How To Understand Investment Banking

How To Understand Investment Banking On The Series 24 Exam

and Become a General Securities Principal

One of the keys to passing the series 24 exam is to make sure that you have a complete understanding of how investment banking will be tested on the Series 24 Exam. This article which was produced from material contained in our series 24 textbook and will help you master the material so that you pass the series 24 exam.

Introduction

The Securities Act of 1933 was the first major piece of securities industry regulation that was brought about largely as a result of the stock market crash of 1929. Other major laws were also enacted to help prevent another meltdown of the nation’s financial system such as The Securities Exchange Act of 1934, but we will start our review with the Securities Act of 1933 as it regulates the issuance of corporate securities.

The Securities Act of 1933 was the first major piece of securities industry legislation and it regulates the primary market. The primary market consists exclusively of transactions between issuers of securities and investors. In a primary market transaction, the issuer of the securities receives the proceeds from the sale of the securities. The Securities Act of 1933 requires non-exempt issuers (typically issuers of corporate securities) to file a registration statement with the Securities Exchange Commission (SEC). The registration statement formerly known as an S-1 is the issuer’s full disclosure document for the Government. The registration statement must contain detailed information relating to the issuer’s operations and financial condition and must include:

• A balance sheet dated within 90 days of the filing of the registration statement.
• Profit and loss statements for the last 3 years
• Company’s capitalization
• Use of proceeds
• Shareholders owning more than 10% of the company’s securities
• Biographical information on the Officers and Directors

The registration statement will be under review by the SEC for a minimum of 20 days. During this time, known as the “cooling off” period, no sales of securities may take place. If the SEC requires additional information regarding the offering, the SEC may issue a deficiency letter or a stop order that will extend the cooling off period beyond the original 20 days. The cooling off period will continue until the SEC has received all of the information it had requested. A Registered Representative may only begin to discuss the potential offering with customers after the filing date.

The Prospectus

While the SEC is reviewing the securities’ registration statement, a registered representative is very limited as to what they may do with regard to the new issue. During the cooling off period, the only thing that a registered representative may do is obtain indications on interest from clients by providing them with a preliminary prospectus also known as a “red herring”. The term “red herring” originated from the fact that all preliminary prospectus must have a statement printed in red ink on the front cover stating: “these securities have not yet become registered with the SEC and therefore may not be sold. An indication of interest is an investor’s or broker dealer’s statement that they might be interested in purchasing the securities being offered. The preliminary prospectus contains most of the same information that will be contained in the final prospectus, except for the offering price, the effective date, and the proceeds to the issuer. The preliminary prospectus will usually contain a price range for the security to be offered. All information contained in a preliminary prospectus is subject to change or revision. The preliminary prospectus must be given to expected purchasers at least 48 hours before the sale is confirmed if the company has not been a reporting company under The Securities Exchange Act of 1934. This is done to ensure that the final prospectus is not the first piece of information forwarded to the purchaser.

The Final Prospectus

All purchasers of new issues must be given a final prospectus before any sales may be allowed. The final prospectus serves as the issuer’s full disclosure document for the purchaser of the securities. Once the issuer’s registration statement becomes effective, the final prospectus must include:

• Type and description of the securities
• Price of the security
• Use of the proceeds
• Underwriter’s discount
• Date of offering
• Type and description of underwriting
• Business history of issuer
• Biographical data for company officers and directors
• Information regarding large stockholders
• Company financial data
• Risks to purchaser
• Legal matters concerning the company
• SEC disclaimer

Prospectus To Be Provided To Aftermarket Purchasers

Certain investors who purchase securities in the secondary market just after a distribution must also be provided with the final prospectus. The term for which a prospectus must be provided depends on the where the issue will be traded in the after market and if the issuer has been reporting financial results as required by the Securities Exchange Act of 1934. If the security has an after market delivery requirement a prospectus must be provided by all firms that execute a purchase order for the security during the term. The prospectus delivery requirements are as follows:

• For IPOs: 90 days after being issued for non reporting companies with securities to quoted on the OTCBB or in the pink sheets, 25 days for non reporting companies to be listed or NASDAQ securities
• Additional offerings: 40 days for securities quoted on the OTCBB or in the pink sheets. No after market requirement for listed or NASDAQ securities