Series 24 - Investment Banking
Hart-Scott-Rodino Act - correct answer ✔✔Requires that a merger or takeover transaction that exceeds
certain value thresholds must be filed with the FTC and Department of Justice - Anti-Trust Department,
for their review of the deal's effect on competition. A 30-day waiting period must be completed without
comment from these regulators before the deal can proceed.
- $200 million takeover adjusted for inflation
- takeover valued between $50 and 200 million only if the 10/100 test applies (inflation adjusted $10m =
20.2m, $50m = 101m, 100m=202m, 200m = 403.9m)
Does not apply to mergers or takeovers valued at $50 million or less
red herring prospectus - correct answer ✔✔Used during the "20-day cooling off period" to solicit
indications of interest.
It is not considered an offer to sell - this can only be done through the final prospectus which is available
as of the effective date.
The "red herring" does not contain the final offering price. On its cover, there is no price; or simply an
estimated price or price range. The final price is not set until just prior to the effective date and this price
is printed on the final prospectus.
Cooling-off period - correct answer ✔✔The 20 day minimum time period (after the preliminary
prospectus is filed with the SEC) before the issue becomes effective.
During this time:
Selling group members are brought in to enhance the sale of the distribution
The issue is Blue Skied
Due Diligence meeting is held
Roadshows take place
,Tombstone ads are published
Distribution of the preliminary prospectus ("red herring") occurs
Spread - correct answer ✔✔The difference between the proceeds paid to the issuer and the public
offering price
Some will be paid to the managing underwriter and then distributed amongst the syndicate members
and selling group.
Includes:
The manager's fee
Underwriting compensation
Selling concession
Reallowance
Negotiated Underwriting - correct answer ✔✔Underwriting of new securities issue in which the SPREAD
between the purchase price paid to the issuer and the public offering price is determined through
negotiation rather than competitive bidding. The spread, which represents the compensation to the
investment bankers participating in the underwriting (called the syndicate), is negotiated between the
issuing company and the MANAGING UNDERWRITER, with the consent of the group.
Used for equity offerings.
Competitive bidding - correct answer ✔✔Used for municipal or debt securities
All bids are sealed and the issuer will award the underwriting to the firm offering the lowest interest rate
Combination distribution - correct answer ✔✔Primary + Secondary Distribution
New shares are being offered by the corporation and shared are being offered by officers or
shareholders.
,Note: If a customer wants to purchase these shares on margin during a combo offering, "secondary
shares" must be designated on the order ticket.
Secondary Distribution - correct answer ✔✔Redistribution of a large block of securities typically held by
a few owners (insiders and institutions)
These securities have already been through primary distribution so they can be purchased on margin
and proceeds are paid to the sellers.
Primary Distribution - correct answer ✔✔Distribution of authorized but previously un-issued shares to
the public. This can be an IPO or a follow-on offering.
CANNOT be purchased on margin
Requires SEC registration before being sold to the public
Market-Out Clause - correct answer ✔✔Escape clause sometimes written into FIRM COMMITMENT
underwriting agreements which essentially allows the underwriters to be released from their purchase
commitment if material adverse developments affect the securities markets.
Green Shoe Provision - correct answer ✔✔Allows the syndicate to purchase an additional 15% of the
issue from the issuer at the public offering price less the spread
Allows the issue to be oversubscribed
Provides some protection for the underwriters as they perform their price stabilization function.
FINRA notification is required when initiating.
Generally used in Firm underwriting commitments.
, C Corporation - correct answer ✔✔Taxable entity that pays tax on any net income and offer limited
liability to shareholders (the most that can be lost is the investment)
"Double taxed" - if cash dividends are paid from "after-tax" income, the shareholders must include this
on their tax returns
Can issue common and preferred stock and bonds
S corporation - correct answer ✔✔A corporation that has fewer than 100 shareholders (individuals only)
that are not taxable entities.
Taxes flow to the shareholders personal tax returns
Common stock only
Limited Liability Corporation - correct answer ✔✔Neither a corporation or partnership; Members can
take a management role without being considered to be general partners
Limited liability
All income and loss is reportable to members' tax returns
Limited Partnership - correct answer ✔✔A partnership with one or more general partners and one or
more limited partners.
General partner is the manager of the venture and takes on unlimited liability. Limited partners are
passive and take on limited liability.
Master Limited Partnership (MLP) - correct answer ✔✔A partnership that is allowed to raise money by
selling units of ownership to the general public
Hart-Scott-Rodino Act - correct answer ✔✔Requires that a merger or takeover transaction that exceeds
certain value thresholds must be filed with the FTC and Department of Justice - Anti-Trust Department,
for their review of the deal's effect on competition. A 30-day waiting period must be completed without
comment from these regulators before the deal can proceed.
- $200 million takeover adjusted for inflation
- takeover valued between $50 and 200 million only if the 10/100 test applies (inflation adjusted $10m =
20.2m, $50m = 101m, 100m=202m, 200m = 403.9m)
Does not apply to mergers or takeovers valued at $50 million or less
red herring prospectus - correct answer ✔✔Used during the "20-day cooling off period" to solicit
indications of interest.
It is not considered an offer to sell - this can only be done through the final prospectus which is available
as of the effective date.
The "red herring" does not contain the final offering price. On its cover, there is no price; or simply an
estimated price or price range. The final price is not set until just prior to the effective date and this price
is printed on the final prospectus.
Cooling-off period - correct answer ✔✔The 20 day minimum time period (after the preliminary
prospectus is filed with the SEC) before the issue becomes effective.
During this time:
Selling group members are brought in to enhance the sale of the distribution
The issue is Blue Skied
Due Diligence meeting is held
Roadshows take place
,Tombstone ads are published
Distribution of the preliminary prospectus ("red herring") occurs
Spread - correct answer ✔✔The difference between the proceeds paid to the issuer and the public
offering price
Some will be paid to the managing underwriter and then distributed amongst the syndicate members
and selling group.
Includes:
The manager's fee
Underwriting compensation
Selling concession
Reallowance
Negotiated Underwriting - correct answer ✔✔Underwriting of new securities issue in which the SPREAD
between the purchase price paid to the issuer and the public offering price is determined through
negotiation rather than competitive bidding. The spread, which represents the compensation to the
investment bankers participating in the underwriting (called the syndicate), is negotiated between the
issuing company and the MANAGING UNDERWRITER, with the consent of the group.
Used for equity offerings.
Competitive bidding - correct answer ✔✔Used for municipal or debt securities
All bids are sealed and the issuer will award the underwriting to the firm offering the lowest interest rate
Combination distribution - correct answer ✔✔Primary + Secondary Distribution
New shares are being offered by the corporation and shared are being offered by officers or
shareholders.
,Note: If a customer wants to purchase these shares on margin during a combo offering, "secondary
shares" must be designated on the order ticket.
Secondary Distribution - correct answer ✔✔Redistribution of a large block of securities typically held by
a few owners (insiders and institutions)
These securities have already been through primary distribution so they can be purchased on margin
and proceeds are paid to the sellers.
Primary Distribution - correct answer ✔✔Distribution of authorized but previously un-issued shares to
the public. This can be an IPO or a follow-on offering.
CANNOT be purchased on margin
Requires SEC registration before being sold to the public
Market-Out Clause - correct answer ✔✔Escape clause sometimes written into FIRM COMMITMENT
underwriting agreements which essentially allows the underwriters to be released from their purchase
commitment if material adverse developments affect the securities markets.
Green Shoe Provision - correct answer ✔✔Allows the syndicate to purchase an additional 15% of the
issue from the issuer at the public offering price less the spread
Allows the issue to be oversubscribed
Provides some protection for the underwriters as they perform their price stabilization function.
FINRA notification is required when initiating.
Generally used in Firm underwriting commitments.
, C Corporation - correct answer ✔✔Taxable entity that pays tax on any net income and offer limited
liability to shareholders (the most that can be lost is the investment)
"Double taxed" - if cash dividends are paid from "after-tax" income, the shareholders must include this
on their tax returns
Can issue common and preferred stock and bonds
S corporation - correct answer ✔✔A corporation that has fewer than 100 shareholders (individuals only)
that are not taxable entities.
Taxes flow to the shareholders personal tax returns
Common stock only
Limited Liability Corporation - correct answer ✔✔Neither a corporation or partnership; Members can
take a management role without being considered to be general partners
Limited liability
All income and loss is reportable to members' tax returns
Limited Partnership - correct answer ✔✔A partnership with one or more general partners and one or
more limited partners.
General partner is the manager of the venture and takes on unlimited liability. Limited partners are
passive and take on limited liability.
Master Limited Partnership (MLP) - correct answer ✔✔A partnership that is allowed to raise money by
selling units of ownership to the general public
