15 Issuing Securities

Question 1

A syndicate is offering stock at a POP of $10. In the secondary market, however, the stock has already dropped to $8; therefore, the lead underwriter appoints a syndicate manager to place a bid in the secondary market of $8.75. This practice:

A. Is called stabilization
B. Is a violation of SEC rules
C. Is a violation of FINRA rules
D. Is called front running

Answer 1

A. Is called stabilization

Rationale:
This is the only time that anyone can prop up the price of the stock during the offering period, it’s called “stabilization.” Make sure the bids placed are not higher than the POP.

Question 2

Which of the following may a registered rep do during the cooling off period?

A. Send a red herring to customers who have given indications of interest
B. Attach a research report to the preliminary prospectus
C. Use the red herring to gain the SEC’s approval of the issue
D. Highlight the most important points of a red herring for a favored customer

Answer 2

A. Send a red herring to customers who have given indications of interest

Rationale:
The SEC doesn’t approve/disapprove anything. Never highlight the red herring and never attach anything to it. Just deliver it to the customer as is.

Question 3

Liability for unsold shares after the offering period closes is borne only by a:

A. Member of a selling group in a best efforts underwriting
B. Member of a selling group in a firm commitment
C. Member of a syndicate in a best efforts underwriting
D. Member of a syndicate in a firm commitment

Answer 3

D. Member of a syndicate in a firm commitment

Rationale:
Only a syndicate member could ever have liability, and only in a “firm commitment” underwriting.

Question 4

All of the following are exempt issuers except:

A. XYZ, a bank holding company
B. Cairo, Illinois
C. Femwood State Bank
D. US Government

Answer 4

A. XYZ, a bank holding company

Rationale:
A bank holding company gets no exemption. These are public companies, like Bancorp South, or First Midwest Bancorp, Inc. A bank is a bank, but a bank holding company is just another public company, subject to the filing requirements of the Act of 1933 and the reporting
requirements of the Act of 1934

Question 5

Only one of the following issuers will NOT issue common stock, and that issuer is:

A. XXR corporation
B. FHLMC
C. GNMA
D. FNMA

Answer 5

C. GNMA

Rationale:
GNMA (Ginnie Mae) is not a company, just an agency of the federal government.

Question 6

Which of the following parties takes on liability for unsold shares?

A. Member of a syndicate in a standby underwriting
B. Member of a syndicate in a best efforts underwriting
C. Member of the selling group
D. Member of a syndicate in an all or none underwriting

Answer 6

A. Member of a syndicate in a standby underwriting

Rationale:
Only a syndicate member could ever have liability, and only in a “firm commitment” underwriting. A standby offering/underwriting is for an additional offer of shares; syndicate members promise to purchase any unused rights/shares of the offer from the issuer.

Question 7

Which of the following securities would likely not have to be registered with the SEC prior to a public offering?

A. Non-profit organization securities
B. Unit investment Trusts
C. Non-convertible preferred stock
D. ADR’s

Answer 7

A. Non-profit organization securities

Rationale:
Stock has to be registered; ADR’s are stock.

Question 8

Which of the following securities would have to be registered with the SEC prior to an initial public offering?

A. Indianapolis General Obligation bond
B. Church bonds
C. Bank securities
D. Preferred Stock

Answer 8

D. Preferred Stock

Rationale:
All are exempt/excused from the registration process except preferred stock.

Question 9

Which of the following parties has capital at risk in a transaction?

A. Underwriter
B. Registered representative
C. Agent
D. Broker

Answer 9

A. Underwriter

Rationale:
Agent-broker-registered rep all mean the same thing no capital at risk. An “underwriter” has to sell all the shares they’ve committed to sell, one way or another.

Question 10

The Securities Act of 1933 applies to which market?

A. Primary
B. Secondary
C. Third
D. First

Answer 10

A. Primary

Rationale:
The primary market is the only thing the Act of 1933 applies to. In the primary market, securities are issued in order to raise capital ($) for issuing corporations.

Question 11

ARC, Inc. is planning to make an initial public offering of $10,000,000 in only three states, all west of the Mississippi River. Therefore, ARC will:

A. Qualify for a Reg A exemption
B. Qualify for a Reg D exemption
C. File an S1 (standard registration statement)
D. Qualify for a Rule 147 exemption

Answer 11

C. File an S1 (standard registration statement)

Rationale:
They dont qualify for an exemption. They’re over the $5 million limit for Reg A, and they’re in more than one state, making Rule 147 unavailable, too. A standard registration statement is called an S1.

Question 12

If a corporate insider sells stock of her company held five months for a profit:

A. The profit must be disgorged to the corporation
B. She will be prosecuted for fraud by FINRA or other DEA
C. She will be prosecuted for fraud by the SEC
D. She must distribute 1% to the members of the board

Answer 12

A. The profit must be disgorged to the corporation

Rationale:
That’s called a “short swing profit” and I wouldn’t recommend taking it. “Disgorged,” by the way, means to “hand it over.”

Question 13

When must the final prospectus be delivered?

A. Before accepting payment from the client
B. No later than settlement
C. At or before the time payment is accepted
D. No later than receipt of confirmation

Answer 13

D. No later than receipt of confirmation

Rationale:
Memorize it and keep moving.

Question 14

Your customer, who is an accredited investor, bought stock in a private placement 15 months ago and would now like to sell some of her shares. The company has 10,000,000 shares outstanding, with the average weekly trading volume over the last four weeks at 115,000. Therefore, the customer may sell how many shares over the next 90 days?

A. 100,000
B. As determined by the company’s board of directors
C. As many as she likes
D. 115,000

Answer 14

C. As many as she likes

Rationale:
For an investor not affiliated with the company (not the CEO, bard member or 10% owner), the volume limits only apply during the first year. So , this individual can sell as much as he/she wants to.

Question 15

What is the required holding period for control stock?

A. 6 months
B. 9 month
C. None
D. 1 year

Answer 15

C. None

Rationale:
Control stock has no holding period—you just don’t want to make a short swing profit on it.

Question 16

Which of the following offerings requires that the issuer file with the SEC?

A. Interstate offering
B. Offerings of state-chartered bank
C. Intrastate offering
D. Offerings of church bonds

Answer 16

A. Interstate offering

Rationale:
The federal regulators are in charge of inter-state commerce. Intra-state would happen in one state and would be subject to only that state’s jurisdiction.

Question 17

An issuer would like to register shares of stock now and sell them over a two-year period. Therefore:

A. This is a shelf offering
B. The first offering must be sold at a higher price than all subsequent distributions
C. This is an illegal and unethical practice under FINRA rules
D. This is an illegal practice under SEC rules

Answer 17

A. This is a shelf offering

Rationale:
Just something else for you to memorize and enjoy!

Question 18

The red herring contains the:

A. SEC endorsement of the issue
B. Effective date
C. Final POP
D. Balance sheet

Answer 18

D. Balance sheet

Rationale:
Remember that the SEC doesnt endorse, verify, guarantee, approve, etc. The final POP and effective date have not been determined when the red herring comes out-the red text warns that information may be added later, including that information.

Question 19

XYL, Inc. did an IPO four years ago. Now, they are offering 10,000,000 additional shares to the public. This is an example of a:

A. Secondary offering
B. Delayed offering
C. Combined offering
D. Subsequent primary distribution

Answer 19

D. Subsequent primary distribution

Rationale:
When an issuer sells brand new shares to the public, we have to see the word “primary” in there somewhere. This might be their second offering of shares, but it is NOT a “secondary” offering. In a “secondary” offering someone other than the issuer receives the proceeds.

Question 20

RRY, Inc. maintains headquarters in the state of Ohio, where it holds 80% of its assets and does 80% of its business. If RRY limits sales to Ohio residents, it may qualify for which of the following exemptions?

A. Rule 144
B. Rule 147
C. Reg A
D. Reg D

Answer 20

B. Rule 147

Rationale:
Rule 147 is for intra- (within the) state offerings. The SEC is for inter- (among, between the) state(s) commerce.

Question 21

What is the holding period for shares purchased through a private placement by non- affiliates of the issuer?

A. 12 months
B. 9 months
C. 6 months
D. None of the choices listed

Answer 21

C. 6 months

Rationale:
Stock sold through a private placement must be held by a non-affiliate for 6 months before he or she sells it. This period is subject to frequent change, so see our updates at www.passthe7.com/updates.

Question 22

What is the required holding period for stock purchased in a Rule 147 offering?

A. 12 months
B. 6 months
C. 9 months
D. There is no holding period

Answer 22

D. There is no holding period

Rationale:
You can’t sell it to a non-resident for the first 9 months, but you can sell it to a resident as soon as you like. A holding period requires you to hold the stock, period.

Question 23

All of the following are true statements except:

A. No sales may be made during the cooling off period
B. A tombstone ad may be used during the cooling off period
C. Registered representatives may not alter or highlight the red herring
D. Only the issuer—not the underwriters—may file the standard registration statement

Answer 23

D. Only the issuer—not the underwriters—may file the standard registration statement

Rationale:
If the issuer couldn’t get a little help from the underwriters, not too many registration statements would ever get filled out. Most underwriters don’t just help-they actually fill the thing out. You could find an actual registration statement if you were so inclined. Might help to make this information more understandable.

Question 24

All of the following are true of Rule 144 except:

A. The greater of 1% of the shares outstanding or the average weekly trading volume over the four most recent weeks may be sold over a 90-day period
B. Rule 144 covers restricted, legend, private placement, and control stock
C. Reg D stock is considered registered with the filing of Form 144
D. Form 144 must be filed within 10 business days of the first sale

Answer 24

D. Form 144 must be filed within 10 business days of the first sale

Rationale:
The form must be filed no later than the time of the sale-not after the sale has already been made.

Question 25

What is the maximum number of institutional buyers in a Reg D offering?

A. 100
B. There is no limit
C. 1% of outstanding shareholders
D. 35

Answer 25

B. There is no limit

Rationale:
You don’t have to worry about maximum numbers for institutional buyers. There is only a maximum for non- institutional or “non-accredited” investors—35 of those little people. But as many pension funds, mutual funds, and rich folks as you want.

Question 26

Rule 144 covers restricted and control stock. Rule 145 covers:

A. Puts and calls held in offshore accounts
B. Non-restricted, non-control stock
C. Proxies to be sent to shareholders for mergers and acquisitions
D. Restricted, non-control stock

Answer 26

C. Proxies to be sent to shareholders for mergers and acquisitions

Rationale:
Another memorization point.

Question 27

The smallest component of the underwriting spread is usually the:

A. Manager’s fee
B. Selling concession
C. Underwriting fee
D. Joint takedown

Answer 27

A. Manager’s fee

Rationale:
The size of this piece is the smallest; luckily, the manager gets this little piece from every single security sold. Then, they also make the underwriting fee and selling concession when they sell. So, the managing underwriter/lead underwriter definitely makes the most money, but the “manager’s fee” is the smallest piece of the three.

Question 28

The largest component of the underwriting spread is usually the:

A. Underwriting fee
B. Selling concession
C. Manager’s fee
D. Reallowance

Answer 28

B. Selling concession

Rationale:
If you want the biggest, fattest piece, you have to make the sale. The selling concession is for those who actually make the sale. Could be a selling group member or a syndicate member.

Question 29

What is a letter of deficiency?

A. Letter sent by the SEC denoting insufficient information on a registration statement
B. Document prepared by the syndicate to potential buyers when market conditions appear unfavorable
C. Letter sent by a broker-dealer to a customer who has failed to pay for a new issue
D. Document prepared by the selling group when market conditions appear unfavorable

Answer 29

A. Letter sent by the SEC denoting insufficient information on a registration statement

Rationale:
Filling out an S1/standard registration statement for the
SEC is like writing a term paper for an impossibly fastidious English teacher. You write the paper—she attacks it
with red pen and demands a rewrite. When the SEC demands a “rewrite,” they call it a “letter of deficiency.”

Question 30

All of the following would be listed in a tombstone except:

A. Names of selling group members
B. Names of syndicate members
C. Name of issuer
D. Name of lead underwriter

Answer 30

A. Names of selling group members

Rationale:
A tombstone names the issuer and the syndicate members. It announces that securities will be for sale and tells the reader how to obtain a prospectus.

Question 31

The SEC has just cleared an issue for ABC, Inc. This means that:

A. The SEC has cleared up factual errors in lieu of sending an X-1 statement
B. The SEC has passed on the merits of the issue
C. The SEC has passed on the accuracy of the information
D. ABC filed an S1

Answer 31

D. ABC filed an S1

Rationale:
The SEC doesn’t verify or pass judgment, period.

Question 32

All of the following are activities associated with investment banking except:

A. Advising on the best ways to raise capital
B. Buying large blocks of securities from an issuer and selling them to the public
C. Offering large blocks of securities to the public
D. Making loans to clients

Answer 32

D. Making loans to clients

Rationale:
They raise money by offering securities, not making loans to their clients. So, they’re “bankers” in a slightly different sense of the term, and the test wants you to know that they don’t do checking, savings, loans, etc.

Question 33

RTE Securities is a member of an underwriting syndicate, which has agreed to sell as much of a $10,000,000 offering as possible and return any unsold securities to the issuer. This is:

A. A hedged underwriting
B. Illegal in all 50 states
C. A best efforts underwriting
D. Illegal without approval of the securities by the SEC

Answer 33

C. A best efforts underwriting

Rationale:
What else would we call it? Go make your best efforts, kid, and we’ll take whatever you can raise.

Question 34

XLT, Inc. is preparing to offer $20,000,000 of securities to the public. XLT has an agreement with its underwriters that they must sell at least $20,000,000 or cancel the offering. This is:

A. A violation of SEC RuleG-37
B. An all or none underwriting
C. Illegal in all 50 states
D. A packaged underwriting

Answer 34

B. An all or none underwriting

Rationale:
We’ll take all of it, or none of it. The money raised from investors goes into an escrow account, and if they don’t raise enough money, the investors get their money back plus a pro rata share of escrow proceeds.

Question 35

XLT, Inc. is preparing to offer $20,000,000 of securities to the public. XLT has an agreement with its underwriters that they must sell at least $20,000,000 or cancel the offering. However, the syndicate may sell up to $25,000,000 if able. This is:

A. A low-high commitment
B. Too non-binding to meet SEC approval
C. A mini-max underwriting
D. Too vague to meet SEC approval

Answer 35

C. A mini-max underwriting

Rationale:
A good test-taker would get this one right, even if he hadn’t studied much. The question gives you a minimum number
and a maximum number. One of the choices says “mini-ma underwriting.”

Question 36

XLT,Inc.ispreparingtooffer $20,000,000 of securities to the public. XLT has an agreement with its underwriters that the syndicate will purchase for its own account any securities it
can not sell to the public. This is:

A. A firm commitment
B. Sufficient to meet SEC approval
C. A best efforts underwriting
D. Illegal in some states, due to high risks involved

Answer 36

A. A firm commitment

Rationale:
Sounds like a firm commitment, right? As always, they dont get real creative with the language. Best efforts - make your best efforts, that’s all. All or none • we’ll take all of it or none of it. Firm commitment = you just bought them, firm.

Question 37

The CEO of a public corporation purchased 10,000,000 shares of her company’s stock via a Reg D offering. After retiring, she hires an underwriter to offer the shares to the public in order to buy an estate in Malibu Beach, California. This is known as a:

A. Golden State Offering
B. Registered, secondary offering
C. Post-IPO
D. Golden parachute

Answer 37

B. Registered, secondary offering

Rationale:
It’s a “secondary” offering because someone other than the issuer gets the proceeds. The exam might call it a “registered secondary.”

Question 38

XXL, Inc. has 20,000,000 shares outstanding. Below is listed the trading volume over the past several weeks:

Week Ending Shares Traded
April 1 230,000
April 8 206,000
April 15 210,000
April 22 206,000
April 29 210,000

The CEO of XXL, Inc. may sell how many shares over the next 90 days?

A. 208,000
B. 200,000
C. 213,000
D. 212,000

Answer 38

A. 208,000

Rationale:
You have to run both calculations and take the bigger number. 1 % of the outstanding shares = 200,000. The average over the four most recent weeks = 208,000. Take the bigger of the two numbers.

Question 39

A resident of Waukesha, Wisconsin purchased ARQ, Inc. common stock in a Rule 147 offering. How long must she wait before selling ARQ common to a resident of Wauwatosa, Wisconsin?

A. 12 months
B. There is no waiting period for this investor
C. 9 months
D. 6 months

Answer 39

B. There is no waiting period for this investor

Rationale:
She can sell to a Wisconsin resident sooner. She just can’t sell to a resident of another state for 9 months.

Question 40

The Securities Act of 1933 covers:

A. Registration of member firms
B. Fraud in the primary market
C. Short sales
D. Margin requirements

Answer 40

B. Fraud in the primary market

Rationale:
The Act of ‘33 is about the primary market, period.

Question 41

The Mega Corporation is offering 200,000 units to the public at a public offering price of $7 per unit. Each unit is comprised of 3 shares of preferred stock and 1 perpetual warrant with an exercise price of $14 per share. If each warrant entitles the holder to purchase 100 shares, the Mega Corporation will raise how much capital through the primary offering?

A. $80 million
B. $1.4 million
C. $29.4 million
D. $4.2million

Answer 41

B. $1.4 million

Rationale:
As usual, the math skills involved are not that high. The company is selling 200,000 units for $7 each. Period.

Question 42

Before the cooling off period for a new issue of securities ends, the issuer and the underwriters hold a meeting to review the status of the offering, which is known as the:

A. Bottom-up review session
B. Top-down review session
C. Pre-release meeting
D. Due diligence meeting

Answer 42

D. Due diligence meeting

Rationale:
Remember that the issuer, the underwriters, and anyone crazy enough to sign the registration statement are “unconditionally liable” to all buyers of the security. If important information is misstated or left out, there could be lawsuits a’ plenty. Given that, a “due diligence” meeting sure sounds like a good idea, right?

Question 43

How would you describe a “rights offering” to a customer who has called up to inquire?

A. It is also referred to as a “secondary offering”
B. It is connected primarily to preferred stock offerings
C. It is connected to debt financing as a sweetener or “kicker”
D. It involves maintaining proportional ownership for current owners of common stock

Answer 43

D. It involves maintaining proportional ownership for current owners of common stock

Rationale:
Warrants-not rights-are used as a sweetener of “equity kicker” to make an issue of bonds or preferred stock more attractive. Preferred stock does not generally have the non-dilution that common stock enjoys. A “secondary offering” would never involve the issuer of the security.

Question 44

ABC is making an equity offering to accredited investors that is not required to be registered under the Securities
Act of 1933. This offering is a(an):

A. Shelf offering
B. Registered secondary
C. Rule 144 offering
D. Private placement

Answer 44

D. Private placement

Rationale:
A private placement is not a secondary offering; it is a primary offering that is not registered under a “Reg D” exemption.

Question 45

A corporation has an outstanding bond issue that they are refunding. This means the corporation:

A. Is issuing stock to raise capital to purchase the bonds
B. Is purchasing the bonds directly from bond holders using corporate profits
C. Is reducing the leverage in its capital structure
D. Is replacing an existing debt with a new debt issued usually at a lower rate

Answer 45

D. Is replacing an existing debt with a new debt issued usually at a lower rate

Rationale:
Refunding and “re-financing” are really the same thing. If rates go down, the issuer issues new debt on which they can pay a lower interest rate. They take some of the proceeds of the new bond issue and retire the existing bonds.

Question 46

All of the following are found in the final prospectus for an equity offering except:

A. Business plan
B. Date and offering price
C. Statement that the SEC neither approves nor disapproves of the offering
D. Agreement among underwriters

Answer 46

D. Agreement among underwriters

Rationale:
The agreement among underwriters is only for the underwriters and the regulators. Investors do not need to see this document in order to make an informed decision about investing in the company.

Question 47

All of the following are accurate statements of the preliminary prospectus (red herring) except:

A. The final public offering price is not included
B. It is used to accept indications of interest during the cooling off period
C. Information may be added at a later date
D. After delivery the investor’s money may be placed in escrow until the effective date

Answer 47

D. After delivery the investor’s money may be placed in escrow until the effective date

Rationale:
It’s too soon to take investors’ money, but the other choices are true.

Question 48

Jersey Securities is the lead underwriter for XYZ Corporation’s new issue of 1 million shares of 5% convertible, non-cumulative preferred stock. If at the close of the offering period there are unsold shares and, therefore, a loss, the loss will be divided among:

A. The selling group members
B. The underwriting firms and the issuer
C. The underwriting firms and selling group members
D. The underwriting firms

Answer 48

D. The underwriting firms

Rationale:
Selling group member firms are never liable for unsold shares. In a firm commitment, the issuer will receive X amount of money from the underwriters, regardless of how many shares are sold.

Question 49

Your employing broker-dealer is a syndicate member for an APO structured as a firm commitment underwriting. Your firm’s liabilities and responsibilities in connection with this offering are detailed in the:

A. Agreement among underwriters
B. Letter of intent
C. Statement of intent
D. Underwriting agreement

Answer 49

A. Agreement among underwriters

Rationale:
Use good test-taking . . . who has to agree to these liabilities and responsibilities? The underwriters, among themselves. Agreement among underwriters. The underwriting agreement is between the issuer and the syndicate. Another name for this document is “syndicate letter,” which also provides an inherent clue.

Question 50

When purchasing shares of an Initial Public Offering, an investor would pay the public offering price plus:

A. The spread
B. A commission only
C. The spread and a fair and reasonable markup
D. No commission or markup

Answer 50

D. No commission or markup

Rationale:
The POP (public offering price) already includes the compensation to the underwriters and selling group members. No commissions or markups are added to the POP, and all investors pay the same POP.

Question 51

ABC Unlimited just completed its initial public offering, underwritten on a firm commitment basis. Out of 1 million shares offered, 9.5 million were placed. Therefore, the remaining 500,000 shares will be:

A. Allocated among the syndicate members according to each firm’s liability
B. Returned to the issuer
C. Confirmed to the selling group members
D. Split among syndicate members and ABC Unlimited

Answer 51

A. Allocated among the syndicate members according to each firm’s liability

Rationale:
In a firm commitment, the syndicate owes the issuer X amount, period. Selling group members NEVER have liability.

Question 52

Which of the following is not addressed by the Securities Act of 1933?

A. Insider trading violations
B. Additional public offerings
C. Contents of a prospectus
D. Non-exempt securities

Answer 52

A. Insider trading violations

Rationale:
Insider trading is handled by the Securities Exchange Act of 1934.

Question 53

The “syndicate letter” associated with an offering of securities is signed by the:

I. Selling group members
II. Managing underwriter
III. Syndicate members
IV. Issuer of the securities

A. I, III, IV
B. II, III
C. II, IV
D. I, III

Answer 53

B. II, III

Rationale:
This is an agreement among the syndicate members or “agreement among underwriters.” The selling group is not underwriting the issue; they are only acting as an agent for the syndicate in placing the shares with investors.

Question 54

When an issuing corporation offers additional shares of common stock to existing holders of the stock, this process is known as:

A. A green shoe offering
B. A secondary offering
C. A shelf offering
D. A rights offering

Answer 54

D. A rights offering

Rationale:
If the issuer is offering the shares, you can eliminate the word “secondary.” Nothing tells us the shares were registered and then sold gradually, so you can eliminate “shelf offering.” A “green shoe clause” allows the syndicate to sell more shares than allotted if the demand exists for an offering of securities.

Question 55

Under FINRA rules for initial public offerings, a “restricted person” is a person who:

A. May not purchase shares of the offering due to a lack of investment sophistication
B. May not purchase more than 10% of any public offering
C. May not purchase shares of the offering
D. May not purchase more than 10% of any public-or private-offering

Answer 55

C. May not purchase shares of the offering

Rationale:
A restricted person can’t buy any part of the offering of common stock. Restricted persons include: member firms, their employees, and the immediate family of their employees.

Question 56

The Trust Indenture Act of 1939 applies to:

A. Offerings of preferred slock and debentures only
B. Initial equity offerings only
C. Debentures
D. Municipal and corporate bonds

Answer 56

C. Debentures

Rationale:
This Act applies to corporate debt-any issue with more than 12 months’ maturity and at leasta $5 million par value.

Question 57

Offeringsofwhichofthe following securities require prospectus delivery to purchasers?

I. Variable life insurance
II. Fixed annuities
III. CMOs
IV. Non-convertible preferred stock

A. II, III
B. Ill, IV
C. I, II
D. I, III, IV

Answer 57

D. I, III, IV

Rationale:
Fixed annuities are not securities. Variable life (not term, or whole) insurance is also a security.

Question 58

Which of the following family members of a receptionist for a FINRA-memberfirm may purchase shares of a new equity offering?

A. Immediate family of a non- registered employee
B. Mother of a registered representative whose firm is an underwriter of the issue
C. Uncle of a registered principal
D. Mother of a registered representative whose firm is not an underwriter of the issue

Answer 58

C. Uncle of a registered principal

Rationale:
Aunts and uncles, grandmas and grandpas are okay-but it doesn’t matter whether the employee is registered or not.
Immediate family members of a receptionist are restricted, just as immediate family members of registered personnel are.

Question 59

Which of the following statements accurately states effects of the “cooling off period”?

A. Non-institutional investors may purchase limited amounts of the security during this period
B. Institutional investors only may purchase shares of the offering during this period
C. Deposits in federal funds may be taken but no shares delivered during this period
D. No sales are allowed during this period

Answer 59

D. No sales are allowed during this period

Rationale:
Indications of interest can be taken, but no sales occur during the cooling off period.

Question 60

When pricing a new equity issue, which of the following factors is least important?

A. Projected EPS
B. Book value
C. Par value
D. Expected dividends to be paid in the future

Answer 60

C. Par value

Rationale:
Par value for common stock is not an important factor to an investor, ever.

Question 61

All of the following relate to new offerings of equity securities except:

A. Regulation A
B. Securities Act of 193
C. Rule 147
D. Rule 144

Answer 61

D. Rule 144

Rationale:
Rule 144 governs secondary transactions for people selling restricted stock… the proceeds do not go to the issuer of the securities.

Question 62

Indications of interest given during the cooling off period for an IPO are:

A. Binding neither on the customer nor the broker-dealer
B. Binding on the customer
C. Binding on both the customer and the broker-dealer unless a prospectus is promptly delivered
D. Binding on the broker-dealer

Answer 62

A. Binding neither on the customer nor the broker-dealer

Rationale:
Indications of interest are non- binding. If the firm can’t actually get the shares, or if the customer changes her mind later… oh well.

Question 63

All of the following statements are accurate of “red herrings” or “preliminary prospectuses” except that:

A. They become obsolete when the final prospectus is effective
B. They are subject to amendment
C. They may not be delivered in conjunction with sales literature
D. They must contain the final public offering price of the issue

Answer 63

D. They must contain the final public offering price of the issue

Rationale:
The final POP is determined later and included in the final prospectus . . . or, the issuer might just send a statement with the POP and the release date to make the preliminary prospectus function as the final prospectus.

Question 64

If a corporation were uncertain about the market for initial public offerings and wanted to time its sales to match changing demand, they would most likely use which type of offering?

A. Shelf offering
B. Rule 147
C. Standby
D. Firm commitment

Answer 64

A. Shelf offering

Rationale:
A shelf offering would let the issuer register shares and then sell them gradually over a 2 or 3 year period.

Question 65

Rule 145 has to do with:

A. Mergers
B. Intra-state offerings of securities
C. Restricted securities
D. Control stock

Answer 65

A. Mergers

Rationale:
Mergers and acquisitions are covered by Rule 145, which requires disclosure to shareholders and their right to vote on the proposed merger/acquisition.

Question 66

ABC Underwriters has contracted with an issuer of securities to perform an underwriting in which the issuer will retain any shares that ABC and any selling group members fail to sell. The underwriting is known as a:

A. Green shoe clause
B. Best efforts
C. Shelf offering
D. Firm commitment

Answer 66

B. Best efforts

Rationale:
ABC only has to make its best efforts and may keep the proceeds for the shares they did manage to sell on behalf of the issuer. ABC is acting as an agent-not a principal-in this transaction.

Question 67

ABC Underwriters has contracted with an issuer of securities to perform an underwriting in which ABC will retain any unsold shares. This underwriting is known as a:

A. Green shoe clause
B. All or none
C. Firm commitment
D. Shelf offering

Answer 67

C. Firm commitment

Rationale:
ABC is acting in a principal capacity by giving a firm commitment to the issuer- ABC must pay the issuer for all shares, whether they are sold to investors or not.

Question 68

ABC Underwriters has contracted with an issuer of securities to perform an underwriting in which the issuer will cancel the offering if a certain minimum amount is not raised. This is known as a(an):

A. Standby underwriting
B. Firm commitment
C. Best efforts
D. All or none underwriting

Answer 68

D. All or none underwriting

Rationale:
In a best efforts underwriting, the issuer will live with whatever the underwriters can raise. In an all-or-none underwriting, the issuer will cancel the offering if the underwriters cant raise at least a certain amount.

Question 69

The prospectus for an upcoming offering of ABC common stock declares that roughly half the shares are being offered by ABC, Inc. and half by selling shareholders. Therefore, this is known as a:

A. Registered secondary
B. Combined offering
C. Shelf offering
D. Secondary distribution

Answer 69

B. Combined offering

Rationale:
If the issuer is selling, you can eliminate the word “secondary.” It is a combined offering in which some of the shares are sold by the issuer (primary) and some by somebody else (secondary).

Question 70

Under the Securities Act of 1933, non-exempt securities would include which of the following?

A. Shares of bank stock
B. Short-term commercial paper
C. Investments in small business investment companies
D. Preferred stock in a utility company

Answer 70

D. Preferred stock in a utility company

Rationale:
Bank stock, short-term debt, and small business investment company securities are exempt from the registration requirements of the Act.

Question 71

A Reg D exemption is afforded an issuer under the Securities Act of 1933 provided all of the following conditions are adhered to except:

A. Maximum number of non- accredited investors
B. No general solicitation
C. Investors must sign investment letters
D. Maximum amount of proceeds raised

Answer 71

D. Maximum amount of proceeds raised

Rationale:
There is no maximum amount that may be raised in a Reg-D private placement. Investors sign investment letters stating that they are not buying in order to quickly re-sell the securities.

Question 72

After a registered representative has spoken with several customers who have expressed interest in a new issue of common stock-and received the preliminary prospectus-th RR discovers that he is allotted 1,200 shares. The registered rep should, therefore:

A. Allocate the shares to each client who expressed interest on a pro rata basis
B. Allocate the shares to each client who expressed interest on a proportional basis
C. Contact all the customers who’ve expressed interest and ask if they’ve made a final purchase decision
D. Keep the shares for his own account as they meet the de minimis requirement

Answer 72

C. Contact all the customers who’ve expressed interest and ask if they’ve made a final purchase decision

Rationale:
All he can do is see who – if anyone – actually wants to buy some of the 1200 shares.

Question 73

If the following offering price (POP) is established as $19, the following stabilizing bid is not allowed:

A. $18.50
B. $18.99
C. $19.00
D. $19.10

Answer 73

D. $19.10

Rationale:
The bid can be no higher than the POP. The underwriters get to stabilize-not pump up–the price the shares are trading for on the secondary market.

Question 74

Under the Securities Act of 1933, which of the following is a non-exempt transaction?

A. Public offering of non-convertible preferred stock
B. Sale of T-bills through a federal reserve bank
C. Rule 147 offering
D. Reg-D offering

Answer 74

A. Public offering of non-convertible preferred stock

Rationale:
Only the offering of preferred stock is subject to SEC registration requirements.

Question 75

What is a standby underwriting?

Answer 75

A type of agreement to sell shares in an initial public offering (IPO) in which the underwriting investment bank agrees to purchase whatever shares remain after it has sold all of the shares it can to the public.