors
Securities Markets
A Securities market is the location or system in which trades of securities occur. The term “Wall Street” is sometimes used to represent the collective marketplace in which employees and customers of the financial industry interact to buy and sell stocks, bonds, and other instruments.
There two stages in which corporate stocks and bonds are marketed:
- The New Issue (Primary) Market – Where stocks are first issued (IPO’s, Primary Offerings)
- The Secondary Market – When stocks are sold as previously issued securities (“used securities”)
Types of Underwriting Methods
- Best Efforts
- Underwriter acts as an Agent and sells as many shares as possible
- Issuer bears the risk
- All or None
- Underwriter acts an Agent and sells the entire issue or all sales are cancelled
- Issuer bears the risk
- Mini-Maxi Agreement
- Corporation can specify that a minimum amount of securities be sold in order to generate a certain level of capital
- Issuer bears the risk
- Standby Underwriter
- Underwriter act as a Dealer and buys shares remaining after preemptive rights offering
- Risk shifts to the Underwriter
- Firm Commitment
- Underwriter acts as a dealer and buys the entire issue
- Underwriter bears the risk
Parties associated with the New Issue Market
- Issuer
- Needs to raise capital by offering a new issue to the public
- Investment Banker (Underwriter) 10%
- Enters into a written agreement to underwrite the new issue
- Selling Syndicate 15%
- Formed by the Investment Banker to help sell the new issue
- Selling Group Members 75%
- Selected additional Broker-Dealers
The percentages represent how much the parties associated with a new issue get compensated. The compensation is based upon the markup or spread.
Final prospectus must be delivered to customers within 25 days of the effective date
For OTC securities not listed on NASDAQ, 90 days after the effective date. (IPO)
Previously issued stock, 40 days
Investment company prospectuses must be updated at least every 13 months
The Secondary Markets
- A security that has been previously sold and is now being resold to another investor is identified as a secondary transaction. The place that an investor goes to sell or purchase “used stock” is referred as the secondary marketplace.
Four Markets for Secondary Transactions
- Exchange Market
- Secondary Auction markets dealing in listed securities
- The OTC Market (OTC unlisted)
- Negotiated market dealing in unlisted securities
- The Third Market
- Negotiated market dealing with exchange listed securities
- Institutional investors trading large blocks of stocks
- The Fourth Market (Instinet)
- Negotiated market dealing with both listed and unlisted securities
- Institutional Investors trading large blocks of stocks
Market Terminology
NYSE member is an individual who has a seat on the exchange. A member firm must have an individual employee who owns a seat on the exchange.
Only NYSE members are permitted to trade on the exchange
NYSE members fall into one of the following four categories:
1. Commission House Broker/Floor Broker
- Executes orders for the firm or the firm’s clients
- Charges a commission to their clients
2. Two Dollar Broker
- Executes orders for floor brokers
- Charges a commission
3. Registered Competitive Trader
- Work for their own accounts
- If they have a client, they must place customer’s order first
4. Specialist
- A market maker for listed securities
- Their job is to maintain a fair and orderly marketplace
Definitions
Market Maker
- Deals with unlisted securities
- Professional OTC securities dealers who “make” a market by providing continuous bids and offers in a particular security
Exempt Issuers and Securities
- Government issues
- Municipal
Securities - Issues of
nonprofit organizations - Commercial paper
with maturities of less than 270 days - Bankers’
Acceptance with maturities of less than 270 days - Issues of
domestic banks and trust companies - Issues of small
business investment companies - Private
Placements (restricted stock/letter stock under regulation D) - Still subject to
anti-fraud provisions
NASDAQ
- National Association of Securities Dealers Automated
Quotation System - A computer system run by FINRA that provides member firms
with quotations for over 5,000 OTC securities. - The largest securities market in the U.S
Three Levels of NASDAQ
- Level I
- Available to registered reps
- Lists highest bids and lowest asks
- Level II
- FINRA subscribers only
- Provides current quote and quote size
- Level III
- Allows market makers to change or delete quotes
- Allows quote input