Selling New Securities - Blue Sky Registration

The new securities must also be registered in each state in which they will be offered for sale. There are 3 types of state registration: notification, coordination, and qualification.

1. Notification (aka filing) registration is the filing of an offering document with certain disclosures. This is available in most states. However, this filing type is available only to those issuers who have been in continuous operation over the past 3 years with a specified amount of earnings. If there are no problems, then the state registration becomes effective on the effective date of the SEC registration.
2. Coordination registration is the automatic registration in some states on the effective date of the SEC registration.
3. Qualification registration, available in all states, has greater requirements for state registration, and the registration for that state does not become effective until the State Administrator approves it. This method is used only when the other methods are not available, especially when the issuer does not qualify for a notification registration.

Due Diligence Meeting

Before the effective date of registration, the investment bankers meet with the corporate officers. The purpose of this due diligence meeting is to discuss:

• whether all materials facts that have been sent to the SEC are true and remain true since the filing of the registration;
• has there been any other developments since the filing of the registration that would have a material impact upon the corporation;
• any changes to be made in the final prospectus. However, the public offering price is not set—that will occur on the effective date.

The importance of this meeting is underscored by the liability that both corporate officers and investment bankers will be exposed to if there have been any material omissions or errors in the SEC registration, for they will have to sign the final registration before it can become effective.

Selling New Securities

Before a corporation can offer securities for sale to the public, it must register the offering with the Securities and Exchange Commission (SEC), the federal agency responsible to enforcing the nation’s securities laws. The primary law governing the public offering of securities is the Securities Act of 1933, also known as the Act of Full Disclosure. Generally, the investment bank that is handling the offering will register with the SEC for the corporation.

SEC Registration

For any new offering of securities, a corporation must file a registration statement with the SEC that contains the following information:

• A description of the corporation.
• A concise biography of the officers and directors of the corporation.
• Financial stakes of all insiders, the directors and officers (control persons) in the corporation, and a list of anyone holding more than 10% of the corporation’s securities.
• Complete financial statements.
• What securities are being offered for sale, and how will the money be used.
• Any legal proceedings that may have a material impact on the company.

The SEC will review the registration to be sure that everything is in compliance with the law, and that there is full disclosure. If it is, then the SEC will approve the registration, and allow the company to sell its securities on a specified date—the effective date. However, SEC approval is not an endorsement of the issue, but only that there has been proper disclosure.

If there is any problem with the registration, then the SEC will send a deficiency letter to remedy the problem. Generally, the underwriting manager handles the deficiency letters quickly, because deficiency letters delay the effective date. No securities can be sold or even offered for sale before the effective date.

The time between filing and the effective date is known as the cooling-off period. During this time, no reports, recommendations, or sales literature may be sent to anyone. The underwriters may, however, send a preliminary prospectus—often called a red herring, because of the red lettering on the title page—that provides potential investors with all the necessary information that an investor would need to make an intelligent decision, which includes a description of the company and its business, income statement and balance sheets, any pending events that could have an impact on the business, such as mergers or acquisitions, its competition, and the agencies that regulate it. What it does not contain, however, is the public offering price of the new securities and the effective date for the sale, since the effective date would not yet be known.

A preliminary prospectus is published to generate and gauge interest among investors in the new securities, but it cannot offer them for sale until the registration has been approved by the SEC. The indication of interest will be used by the investment bank to price the new securities.

SEC Rule 134 does permit 1 other type of publication during the cooling-off period—the tombstone ad. The tombstone ad must be clear that it is an announcement only, and not an offer to sell nor a solicitation to buy.

Underwriter Compensation and Syndication

The underwriters make their money by selling the new securities at a markup from what they paid for it, known as the underwriting discount, or underwriting spread. The underwriting discount is set by bidding and negotiation, but is influenced by the size of the new issue, whether it is stocks or bonds, and the perceived difficulty of selling the new issue, with more speculative issues requiring a larger underwriting spread for the increased risk. The flotation costs of the new issues, which is the total cost of bringing the new securities to market, also includes legal, accounting, and other expenses borne by the issuer in addition to the underwriting discount. Flotation costs are generally a greater percentage of the total sale of the new securities for small issues than for larger issues, greater for stocks than for bonds. The underwriting spread may vary from about 1% for investment-grade bonds to almost 25% for stocks of a small company.

As additional compensation, the underwriting firm may also get rights to buy additional securities at a specified price, or receive a membership on the board of directors of the issuing company. The underwriting firm frequently becomes a market maker in the new security, keeping an inventory and providing a firm bid and offer price for the new security to provide a secondary market so that investors can buy or sell the new securities after the primary sale. Providing liquidity for investors increases the value of the primary offering, since few investors would buy the new security if they couldn't sell it at will.


Syndication — Enlisting Other Investment Banks to Sell the New Securities

Sometimes the investment bank will enlist the help of other investment banks to sell the securities, forming a underwriting syndicate. The investment bank, which could be multiple firms that the company selected, is called the originating house (aka syndicate manager, managing underwriter), which selects the members of the syndicate and determines how many shares each will get, and manages the overall process. The underwriting manager determines, along with the issuer, the offering price and the time of the offering, and controls all advertising for the new issue. The managing underwriter not only handles the federal registration, and responds to any deficiency letters from the SEC, but, since state security laws (aka Blue Sky laws) require that the new issue must be registered in each state in which it is offered, the manager also ensures that the security has been Blue Skyed.

The members sign an Agreement Among Underwriters (AAU), which stipulates, among other things, the management fee, and that they will represent the issuer. Also, the percentage of each underwriter's allotment of the new issue is stipulated. There may be an overallotment provision (aka green shoe, because this provision was 1st used in an underwriting for the Green Shoe Company) that will allow the underwriters to get more shares at the original price if the issue turns out to be oversubscribed.

Each member of the syndicate must also sign an Underwriting Agreement (UA) which stipulates the relationship of the syndicate members and the issuer, including their rights, obligations, terms, and conditions, and that the issuer is required to sell and the syndicate members are required to purchase a specified number of shares. This agreement is signed when the registration of the new securities becomes effective.

There are 2 types of obligations concerning the purchase of the new issue by the syndicate members. The most common type—the divided account, or Western account—requires that the syndicate member sells its allotted shares of the new issue, but it is not obligated to sell the unsold shares of other members. The undivided account (aka Eastern account) requires that each underwriting member to buy not only his own allotted shares, but also the same percentage of unsold shares of other members as the member's allotment percentage.


Example — Western and Eastern Accounts:

5 members of the syndicate are each allotted 20% of a new issue of $100,000,000 of securities. All but $5,000,000 has been sold. If the members are bound by an Eastern account, then each member will be required to buy 20%, or $1,000,000, of the unsold shares. If, however, they agreed to a Western account, then no member has to buy the unsold shares of any other member.

In addition, each member of the syndicate, including the originating investment bank may have selling groups (also called selling syndicate), consisting of other investment bankers, dealers, and brokers, that may also sell to investors. Members of the selling group, which can number in the hundreds for some issues, sign a Dealer Agreement (aka Selling Agreement) that stipulates the terms of the relationship, including the commission (also called selling concession), the date of termination—typically 30 days—and whether the selling groups have to buy unsold shares.

The main advantage of syndication is that it reduces risk by sharing it among the syndicate members, and each syndicate member and their selling groups have their own customers to whom they can sell the new issues, so it reduces the amount that any one brokerage would have to sell, making it more likely all of the new issue would be sold.

A typical compensation arrangement for a syndicate is the originating house gets a small percentage of the underwriting spread of the entire issue; the other members of the syndicate get a percentage of all issues sold by them or their selling groups; and the selling groups get a percentage of what they sell. Below is a typical compensation schedule for a new security priced at $20 per share:

Sample Distribution of Investment Banking Fees
Public Offering Price	$20.00	per share
Manager's Fee	$.25	The underwriting manager receives this for all share's sold.
Underwriter's Allowance	$1.75	The syndicate member receives this for every share that it sells.
Selling Concession	$1.00	What the selling group earns per share.
Reallowance	$.50	Per share for a broker or dealer who is not part of the syndicate or any selling group.
Amount Received by Issuer	$18.00	per share

Note that the underwriting manager as well as other members of the syndicate can also sell directly to investors, and if they do, they get the percentage that would otherwise go to compensate everyone below them. So if the underwriting manager sold directly to their institutional investors, for instance, then the manager would get the full $2 of the underwriting spread. If a member of the syndicate sells to their own customers, they would get $1.75 of the spread, because $.25 of that spread still goes to the underwriting manager, but they would also get $.75 of any shares sold by their selling groups.

Selling a IPO by a Dutch Auction

In a hot IPO, when many investors are clamoring to get shares, many of those who do get the newly issued shares will flip it—immediately sell it in the open market for instant profits. The investment bank must, by law, sell the new shares at the offering price regardless of demand. Because of the demand for the new issues, they have to be allocated, and usually it's the biggest clients of the investment bankers who get the issue—small investors almost never get to participate. Furthermore, neither the investment bankers nor the issuer can profit from flipping. However, flipping is an indication that the offering price was set too low, but, on the other hand, the bankers don't want to set the price too high so that they can be sure to sell the entire issue quickly.

With a hot IPO, it is difficult to ascertain what price would be best, so some companies use a Dutch auction to determine the price. Google used this method for its IPO, for instance. In a Dutch auction, the public is invited to submit closed bids, indicating how many shares they want and at what price they are willing to pay. Then the company sets the offering price that will sell out the whole issue. Everyone who bid at or above the offering price will get shares at the offering price, even if they bid higher. 

Those who bid below the price will get no shares. In most cases, the successful bidders will not get all of the shares that they requested, because there will not be enough, so the shares will be allocated proportionally to the amount that they requested to the total amount requested. So, if the successful bidders requested 10,000,000 shares, but there are only 2,000,000 shares available, then each bidder will get 20% of whatever they requested.

Standby Commitment for a Rights Offering — Lay Off

When the investment bank also has a standby commitment with its client, then the investment bank agrees to purchase any subsequent new issues of stock shares at the subscription price that are not purchased by current stockholders in a rights offering, which it will then sell to the general public as a dealer in the stock.

The investment bank takes a risk, however, in that the price of the stock could decline during the 2 to 4 weeks of a rights offering. To minimize this risk, the investment bank may do a lay off:

buying up any rights that are sold by the current stockholders, then exercising the right and selling the stock; and by selling enough stock short, up to 1/2% of a new issue, to cover an expected proportion of unexercised rights, then using the rights to cover the short.

Best Efforts Underwriting

Most agreements for the sale of new securities are an underwriting, but sometimes the investment bank will agree to a best efforts approach because the company is perceived as a risky investment for a new issue. The investment bank will do its best to sell all of the new securities, but it does not guarantee it. The company bears the risk that the investment bank may fail to sell all of the new issue, thereby lessening the amount of money that the company receives.

There are 2 variations of the best-efforts underwriting: all-or-none or mini-max. An all-or-none underwriting requires that the entire issue be sold within a specified time, or else the program is terminated. A mini-max (aka part-or-none) underwriting is similar, except that only a specified minimum must be sold. In either case, SEC Rule 15c2-4 requires that all money collected from any sales be deposited in a separate escrow account at an independent bank for the benefit of the investors. If the sale is canceled, then the money must be returned to the investors, and no more orders will be taken; if the underwriting is successful, then most of the money goes to the issuer minus the fees paid to the underwriters.

Equity Managed Accounts

Why an Equity Managed Account?

Self-trading in the equity markets is at best a difficult proposition. To be successful, a trader must follow market movements 24 hours a day, five days a week. Many Stock investors and traders do not have the time, experience or desire to trade with this intensity themselves. COMPASS Account Management is a group of several expirienced traders, created for investors with risk capital who do not necessarily want to trade on their own or know nothing about Stock Market. In a COMPASS Managed Account the positions belong to your portfolio alone. Unlike mutual funds or hedge funds which merge your funds with other investor’s, a COMPASS Managed Account is in your name and all or part of your funds can be redeemed within one day. There is no lock up period.

How it works?

You open a private, personal, password protected Managed Account under your name with a proprietary trading company, where you will have access to it anywhere in the world via the internet. We get limited powers documents to trade your account, but not to withdraw any funds. You give us username and password allowing a trader to place trades on your behalf.

Fees

Plan A – Expected Monthly Return On Investment: 10%

The COMPASS Managed Account Performance Fee is charged on each month's net profits only and it's deducted from the account monthly. The Performance Fee is deducted from the net profits and there is no performance fee if there is no profit.

Monthly Performance Fee:

40% accounts $5,000.00 - up to $20,000.00 *

30% accounts $20,000.00 - up to $50,000.00

20% accounts $50,000.00 - $100,000.00

10% accounts $100,000.00 and more.

* For deposits lower than $ 20,000 there is a maintance fee of $130.00 paid at the begining of each month. Payment methods offered: Moneygram and WesternUnion.

Plan B – Expected Monthly Return On Investment: 10%

In this type of a Managed Account, investor keeps 100% of the net profits! Investor only pays a Monthly Maintance Fee:

Monthly Maintance Fee:

$ 399.00 per account with $5,000.00 - up to $ 50,000.00

$ 799.00 per account with $50,000.00 - up to $ 100,000.00
$ 999.00 per account with $ 100,000.00 and more

Monthly Maintance Fees are paid at the begining of each month. Payment methods offered: Moneygram, WesternUnion and Bank Wire.

COMPASS Managed Accounts are not a hedge fund or pooled funds. Clients do not deposit funds with us or through us, this is done through our fully registred Proprietary Trading Firm.

Our Trading Strategy

Using a discretionary approach, trades are entered manually when a combination of historically proven technical indicators signal a potential low risk entry and using risk management. Generally every trade is closed at the end of a trading day, and there is no overnight risk.

 Strict money management methods, known as a Variable Fractional Percent, are incorporated in order to preserve capital and produce the maximum return for the investors.

Benefits

·        Profits possible regardless of direction of the general market. Our strategies actually make most profits during markets fall. Volatile market conditions increase our trading oportunities.

·        Only the client can withdraw funds. The Manager has Limited Power of Attorney.

·        Client funds are in client's name.

·        Client receives monthly performance statement and weekly profit/loss statement.

·        Only $5,000.00 initial capital required to be part of the program.

Risks
Historical maximum loss is 30% from the capital value. Maximum loss (One-Time-Loss) can be up to 50%, a point when all possitions will be closed to protect initial deposit.  

All Trading involves risk. Leveraged trading has large potential rewards, but also large potential risk. Be aware and accept this risk before trading. Never trade with money you cannot afford to lose. All forecasting is based on statistics derived from past performance of any trading methodology and is no guarantee of future results.

Profits
Net Profit Rates are variabled on market movement. Expected average net profit is  10% per month and may increase to 15% if the markets are very volatile.

How does the Manage Account Work?
You open an account under your name with a proprietary firm and give us a power of attorney to only-trade your account.

Profit Sharing And Costs With Examples

Plan A

In the Plan A, there is a $130.00 montlhy maintence fee, paid at the bigining of a month for accounts deposited with less than $20,000.00. Profit split vary on money invested.

Example 1:

Deposit: $15,000.00

Net Profit achieved: 10% or $1,500.00

Compass Payout (40%): $600.00 - $130 =  $470.00

Investor’s Payout (60%): $900.00 + $130 = $1,030.00

Example 2:

Deposit: $40,000.00

Net Profit achieved: 10% or $4,000.00

Compass Payout (30%): $1,200.00

Investor’s Payout (70%): $2,800.00

Net Profit is profit made after trading commissions and platform costs.

Plan B

In Plan B there are only maintance fees, as the investor keeps all the profits.

Example 1:

Deposit: $15,000.00

Net Profit achieved: 10% or $1,500.00

Compass Maintance Fee: $399.00

Investor’s Payout (100%): $1,500.00 - $399.00 = $1,101.00

Example 2:

Deposit: $40.000.00

Net Profit achieved: 10% or $4,000.00

Compass Maintance Fee: $799.00

Investor’s Payout (100%): $4,000.00 - $799.00 = $3,201.00

Example 3:

Deposit: $90.000.00

Net Profit achieved: 10% or $9,000.00

Compass Maintance Fee: $999.00

Investor’s Payout (100%): $9,000.00 - $799.00 = $8,201.00

Final Risk Control and Guarantee
Note that you own your account and if at any time you feel concerned that your account is not well managed you email us at any given time within 24hrs. Also Trader will stop trading the account immediately if loss falls to 1/2 of your initial opening account balance. For example, for an account with $5,000.00 opening balance, your risk is only $2,500.00.

Contact: compassam@safe-mail.net

Investment Banking — Issuing And Selling New Securities

When a company or other organization wants to raise funds, it frequently does so by issuing and selling new securities, such as stocks or bonds. An investment bank usually helps in this process by providing expertise and customers to buy the securities. A company does not need to use an investment bank, but it usually does, because it is less costly than trying to sell securities directly to the public.

An investment bank is not a bank in the usual sense. It doesn't have checking or savings accounts, nor does it make auto or home loans. It is a bank in the general sense, in that it helps businesses, governments, and agencies to get financing from investors in a similar way that regular banks help these organizations get financing by lending money that the banks' customers have deposited in the banks' savings, checking, and money market accounts, and CDs. In other words, connecting the need for money with the source of money.

An investment bank helps an organization, which may be a company, or a government or one of its agencies, in the issuance and sale of new securities. It is usually a division of a brokerage firm, because many of their activities are related. When an organization needs funds, it will first discuss the options and possibilities with an investment banker: how much money will be needed, what type of security to sell and any special features it might have, at what price, and how much this will cost the company.

Underwriting Agreement — Firm Commitment

If the investment bank and company reach an agreement to do an underwriting—also known as a firm commitment—then the investment bank will buy the new securities for an agreed price, and resell the securities to the public at a markup, bearing all of the expenses associated with the sale. The company gets the guaranteed funds even if the investment bank does not sell all of the securities. Thus, the investment bank takes a significant risk in a firm commitment. Often, the investment bank becomes a broker-dealer, or market-maker, in the new security.

Direct responsibilities in an underwriting include registering the new securities with the Securities and Exchange Commission, setting the offering price, possibly forming and managing a syndicate to help sell the new securities, and to peg the price of the new issue by buying in the open market, if necessary.

Selecting the Right Offer Price is very Important in an Underwriting

If the offer price is too high, the investment bank will fail to sell all of the new issue (undersubscription), then it will have to hold some of the issue in inventory, hoping to sell it later. If the investment bank holds the new issue in inventory, this will tie up capital that can be used elsewhere, or, worse yet, it will have to borrow money. Furthermore, the initial customers who paid a higher price for the new issue will be disappointed that they paid a higher price, and the investment bank may lose these customers in a future offering. The bank will also probably submit a stabilizing bid until either the new issue sells out, or it ends the offering and just takes the loss.

If the offering price is too low, then the new issue will quickly sell out, and the price of the new issue will rise quickly because the supply will be limited (oversubscription), inducing the initial investors to sell for quick profits—commonly called flipping. However, the company will not reap any of this extra money, and it will be disappointed that the initial offering price was not higher. Investment banking is a very competitive business. The issuer and other companies will see this as a failure to set the best price, and may take its future business elsewhere.

SOUTH Trading System Performance (June 2011): +11.85%

SOUTH – Short Only

Direction: Long Only

Leverage Used: 2:1

Max Drawdown: -9.24%

Starting Capital: $10,000

Ending Capital: $65,025

Net Profit (Month June): $6,898

Net Profit % (Month June): 11.85% 

Net Profit (Since Inception): $55,025

Net Profit % (Since Inception): 550.26% 

June was a solid month as South trading system posted a gain of 11.85%, after making 85.39% in May!

June started with a mixed results, making as much as 6% but then lost all that and more and went to a loss of 3.5% during first half of the month. In the second half of the month, system started to make money and finished a month with a gain of 11.85%. Drawdown during this month was -9.22%.

At the end of June, South trading system made 11.85% before commissions, and a compounded gains of 550.26% (since inception in January 2011). This month’s drawdown was -9.22%, which is lower then a historical drawdown of -9.24%. It is important to understand that reported drawdown was based on loosing trades only, and that means that if a trade was profitable when it was closed, but it had a loss while it was opened (because of natural contractions of the market), that loss would not be reported by our drawdown calculations! Real drawdown is always higher by 3-5%, so readers should know this.

Largest daily loss during the month was -7.30%, and a largerst daily gain of 8.15%.

At the end of reporting month and since inception, South trading system made a profit of $55,025 and finished a month with a balance of $55,025.

To see South's last month report click here, and other trading systems offered click here. If You would like to subscribe to this system and start reciving daily Trade Alerts,  click on the link below and fill out the form:

NORTH Trading System Performance (June 2011): 11.03%

NORTH – Long Only

Direction: Long Only

Leverage Used: 2:1

Max Drawdown: -10.75%

Starting Capital: $10,000

Ending Capital: $16,575

Net Profit (Month June): $1,647

Net Profit % (Month June): 11.03% 

Net Profit (Since Inception): $6,575

Net Profit % (Since Inception): 65.76% 

June was an excellent month posting an overall gain of 11.03%, after making 21.07% in May! The first day of the month ended with a gain of 7.44%, and that gain most contributed to this months overall gain reported.

At the end of June, North trading system made 11.03%, before commissions and increased the compounded gains up to 65.76% (since inception in January 2011). This month’s drawdown was less then -10.75%, which is a maximum drawdown since inception of the system.

Largest daily loss during the month was -2.32%, and a largest daily gain was 7.44%.

At the end of this month, since inception North trading system made $6,575 and finished a month with a balance of $16,575.

To see North's last month report click here, and other trading systems offered click here. If You would like to subscribe to this system and start reciving daily Trade Alerts,  click on the link below and fill out the form:

EAST Trading System Performance (June 2011): +2.40%

EAST – Short Only

Direction: Short Only

Leverage Used: 2:1

Max Drawdawn: -12.68%

Starting Capital: $10,000

Ending Capital: $29,080

Net Profit (Month June): $680

Net Profit % (Month June): 2.40% 

Net Profit (Since Inception): $19,080

Net Profit % (Since Inception): 190.81%

Flat month. In the beginning of the month system had a very good start, making more than 8.09% in just two days. After that, almost every trade was losing money. Drawdown lasted almost entire month. On the two last days of the month we succeed in recouping our losses and made 7.89%, which was enough to put us in positive territory (monthly profit) and get out of drawdown.

At the end of a June, system made 2.40% before commissions and made a compounded profits of 190.81% since January 2011. Of course, because of losing money almost entire month, drawdown increased to -12.68%.

The chart below shows daily profit and loss made during this month. As it can be seen from the chart, largest daily loss was -4.88% and largest daily gain was 8.14% (made during the first trading day of the June).

To see East's last month report click here, and other trading systems offered click here. If You would like to subscribe to this system and start reciving daily Trade Alerts,  click on the link below and fill out the form: