IEM Prospectus: 2006 US House Control Market

On Thursday, June 1, 2006, at 12:15pm CDT, the Iowa Electronic Market (IEM) will open trading in a market based the composition of the US House of Representatives after the 2006 U.S. elections. This document describes that market and should be viewed as a supplement to the Trader’s Manual. Except as specified in this prospectus, trading rules for this market are the same as those specified in the Trader’s Manual for the Iowa Electronic Market.

Contract liquidation values in this winner-takes-all House Control Market will be determined by whether the Republicans increase the number of seats they hold in the House, maintain an absolute majority but do not increase their lead, or lose the absolute majority. The contract that represents the actual outcome of the election will have a liquidation value of $1.00. All other contracts will expire worthless.

CONTRACTS

The financial contracts initially traded in this market are:

Code	Contract Description
RH.gain06	Republicans win more than 231 House seats
RH.hold06	Republicans win more than 217 but no more than 231 House seats
RH.lose06	Republicans win 217 or fewer House seats

The contract RH.gain06 represents the outcome that Republicans increase the number of seats they now hold in the House; that is, Republicans hold more than 231 House seats after the election. (231 is the number of Republicans in the House according to the Office of the Clerk of the House of Representatives on May 10, 2006.) The contract RH.hold06 represents the outcome that Republicans maintain an absolute majority in the House, but do not increase their control; that is, Republicans hold more than 217 and less than or equal to 231 House seats. The contract RH.lose06 represents the outcome that Republicans lose an absolute majority in the House (hold 217 or fewer House seats). All references to “seats” in this document are to voting seats in the House of Representatives and specifically exclude those non-voting seats held by Representatives from American Samoa, Guam, Puerto Rico, the U.S. Virgin Islands, and the District of Columbia.

DETERMINATION OF LIQUIDATION VALUES

This market is a winner-takes-all market. The contract that denotes the actual outcome of the election will have a $1.00 liquidation value; all others will expire worthless. For example, if as a result of the November 2006 elections, Republicans hold 220 House seats, the contract RH.hold will pay off $1.00 and the contracts RH.gain and RH.lose will each expire worthless.

The New York Times will be our official source of election results. For purposes of determining payoffs, we will use the composition of the House as determined by each member’s party affiliation on the election ballot.

In the event that the election is delayed or postponed, liquidation will take place in a timely fashion after the close of polling sites for the popular vote.

In the event that the liquidation values of contracts cannot be determined until after run-off elections are completed, liquidation will occur after a sufficient number of run-off elections are completed so as to determine the liquidation values. In this case, we will count the parties of elected representatives as of the date that they won their respective elections. That is, party changes or vacancies that arise between the general election and runoffs will have no effect on IEM contract values.

If a candidate is nominated by more than one party and one of the parties is a major party (Democrat or Republican), that candidate will be counted according to his or her major party affiliation (Democrat or Republican). If none of the parties nominating a candidate are Republican or Democrat, we will count that candidate as Non-Republican. If a party goes by multiple designations (such as the Democratic- Farmer-Labor Party of Minnesota) and one of the party designations is a major party (Democrat or Republican), the candidate of that party will be counted according to the party’s major party designation (Democrat or Republican). If none of the designated parties are Republican or Democrat, we will count that party’s candidate as Non-Republican.

Liquidation formulas can be viewed by first selecting Display Options and then choosing Liquidation Formulas.

The judgment of the IEM Directors will be final in resolving questions of interpretation and typographical or clerical errors.

CONTRACT SPIN-OFFS

The Directors of the IEM reserve the right to introduce new contracts to the market as spin-offs of existing contracts. When a contract spin-off occurs, an original contract will be replaced by new contracts which divide the payoff range of the original contract into sub-intervals. No holder of the pre-spinoff contracts will be adversely affected. Traders will receive the same number of each of the new contracts as they held in the original, and the sum of the liquidation values of the new contracts will equal the liquidation value of the original. Decisions to spin-off a contract will be announced at least two days in advance of the spin-off. The new contract names, the specifications regarding liquidation values and the timing of the spin-off will be included in the announcement. This announcement will appear as an Announcement on your WebEx login screen.

CONTRACT BUNDLES

Fixed price contract bundles consisting of one share of each of the contracts in this market can be purchased from or sold to the IEM system at any time. The price of each fixed price contract bundle is $1.00. Because exactly one of the listed U.S. House compositions will result from the election, the total payoff from holding a fixed price contract bundle until the market closes is $1.00.

To buy or sell fixed price contract bundles from the system, use the “Market Orders” option from the Trading Console. Select “House06 (buy at fixed price)” from the Market Orders list to buy bundles. Select “House06 (sell at fixed price)” to sell bundles.

Bundles consisting of one share of each of the contracts in this market may also be purchased and sold at current aggregate market prices rather than the fixed price of $1.00. To buy a market bundle at current ASK prices, use the “Market Order” option as above but select “House06 (buy at market prices).” To sell a bundle at current market BID prices, select “House06 (sell at market prices).”

Bundle purchases will be charged to your cash account and bundle sales will be credited to your cash account.

MARKET CLOSING

This market will remain open until contract liquidation. Liquidation values will be credited to the cash accounts of market participants.

MARKET ACCESS

Current and newly enrolled IEM traders with U.S. dollar accounts will automatically be given access rights to the 2006 House Control Market. Access to this market is achieved by logging into the IEM and choosing “House06” from the Navigation Bar.

Funds in a trader’s cash account are fungible across markets so new investment deposits are not required. Additional investments up to the maximum of $500 can be made at any time. New traders can open accounts using the IEM OnLine Account Application page at https://iemweb.biz.uiowa.edu/signup. There is a one-time account registration fee of $5.00, and investments are limited to the range of $5.00 to $500.

Requests to withdraw funds may be submitted at any time by completing the IEM’s Online Withdrawal Request form or by completing and mailing the paper version of the request form. Additional information about requesting withdrawals is available at tippie.uiowa.edu/accounts/withdrawals.html.