[0:00]Okay, we're back. It's Kenneth Capital Vantage tutoring, it's my job to get you past the SIE exam. And here's part two, should be part two of the complete SIE. We're going to talk about offerings. You know offerings, how they bring in the money, how the primary purpose of Wall Street is to raise money for companies so they can do shit, right? That's what we're doing here. That's what the offerings. So let's talk with who's in it. First, let's talk with the participants, like for example, the underwriting syndicate. Okay, so the investment bankers, these are the folks that help companies or municipalities raise money by issuing new securities. They'll price the offering, market it and handle all the paperwork to get it off the ground. That's the investment banker. Underwriting syndicate, if the offering's big, one investment bank might, it might be a little bit too much for them. So they'll all chip in, buy the securities from an issue and then spread them out to investors, a big old team effort. Now inside that, there is, I'll see if I get to it later. Now we have municipal advisors. These are the firms that advise states, cities and other local towns and stuff how to issue the bonds. They're like the city's wingman. They kind of help make sure the deal gets structured in time properly. So we have two types of offering: public versus private. Public: these offerings are sold to anyone and everyone, your mom, your cousin, everyone on the subway. They're registered with the SEC and there's a prospectus that lays out all the nitty-gritty details. Private: these are offered to a group of accredited or sophisticated investors, no big flashy air campaign, a lot less disclosures. And you generally need to meet certain income requirements to do this. So, normally to buy a private activity, private activity, private placement, you have to be accredited, which I always remember one, two, three accredited. Your net worth is one million, excluding your house and cars, or, or, or you're single and you make two hundred grand a year and expected to keep doing that. Or you're miserable, I mean married, and you make three hundred grand a year and expected to keep doing it. Also, if you have the 7 or the 65 or the 82, you're considered accredited. And you need to be sophisticated or they're going to need what they call a purchaser's rep to sit in with you to explain the nitty-gritty details. Now, let's talk about different types. IPOs versus secondaries and follow-ons, okay? IPO is the first time a company goes public, like the big moment when they ring the bell on the stock exchange and everyone's clapping all the new millionaires. That's the first time they raised money. An IPO is the first time they raise money by selling shares to the public. A secondary, it's when existing shares are sold by insiders or major shareholders. So like a Bill Gates, or a Bezos, or an Elon Musk, when they sell some of their shares in an offering. They're sold after the IPO, it doesn't create new shares, it just changes the ownership, okay? So again, an IPO, primary is a first-time issuance, they're issuing new shares, that's how they go public, whatever it is. And then a secondary offering is when existing shareholders, like partners, officers, directors, sell their shares into the public to raise some money for themselves, not the company. A follow-on or an additional, this is when the company already has shares on the market, but they say, hey, you know what, let's issue some more to raise capital. These are brand new shares, these do dilute existing ownerships a little bit. So if we do an additional offering, we're we are basically, um, diluting the shares of the new people. So a lot of times they'll do it with a rights offering, which we'll get to it later, where they let all the existing shareholders buy more shares at a discount from where we're offering it to the public. Also, we have best efforts versus firm commitment. Best efforts is the underwriter goes, look, we'll do the best we can to sell the shares, but we're not promising, we'll buy whichever left. We will just, if we don't sell anything, the issuer could be stuck with unsold options. Okay, options, a portion. So again, the underwriter says we'll do the best we can. Whatever we don't sell, we'll give back to you. Now, there are limits to that, where they'll, you know, there's limits and stuff. But let's just go right now. Best efforts means we're going to sell the best, the underwriter is going to sell the best they can, do the best they can to sell them. And whatever left over, the issuer will have to take it. Also, remember if you think I'm speaking too fast, knock it down to 0.75% and that should help. I may sound a little drunk, but it is help. Okay. Then we have firm commitment. The underwriter, the God, I'm speaking, speaking horribly. The underwriter buys the entire issue. So literally, if I'm going to go public and I do a firm commitment, the underwriter will buy all the shares or the bonds from me and then try to sell them for a profit with a little markup. But the problem is if they can't sell them, they eat the loss, not me. So best efforts, the risk is on the issuer. Firm commitment, the risk is on the underwriting group. Okay. Um, that's why underwriters will do a lot of homework before they do a firm commitment, because they want to make sure they can sell it. Now, we can also talk about a shelf registration. It lets an issue or register a bunch of securities with the SEC, but then puts them on the shelf and issue them down the road when the market conditions are right. It's like buying groceries and bulk and then cooking dinner when you need it. Okay, so let's do it that way. I get permission, I do a shelf offering, I sold an S3, usually well known seasoned issues can do this. This is never an IPO. It's we're issuing shares and we're already out there, you know, we're shares out stand or a lot of bonds out standing. And we we we get approved approval to issue it to register them. And then we issue them at a later date, up to three years later. We can issue them a little bit at a time or one big bulk thing in a year or two years or three years. But it's called a shelf offering because we're getting the permission from the SEC to issue them and then we put them on a shelf and we sell them when the market's going well. Now, the whole point is we can tap the market multiple times without having to do a full registration. It's good for, again, it's for well known season issues. So maybe what I'll do, I'll get authorized to issue 20 million shares. Maybe I don't need all to sell all 20 million, so maybe I'll sell 5 million when I needed it, another two, another eight. All up to the 20 million over the next three years, I can issue them as needed when I need the moolah. And if you like what you see so far, please hit a like, subscribe, hit the notification button so when my another shit shows up. See the like button, hit that, hit the notification bell so when I put up more shit, you can see it. Let's go, baby. Let's keep going. Now let's talk about the offering dogs, okay? First, we have the official statement, okay? This is for muni bonds. This is the big disclosure doc telling investors about the project, the finances and any risks. Their prospectus is for corporate offerings, also known as non-exempt, corporate offerings, mutual funds, stuff like that. This is you're supposed to read this. This is the user's manual for the investment, what you're buying, risks, fees, management, all that stuff. All the rest, everything, what you can expect. Delivery requirements. So, they want to make sure the investors get these documents. So we are going to have we're going to have rules on when you have to do it. So let's talk about them. First of all, it has to come untouched. You can't fuck around with it, you can't highlight it, you can't omit it, you can't circle anything or go, hey, read this. It has to come pretty much pristine, okay? You have to get this. Now, by the way, you can email it to them or give them a link to a website, because there's a thing called access equals delivery. So giving them access to the prospectus is the same as delivering it. So, you have to send it to them no later than completion of the trade, which is usually settlement. And how long are they subject to it? So if it's an over-the-counter IPO, I mean, it's an over-the-counter, not on exchange IPO, they are subject to this delivery rule for 90 days. They don't get it in 90 days, but they're subject to the rule for the first 90 days after they after the IPO. If it's a follow-on over-the-counter, which means not on exchange, it's only 40 days they're subject to it, like biblical, like Noah, Moses, shit like that. Then, if it's an IPO that's on the stock exchange, it's big, it's it's been registered, the SEC and the exchanges are declaring, demanding a bunch of disclosures, it's only 25 days. So an IPO over the counter 90, additional offering over the counter, follow-on if you want to call it, 40 days. And if it's an IPO stock exchange, it's 25. Sounds like I forgot something. If it's an if it's a follow-on, but it's on the exchange already, there's no prospectus because they've already been disclosing quarterly reports, and every broker in the world, they're like ripping it apart. SEC filing. So a public offering, you would do an S1 for an IPO, S3 for a shelf. Sam 1 and Sam 3 for a shelf offering. They review it on the S1 is usually going to be a 20-day review, unless they're an accelerated filer, like a big one and they can get it shortened, but it's usually a 20-day review. They kind of make sure the disclosures are there, and they don't, they don't bless the offering, they don't say you're approved. They just say, hey, they filled out the paperwork and they paid the fees, so we're good to go. So S1 is for an IPO, S3 is for a shelf. What's interesting about a shelf, if it's a well-known seasoned issuer, instead of waiting 20 days, the second you file it, you're effective and you can sell the shares. Remember, that's the word you want to hear, effective, not approval. They don't, they don't make any assertions about being married or telling the truth. It's literally, hey, you're effective, you're you're allowed to sell it. Blue Sky, if you hear the term Blue Sky, they're talking about rules out of the Blue Sky, it's all about state stuff, okay? These are state level regulations. You might have to register in each state where you're playing to sell the securities, unless you're exempt, like a federal coverage security. Um, it's basically just making sure that you're not screwing over the customers in the states. So each state has its own administrator that has that enforces the rules of each state. So unless you're exempt, like a stock exchange or a mutual fund or federal covered or muni or Treasury, you will have to register in every state that you sell shares in. There are exceptions, but that's not this test. Now, let's talk about some of the rules. Sipic, okay? The so, basically, if you have a broken dealer, you have to let the customers know about Sipic, Securities Investor Protection Corporation. It's like FDIC for her banks. They you have to provide the Sipic's contact info and explain that Sipic is there to protect customer funds if their brokerage goes belly up. So, Sipic covers like an insurance policy for the broker dealer failing. It jumps in when the firm fails and can't return your securities or cash. Sipic does not cover you if your stock tanks, or if you make a bad trade. It doesn't cover, um, non-securities. It covers it's replacing missing assets when the broker fails. So it's not it's not going to replace, um, futures and forwards and non-securities, it will replace cash and securities. If you have a if you have a street name account, which means the broker dealer has your names, held your shares held in their name, that's street level, that's street name and they will cover it. If it's in your own name, if you own the securities in your own name, they won't cover it, because you don't need to. Because you could just call up the firm and go, oh, you have my 20 shares of Nvidia. And Video, go yeah, we have your name, you'll just get new shares. It's the problem is that street name is when the broker dealer owns the shares for your name in your benefit. So if you call up Nvidia and go, where's my shares? They go, we don't know who you are, but the broker dealer does it. Now, the magic number is 500,000. So it's up to 500 grand in each separate capacity, meaning each type of account registration. So if you have an individual, a joint or a Roth, those are all considered separate accounts. That's four different accounts, up to 500 each, not two million each, 500 each. But again, if you have a cash and a margin account, they consider it one account. So if you have 500 grand in cash, you'll only cover 250. If you have 500 grand in stock, they'll cover the whole 500 grand. So if you have 50 grand in cash and 300 in stock, your total assets are 350. Your brokerage implodes, you'll get the whole 350 grand. You'll get 50 grand in cash and 300 in cash for the stock shown. Now, separate capacity means if you have an individual and a joint and a trust and an IRA, those are all separate accounts. That's four different accounts, up to 500 each, not 2 million each, 500 each. But again, if you have a cash and a margin account, they consider it one account. Okay, so if your firm is underwriting a new issue, bringing it public, or whatever, or you have a big stake in it, you have to disclose it, okay? So again, if your firm is underwriting a new issue or holds a big position in a stock that you're pushing, you can't not tell anyone, you have to let them know. You have to be upfront about with the client so that they can know that you might have a conflict of interest. If you're a market maker, you're quoting buy and sell orders to keep the market liquid. That's your job, market makers buy and sell, all they long to keep it liquid, you can't charge the issuer or promoter fees for just making that market. So it works both ways. The issuer can't pay you to make a market in the stock, and the market maker can't say, hey, I'll make a market if you give me this much money. That's paid to play, we can't do that stuff. So here are the rules. We have Sipic, letting people know who's got their back if things go bad. I mean the broker dealer go south, making sure no one's hiding a conflict of interest, and you got to prevent shady pay for play for market making. And again, the thing with a market making is that I'm making a market if if I, if you pay me to do it, it's going to create a false impression that there's activity and we can't do that. Okay, let's jump into the G11. This is for Munis, okay? These rules lay out how underwriters handle the distribution of a brand new bond issue, okay? It's first is the order period. That's how the underwriter manages different types of orders, presale, group, designated member. Remember, so in reality, there's four, you have presale, group, designated member. But retail always comes ahead of everyone, so the the the issuer will decide what retail is and what order they have. But remember, presale orders are are orders received before the underwriter has won the deal. Group orders are orders received after you know who the underwriter and the syndicate wins the deal. Designated are where you're saying, oh, I just want one underwriter to get the commissions and that comes third. And then member orders are for the member members to get the members of the syndicate and stuff to get shares for themselves, which always has to come last. So it so it goes, presale, group, designated member. Pretty girls drive Mercedes. Pro garfers don't miss, pretty girls do me, whatever you want to do. They don't. Um, my wife does. Whatever. Ooh, I'm I'm going down a hole that I can't get out of without sending stupid. So I'm just going to stop.
[14:09]So again, presale orders are orders received before the underwriter has been chosen, who won the deal, like you're you're bet, you're jumping in with these people. After they choose the underwriter, any orders received after that are group orders, then designated, then members. So what happens is if we it's not a big deal if we don't oversell the bond, it doesn't matter. But if we sell too many bonds, we have to decide who's going to get first. So first priority is presale, then group, then designated, then member. And really retail comes ahead of everyone, okay? Okay, we have to disclose with the primary offering. So this rule ensures that anybody buying a brand new muni security gets the full story, no shady shit. So first we have the official statement, the underwriter or dealer must provide an official statement if the issuer wrote it. Remember, the official statement is like their prospectus, okay? You have to do it by a certain time, usually it's by completion of the trade. Now, here's the thing, they don't have to write one. Remember, MSRB writes rules and FINRA and SEC enforce it, but the issuers are cities and states, they don't actually have to listen to federal law. So they don't have to write an official statement. No broker dealer in the world will sell a bond without an official statement. So they don't have to, they kind of back ended by saying, hey, if they give one out, you have to give it. So the broker dealers go to the city or state and go, you got to write one, or we're not going to sell it. So this that's the whole deal that if anyone, if you if there's an official statement written, anyone who buys the bond has to get it. Now, just like the disclosure docs on the prospectus, there's a preliminary official statement, too. It's done before the deal is final. Every stock or security, I'm starting, has a unique identifier. It's a cusip. I was think of like a VIN number, but like IBM, all the shares of IBM have a cusip number. But each different security that IBM has would. So I go back to when I first started on the exchange, somebody called up and wanted to buy the chemical preferred stock. And I said, okay, I went to the the trading floor. I went to the trading post and they go, they go, there's nine of them, which one? So I went back and said, oh, he wants the eight percent. I went back and there were two eight percent preferreds. I said, crap. So I had to go back and get the cusip number because each preferred has its own cusip number identifier. Okay, it's like a serial number. So I want, I once I got that number, now, remember, securities are fungible. So it's not like if I buy one share of Chemical 8% preferred under the cusip number, the entire series has the same cusip number. So it doesn't matter which ones you buy, but chemical had, this is an old bank, had eight different preferreds. They all had a different cusip number, the common stock had a cusip number. It's an it's a unique identifier. And basically, if we don't have a cusip, things get messy. So we make sure that every every security has a cusip number. G11, not that you need to know numbers, but have it floating around. G11 is the process for delivering munis to the market. That's the, um, that's the presale group designated member. G32 is you have to disclose the official statement. G34, everything has an ID number, meaning cusip number. Okay, we're still in the primary market, but this is for non-exempt securities. What act covers it? Yes, the 33 Act. It's the granddaddy, the big papa securities act, okay? It lays out how new security offerings have to be registered and what info companies must tell you, okay? So let's talk about the big one. What it does, it tells the companies, here's a laundry list of everything you got to disclose when you register the securities. It's all about the details. The people in charge, how they're using the money they raise, financial statements and their risks and all that. It has to be fair and balanced statement of the risks and disclosures, okay? They got, investors really do deserve to know what they're buying, no secrets, no BS, stuff like that. That would be in the S1, okay? The S1 is when you register, unless you're exempt after the so once you file the S1, the registration statement, that's start a 20 day cooling off period. Now, some of the bigger companies can be what they call accelerated filers, where they can shorten it, but let's just stick with the 20 days. That's a 20 day review. You can't really do much during it. You can, you can, you can send out a red herring, which is a preliminary prospectus, which is the prospectus without the date and price. You can do red, you can do um, indications of interest. Hey, are you interested? How many shares do you want to buy? It's not binding on anyone. You're not selling it. No money. You can blue sky, which registered in all different states. And then we also have where we have a due diligence meeting, okay? So the due diligence meeting is where the accountants, the lawyers, the underwriters, everyone get together and goes over the last minute stuff right before the effective date to make sure that we're solid. Now, you cannot start selling the shares until it's effective. They will never say they're approved. Approved is not in their vocabulary. Remember, the vocabulary, like calculator. No regulator ever approves anything ever, okay? So basically, it has a 20 day cooling off period and at the end of the 20 days, if they say nothing, you're effective. You cannot sell the shares until it's effective. Everything's on standby until then. Okay, now the prospectus, it's all the shit that needs to be in the prospectus is like, it's like a cheat sheet of all the information. Tell them investors, the deals terms, the risks, the financial details, the company plans. The prospectus as you're, as an investor, it's like your best friend. It it if the company tries to hide something, they're in violation of this section. So they have to disclose everything. This is the thing with um, WeWork right before COVID hit. They tried to go public. I think his name is Adam. He, he had a disclosed, he borrowed like 700 million dollars from the company. A lot of fucking money to borrow. It was in there. They kind of buried it, but people saw it and go, hey, what's going on? And it actually killed the deal for three years. Remember, you can't make unlawful representations. You can't say, hey, this is approved by the SEC or they'll never guarantee the SEC will never guarantee or approve anything. They basically just have to check, are the disclosures there? So literally, if you have a company that really has a very small chance of making money, but you just disclose the shit out of it, they have to declare it effective. It's fun. Remember, you can't say anything like great investment. They can't say the SEC approved this. You can't make any sort of representation the SEC ascertained the merit of it. They literally don't. They're looking at, did you pay the fee, did you disclose the risks? You're good to go. Now, what's an accredited investor? So an accredited investor, remember, one, two, three accredited. One million net worth, 200 salary, single, or 300 if you're miserable, I mean married. That's so why does that matter? Because there are some things accredited investors can do. They're still sort of retail, but they're rich retail. Now, again, one, two, three accredited. One million net worth, 200 salary, if you're single, or 300 if you're miserable, I mean married, or they have an active 7 or 65 or 82. You pass the exam, it doesn't do it. You have to be active and running. What can they do? They can buy usually in private placements and do other things that regular mom and pop can't do. We'll get to it later when we get to the exceptions. Now, mutual funds can do what they call a summary. Now, the prospectus has to be clean. Literally, if you hand the prospectus to someone, it has to be untouched, unmarked, uncategorized, none of that shit. You can give them a website, a link to the website, you can give them a PDF. Access equals delivery, but you can't, you can't mark it up or change it. It can't be deleted. You can't even rewrite it in English, like in, in, it is big print, you can't touch it. Now, mutual funds have prospectuses, too. But since mutual funds, I don't know why they do this, but they allow what they call an omitting or a summary prospectus. So some people can't they, some people can't read that, you know, 300 page thing. So they're going to have a summary prospectus, which is highlights. It's all the highlights stuff. Now, the one thing is, you can get it's like a cliff notes, okay? Of the, of the prospectus. Now, the thing is, the mutual fund, you can give it to them. You have to make the regular prospectus available to them. And it cannot be a company with a an application to invest. You can send it to them and if they want to invest, they can reach out to you. You can't, um, send to say, oh, here's the summary and here's an application to invest. That doesn't work.
