Chapter 1 - Public and Private Offerings Flashcards
Primary purpose of the Securities Act of 1933
Provide investors with full and fair disclosure regarding new issues (prospectus)
True or False: The SEC judges an offering’s investment merit and provides approval.
False
True or False: Blue-Sky Laws apply to broker-dealers and agents operating within a state
True
For how long may a new issue be sold under a shelf registration?
Up to 3 years
True or False: Shelf Registration gives flexibility to the issuer by allowing delayed or continuous sales.
True
The holding period for unregistered (restricted) securities under Rule 144 is __________.
6 Months
Once Form 144 is filed, owners have __________ to sell their securities.
90 Days
QIB stands for ___________________________.
Qualified Institutional Buyer (QIB)
QIBs are financial institutions that have at least $_________________ invested in securities of non-affiliated issuers.
$100 million
Rule 144A exempts sellers from the holding period and volume limitations of Rule 144 if trading is done with a _____.
QIB
What business structure features double taxation at both the corporate rate and the owner’s personal rate?
C Corporation
The SEC will issue a ____________________ to indicate that a registration statement is inadequate.
deficiency letter
If a completed registration must be amended, when will it become effective?
Upon SEC declaration
For how long must a prospectus be made available in the secondary market for an exchange-listed IPO?
25 days
What is a company that has less than $25 million in revenue and outstanding shares valued at no more than $25 million?
Small business issuer
What form is used by a small business seeking to raise $10 million or less?
Form SB-1
An issuer with $700 million outstanding voting shares would be placed in what category?
Well-Known Seasoned Issuer (WKSI)
An issuer with $75 million outstanding voting shares would be placed in what category?
Seasoned Issuer
What document may a Well-Known Seasoned Issuer (WKSI) use to communicate with potential investors?
Free writing prospectus
True or False: A free writing prospectus may be published only after a registration statement has been filed.
False
What provision in securities law restricts certain types of communication during the offering?
Gun Jumping
Shelf Registration is valid for up to _____ years.
3 Years
What is the maximum amount of proceeds selling shareholders may receive through a Regulation A offering?
$1.5 million
The maximum number of non-accredited investors in a Reg. D offering is _____.
35
A Purchaser Representative for a non-accredited investor may be an officer of the issuer if ________________________.
related to the purchaser.
U.S. companies may issue securities abroad and claim an exemption from registration under what provision?
Regulation S
What amount of time must elapse before equity securities issued under Regulation S may be resold into the U.S.?
1 year
What amount of time that must elapse before debt securities issued under Regulation S may be resold into the U.S.?
40 days
True or False: ADRs can be quoted on the NYSE, Nasdaq, the OTCBB, or the Pink Sheets.
True
What business structure provides flow-through tax treatment and has a P&L reported on the owner’s personal tax return?
An S Corporation
Accredited investors have net worth of at least $_________ or pre-tax income in each of the last two years of $________.
$1 million net worth, $200k pre-tax income
True or False: C Corporations and limited liability companies (LLCs) allow for an unlimited number of shareholders.
True
An S Corporation is allowed a maximum of ____ shareholders.
100
How is the taxation of income for S Corporations and LLCs identical to that of a partnership?
Federal tax is avoided by passing through income and loss to shareholders (no double taxation).
How many classes of stock may be issued by C Corporations and limited liability companies (LLCs)?
Both may issue multiple classes of stock.
What is an ownership characteristic of S Corporations, C Corporations, and limited liability companies (LLCs)?
Limited liability for the owners
How are C Corporation profits taxed?
At both the corporate and shareholder level (double taxation)
True or False: S Corporations may be foreign corporations with multiple classes of stock.
False. S Corporations must be domestic corporations with only one class of stock.
For tax purposes, S Corporations and limited liability companies (LLCs) are ______________ investments.
Pass through
True or False: Flexible management structure is a characteristic of a limited liability company (LLC).
True
In what does a real estate investment trust (REIT) invest?
A diversified portfolio of properties and/or mortgages
A REIT must have a minimum of ____ shareholders, with no more than ____% of the trust owned by _____ or fewer persons.
100 shareholders, 50% owned by five or fewer persons
What is an ownership characteristic of a REIT?
Limited liability
True or False: The initial offering of a REIT is exempt from the Securities Act of 1933.
False. Registration is required under the Act.
After the initial offering of a REIT, where will subsequent trading occur?
Either on an exchange or OTC
On what must 95% of a REIT’s gross income be derived?
Real estate-related activities, interest received on mortgages, or dividends and interest
95% of a REIT’s gross income may be based on various activities, and ____% must be solely from real estate.
75%
What investment benefit do REITs provide to investors?
Stable dividend payments
A REIT will not be taxed on its income if it distributes ____% of it to shareholders.
90%
Partnerships distribute ____% of income to owners, while REITs generally distribute ___% of income to shareholders.
100% income to owners, 95% shareholders
True or False: Generally, shareholders bear the burden of paying tax on income generated by a REIT.
True. Most REITs distribute a significant amount of their income to shareholders.
True or False: A REIT is considered an investment company.
False
A non dilutive offering of previously issued shares, often by officers or directors, is called a __________ offering.
Secondary offering
Define initial public offering (IPO).
A company’s first public offering of securities
What is the name of the offering of additional shares after a company has conducted its initial public offering (IPO)?
A follow-on offering or additional issuance
What is a combined offering?
One in which the proceeds will be split between the issuing company and selling shareholders
True or False: Registration provisions apply when securities are offered publicly.
True
True or False: Registration provisions apply when securities are offered through a private placement.
False. Private placements are exempt from registration.
What is one disadvantage to offering securities through a private placement?
The offering is limited to only certain types of investors.
True or False: Using a private placement to offer securities is a faster, less expensive method than a public offering.
True
What are the details related to the Section 4(6) exemption?
An exemption is provided if securities are sold to accredited investors and no more than $5 million of capital is sold.
An offering of shares with the proceeds being directed to the issuing corporation is called a ________ offering.
primary offering
True or False: A significant goal of the Securities Act of 1933 is to prevent fraud in the sale of new issues.
True
The SEC ____________ clause must be included in the prospectus for a new issue.
No Approval Clause
True or False: Rather than judging an investment’s merit, the SEC reviews completeness of registration documentation.
True
Complete the following statement: The SEC requires a securities offering to register unless it is _______.
exempt
List some items that are required to be included in an issuer’s registration statement.
Nature of its business, total capitalization (equity and debt), financial statements, biographies of officers/directors
What information is NOT included in an issuer’s registration statement?
Earnings projections, comparison of profitability to its competitors, or results of its due diligence meeting
Public offerings of securities require the delivery of a ___________.
prospectus
Before initiating quotes for a non-exchange stock, what is the member firm’s responsibility?
The quoting firm must collect and review certain information about the issuer (i.e. complete Form 211).
What exception allows a firm to quote a non-exchange stock without filing Form 211?
The piggyback exception.
The exception is based on the stock having been subject to regular and continuous quotes.
To qualify for the piggyback exception, a quote must have appeared on at least ____ of the last ____ days.
12 of the last 30 days
Before initiating quotes for a stock quoted in the Pink Sheets, with whom must Form 211 be filed?
FINRA
How many specific items about an issuer must a member firm collect and submit to FINRA prior to quoting the stock?
16 specific items
Before initiating quotes for a non-exchange security, a market maker must file __________.
Form 211
Form 211 must be filed at least ______ business days prior to initiating quotes for an OTCBB security.
3
Filing Form 211 is not required if stock has been the subject of regular and continuous quotes for the past ____ days.
30
As it applies to the piggyback exception, what does regular and continuous quoting imply?
A quote has appeared on at least 12 of the last 30 days with no more than four business days elapsing without a quote
True or False: Form 211 must be filed by firms that intend to make markets in Nasdaq securities.
False. Form 211 is required for firms that intend to initiate quotes for non-exchange securities.
Before initiating quotes for a non-exchange stock, where may required information be obtained about the issuer?
The issuer’s current prospectus or offering circular, or its current Form 10-K and all subsequent 10-Q and 8-K Forms
Related to the registration process, when does the cooling-off period begin?
Once the registration statement is filed with, and filing fee is paid to, the SEC
True or False: For a new issue, indications of interest are NOT shared with management.
False. Indications of interest are shared to assist in determining the offering price.
For a new issue, are indications of interest binding or non-binding?
non-binding
True or False: During the cooling-off period, sales may be effected and money may be accepted.
False
To blue sky an issue means to register the offering at the ______ level.
State
Regarding a new issue, when is the final due diligence meeting held?
Prior to the anticipated effective date
Who attends the final due diligence meeting held prior to the effective date?
The issuer, underwriter, and other interested parties
What is the main purpose of the final due diligence meeting?
To ensure that prospectus information is complete and accurate
An offering’s effective date is generally the _____ day after the filing of the last amendment.
20th day
What may take place during the post-registration period?
Sales may be confirmed, money may be accepted, and the final prospectus may be delivered.
True or False: The preliminary prospectus (red herring) will include the final offering price.
False. The red herring may give a price range, but will not include the final price.
True or False: During the pre-filing period, certain issuers may be prohibited from communicating with the public.
True
What is a statutory prospectus?
Any communication, whether written or broadcast, that offers a security for sale
A statutory preliminary prospectus is also referred to as a _____________.
red herring
List some items that may be omitted from a preliminary prospectus.
Final offering price, underwriting and dealer discounts, and proceeds to be received by the issuer
What items must be included in a preliminary prospectus?
The number of shares or amount of bonds to be issued, as well as the use of the proceeds
True or False: A red herring may be filed as a part of a registration statement and used before the effective date.
True
Once the final offering price is set, the issuer files a _________________ with the SEC.
Final prospectus
Define free writing prospectus (FWP).
Written/electronic communication, used as a disclosure document, that does not meet statutory prospectus standards
What recommendation is made through a legend placed on a free writing prospectus?
That investors should read the statutory prospectus
True or False: An FWP constitutes an offer to sell, or solicitation to buy, a registered offering.
True
What are some examples of a free writing prospectus?
Offering term sheets, e-mail, press releases, and marketing materials
True or False: After-market prospectus requirements do NOT apply to dealers not involved in the original distribution.
False.
After-market prospectus requirements apply to dealers who are, or are not, involved in the original distribution.
In the after-market, a prospectus must be provided for ____ days following a non-exchange IPO.
90 days
In the after-market, a prospectus must be provided for ____ days following a non-exchange follow-on offering.
40 days
In the after-market, for how long must a prospectus be provided following an IPO of a stock to be listed on an exchange?
25 days
What is the after-market prospectus requirement for the follow-on offering of an exchange-listed stock?
No requirement exists for the follow-on offering of an exchange-listed stock.
On what is the length of time a prospectus must be sent in the after-market based?
The amount of information available to the potential purchaser
For what offerings is there no after-market prospectus requirement?
For follow-on offerings of exchange-listed stocks
What form is used by a small business seeking to raise an unlimited amount of capital?
Form SB-2
Using Form SB-1, a small business issuer may raise no more than $___ million.
$10 million
Using Form SB-2, what amount of capital may a small business issuer raise?
unlimited
Once Form SB-1 is initially filed, the statement becomes effective in ____ business days.
20 business days
To qualify as a small business issuer, the company must be located in the _____ or _______.
U.S. or Canada
For an existing SB-1 registration, when would a post effective amendment become effective?
Immediately
What does the Trust Indenture Act of 1939 regulate?
The issuance of corporate bonds
According to the Trust Indenture Act of 1939, for what reasons may default occur?
The issuer misses interest or principal payments, or fails to comply with a covenant
Describe a cross default clause.
A statement that default may occur on one loan due to an issuer defaulting on another loan.
True or False: A covenant in a bond indenture may restrict the sale of an asset being used as collateral.
True
True or False: Covenants in a bond indenture may set the maximum debt-to-equity ratio to be maintained.
True
True or False: A covenant may be included in a bond indenture to require a certain debt service coverage ratio.
True
True or False: Covenants exist to restrict the change of a company’s control and to require insurance on certain assets.
True
According to the Trust Indenture Act of 1939, a trustee is appointed to represent the _____________ best interests.
bondholder’s
To be considered a WKSI, the issuer must have been a reporting company for the previous ____ months.
12 months
True or False: To be a WKSI, the issuer must be a reporting company and have a certain public float of debt or equity.
True
To satisfy WKSI status, within 60 days of determination, an issuer must have how much public float in debt or equity?
A public float of $700 million in equities or $1 billion in aggregate debt issuances in the previous three years
To be considered a WKSI, an issuer must be eligible for automatic shelf registration using what registration form?
Form S-3 (short form registration statement) or F-3 (for foreign private issuers)
If WKSI status is lost after the filing of the automatic shelf registration, how long may the offering continue?
Until the filing of the next Form 10-K
What is a benefit to achieving WKSI status?
The company is permitted to offer securities without SEC review.
True or False: A WKSI is offered a streamlined registration process and more freedom when communicating with investors.
True
When is the registration of a well-known seasoned issuer (WKSI) effective?
Immediately at the time of filing with the SEC
True or False: A well-known seasoned issuer (WKSI) may NOT be an ineligible issuer.
True
What are the requirements for a WKSI to file a shelf registration that will be effective for three years?
The offering must begin immediately and the issuer must be eligible to file Form F-3 or S-3.
A well-known seasoned issuer (WKSI) is able to file an ASR. What does ASR mean?
Automatic Shelf Registration
What type of information may be omitted when an issuer files a shelf registration?
Offering price, amount selling, selling shareholders’ names, offering type (primary or secondary), security description
True or False: A shelf registration filing must include identification of the type or class of securities being sold.
True. However, a detailed description of the securities may be omitted.
Rule 415 establishes the requirements for _______ registration.
Shelf registration
For a WKSI, a shelf registration becomes effective ______________.
Immediately
True or False: For a seasoned issuer, a shelf registration becomes effective immediately.
False. A seasoned issuer may use a shelf registration, but it will be subject to SEC staff review
True or False: Shelf registration may be used by issuers other than WKSIs and seasoned issuers.
True. Other eligible issuers may use a shelf registration, but it is effective for two years
Explain the importance of Regulation S-K.
It sets rules for: 1) the format used to present projections and 2) the non financial components of a firm’s filings.
According to Reg. S-K, documents filed more than _____ years ago may not be incorporated.
Five years
True or False: Regulation S-K requires the use of outside review.
False. Outside review is permitted, but NOT required.
Under Reg. S-K, if outside review is conducted, what disclosures must be made?
Extent of review, reviewer’s qualifications, material facts of how the review was sought/obtained
Under Regulation S-K, what are the requirements for presenting projections?
They must be clear and not misleading, and an appropriate time frame must be used.
What requirement is established by Regulation S-X?
The requirement that a registrant maintain effective internal controls in connection with its financial reporting
According to Reg. S-X, who must prepare an attestation report?
A certified public accountant (CPA)
Under Reg. S-X, what must the CPA’s attestation report include?
The CPA’s opinion of the firm’s internal controls
Which regulation requires that a registrant maintain effective internal controls regarding its financial reporting?
Regulation S-X
Under Rule 147, what percentage of issuer assets must be located, revenues generated, and proceeds used in the state?
80%
True or False: For a Rule 147 exemption, the issuer’s home must be in the state in which the securities will be sold.
True
True or False: Only individuals may purchase securities issued under a Rule 147 exemption.
False
For an Iowa Rule 147 offering, to whom may an Iowa resident sell without complying with the nine-month holding period?
Another resident of Iowa
True or False: Regulation A limits the amount of capital that may be raised, but not number of shares that may be sold.
True
In a Regulation A offering, what disclosure document is provided to investors?
An offering circular
Where must issuers be located to qualify for a Reg. A exemption available for raising a limited amount of capital?
U.S. or Canada
Regulation A requires an issuer to file ____ years of financial statements that may be __________.
Two years, unaudited
True or False: In a Regulation A offering, securities may NOT be offered publicly.
False. Public offerings are permitted.
As it relates to a Regulation A offering, explain how an issuer tests the waters.
Using general solicitations and advertising before filing an offering statement with the SEC to gauge investor interest
True or False: A business entity formed in Mexico may use the Regulation A exemption.
False
The number of investors who may purchase stock under a Regulation A offering is __________.
unlimited
What is a Private Investment in Public Equity (PIPE)?
When a BD acts as a placement agent for restricted securities of an issuer whose securities are already publicly traded.
True or False: A Private Investment in Public Equity (PIPE) is a form of private placement.
True
Prior to a PIPE offering, what is an RR permitted to do?
Solicit and accept indications of interest
Generally, what happens to the stock’s price once the issuer announces a PIPE offering?
It declines since there will be an increase in the number of shares (potential dilution).
Who frequently purchases securities through PIPE offerings?
Hedge funds
True or False: Prior to a PIPE offering, an RR may sell the stock short or buy put options on the stock.
False. These activities would violate insider trading rules.
True or False: Rule 504 and 505 Private Placements require purchaser representatives.
False. Purchaser representatives are required under Rule 506.
Regulation D offerings under Rule 504 may not exceed $___ million.
$1 million
What amount of capital may be raised by an issuer under Regulation D, Rule 506?
Unlimited amount
Explain the details of Regulation D, Rule 504 offerings.
$1 million limit; no disclosure requirement; unlimited number of purchasers
Explain the details of Regulation D, Rule 505 offerings.
$5 million limit; disclosure required; unlimited accredited, with limit of 35 nonaccredited (no rule on sophistication)
Explain the details of Regulation D, Rule 506 offerings.
No dollar limit, disclosure required, unlimited accredited investors, with 35 nonaccredited limit (need purchaser rep)
As it applies to Regulation D offerings, who would be considered an accredited investor?
An institution, an officer/director of the issuer, or an individual who meets a financial test
For an individual to be considered accredited, she must have income of $_______ in each of the last two years.
$200,000
For spouses to be considered accredited, they must have income of $_______ in each of the last two years.
$300,000
Who evaluates the risks and merits of a private placement for a nonaccredited investor?
The purchaser representative
True or False: Purchaser representatives must pass a specific exam or be certified to act in this capacity.
False. There is no specific qualification required to be appointed as a purchaser representative.
True or False: A purchaser rep may not be an officer, director, or greater than 10% owner of the issuer.
True. Unless they’re related to the nonaccredited investor.
rue or False: An offering memorandum is required to be delivered to purchasers in a private placement.
False. An offering memorandum is required to be provided to nonaccredited investors only.
True or False: The SEC recommends the delivery of an offering memorandum to all private placement purchasers.
True. However, delivery of the memorandum is required for nonaccredited investors only.
What information may be found in an issuer’s private placement offering memorandum?
The use of the proceeds, specific suitability standards, and the issuer’s financial statements
For a private placement, what must purchasers sign to acknowledge the restricted nature of the securities?
An investment letter
What instructions must be issued to ensure that no illegal sale occurs for securities acquired privately?
Stop transfer instructions
To indicate that private placement securities are unregistered/restricted, a _______ is placed on the certificates.
legend
True or False: An incentive for buying securities through a private placement is the liquidity of the investment.
False. Securities acquired through a private placement are illiquid since their sale is restricted.
True or False: Rule 144A securities are only equities.
False. Rule 144A securities may be equity or debt.
True or False: Rule 144A securities may be offered by both domestic and foreign issuers.
True
When are securities ineligible for the Rule 144A exemption?
When the issuer has the same class of securities listed on an exchange.
Is a high net worth individual who meets the accredited investor definition under Regulation D considered a QIB?
No. A QIB is an institution, not an individual.
Volume and holding period restrictions do not apply to the resale of private placements if the __________ is a QIB.
purchaser
When may Regulation S securities be resold through a designated offshore securities market?
Immediately
What does Regulation S provide to U.S. companies?
An exemption from registration if its securities are issued outside the U.S.
What conditions must be met to qualify for an exemption under Regulation S?
The offer may NOT be directed to a U.S. resident and the trade must be effected through an overseas securities market.
True or False: Under Reg. S, investors may resell non-convertible debt in the U.S. even if held for less than one year.
True. Non convertible debt has a 40-day holding period.
True or False: Regulation S limits the amount of capital that may be raised through overseas offerings.
False. There is no capital limit; however, all investors must be non-U.S. residents.
A BD is running a sales contest that offers prizes to staff based on mutual fund sales. When is this practice allowed?
When the compensation (prize) is not based on the sale of a particular fund
Provided a FINRA member has a selling agreement with a fund, when may the member buy shares at a discount?
If the purchase is for its own account or to fill an existing client order
If mutual fund shares are redeemed within seven business days of purchase, _____% of sales charges are forfeited.
100%
True or False: Recommending short-term trading of mutual fund shares is advantageous to selling BDs.
False. BDs who recommend short-term trading would risk forfeiting sales charges due to the early redemption.
May fund sponsors hold educational seminars and pay hotel and meal expenses for BD salespeople and their guests?
No. Fund sponsors may pay hotel and meal expenses for BD salespeople, but NOT for their guests.
What is the purpose of Rule 145?
To be sure that securities acquired through reclassification are subject to registration and prospectus requirements.
According to Rule 145, what are some examples of reclassifications that trigger registration requirements?
Substitutions of one security for another, mergers involving an exchange, spinoffs, or transfers of corporate assets
What types of events are exempt from Rule 145?
Stock splits, reverse splits, or adjustments in par value
What form is filed to register securities issued in transactions subject to Rule 145 provisions?
Form S-4
Is a BD allowed to initiate coverage of a reporting company and begin to act as its underwriter simultaneously?
No. A BD may only continue its regular coverage of a reporting company (not initiate).
If ABC’s common stock is in registration, an underwriter of the deal may comment on the issuer’s __________________.
non convertibles
If ABC’s nonconvertibles are in registration, an underwriter of the deal may comment on the issuer’s _______________.
common stock
When does a BD have no restrictions on publishing research reports about a new issue?
When the BD is not acting as an underwriter of the offering
True or False: A BD may publish research reports about a stock when not acting as the issuer’s underwriter.
True
When is a BD, who is acting as an underwriter for a WKSI’s common stock, allowed to publish research about the stock?
When continuing its regular coverage of the issuer (It may not be initiating coverage.)
What is the name of the disclosure document used for a private placement?
An offering memorandum, also called a private placement memorandum (PPM)
What are the requirements to qualify for a Tier 1 exemption under Regulation A+?
A maximum offering of $20 million over 12 months, with no more than $6 million being offered by selling shareholders
What are the requirements to qualify for a Tier 2 exemption under Regulation A+?
A maximum offering of $50 million over 12 months, with no more than $15 million being offered by selling shareholders
True or False: Canadian companies are not eligible to use the Regulation A+ exemption.
False. Both U.S. and Canadian companies are eligible to use the Regulation A+ exemption.
True or False: 100% of investors must be state residents to qualify for the Rule 147 intrastate exemption.
True
The Securities Act of 1933 regulates ____________.
new issues.
May a preliminary prospectus (red herring) be sent during the cooling-off period?
Yes. The red herring is used to obtain indications of interest from potential purchasers.
Rule 147 offerings may not be sold to an out-of-state investor for ____ months following the last sale of a new issue.
Six months
