Chapter 2 Part 3

Question 1

The red herring is used to obtain

Answer 1

1. indications of non-binding client interest

2. until SEC declares a registration is effective, no solicitations may occur and no money or orders can be accepted

Question 2

also during the cooling-off period, the issuer will

Answer 2

Register the issue in the states where the underwriter plans to sell the securities. Underwriting broker-dealers, as well as their sales personnel, are required to register in states where the distribution will occur, and Administrator may approve or disapprove the sale of a security within its borders.

Question 3

If the SEC determines that the registration statement has material deficiencies (such as omissions or misrepresentations), it may

Answer 3

issue a deficiency letter that postpones the effective date, or issue a stop order that prohibits the sale of the securities.

Question 4

Clients usually receive a copy of the final prospectus with the confirmation of purchase. In order to accommodate this, the managing underwriter must

Answer 4

furnish both the preliminary and final prospectuses to all other broker-dealers participating in the distribution.

Question 5

Waiting Period

Answer 5

Lasts 20 Days From Last Amendment, Unless Accelerated
Issue Preliminary Prospectus
Register the Issue
Hold Due Diligence Meeting •
Accept Indications of Interest (No Sales) then effective date

Question 6

Post-Effective Period

Answer 6

Issue Final Prospectus

Confirm Sales • 25/40/90. Day After-Market Prospectus Requirement For Dealers

Question 7

exempt security

Answer 7

A security that is not required to be registered

Question 8

Under the Securities Act of 1933, securities are exempt based on

Answer 8

the issuer, the type of security, or the transaction through which the security is offered or sold.

Question 9

When an exemption for a security or a transaction is claimed, the burden of proof rests with

Answer 9

the person requesting it. As always, exemption from registration does not exempt a security from federal and state antifraud provisions within the law.

Question 10

Certain securities are exempt from federal registration based on the issuer of the security. Securities issued or guaranteed by the following exempt issuers are not required to register at the federal level.

Answer 10

U.S. government and U.S. government agencies
Municipalities
Nonprofit organizations
Domestic banks and trust companies (including savings and loan associations but not bank holding companies)
Small business investment companies (exempted by federal legislation related to small businesses)
Railroads
Religious, educational, or charitable institutions

Question 11

exempt transactions

Answer 11

In some cases, an exemption from registration is provided based on the manner in which securities are offered, rather than based on the issuer or the type of security involved

Question 12

SEC regulation D exempts private placements of securities from the registration requirements of the Securities Act of 1933, if the following conditions arc met

Answer 12

The issuer must have reason to believe that the buyer is a sophisticated investor (i.e one who is experienced enough to evaluate the risks involved).
The buyer must have access to the same financial information that would normally be included in a prospectus. This information is provided in a document known as an offering memorandun.
The issuer is assured that the buyer does not intend to make a quick sale of the securities. This is usually accomplished by requiring the purchaser to sign an investment letter and by placing a legend on the stock certificate indicating that resales of the securities are restricted.

Question 13

An accredited investor is defined as

Answer 13

a financial institution (such as a bank), a large tax-exempt plan, or a private business development company.

Question 14

In addition, an accredited investor may be

Answer 14

any director, executive officer, or general partner of the issuer, or an individual who meets either one of the following financial tests.
Has a net worth of at least $1 million, excluding equity in his primary residence, or
Has a minimum gross income of $200,000 ($300,000 for a married couple) for each of the past two years, with the anticipated continuation of this income level

Question 15

number of accredited investors can participate in a private placement

Answer 15

unlimited

Question 16

A unaccredited investor is an investor that is

Answer 16

not a financial institution, a large tax-exempt plan, etc. Furthermore, a nonaccredited investor is an individual who does not meet the financial test.