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Underwriting US Government Securities Issues

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A Primer for Physician Investors and Medical Professionals

By: Dr. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief] http://www.CertifiedMedicalPlanner.org

[PART 4 OF 8]

Dr. Marcinko at Emory University

NOTE: This is an eight part ME-P series based on a weekend lecture I gave more than a decade ago to an interested group of graduate, business and medical school students. The material is a bit dated and some facts and specifics may have changed since then. But, the overall thought-leadership information of the essay remains interesting and informative. We trust you will enjoy it.


The underwriting of US Government securities is the largest underwriting market in the world, but are issued a bit differently than we have seen to date, in this series..

For example, there is no such thing as a negotiated underwriting on a US Government security. All offerings of the Treasury are sold by auction. The auction is conducted by the Federal Reserve Bank of New York in accordance with a published schedule. Unfortunately, they are not open to the public, just primary dealers. A bank or investment dealer is appointed by the president of the Federal Reserve Bank of New York and are the only entities authorized to buy and sell government securities in direct dealings with the FED. One becomes a primary dealer through qualifications of reputation, underwriting capacity, and adequacy of staff and facilities.

Currently, 13 and 26-week treasury bills are offered every week on Mondays, while 52- week bills are auctioned once a month. Treasury notes and bonds are auctioned much less frequently on a schedule that will not be asked on your exam. Those dealers wishing to acquire a particular Treasury security enter bids on a yield basis rather than at a specific  price. This method is sometimes called a Dutch auction. As a practical matter, about a week or so before the proposed auction, the Treasury announces the following four items: amount, maturity date, nominal or coupon rate anticipated, and  the minimum denominations available (except for T bills which don’t have interest coupons and always carry a minimum denomination of $10,000).

Can the individual medical professional purchase newly issued Treasuries? Yes! Rather than turning in a competitive bid, as the primary dealer does, the individual will turn in a non-competitive bid. Competitive bidding with governments is similar to the other competitive bidding discussed above. The underwriter turning in the lowest bid, wins. Due to the enormous size of Treasury offerings, it is extremely rare that the lowest bidder is able to take the entire issue. That being the case, the Treasury moves to the next best and the next best bidders, until most of the issue is taken. There is always a small portion left over for the non-competitive bidders.  Non-competitive bids may only be made in amounts of $1 million or less.  All non-competitive bids are automatically filled at the average yield of the competitive bids which have been accepted.

Underwriting  State Issues (Blue Sky Registration)

Unlike Federal issues, there are three types of State registration that are important for the medical professional to know:

Notification: This is the simplest form of registration and is used by a an issuer who has been in continuous operation for at least the previous three years.  Most, but not all, states permit registration by notification. 

Coordination: This occurs when an issuer wishes to coordinate a Federal registration under the Securities Act of 1933 with Blue Sky registration in one or more states. Under most circumstances, the Blue Sky registration automatically becomes effective when the Federal registration statement becomes effective.

Qualification: Any security may be registered in a state by qualification, but it’ s most commonly used by those issuers who are unable to use notification or coordination. Registration by Qualification becomes effective when so ordered by the State Administrator.

Exempt Securities

There are many securities which are exempt from the Act of ’33 registration and prospectus requirements. They include:

  • US Government and  Federal Agency issues.
  • Municipal, State issues and commercial paper with a maturity not in excess of 270 days.
  • Intra-state offerings (Rule 147)  because they are blue-sky chartered within the state.
  • Small Public offerings (Regulation A) if the value of the securities issued does not exceed $5,000,000 in any  12 month period. An issuer using the Regulation A exemption does not make the normal filings with the SEC in Washington. Instead, they file a simplified disclosure document with their SEC Regional Office, known as an Offering Statement. It must be file at least 10 business days prior to the initial offering of the securities. No securities may be sold unless issuer has furnished an offering circular (full disclosure document) to the purchaser at least 48 hours prior to the mailing of confirmation of the sale, and, if not completed within 9 months from the date of the offering circular, a revised circular must be filed. Every 6 months, issuers must file a report with the SEC of sales made under the Regulation A exemption until offering is completed.
  • Traditional insurance policies are considered to be securities and are exempt, as are fixed annuities. However, some of the newer forms of life insurance, like variable life, as well as variable annuities, have investment characteristics and, therefore are not exempt from registration.
  • Commercial paper and banker’s acceptances (9 month or shorter maturity), since they are money market instruments.

US capitol

The Private Placement (Regulation D) Securities Exemption

Since the Securities Act of 1933 requires disclosure of all public offerings (other than the exemptions just described), it should make sense that any securities offering not offered to the public would also be exempt. The Act provides a registration exemption for private placements, know as Regulation D.

Since one of the stated purposes of the Act of 1933 is to prevent fraud on the sale of new public issues, an issue which has only a limited possibility of injuring the public may be granted an exemption from registration. The SEC just doesn’t have the time to look at everything so they exempt offerings which do not constitute a “public offering”. Strict adherence to the provisions of the law, however, is expected and is scrutinized by the SEC. This exemption provision of the Act of ’33 lies within Regulation D.

Regulation D describes the type and number of investors who may purchase the issue, the dollar limitations on the issue, the manner of sale, and the limited disclosure requirements. Bear in mind at all times that from the issuer’s viewpoint, the principal justification for doing a private, rather than public offering, is to save time and money, not to evade the law. Remember, it is just as illegal to use fraud to sell a Regulation D issue as it is in a public issue. However, if done correctly, a Regulation D can save time and money, and six separate rules (501-506).

Rule 501: Accredited investors are defined as: corporations and partnerships with net worth of $5,000,000 not formed for the purpose of making the investment; corporate or partnership “insiders”; individuals and medical professionals with a net worth (individual or joint) in excess of $1,000,000; individuals with income in excess of $200,000 (or joint income of $300,000) in each of the last two years, with a reasonable expectation of having income in excess of $200,000 (joint income of $300,000) in the year of purchase; and any entity 100% owned by accredited investors.

Rule 502:  The violations of aggregation and integration are defined:

Aggregation: Sales of securities in violation of the dollar limitations imposed under Rules 504 and 505 (506 has no dollar limitations).

Integration: Sales of securities to too large a number of non-accredited investors, in violation of the “purchaser limitations” set forth in Rules 505 and 506 (504 has no “purchaser limitations”).

Rule 503: Sets forth notification requirements. An issuer will be considered in violation of Regulation D, and therefore subject to Federal penalties, if a Form D is not filed within 15 days after the Regulation D offering commences.

Rule 504: Enables a non-reporting company to raise up to $1,000,000 in a 12-month period without undergoing the time land expense of an SEC registration. Any number of accredited and non-accredited investors may purchase a 504 issue.

Rule 505: Enables corporations to raise up to $5,000,000 in a 12-month period without a registration. The “purchaser limitation” rule does apply here. It states that the number of non-accredited investors cannot exceed 35.

Rule 506: Differs from 505 in two significant ways. The dollar limit is waived and the issuer must take steps to assure itself that, if sales are to be made to non-accredited investors, those investors meet tests of investment “sophistication”. Generally speaking, this means that either the individual non-accredited investor has investment savvy and experience with this kind of offering, or he is represented by someone who has the requisite sophistication. This representative, normally a financial professional, such as an investment advisor, accountant, or attorney, is referred to in the securities business as a Purchaser Representative.

Obviously, we would have few problems if only medical investors in private placements were accredited investors, but that is not always the case. Since we are limited to a maximum of 35 non-accredited investors, how we count the purchasers becomes an important consideration. The SEC states that if a husband and wife each purchase securities in a private placement for their own accounts, they count as one non- accredited investor, not two. It would also be true that if these securities were purchased in UGMA accounts for their dependent children, we would still be counting only one non- accredited investor.

In the case of a partnership, it depends upon the purpose of the partnership. If the partnership was formed solely to make this investment, then each of the partners counts as an individual accredited or non-accredited investor based upon their own personal status, but if the partnership served some other purpose, such as a law firm, then it would only count as one purchaser .

Regulation D further states that no public advertising or solicitation of any kind is permitted. A tombstone ad may be used to advertise the completion of a private placement, not to announce the availability of the issue.

As a practical matter, however, whether required by the SEC or not, a Private Offering Memorandum for a limited partnership, for example, is normally prepared and furnished so that all investors receive disclosure upon which to base an investment judgment.

If any of the provisions of the Securities Act of 1933 are violated by an issuer, underwriter, or investor, this is known as “statutory underwriting”, underwriting securities in violation of statute. One who violates the ’33 Act is known as a statutory underwriter. One all too common example of this occurs when a purchaser of a Regulation D offering offers his unregistered securities for re-sale in violation of SEC Rule 144, an explanation of which is given below:

In simple English, SEC Rule 144 was created so that certain re-sales of already-existing securities could be made without having to file a complete registration statement with the SEC. The time and money involved in having to file such a registration is usually so prohibitive as to make it uneconomical for the individual seller. What kinds of re-sales are covered by Rule 144 and are important to the medical investor? Let’s first define a few terms.

Restricted Securities: Unregistered Securities purchased by a medical or other investor in a private placement. Also called Letter Securities, Legend Securities, referring to the fact that purchasers must sign an “Investment Letter” attesting to their understanding of the restrictions upon re-sale and to the “Legend” placed upon the certificates indicating restriction upon resale.

Control Person: A corporate director, officer, greater than 10% voting Stockholder, or the spouse of any of the preceding, are loosely referred to as Insiders or Affiliates due to their unique status within the issuer .

Control Stock: Stock held by a control person. What makes it control stock is who owns it, not so much how they acquired it.

Non-Affiliate:  An investor who is not a control person and has no other affiliation with the issuer other than as an owner of securities.

Rule 144 says that restricted securities cannot be offered for re-sale by any owner without first filing a registration statement with the SEC:

  1. unless the securities have been held in a fully paid-for status for at least two years;
  2. unless a notice of Sale is filed with the SEC at the time of sale and demonstrating compliance with Rule 144
  3. unless small certain quantity apply.

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com


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One Response

  1. T bills

    Rates on one-month Treasury bills are negative for a sixth consecutive day, the longest stretch since the end of 2011, as demand for the safest and most liquid securities surges into quarter end.



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