Section 1
Function 1: Seeks Business for the Broker-Dealer
New issues and underwriting
54 min read
· Lesson 2 of 2
About This Lesson
Chapter 1 covered how firms talk to the public; this chapter covers how firms bring securities to the public. A new issue moves through a fixed sequence, registration with the SEC, a cooling-off period, syndicate formation, pricing, and distribution, and the exam tests that sequence by asking two questions over and over: what is permitted at this stage, and who bears the risk at this link in the chain? Hold on to those two questions and most of this chapter answers itself.
What you'll cover
- SEC registration and review, the cooling-off period, the red herring versus the final prospectus, and issuer versus nonissuer transactions
- underwriting commitments (firm commitment, best efforts, all-or-none), the syndicate and selling group, the spread, and stabilization with the green shoe
- exempt securities and exempt transactions: Reg A, Reg D private placements, Rule 144, Rule 147, plus accredited investors and QIBs
This is the second chapter of the course.
In this chapter
54 min · 14 concept checks
Section 1 of 3
~14 min · 5 concept checks
Registration, Cooling-Off & Issuer Classification
The Path from Private to Public: SEC Registration Process
When a company wants to raise capital from the general public by selling securities, it must register those securities with the SEC under the Securities Act of 1933. The rules governing what issuers and underwriters can say — and can't say — at each stage are among the most heavily tested topics on the Series 7.
1
Pre-filing period
Before SEC filing
Due diligence
Select underwriters
Draft registration statement
No offers or sales
No market conditioning publicity
2
Cooling-off period (waiting period)
At least 20 calendar days after filing
Distribute red herring (preliminary prospectus)
Take indications of interest
Hold road shows
No binding sales
No final prospectus
No confirmed orders
3
Post-effective period
After SEC declares registration effective
Accept binding orders
Execute sales
Deliver final prospectus
Cannot sell without final prospectus delivery
SEC Review — What the SEC Does and Does NOT Do
Start with a trap the exam sets over and over: the SEC does NOT approve or disapprove securities offerings, ever. Every registration question is really probing whether you know the precise, limited thing the SEC actually does:
What the SEC does:
• Reviews the registration statement for completeness and accuracy
• Issues comments and requires amendments if disclosures are inadequate
• Clears or releases the registration when review is complete — making the registration "effective"
What the SEC does NOT do:
• The SEC does not approve, recommend, or endorse any security
• The SEC does not pass judgment on the merit, accuracy, or investment quality of the offering
• Effective registration is NOT a stamp of approval; it merely permits the security to be sold legally
• Reviews the registration statement for completeness and accuracy
• Issues comments and requires amendments if disclosures are inadequate
• Clears or releases the registration when review is complete — making the registration "effective"
What the SEC does NOT do:
• The SEC does not approve, recommend, or endorse any security
• The SEC does not pass judgment on the merit, accuracy, or investment quality of the offering
• Effective registration is NOT a stamp of approval; it merely permits the security to be sold legally
SEC disclaimer requirement: every prospectus carries a front-cover disclaimer stating that the SEC has not approved or disapproved the securities and has not passed on the accuracy of the prospectus. The moment an answer choice says the SEC "approved" or "endorsed" an issue, you can eliminate it.
Cooling-Off Period
Between the filing of the registration statement and its effective date sits the cooling-off period, typically a minimum of 20 days, and the exam cares intensely about what is and is not allowed inside it:
- The preliminary prospectus (red herring) may be distributed to gather indications of interest.
- No sales may be made and no payments may be accepted.
- Tombstone advertisements may identify the security but cannot constitute offers.
- The final offering price is determined near or at the effective date and printed in the final prospectus.
Issuer vs Nonissuer Transactions
Before anything else in a new-issue question, follow the money: who receives the sale proceeds? That one answer classifies the transaction as primary (issuer) or secondary (nonissuer) and tells you which regulatory framework applies.
Issuer Transaction
The issuing company receives the sale proceeds. Includes IPOs, follow-on offerings, and treasury stock resales. Always a primary market transaction. Subject to Securities Act of 1933 registration requirements unless an exemption applies.
Nonissuer Transaction
An existing shareholder receives the proceeds, not the issuing company. Standard secondary market trading. Subject to Securities Exchange Act of 1934 framework rather than the 1933 Act’s primary market provisions.
Treasury stock exception: when a company resells treasury stock, the company receives the proceeds, which makes it an issuer transaction. But those shares were previously issued and reacquired, so a treasury resale is not an IPO and not a primary offering of newly created shares.
An IPO is always an issuer transaction. By definition, an initial public offering is the issuer selling shares to the public for the first time, with the proceeds going to the issuing company.
Common Mistake: Confusing the Preliminary and Final Prospectus
The preliminary prospectus, the red herring, circulates during the cooling-off period to gauge investor interest, but it cannot be used to accept binding orders, and it is missing two things: the offering price and the effective date.
The final prospectus contains the offering price and must reach every buyer no later than the time of confirmation of sale. For certain IPOs, Rule 15c2-8 goes further and requires delivery at least 48 hours before confirmation.
On the exam: when a question says "during the cooling-off period," only three things are on the table: distributing the preliminary prospectus, holding road shows, and taking indications of interest. No binding sales, no final prospectus, no accepting checks.
The preliminary prospectus, the red herring, circulates during the cooling-off period to gauge investor interest, but it cannot be used to accept binding orders, and it is missing two things: the offering price and the effective date.
The final prospectus contains the offering price and must reach every buyer no later than the time of confirmation of sale. For certain IPOs, Rule 15c2-8 goes further and requires delivery at least 48 hours before confirmation.
On the exam: when a question says "during the cooling-off period," only three things are on the table: distributing the preliminary prospectus, holding road shows, and taking indications of interest. No binding sales, no final prospectus, no accepting checks.
Concept Check
During the cooling-off period for a new equity offering, which of the following activities is permitted?
The cooling-off period (at least 20 calendar days after SEC filing) permits distributing the preliminary prospectus (red herring), holding road shows, and collecting non-binding indications of interest. No binding orders may be accepted, and the final prospectus may not yet be delivered because the registration statement is not effective and the final offering terms, including the price, have not been set. Tombstone ads during this period therefore cannot include the offering price.
Concept Check
During the cooling-off period of an IPO, a registered representative may:
During the cooling-off period (between the filing date and the effective date), the underwriter and registered reps may distribute the preliminary prospectus — also called the red herring — and collect non-binding indications of interest. They cannot accept orders, confirm sales, or deliver the final prospectus until the registration statement becomes effective. The final prospectus must accompany or precede any confirmation of sale.
Concept Check
A red herring (preliminary prospectus) is distributed during the cooling-off period to gather indications of interest from prospective investors. Which of the following is NOT in the red herring document?
The final offering price is NOT in the red herring. The red herring is distributed during the cooling-off period before the registration becomes effective and before the final offering price is set. The final price is determined near or at the effective date based on market conditions and the indications of interest gathered during cooling-off. The final price appears in the final prospectus delivered to investors at confirmation. The red herring contains security descriptions, business and management information, material risk factors, and use of proceeds.
Concept Check
An initial public offering (IPO) is always classified as which type of transaction in the new-issue securities marketplace?
An IPO is always an issuer transaction. The defining characteristic of an IPO is the issuing company selling shares to the public for the first time, with the sale proceeds flowing directly to the company itself as new capital. Nonissuer transactions involve existing shareholders selling to other investors, with no proceeds reaching the company — this is secondary market activity, not an IPO. Treasury stock resales are issuer transactions but not IPOs because the shares were previously issued. Follow-on offerings come after an IPO and add additional shares to an already-public company.
Concept Check
A corporation resells treasury stock that it had previously repurchased from the open market. The resale transaction is best characterized in regulatory terms as which of the following?
A treasury stock resale is an issuer transaction because the company itself receives the proceeds from the sale. The company reissues shares it had previously bought back, with the new buyers paying the company directly. However, treasury stock resales are NOT considered primary offerings of new shares because the shares were previously issued and are simply being reissued from the company treasury. The exam tests whether candidates can hold both concepts simultaneously: issuer transaction yes, primary offering of new shares no. The transaction is also not a nonissuer transaction since proceeds reach the issuer.
Section 2 of 3
~16 min · 4 concept checks
Underwriting Commitments, Syndicate & Spread
Types of Underwriting Commitments
When a broker-dealer agrees to underwrite a new issue, the type of commitment it makes determines who bears the financial risk if shares go unsold.
Firm commitment
Underwriter buys the entire issue and resells it. Unsold shares stay with the underwriter.
Underwriter bears risk
Best efforts
Acts as agent — sells as much as possible. Unsold shares returned to issuer.
Issuer bears risk
All-or-none
Best efforts, but deal cancelled entirely if not fully subscribed. All funds returned.
Issuer bears risk
Mini-max
Best efforts with a floor (minimum) and ceiling (maximum). Proceeds only if minimum met.
Issuer bears risk
Standby
Used in rights offerings. Underwriter buys any shares not exercised by existing shareholders.
Underwriter bears risk
The Syndicate: Roles, Risk, and Compensation
Large offerings are too big for any single broker-dealer to handle. The syndicate brings multiple firms together. Each firm's compensation reflects exactly how much risk it takes on.
Issuer
Sells securities, receives net proceeds after spread
Managing (lead) underwriter
Runs the deal — due diligence, pricing, book-building, allocations
Management fee
Additional takedown
Selling concession
Syndicate members
Take proportional underwriting risk; sell their allocation
Additional takedown
Selling concession
Syndicate members
Take proportional underwriting risk; sell their allocation
Additional takedown
Selling concession
Selling group
Sells shares as agent — no underwriting risk, no unsold share obligation
Selling concession only
Selling group
Sells shares as agent — no underwriting risk, no unsold share obligation
Selling concession only
Underwriting Methods and Syndicate Structure
Three separate distinctions stack up here, and the exam tests every one of them the same way: by asking who carries the risk. Keep that question in front of you as you read.
Negotiated vs Competitive Underwriting
Negotiated Underwriting
The issuer selects an investment bank as syndicate manager and negotiates terms directly. Most corporate offerings use this approach. The syndicate manager acts as lead underwriter and assembles the syndicate to spread risk.
Competitive Underwriting
The issuer solicits sealed bids from competing syndicates. Most municipal general obligation bonds use this method. The lowest interest cost bid wins the underwriting business.
Syndicate Members vs Selling Group Members
Syndicate members commit to purchase a specified portion of the issue from the issuer. They put their own capital at risk and act in a principal capacity: if the shares cannot be resold to the public, the syndicate owns the inventory.
Selling group members make no purchase commitment to the issuer. They act as agents with no financial liability; they help distribute shares but bear no inventory risk if the offering does not sell.
Selling group members make no purchase commitment to the issuer. They act as agents with no financial liability; they help distribute shares but bear no inventory risk if the offering does not sell.
Firm Commitment vs Best Efforts
Firm Commitment: Underwriter agrees to purchase ALL securities from the issuer. Underwriter bears the full risk of resale. If the public does not buy, the underwriter owns the unsold shares.
Best Efforts: Underwriter agrees only to use best efforts to sell the securities. No obligation to purchase unsold shares. The issuer bears the risk of an undersold offering. Common in smaller or speculative offerings.
All-or-None: A best-efforts variant where the offering is canceled if the entire issue cannot be sold. Investor funds are returned if the threshold is not met.
The Underwriting Spread: Total Takedown, Additional Takedown, and Selling Concession
The underwriting spread is the difference between the public offering price and what the issuer receives. It is divided into three components — and the relationships between them generate multiple Series 7 exam questions.
Public offering price = $20.00
← Spread →
← Total takedown →
Management fee
Paid to the managing underwriter only. Compensation for running the deal.
Additional takedown
Retained by syndicate members even when a selling group member makes the sale. The selling group keeps the concession; the syndicate keeps the additional takedown.
Selling concession
Largest component. Paid to whoever distributes shares — syndicate members AND the selling group.
Spread = Public offering price − Issuer proceeds
Total takedown = Additional takedown + Selling concession
Additional takedown = Compensation to syndicate members for bearing underwriting liability (above the concession)
Selling group earns selling concession only (no additional takedown, no management fee)
Total takedown = Additional takedown + Selling concession
Additional takedown = Compensation to syndicate members for bearing underwriting liability (above the concession)
Selling group earns selling concession only (no additional takedown, no management fee)
Eastern vs. Western Account: Syndicate Liability
When a syndicate member has sold its entire allotment, does it still have liability for unsold bonds? The answer depends entirely on whether the syndicate is an eastern (undivided) or western (divided) account.
Eastern account
Undivided account
More common
Each member is liable for their own allotment plus a proportional share of any unsold bonds — even after selling their entire allocation.
Example: Firm A has 20% of a $10M deal and sells its full $2M. $1M remains unsold. Firm A still owes $200K (20% of $1M unsold).
Western account
Divided account
Less common
Each member is liable only for its own allotment. Once a firm sells its allocation, its obligation ends — period.
Example: Firm A has 20% of a $10M deal and sells its full $2M. $1M remains unsold. Firm A owes nothing — its obligation ended.
Exam trap: The question describes a firm that has sold its
entire allotment and asks whether it has remaining liability. In an eastern (undivided)
account — yes. In a western (divided) account — no.
Eastern = undivided = more risk per member.
The One Question You Will Definitely See: Selling Group vs. Syndicate
FINRA loves to test the line between the selling group and the syndicate with one targeted question: "A firm is in the selling group but NOT a member of the syndicate. What does it earn?"
Answer: The selling concession only.
The selling group acts as an agent. It sells shares but takes no underwriting risk, so it earns no management fee and no additional takedown. Syndicate members are principals who actually purchase the securities from the issuer and assume the risk of unsold shares, and they keep the full takedown, additional takedown plus selling concession, on the shares they sell. The management fee belongs to the managing underwriter alone. Hold that line and you own this question every time it appears.
FINRA loves to test the line between the selling group and the syndicate with one targeted question: "A firm is in the selling group but NOT a member of the syndicate. What does it earn?"
Answer: The selling concession only.
The selling group acts as an agent. It sells shares but takes no underwriting risk, so it earns no management fee and no additional takedown. Syndicate members are principals who actually purchase the securities from the issuer and assume the risk of unsold shares, and they keep the full takedown, additional takedown plus selling concession, on the shares they sell. The management fee belongs to the managing underwriter alone. Hold that line and you own this question every time it appears.
Market Stabilization: The Green Shoe and Regulation M
Once a new issue starts trading, the managing underwriter is permitted to stabilize the price by placing a bid at or below the offering price, so the stock does not immediately break below the IPO price. This is a narrow, deliberate exception to the general ban on price manipulation, carved out under Regulation M.
The Green Shoe (Over-Allotment Option): the managing underwriter typically holds an option to sell up to 15% more shares than the original offering size, and the option works in both directions. If the stock trades above the offering price, demand is strong, so the underwriter exercises the option and buys the extra shares from the issuer. If the stock trades below, the underwriter instead buys shares in the open market, stabilizing the price and covering the over-allotment short position without ever exercising the option.
Key rule: stabilizing bids can never sit above the offering price. The goal is support, not artificial inflation.
Once a new issue starts trading, the managing underwriter is permitted to stabilize the price by placing a bid at or below the offering price, so the stock does not immediately break below the IPO price. This is a narrow, deliberate exception to the general ban on price manipulation, carved out under Regulation M.
The Green Shoe (Over-Allotment Option): the managing underwriter typically holds an option to sell up to 15% more shares than the original offering size, and the option works in both directions. If the stock trades above the offering price, demand is strong, so the underwriter exercises the option and buys the extra shares from the issuer. If the stock trades below, the underwriter instead buys shares in the open market, stabilizing the price and covering the over-allotment short position without ever exercising the option.
Key rule: stabilizing bids can never sit above the offering price. The goal is support, not artificial inflation.
Concept Check
In a negotiated underwriting, the investment banker who negotiates the terms of the offering directly with the issuing company is known as which of the following roles?
The investment banker who negotiates terms with the issuer in a negotiated underwriting is the syndicate manager. The syndicate manager acts as the lead underwriter, sets pricing in consultation with the issuer, assembles the syndicate of co-underwriters who share the offering risk, and coordinates the entire underwriting process. Selling group manager is not a standard term — selling group members are agents added later to help distribute shares. Investment manager is a portfolio management role unrelated to underwriting. Negotiating manager is not a recognized industry term.
Concept Check
A broker-dealer participating in an underwriting wants to limit its financial liability and avoid principal-capacity inventory risk on the offering. The broker-dealer should participate in which capacity for the underwriting transaction?
Selling group members act as agents with no commitment to purchase securities from the issuer. They have no financial liability for unsold shares and bear no inventory risk if the offering does not sell completely. This is the appropriate role for a broker-dealer wanting to participate in distribution without principal-capacity exposure. Syndicate members commit to purchase a specified portion and act as principals — this carries the financial liability the broker-dealer wants to avoid. Syndicate managers carry the largest principal exposure as lead underwriter. Standby underwriters specifically commit to purchase unsold shares.
Concept Check
A broker-dealer that is a member of the selling group for a new offering, but is NOT a member of the underwriting syndicate, will receive which component(s) of the underwriting spread?
The selling group earns only the selling concession — the per-share fee for distributing securities to investors. Selling group members act as agents and take no underwriting risk, so they receive no management fee (paid only to the managing underwriter) and no additional takedown (paid only to syndicate members who actually purchase the securities from the issuer and assume risk of unsold shares).
Concept Check
A syndicate member in a firm commitment underwriting sells securities to the public above the agreed public offering price. This violates which FINRA rule?
FINRA Rule 5141 prohibits syndicate members in a fixed-price offering from selling securities at a price higher than the public offering price stated in the prospectus. In a firm commitment deal, the entire syndicate agrees to sell at the POP. Selling above this price violates the integrity of the offering and the agreement among syndicate members. Violations can result in penalties including being removed from the syndicate.
Section 3 of 3
~16 min · 5 concept checks
Exempt Securities & Exempt Transactions
Exempt Securities vs. Exempt Transactions
The Securities Act of 1933 requires SEC registration for most new securities offerings, but there are two categories of exceptions. Understanding the distinction is fundamental.
Exempt securities
The type of security itself is exempt — never needs to register
U.S. government and agency securities (Treasuries, GNMA, FNMA)
Municipal securities (issued by states and local governments)
Short-term corporate debt maturing within 270 days (commercial paper)
Securities of banks regulated by federal banking agencies
Securities of non-profit organizations (churches, charities)
Exempt transactions
The method of offering provides the exemption — see card grid below
Regulation D (private placements under Rule 506(b) and 506(c))
Regulation A+ (Tier 1: $20M max; Tier 2: $75M max)
Rule 144A (resale to QIBs only)
Intrastate offering (Rule 147 — within one state only)
Accredited Investors and QIBs — Know the Thresholds Cold
Two investor categories appear constantly on the Series 7. The thresholds are the exam trap — don't confuse accredited investor with QIB.
Accredited investor
Used in: Reg D (Rule 506(b) and 506(c))
Individual — income
$200K income (or $300K joint) in each of the last 2 years, with expectation of same
Individual — net worth
Net worth over $1M, excluding primary residence
Entity
Total assets over $5M — not formed for the specific purpose of investing
Trap: The $1M net worth test excludes the primary residence.
Qualified institutional buyer (QIB)
Used in: Rule 144A resales
Institution threshold
Owns and invests at least $100M in securities of unaffiliated issuers in the ordinary course of business
Broker-dealer threshold
Owns and invests at least $10M (lower threshold for registered broker-dealers)
Individuals
Cannot qualify — QIBs are institutions only, regardless of net worth
Trap: High net worth individuals cannot be QIBs. The $100M threshold is institutional only.
Restricted — qualified investors only
Semi-open — simplified registration
Open — general public permitted
Reg D — Rule 506(b)
Restricted
No general solicitation · Unlimited raise · No SEC registration
Who: Unlimited accredited + up to 35 sophisticated non-accredited
Reg D — Rule 506(c)
Restricted
General solicitation permitted · Unlimited raise · Must verify accreditation
Who: Accredited investors only
Reg A+ — Tier 1
Semi-open
Offering circular required · $20M max in 12 months · State review applies
Who: General public — no investor restrictions
Reg A+ — Tier 2
Semi-open
Offering circular required · $75M max · Ongoing reporting · State review preempted
Who: General public — no investor restrictions
Rule 144A
Restricted
Resale of unregistered securities · No holding period for QIBs · No SEC registration
Who: QIBs only ($100M+ in securities)
Intrastate — Rule 147
Open
Offering conducted entirely within one state · No federal registration
Who: Residents of that state only
Exempt Transactions — Reg A, Reg D, Rule 144, Rule 147
Regulation A (Reg A+) — Small/Medium Offerings
Regulation A gives small and mid-sized companies a lighter path to raising capital. The JOBS Act of 2012 expanded it into two tiers, which is why you will see it called "Reg A+":
- Tier 1: Up to $20 million in any 12-month period.
- Tier 2: Up to $75 million in any 12-month period.
A Reg A issuer files an offering circular with the SEC rather than a full registration statement, and investors receive the offering circular in place of a prospectus.
Regulation D — Private Placements
Regulation D exempts private placements from standard registration, and the exam tests the two flavors of Rule 506 against each other:
- Rule 506(b): Unlimited capital raise. Up to 35 non-accredited "sophisticated" investors plus unlimited accredited investors. No general solicitation. Sales reported on Form D filed with the SEC.
- Rule 506(c): Unlimited capital raise. ALL investors must be accredited, with verified accreditation. General solicitation permitted.
Rule 144 — Restricted and Control Stock Resales
When approaching a Rule 144 question, ask two things:
1. What kind of stock is being sold? Restricted (held in private placement) or Control (owned by an insider).
2. Who is selling it? An insider/affiliate or a noninsider/nonaffiliate.
Restricted stock has a 6-month holding period (1 year if non-reporting issuer). Control stock has volume limitations on sales but no holding period unless it is also restricted. Rule 144 limits noninsider affiliate sales to the greater of 1% of outstanding shares or the average weekly trading volume over the past 4 weeks.
1. What kind of stock is being sold? Restricted (held in private placement) or Control (owned by an insider).
2. Who is selling it? An insider/affiliate or a noninsider/nonaffiliate.
Restricted stock has a 6-month holding period (1 year if non-reporting issuer). Control stock has volume limitations on sales but no holding period unless it is also restricted. Rule 144 limits noninsider affiliate sales to the greater of 1% of outstanding shares or the average weekly trading volume over the past 4 weeks.
Rule 147 — Intrastate Offerings
Rule 147 exempts purely intrastate offerings. The issuer must be incorporated in the state, do substantial business there, and sell only to residents of the state, and buyers cannot resell to non-residents for at least 6 months after purchase.
Rule 144: Resale of Restricted and Control Securities
Rule 144 governs how holders of restricted securities (received in private placements) and control securities (held by company affiliates) can resell them into the public market. This is separate from new issuances — it is a resale rule.
Restricted securities
Unregistered securities acquired through private placements, Reg D offerings, or directly from the issuer
Received in exchange for services or as compensation
Acquired in Reg D / Rule 506 private placements
Bear a restrictive legend on the certificate
Control securities
Securities held by affiliates of the issuer — regardless of how they were acquired
Officers and directors of the issuer
Shareholders owning 10% or more of outstanding shares
May be freely-traded shares — the holder's affiliate status controls
Rule 144 resale conditions
6 months
Holding period — reporting company (SEC-registered / public)
12 months
Holding period — non-reporting company (private issuer)
Volume limits
Max 1% of outstanding shares or avg weekly trading volume over past 4 weeks
Manner of sale
Must sell through broker transactions or directly with a market maker
Exam trap: An affiliate selling freely-traded (not restricted)
shares still must comply with Rule 144 volume limits — because they are a
control person, not because the shares are restricted. Rule 144 covers both types independently.
Interactive: What Type of Offering Is This?
Score: 0 / 8
📱 Tap a chip to select it, then tap a bucket to place it.
Drag or tap each scenario into the correct offering type
Registered (S-1)
Full SEC registration, prospectus to all investors
Regulation D
Private placement — accredited/sophisticated investors
Regulation A+
Mini-IPO — offering circular, $20M or $75M cap
Rule 144A
Unregistered resale to Qualified Institutional Buyers
Concept Check
Under Rule 506(b) of Regulation D, a private placement may include which of the following investor combinations?
Rule 506(b) permits an unlimited number of accredited investors plus up to 35 non-accredited investors — but those non-accredited investors must be sophisticated (i.e., they possess sufficient knowledge and experience to evaluate the investment). Rule 506(c) allows general solicitation but restricts participation to accredited investors only. Rule 506(b) prohibits general solicitation regardless of investor type.
Concept Check
Which of the following best describes a Qualified Institutional Buyer (QIB) under Rule 144A?
A QIB under Rule 144A is an institution — not an individual — that owns and invests at least $100 million in securities of unaffiliated issuers in the ordinary course of business. Individuals cannot qualify as QIBs regardless of net worth. Rule 144A permits the resale of unregistered securities to QIBs without SEC registration, providing a liquid secondary market for institutional private placement participants.
Concept Check
ABC Corporation wants to raise capital but is a small company raising less than $75 million. It wants to avoid full SEC registration. Which exemption is most appropriate?
Regulation A+ (Tier 2) allows companies to raise up to $75 million in a 12-month period through a simplified offering process, sometimes called a "mini-IPO." Unlike full registration, it allows public solicitation and sales to unaccredited investors with fewer ongoing reporting requirements. Regulation D is a private placement exemption that prohibits general solicitation and is limited to accredited investors. Rule 144A is a secondary market exemption for institutional buyers.
Concept Check
XYZ Inc. plans to use Regulation A to raise $8 million by offering common stock in its home state and three other states. To clear the offering for sale by the SEC, XYZ must file which of the following documents?
Regulation A offerings file an offering circular with the SEC rather than a full registration statement. The offering circular is the streamlined disclosure document developed for Reg A small and medium offerings, providing investor disclosures while reducing the cost burden compared to standard Form S-1 registration. Letters of notification were used before the JOBS Act updates. Standard registration statements are used for conventional registrations outside the Reg A framework. Reg A offerings are exempt from full registration but still require the offering circular filing and SEC clearance before sales can begin.
Concept Check
Sales made under the provisions of Rule 506(b) of Regulation D must be reported to the SEC on which of the following forms?
Reg D Rule 506(b) sales must be reported on Form D, filed with the SEC within 15 days after the first sale of securities under the exemption. Form D is the standard notice of exempt offerings under Regulation D. Form U4 is the registration form for associated persons of broker-dealers (registered representatives), filed with FINRA. There is no Form 506 — the form name is simply Form D regardless of which Reg D rule the offering uses. Form 13F is the quarterly holdings report for institutional investment managers with $100 million or more in equity assets under management. Form D is uniquely the Reg D filing.
Summary
Exam Essentials — high-yield review
Chapter Summary
Ch 2 Exam Essentials — New Issues and Underwriting
- Cooling-off period: Between filing date and effective date. Reps may distribute the preliminary prospectus (red herring) and collect indications of interest — no orders, no sales.
- Firm commitment vs. best efforts: Firm commitment = underwriter buys all shares at a discount and resells; bears the risk. Best efforts = underwriter sells as agent; unsold shares go back to issuer.
- Reg D (Rule 506): Private placement exemption. No registration, no general solicitation (506(b)) or solicitation allowed to accredited investors only (506(c)). Unlimited accredited investors, up to 35 sophisticated non-accredited.
- Rule 144: Governs resale of restricted and control securities. Holding period 6 months (restricted); volume limits, manner of sale, Form 144 filing required for control securities.
- Eastern vs. western accounts: Eastern = undivided (each member liable for entire unsold balance proportionally). Western = divided (each member liable only for its own allocation). Most syndicates use eastern.
New Issues Exam Traps — Consolidated
Twelve ways the exam tries to trip you on new issues. Run through this list the night before; each one has been the difference between right and wrong on a real question:
1. SEC clears or releases; SEC NEVER approves. Every prospectus has a front-cover SEC disclaimer. Effective registration is not endorsement.
2. IPO is always an issuer transaction. Treasury stock resale is also an issuer transaction (issuer receives proceeds) but is not a primary offering of new shares.
3. Syndicate members act as principals; selling group members act as agents. Syndicate members bear financial liability. Selling group members do not.
4. Firm commitment shifts risk to underwriter. Best efforts shifts risk to issuer. All-or-none cancels offering if not fully sold.
5. Negotiated underwriting uses syndicate manager. Most corporate IPOs are negotiated. Most municipal GO bonds are competitively bid.
6. Red herring is the preliminary prospectus. Used to gather indications of interest during cooling-off. Final offering price is NOT in red herring.
7. Indications of interest are NOT binding orders. The investor can withdraw without penalty before the effective date.
8. Reg A Tier 1 = $20M; Tier 2 = $75M. Reg A files an offering circular, not a full registration statement.
9. Rule 506(b) of Reg D requires Form D filing. Unlimited accredited investors plus up to 35 sophisticated non-accredited investors. No general solicitation.
10. Rule 144 restricted stock holding period: 6 months reporting issuers, 1 year non-reporting. Volume limit for affiliate sales: greater of 1% or 4-week trading average.
11. Rule 147 intrastate stock cannot be resold to nonresidents for 6 months. Issuer must be in-state and conduct most business in-state.
12. Municipal spread questions use bond points: 1 point = $10. Manager’s fee is typically the smallest spread component. Selling concession is typically the largest.
Twelve ways the exam tries to trip you on new issues. Run through this list the night before; each one has been the difference between right and wrong on a real question:
1. SEC clears or releases; SEC NEVER approves. Every prospectus has a front-cover SEC disclaimer. Effective registration is not endorsement.
2. IPO is always an issuer transaction. Treasury stock resale is also an issuer transaction (issuer receives proceeds) but is not a primary offering of new shares.
3. Syndicate members act as principals; selling group members act as agents. Syndicate members bear financial liability. Selling group members do not.
4. Firm commitment shifts risk to underwriter. Best efforts shifts risk to issuer. All-or-none cancels offering if not fully sold.
5. Negotiated underwriting uses syndicate manager. Most corporate IPOs are negotiated. Most municipal GO bonds are competitively bid.
6. Red herring is the preliminary prospectus. Used to gather indications of interest during cooling-off. Final offering price is NOT in red herring.
7. Indications of interest are NOT binding orders. The investor can withdraw without penalty before the effective date.
8. Reg A Tier 1 = $20M; Tier 2 = $75M. Reg A files an offering circular, not a full registration statement.
9. Rule 506(b) of Reg D requires Form D filing. Unlimited accredited investors plus up to 35 sophisticated non-accredited investors. No general solicitation.
10. Rule 144 restricted stock holding period: 6 months reporting issuers, 1 year non-reporting. Volume limit for affiliate sales: greater of 1% or 4-week trading average.
11. Rule 147 intrastate stock cannot be resold to nonresidents for 6 months. Issuer must be in-state and conduct most business in-state.
12. Municipal spread questions use bond points: 1 point = $10. Manager’s fee is typically the smallest spread component. Selling concession is typically the largest.
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