Welcome to IPOs, Secondary Offerings and Safe Harbor: the unit that governs what a trading desk may and may not do while an offering is in the market, and what it must tell FINRA when it does.
Exam Weight: about 4 of the 50 scored items (CertFuel planning estimate; FINRA publishes weights only by function, and Function 1, Trading Activities, is 41 items / 82%)
What You'll Learn
In this unit, you'll cover:
- New Issues, Initial Public Offerings and Distributions: the three different tests that decide whether an offering is an initial public offering, a new issue, or a distribution, and why one offering can fail two of them and still meet the third
- The Regulation M Restricted Period: the one-day and five-day windows, the separate clock for a merger, acquisition or exchange offer, who is bound by which rule, the excepted activities, and the excepted securities
- Short Sales Around a Public Offering: the restricted period that runs backward from pricing, and the three exceptions that let a short seller still buy in the offering
- Trading a New Listing: the ban on trading a new listing off-exchange before the listing exchange opens it, the ban on accepting a market order before secondary trading starts, and the unregistered-exchange prohibition
- New Issue Allocations and Spinning: quid pro quo allocations, the spinning ban and its exceptions, the reports the book-running lead manager owes the issuer, lock-up releases and returned shares
- Penalty Bids: what a penalty bid and a syndicate covering transaction are, when a firm may claw back a representative's concession on a flip, and the records that follow
- Stabilizing Bids: the purpose limit, the price ceiling, how stabilizing may be initiated, how a bid is maintained or adjusted, priority, disclosure and the records the manager keeps
- Passive Market Making: the scope of the relief, the daily purchase limit, the duty to lower a bid, displayed size, identification, notice and prospectus disclosure
- Required Notification Related to IPOs and Secondary Offerings: the manager's notices for a restricted-period distribution and an actively-traded one, the over-the-counter penalty bid notice, and the quotation withdrawal duty
- The Issuer Repurchase Safe Harbor: the four daily conditions on brokers, time, price and volume, the definitions that drive them, and the alternative conditions after a market-wide trading suspension
- Trading Plans and the Insider Trading Defense: what trading "on the basis of" material nonpublic information means, and the conditions a trading arrangement must meet to earn the affirmative defense
- Regulation D Offerings: what Regulation D exempts and what it does not, the general conditions, the two exemptions, one capped at $10,000,000 and one with no dollar ceiling, and who counts as an accredited investor
Why This Matters
Function 1 is 82% of the Series 57 exam, and this unit sits at the point where a trader's ordinary activity becomes regulated conduct. A firm in a syndicate cannot bid the way it bids on any other day, and a passive market maker is a registered Nasdaq market maker under extra conditions.
A firm that stabilizes owes notices to the market and to its syndicate, and a firm that covers a syndicate short or imposes a penalty bid owes prior notice to the self-regulatory organization over the principal market.
The unit moves from definitions to prohibitions to paperwork:
- Which regime an offering falls into, and on what fact
- What a participant may not do while the distribution runs
- What it may still do, under a named exception
- What it must file, record and disclose
Let's start with the three tests that decide which regime an offering falls under.