Prospectus: 2006 U.S. Senate Control Winner-Takes-All Market

On Thursday, June 1, 2006, at 12:30pm CDT the Iowa Electronic Market (IEM) will open trading in a market based the composition of the U.S. Senate 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 Senate Control Market will be determined by whether the Republicans increase the number of seats they hold in the Senate, maintain a majority but do not increase their lead, or lose the 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
RS.gain06     Republicans hold more than 55 Senate seats
RS.hold06     (Republicans hold 51 to 55 Senate seats) OR
(Republicans hold 50 Senate seats AND the Vice-President is a Republican)
RS.lose06     (Republicans hold 50 seats AND the Vice-President is a Democrat) OR
(Republicans hold fewer than 50 Senate seats)

The contract RS.gain06 represents the outcome that Republicans increase the number of seats they now hold in the Senate after the elections; that is, Republicans hold more than 55 Senate seats after the election. (55 is the number of Republicans in the Senate according to the Office of the Clerk of the House of Representatives on May 10, 2006.) The contract RS.hold06 represents the outcome that Republicans maintain a majority in the Senate (including the Vice President if necessary), but do not increase their control after the elections; that is, Republicans hold exactly 51 to 55 Senate seats OR Republicans hold exactly 50 Senate seats and the Vice Presidency. The contract RS.lose06 represents the outcome that Republicans lose the majority in the Senate after the elections (hold less than 50 Senate seats OR exactly 50 Senate seats, but not the Vice Presidency). Thus, ties in the Senate are broken in favor of the party of the Vice President.


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 2006 general elections, Republicans hold 51 Senate seats, the contract RS.hold06 will pay off $1.00 and the contracts RS.gain06 and RS.lose06 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 Senate as determined by each member's party affiliation at the time of the election. For newly elected Senators, this will be their party affiliations as shown on the election ballot. For Senators not standing for re-election, this will be their party affiliations as reported in the most recent Congressional Quarterly Weekly Report at the time of the election.

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 senators and as of the date that they won their respective elections and we will count the parties of senators not up for re-election as of the date of the general election. That is, party changes or vacancies that arise between the general election and runoffs will have no effect on IEM contract values.

If there is a vacant senate seat not up for re-election and not filled by the election, that seat will be counted as belonging to the party of the governor of the state of that senate seat after the election.

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. Senate 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 "Senate06 (buy at fixed price)" from the Market Orders list to buy bundles. Select "Senate06 (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 "Senate06 (buy at market prices)." To sell a bundle at current market BID prices, select "Senate06 (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 Senate Control Market. Access to this market is achieved by logging into the IEM and choosing "Senate06" 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/iem/accounts/withdrawals.html.