Chapter 8 - Issuing Securities Flashcards
All of the following individuals would be considered an insider except
A) an 11% shareholder of a public company
B) the CFO of a public company
C) a vice president of a public company
D) the chairman of a company’s board
Correct Answer:
C) A vice president of a public company
Answer Explanation
An insider is defined as an officer (e.g. CEO, CFO), boardmember, or greater than 10% shareholder of a company.
Textbook Reference
Please see textbook section 8.1.1
Which two of the following statements about CUSIP numbers are TRUE?
I. They are issued by the MSRB
II. They are not required on trade confirmations.
III. They are used primarily to identify securities in the clearance and settlement process
IV. Issuers of new municipal securities are responsible for obtaining the CUSIP number
A) I and III
B) I and II
C) II and III
D) III and IV
Correct Answer:
A) I and III
Answer Explanation
The CUSIP number facilitates the clearing and settlement process for securities. The underwriter of a new issue of municipal securities is responsible for requesting the CUSIP number from the MSRB. CUSIP numbers must appear on transaction confirmations to ensure that securities that are delivered match the securities that are purchased.
Textbook Reference
Please see textbook section 8.4.4
SEC Rule 145 addresses the
A) Financial requirements that an issuer must satisfy prior to proceeding with a public offering.
B) Trading of an issuer’s shares in the secondary market.
C) Reclassification of an issuer’s securities.
D) Documentation standards that must be satisfied as part of federal books and records requirements.
Correct Answer:
C) Reclassification of an issuer’s securities
Answer Explanation
SEC Rule 145 addresses the reclassification of an issuer’s securities, and all of the accompanying documentation standards for investor protection.
Textbook Reference
Please see textbook section 8.2.6
A primary purpose of the Securities Act of 1933 is to
A) provide SEC approval of new securities offerings.
B) provide full and fair disclosure to investors.
C) protect investors who trade securities in the secondary market.
D) require broker-dealer supervisory systems and controls.
Correct Answer:
B) provide full and fair disclosure to investors
Answer Explanation
The fundamental purpose of the Securities Act of 1933 is to provide full and fair disclosure to investors so that they have sufficient information to make investment decisions. The Securities Exchange Act of 1934 regulates trading markets, broker-dealers and their associated persons.
Textbook Reference
Please see textbook section 8.1
Under the ‘33 Act, it is a felony to offer or sell unregistered securities through interstate commerce, unless the securities are
A) exempt from SEC registration.
B) primary issues of common stock.
C) limited purpose bonds.
D) transferred between securities dealers.
Correct Answer:
A) exempt from SEC registration
Answer Explanation
Unregistered securities can not be sold in interstate commerce unless they qualify for one of several exemptions from registration. In general, it doesn’t matter who buys, sells or trades unregistered securities. It only matters whether or not they have qualified for an exemption.
Textbook Reference
Please see textbook section 8.2
What is the amount of securities that control persons can sell within 90 days after filing a Notice of Proposed Sale with the SEC?
A) The greater of 50,000 shares or $50,000 worth of the stock
B) An amount not to exceed the greater of 1% of the outstanding shares of the same class of stock being sold, or the average reported weekly trading volume during the four weeks preceding the sale.
C) There is no limit as long as the sale takes place within 90 days.
D) A maximum of 10% of their holdings within each 90 day period
Correct Answer:
B) An amount not to exceed the greater of 1% of the outstanding shares of the same class of stock being sold, or the average reported weekly trading volume during the four weeks preceding the sale.
Answer Explanation
When control persons file a proposed notice of sale with the SEC, they are entitled to sell an amount not to exceed the greater of 1% of the outstanding shares of the same class of stock, or the average reported weekly trading volume during the four weeks preceding the sale. This amount is the maximum that can be sold within the three month period following the notice of sale.
Textbook Reference
Please see textbook section 8.2.4.2
All of the following would be defined as affiliates EXCEPT
A) a director that does not own company stock
B) a shareholder who owns 7% of a company’s voting stock
C) spouse of a director of the issuer
D) an officer of a corporation that has been granted stock options
Correct Answer:
B) a shareholder who owns 7% of a company’s voting stock
Answer Explanation
Affiliates, also called corporate insiders, are defined as officers, directors, or 10% shareholders of an issuer. The spouse of a corporate insider is also considered a corporate insider.
Textbook Reference
Please see textbook section 8.2.4.2
When does the road show take place?
A) During the post-effective period
B) During the cooling-off period
C) During the pre-registration period
D) During the active solicitation period
Correct Answer:
B) During the cooling-off period
Answer Explanation
The cooling-off period begins once the issuer files the registration statement with the SEC. During the cooling-off period, the underwriters can market the securities to investors, including via road shows.
Textbook Reference
Please see textbook section 8.1.4
Under the Securities Exchange Act of 1934 all of the following persons are defined as insiders EXCEPT
A) A non-affiliated director of the firm
B) A staff accountant who has worked for the company for more than 10 years.
C) An owner of more than 10% of the outstanding stock of a corporation
D) An officer of the firm that does not own stock in the company
Correct Answer:
B) A staff accountant who has worked for the company for more than 10 years.
Answer Explanation
The Securities Exchange Act of 1934 defines insiders as officers, directors and owners of more than 10% of the outstanding stock of a corporation
Textbook Reference
Please see textbook section 8.1.1
Which of the following best describes a secondary offering?
A) The offering of shares following the company IPO
B) A private company offering shares to the public for the first time
C) An offering of new stock by a public company
D) The sale of shares by an institutional investor
Correct Answer:
D) The sale of shares by an institutional investor
Answer Explanation
An example of a secondary offering is where existing investors are selling some or all of their shares in to the open marketplace.
Textbook Reference
Please see textbook section 8.3.1
What is the correct sequence of events, from first to last, in the registration timeline?
A) Registration statement filed, effective date, road show, bake-off
B) Bake-off, registration statement filed, road show, effective date
C) Road show, registration statement filed, bake-off, effective date
D) Road show, bake-off, effective date, registration statement filed
Correct Answer:
B) Bake-off, registration statement filed, road show, effective date
Answer Explanation
The timeline begins with pre-registration period events such as a bake-off to choose the lead underwriter. It ends with the effective date, which is when the SEC clears the securities for public sale.
Textbook Reference
Please see textbook section 8.1.4
All of the following activities are defined as manipulative or fraudulent EXCEPT
A) stock pools
B) stabilizing
C) spoofing
D) matched trades
Correct Answer:
B) stabilizing
Answer Explanation
Spoofing, stock pools and matched trades are all manipulative activities associated with influencing the market price of securities. Stabilization is a legal pricing support activity when used by underwriters in bringing a new issue to market.
Textbook Reference
Please see textbook section 8.3.7.1
A company is selling an additional issue of common stock. In this situation, all of the following persons are insiders EXCEPT
A) A shareholder who currently owns 13% of the outstanding common stock of the company.
B) The chief financial officer of the company
C) The Chief Marketing Officer of the company
D) The lead underwriter
Correct Answer:
D) The lead underwriter
Answer Explanation
Under the Securities Exchange Act of 1934, an insider is defined as an officer, director or shareholder who owns 10% of more of the company’s outstanding stock. The lead underwriter is not an insider, but may have access to inside information.
Textbook Reference
Please see textbook section 8.1.1
A preliminary prospectus must be delivered to a potential purchaser no later than
A) Upon settlement of the transaction
B) 48 hours prior to the mailing of the confirmation of sale
C) With the confirmation of sale
D) 24 hours prior to the mailing of the confirmation of sale
Correct Answer:
B) 48 hours prior to the mailing of the confirmation of sale
Answer Explanation
A preliminary prospectus when used in conjunction with an IPO is required to be delivered by the broker-dealer at least 48 hours prior to the confirmation of sale.
Textbook Reference
Please see textbook section 8.1.2
MSRB Rules require final settlement of a syndicate account to occur
A) When all credits of the syndicate are distributed to its members
B) Within 30 calendar days following the date all securities have been delivered by the issuer to the syndicate
C) On the date that the securities are delivered by the issuer to the syndicate manager
D) Within two business days following the date all securities have been delivered by the issuer to the syndicate
Correct Answer:
B) Within 30 calendar days following the date all securities have been delivered by the issuer to the syndicate
Answer Explanation
Final settlement of the syndicate account must occur within 30 calendar days following the date all securities have been delivered by the issuer to the syndicate.
Textbook Reference
Please see textbook section 8.4.1.2
Underwriters act in an agency capacity when engaged in which types of underwritings?
I. Firm commitment
II. Mini-max
III.Best efforts
IV. Standby
A) II and IV
B) II and III
C) I and III
D) I and IV
Correct Answer:
B) II and III
Answer Explanation
Underwriters are acting in an agent capacity when the issuer has the risk of the offering, and any unsold issue is returned to the corporation. In a best efforts underwriting, the underwriters sell as much as possible, but return any unsold issue to the issuing corporation. In a mini-max, a minimum amount must be sold or the offering is called off. If the minimum is sold, any unsold portion is returned to the issuer. In a firm commitment, the underwriters will purchase the entire issue. A standby underwriting is a type of firm commitment offering to shareholders with preemptive right. The underwriters purchase the shares not subscribed to by current shareholders.
Textbook Reference
Please see textbook section 8.3.3
According to Rule 144, which of the following persons is NOT a control person?
A) An individual who serves as a director of the issuer of the stock
B) A person who owns more than 10% of the outstanding voting stock of the issuer
C) A relative who lives in the same household as a control person
D) A non-affiliate who has obtained non-public information about the issuer of the stock
Correct Answer:
D) A non-affiliate who has obtained non-public information about the issuer of the stock
Answer Explanation
A non-affiliate, even one who has knowledge of inside information about an issuer, is not a control person.
Textbook Reference
Please see textbook section 8.2.4.2
An official statement is not yet available for a new issue of municipal securities. In this situation
A) A preliminary official statement can be used if available, but a final official statement must be furnished as soon as possible
B) Delivery of the official statement is not required
C) A preliminary official statement will satisfy delivery requirements
D) The transaction can take place only with approval from the MSRB.
Correct Answer:
A) A preliminary official statement can be used if available, but a final official statement must be furnished as soon as possible.
Answer Explanation
If the official statement is not yet available, customers must receive written notice of its status, and a copy of the preliminary official statement must be provided if it exists. The final official statement must be delivered when it is available.
Textbook Reference
Please see textbook section 8.4.3
The price received by investors in a tender offer will
A) will be identical for all investors, regardless of the number of shares being tendered.
B) be decided at the time of publication of the next audited financial statements.
C) be determined by the board of directors at the next meeting.
D) vary based on the exact number of shares the investor is tendering.
Correct Answer;
A) will be identical for all investors, regardless of the number of shares being tendered.
Answer Explanation
In a tender offer, all investors receive the same exact price. This is known as “all holders best price”.
Textbook Reference
Please see textbook section 8.2.6.1
All of the following statements describe a best efforts underwriting EXCEPT
A) The underwriter may purchase only the amount required to fill its clients’ orders
B) They are mainly used for securities with higher risk.
C) If the underwriter chooses to purchase the entire amount of the offering, it is responsible for the unsold inventory
D) The securities are sold to the public at the public offering price
Correct Answer:
C) If the underwriter chooses to purchase the entire amount of the offering, it is responsible for the unsold inventory
Answer Explanation
In a best efforts agreement, the underwriter agrees to sell as much of an issue as possible to the public at the public offering price. The underwriter can purchase only the amount required to fulfill its client’s order, or the entire issue. However, if the underwriter is unable to sell all of the securities, it is not responsible for any unsold inventory. Best efforts underwritings are typically used when securities are considered relatively high risk.
Textbook Reference
Please see textbook section 8.3.3
An investor is seeking to purchase 5 million shares of ABC in a tender offer, while shareholders are willing to collectively tender 50 million shares. If an individual shareholder tendered 600 shares,
A) 50 shares will be accepted.
B) 600 shares will be accepted.
C) 500 shares will be accepted.
D) 60 shares will be accepted.
Correct Answer:
D) 60 shares will be accepted.
Answer Explanation
If a tender offer is oversubscribed, shares will be accepted proportionately from those shareholders who tendered their shares. In this question, the offer was oversubscribed by a multiple of ten, thus 10% of each shareholder’s tendered shares will be accepted.
Textbook Reference
Please see textbook section 8.2.6.1
Which of the following is true regarding Private Placements?
A) There is a limit to the number of total investors permitted.
B) There is no limit to the amount of money that can be raised and there is no limit to the number of total investors.
C) There is a limit to the amount of money that can be raised.
D) There is a limit to both the amount of money that can be raised and the number of permitted investors.
Correct Answer:
B) There is no limit to the amount of money that can be raised and there is no limit to the number of total investors.
Answer Explanation
Private placements can be executed for an unlimited amount of money. Deals in excess of $5 million may be limited to 35 non-accredited investors, but there is no limit to the number of total investors.
Textbook Reference
Please see textbook section 8.2.3.1
Competitive bids provide issuers with all of the following benefits EXCEPT
A) avoids the appearance of impropriety
B) lower borrowing costs
C) higher dollar amount raised
D) lower fees
Correct Answer:
C) high dollar amount raised
Answer Explanation
A competitive bidding process has all of the benefits listed except a higher capital raise. The process fosters competition among underwriters, thereby driving down gross spread as well as coupon.
Textbook Reference
Please see textbook section 8.3.2
In an underwriting of corporate securities, a best efforts arrangement
I. is typically used for high risk securities.
II. is typically used for low risk securities.
III.assigns financial responsibility for unsold shares to the underwriters.
IV. does not assign responsibility for unsold shares to the underwriters.
A) I and III
B) I and IV
C) II and III
D) II and IV
Correct Answer:
B) I and IV
Answer Explanation
A best efforts is an underwriting agreement in which the underwriters attempt to sell all the securities but have no obligation to buy what is not purchased by investors. These agreements are usually used for higher-risk securities.
Textbook Reference
Please see textbook section 8.3.3
Under a negotiated sale, the issuer
A) holds a competitive process to obtain the best possible terms
B) and the underwriter agree to a stand-by commitment
C) send RFPs to prospective underwriters
D) and the underwriter agree on the terms and fees of the offering
Correct Answer:
D) and the underwriter agree on the terms and fees of the offering
Answer Explanation
In a negotiated sale, the issuing municipality and the chosen underwriter negotiate the terms of the offering in lieu of having several underwriters compete for the business.
Textbook Reference
Please see textbook section 8.3.2
The agreement among underwriters is signed by
A) Selling group members
B) The issuer and the syndicate manager
C) Bond counsel
D) The syndicate members
Correct Answer:
D) The syndicate members
Answer Explanation
The agreement among underwriters sets forth terms for and is signed by the syndicate members.
Textbook Reference
Please see textbook section 8.3.4.1
Underwriter actions that aim to maintain secondary market prices after an offering commences are called
A) supporting
B) structuring
C) fixing
D) stabilizing
Correct Answer:
D) stabilizing
Answer Explanation
Under Regulation M Rule 104, an underwriter may stabilize the price of an offering of new securities. Stabilizing is defined as placing a bid or the effecting the purchase of a security for the purpose of maintaining the price of a security.
Textbook Reference
Please see textbook section 8.3.7.1
A broker-dealer is facilitating a private placement on behalf of Company A in order to finance an acquisition of Company B. Which group would the broker-dealer be LEAST likely to target as investors in the private placement?
A) Institutional clients of the broker-dealer
B) Corporate trusts with at least $5 million in assets
C) Officers and directors of Company A
D) Employees of Company A
Correct Answer:
D) Employees of Company A
Answer Explanation
Private placements can be sold to an unlimited number of accredited investors and up to 35 non-accredited investors. Accredited investors include officers and directors of the issuer, institutions, trusts and business partnerships with at least $5mm in assets, and individuals with at least $200k in income or $1mm of net worth. Employees of the issuer are not accredited, and therefore would be a less likely target as investors in the private placement.
Textbook Reference
Please see textbook section 8.2.3
Rules against anti-manipulation in the primary market sale of exempt securities are addressed in
A) The Investment Company Act of 1940
B) The Securities Act of 1933
C) The Glass Steagall Act
D) The Securities Exchange Act of 1934
Correct Answer:
B) The Securities Act of 1933
Answer Explanation
The Securities Act of 1933 includes anti-fraud and anti-manipulation rules that apply to primary market transactions. Neither exempt nor non-exempt securities are excluded from the anti-fraud provisions of the Acts of 1933 or 1934.
Textbook Reference
Please see textbook section 8.1
When the SEC declares a registration statement effective, a registered representative may tell a client
A) that the securities are investment grade
B) that the registration statement has been announced as being effective.
C) that the securities are guaranteed by the SEC.
D) that the SEC has approved the registration statement.
Correct Answer:
B) that the registration statement has been announced as being effective
Answer Explanation
A registered representative may tell a client that the registration statement was declared effective by the SEC, and that this does not constitute an approval by the SEC.
Textbook Reference
Please see textbook section 8.1
All of the following are provisions of Rule 147 EXCEPT
A) the issuer is considered to be doing business within the state if it derived 80% of its gross revenues from business in that state
B) the securities can be offered only to people that are residents of the state
C) buyers must hold the securities for at least 12 months before selling them to investors outside the state
D) the issuers’ principal office must be located within the state
Correct Answer:
C) buyers must hold the securities for at least 12 months before selling them to investors outside the state
Answer Explanation
Rule 147 addresses intrastate offerings. An issuer is eligible to distribute securities under Rule 147 if its principal office is in the state and it meets one of the following requirements: derives at least 80% of its gross revenues from business in that state, 80% of the assets are located in the state, uses 80% of the proceeds of the sale of securities in the state, or if a majority of the employees are located in the state. Securities under Rule 147 can be offered only to residents of the state who must hold the securities for 6 months before they can be sold to non-state residents.
Textbook Reference
Please see textbook section 8.2.2
Glen is an associated person of Broker-dealer M. His firm is involved in the upcoming IPO of Issuer O. May Glen purchase the IPO of Issuer O?
A) Yes, since Glen’s firm is involved in the IPO
B) No, as associated persons are prohibited from purchasing equity IPOs in most instances
C) Yes, if Glen has made previous purchases of IPOs in the past
D) No, unless he purchases the IPO from a broker-dealer which is not involved in the offering
Correct Answer:
B) No, as associated persons are prohibited from purchasing equity IPOs in most instances
Answer Explanation
FINRA rules generally prohibit associated persons of a broker-dealer from purchasing equity IPOs. There are several exceptions, such as a scenario where the issuer directs shares of its IPOs to specific parties, which can include associated persons of a FINRA member firm.
Textbook Reference
Please see textbook section 8.3.6
Which of the following would NOT allow the issuer to qualify for an exemption under the provisions of Rule 147?
A) The issuer performs at least 80% of it business operations within the state
B) 80% of the securities are sold to state residents
C) The issuer uses at least 80% of the funds raised to conduct business within the state
D) The issuer’s home office is in the state of issue
Correct Answer:
B) 80% of the securities are sold to state residents
Answer Explanation
To comply with Rule 147 and avoid registration with the SEC, the company must have its principal place of business in the state and the offering must be sold entirely to state residents. Additionally, the issuer must meet one of the following requirements: 80% of the proceeds used in the state, 80% of the assets located in the state, 80% of the revenues generated in the state, or a majority of the employees are located in the state.
Textbook Reference
Please see textbook section 8.2.2
The process that is used by issuers and underwriters to investigate and review a potential offering and ensure the accuracy of available information is
A) due diligence
B) legal examination
C) objective determination
D) preliminary study
Correct Answer:
A) due diligence
Answer Explanation
Due diligence is the process used to investigate a potential deal for the protection of the parties to the contract.
Textbook Reference
Please see textbook section 8.1.4
What type of prospectus may investment bankers use to inform brokers and investors during the cooling-off period, while public offerings are awaiting clearance by the SEC?
A) White knight
B) Greenmail
C) Red herring
D) Green shoe
Correct Answer:
C) Red herring
Answer Explanation
The preliminary prospectus, also known as a red herring, may be delivered to potential purchasers of the offering during the cooling-off period. Indications of interest may be taken, but no sales may be made until the effective date.
Textbook Reference
Please see textbook section 8.1.2
When securities are purchased by investors in a Regulation D private placement, what determines the required holding period, before they can be sold?
A) Whether or not the issuer reports financial information to the SEC
B) The size of the private placement
C) Whether or not the offering is an IPO
D) The size of the issuer
Correct Answer:
A) Whether or not the issuer reports financial information to the SEC
Answer Explanation
Companies that report financial information to the SEC are considered public companies. Securities acquired through private placements are restricted or control securities. If these securities are issued by a public company the minimum holding period until resale is six months. Otherwise, it is 12 months.
Textbook Reference
Please see textbook section 8.2.4.1
Which of the following provisions of the Securities Act of 1933 applies to municipal securities?
A) Inside information provisions
B) Requirement to file a registration statement with SEC
C) Antifraud provisions regarding disclosure to potential investors
D) Guarantees against loss in the sales of securities
Correct Answers:
C) Antifraud provisions regarding disclosure to potential investors
Answer Explanation
Municipal securities issuers are exempt from filing registration statements with the SEC, but cannot withhold or intentionally mislead investors with regard to information that is essential to an investment decision. The antifraud provisions of the Act of 1933 apply to municipal issuers. Insider trading provisions are found in the Securities Exchange Act of 1934, along with prohibited practices in the sale of securities like guarantees against loss.
Textbook Reference
Please see textbook section 8.1
In which of the following types of underwritings is the entire offering canceled unless 100% the shares are sold?
A) Firm Commitment
B) All-or-None
C) Mini-max
D) Standby
Correct Answer:
B) All-or-none
Answer Explanation
An All-or-None is a specific type of best efforts underwriting whereby if the underwriter is not able to sell all the shares being offered, none of the shares will be offered and the offering will be canceled.
Textbook Reference
Please see textbook section 8.3.3
For a new issue of municipal securities, the CUSIP number is typically obtained by the
A) Underwriter
B) Issuer
C) Trustee
D) Bond counsel
Correct Answer:
A) Underwriter
Answer Explanation
Underwriters and dealers that participate in the placement of a new issue of municipal securities must ensure that application is made for a CUSIP number for the new issue.
Textbook Reference
Please see textbook section 8.4.4
Required updates that disclose material information from state and local governments and other parties are called
A) Official notices
B) Statements of additional information
C) Event notices
D) Focus reports
Correct Answer:
C) Event notices
Answer Explanation
Mandated reports of continuing disclosure information are reported to the MSRB through event notices.
Textbook Reference
Please see textbook section 8.4.2.2
A preliminary prospectus (“red herring”) must contain substantially all information included in a final prospectus EXCEPT
A) Timely details of the offering not yet established
B) A description of securities offered
C) Information about the underwriters
D) The issuer’s financial statements
Correct Answer:
A) Timely details of the offering not yet established
Answer Explanation
The preliminary prospectus is published before the offering becomes effective, and it is used to inform prospective investors about terms of the offering. It may not include timely details of the offering not yet established.
Textbook Reference
Please see textbook section 8.1.2
In a new offering of corporate securities, a firm commitment
I. Is the most common type of underwriting
II. Is typically used for high risk securities
III. Assigns financial responsibility for unsold shares to the underwriters
IV. Assigns no responsibility for unsold shares to the underwriters
A) II and IV
B) I and IV
C) I and III
D) II and III
Correct Answer:
c) I and iii
Answer Explanation
A firm commitment is an underwriting agreement in which the underwriters have obligation to buy the securities that are not purchased by investors. These agreements are the most common types of corporate underwritings.
Textbook Reference
Please see textbook section 8.3.3
A commitment whereby the underwriter agrees to purchase any portion of an issue offered to existing shareholders under a rights offerings that is left unsubscribed is known as a
A) Competitive bid
B) Best efforts offering
C) Stand-by commitment
D) Firm commitment
Correct Answer:
C) Stand-by commitment
Answer Explanation
Under a stand-by commitment the underwriter agrees to purchase for resale, any percentage of a rights offering that is not subscribed during a two to four-week standby period.
Textbook Reference
Please see textbook section 8.3.3
In firm-commitment public securities offerings, what is the main advantage of the syndication process to investment bankers?
A) Increased profit
B) Risk-sharing
C) Regulatory compliance
D) Ability to sell securities across state lines
Correct Answer:
B) Risk-sharing
Answer Explanation
Syndication helps to spread the risk of an offering among all investment banks participating in the syndicate. This is especially important in firm-commitment offerings, in which investment bankers bear the risk for any unsold securities.
Textbook Reference
Please see textbook section 8.3.3
The SEC defines an accredited investor as
A) a married couple with at least $1,000,000 net worth or at least $300,000 in net income.
B) a married couple with at least $1,000,000 net worth or at least $200,000 in net income.
C) a single person with at least $500,000 net worth or at least $200,000 in net income.
D) a single person with at least $500,000 net worth or at least $300,000 in net income.
Correct Answer:
A) a married couple with at least $1 mn in net worth or $300 k in net income
Answer Explanation
Accredited investors include institutions, employee benefit plans, charitable organizations, and individuals who meet asset or income tests. The asset test is $1 million of net worth. The income test requires $200,000 in individual income or $300,000 in joint income for the two most recent years.
Textbook Reference
Please see textbook section 8.2.3
A company plans on raising $40 million in a private placement, and has targeted different classes of investors, as follows:
* $10 million sold to mutual funds.
* $10 million sold to hedge funds.
* $20 million sold to 35 non-accredited investors.
Which of the following statements regarding this transaction is correct?
A) This transaction is prohibited because mutual funds cannot invest in a private placement.
B) This transaction is permitted and complies with applicable private placement regulations.
C) This transaction is prohibited because non-accredited investors cannot account for 50% or more of the equity in a private placement.
D) This transaction is prohibited because $20 million exceeds the maximum amount that non-accredited investors can contribute in a private placement.
Correct Answer:
B) this transaction is permitted and complies with applicable private placement regulations
Answer Explanation
Although it is unusual for a private placement where non-accredited investors are contributing a substantial percentage of the overall capital, it is not prohibited. Mutual funds are permitted to invest in private placements.
Textbook Reference
Please see textbook section 8.2.3.1
Final settlement of a municipal syndicate account must be completed
A) Within 10 calendar days
B) Within 10 business days
C) Within 30 business days
D) Within 30 calendar days
Correct Answer:
D) Within 30 calendar days
Answer Explanation
The final settlement of the municipal syndicate account must be effected within 30 calendar days. Settlement of designated credits must be disclosed and paid within 10 business days.
Textbook Reference
Please see textbook section 8.4.1.2
In regard to U.S. securities law, commercial paper is exempt from
A) Registration requirements, but not anti-fraud provisions
B) Both registration requirements and anti-fraud provisions
C) Neither registration requirements nor anti-fraud provisions
D) Anti-fraud provisions, but not registration requirements
Correct Answer:
A) Registration requirements but not anti-fraud provisions
Answer Explanation
Commercial paper is generally exempt from securities registration requirements under the 33 Act, as long as maturities do not exceed 270 days. However, it is not exempt from anti-fraud provisions of U.S. securities law.
Textbook Reference
Please see textbook section 8.2.1
Stock that is restricted is defined as stock that
A) can be sold in limited amounts only by all owners.
B) cannot be sold to non-institutional investors.
C) has a legend that must be removed before its sale because it was not registered with the SEC.
D) is subject to special handling because it is held in a margin account.
Correct Answer:
c) has a legend that must be removed before its sale because it was not registered with the SEC
Answer Explanation
Restricted stock was acquired through an unregistered transaction from the issuer or from an affiliate of the issuer. Because it was not registered with the SEC at the time it was issued, it has a legend that must be removed before it can be resold.
Textbook Reference
Please see textbook section 8.2.4.1
The specific agreement governing a selling group’s duties in a new issue is called the
A) trust indenture
B) underwriting agreement
C) agreement among the underwriters
D) selected dealer agreement
Correct answer:
selected dealer agreement
Answer Explanation
The specific agreement governing a selling group’s duties in a new issue is called a selected dealer agreement. The underwriting agreement specifies terms between the issuer and the managing underwriter; the agreement among the underwriters addresses terms between all underwriting firms and the managing underwriter.
Textbook Reference
Please see textbook section 8.3.4.2
Rule 144 provides which of the following?
A) Federal guidelines for lending standards to private companies
B) An exemption from reporting requirements for issuers with foreign subsidiaries
C) An exemption from the ‘33 Act and permits the resale of restricted or control securities to the public
D) Guidelines for the communication between public companies and PIPE investors
Correct answer;
C) An exemption from the ‘33 act and permits the resale of restricted or control securities to the public
Answer Explanation
SEC Rule 144 provides a safe harbor permitting the sale of restricted and affiliate securities, in limited amounts without requiring registration of the securities sold.
Textbook Reference
Please see textbook section 8.2.4
A new issue of municipal securities is coming to market through a negotiated underwriting. The spread for this issue is the difference
A) In yields between all bonds offered through the issue.
B) Between the price paid to the issuer and the price initially offered to the public.
C) Between the highest and lowest coupons of the bonds offered.
D) In credit ratings between all rating agencies that have rated the issue.
Correct Answer;
b) between the price paid to the issuer and the price initially offered to the public
Answer Explanation
The spread is defined as the difference between the price paid to the issuer and the price at which the bonds are initially offered to the public, whether the issue is a negotiated or competitive underwriting. If a municipality receives $995 per bond from the underwriter, and the underwriter sells the bonds to customer accounts for $1,000, the spread is $5, or ½ point.
Textbook Reference
Please see textbook section 8.3.5
According to Rule 144, which TWO of the following are TRUE of control persons and non-affiliates?
I. Control persons are subject to a holding period on restricted stock.
II. Control persons are not subject to a holding period on restricted stock.
III. Non-affiliates are subject to volume limitations.
IV. Non-affiliates are not subject to volume limitations.
A) I and IV
B) I and III
C) II and IV
D) II and III
Correct Answer:
A) I and Iv
Answer Explanation
Control persons are subject to both a holding period and volume limitations on the sale of restricted stocks. Non-affiliates are subject to holding periods, but not volume limitations.
Textbook Reference
Please see textbook section 8.2.4.2
What type of investor may participate in a securities offering marketed under Rule 144A of the Securities Act of 1933?
A) Any type of qualified conduit
B) A qualified institutional buyer
C) An accredited investor
D) Any institution
Correct Answer:
B) A qualified institutional buyer
Answer Explanation
“Qualified institutional buyers” (QIBs) are defined under Rule 144A of the 33 Act. They include insurance companies, investment companies, employee benefit plans, investment advisers, investment companies or trust funds holding at least $100 million of securities.
Textbook Reference
Please see textbook section 8.2.5
To qualify as an “accredited investor” under the SEC’s Regulation D, a single person would need to have income of
A) at least $150,000 in the most recent year
B) at least $200,000 in each of the two most recent years
C) at least $250,000 in the most recent year
D) at least $100,000 in each of the two most recent years
Correct Answer;
b) at least $200k in each of two most recent years
Answer Explanation
The Regulation D income test is based on sustainable income over the two most recent years, with an expectation of maintaining similar income in the future. The threshold is $200,000 for a single person or $300,000 for a married couple.
Textbook Reference
Please see textbook section 8.2.3
A new issue of municipal bonds has an aggregate par value of $12 million. The following syndicate orders have been received: $5 million in group orders; $5 million in member orders; $5 million in designated orders. What is the allocation priority for these orders from highest to lowest?
A) $5 million in member orders; $5 million in designated orders; $2 million in group orders.
B) $5 million in designated orders; $5 million in member orders; $5 million in group orders.
C) $5 million in group orders; $5 million in designated orders; $2 million in member orders.
D) $5 million in group orders; $5 million in member orders; $2 million in designated orders.
correct answer;
C) $5m in group orders, 5 m in deisgnated, 5 mn in member
Answer Explanation
The allocation priority is found in the syndicate letters, and usually follows the following priority: Presale, Group net, Designated, Member. Only $2 million of the member orders can be filled.
Textbook Reference
Please see textbook section 8.4.1.1
Which of the following are requirements of an issuer to pursue an exempt offering under Rule 147?
I. The issuer is incorporated in the state
II. 100% of the securities must be sold to state residents
III. 100% of the issuer’s assets must be located in the state
IV. The issuer’s board of directors must all be residents of the state
A) I, II, and III only
B) I and II only
C) I only
D) I, II, III, and IV
Correct Answer:
B) I and II only
Answer Explanation
For an intrastate exemption under Rule 147, the issuer’s principal place of business must be in the state and 100% of the securities must be sold to state residents. Additionally, they must meet one of the following requirements: at least 80% of the asset must be located in the state, at least 80% of the revenues must be derived from the state, at least 80% of proceeds from the sale of securities must be used in the state, or a majority of the company’s employees must work in the state.
Textbook Reference
Please see textbook section 8.2.2
Your client Horton placed an order today to purchase the new Able County Port Authority revenue bonds, being priced to yield 3.50% to maturity. You must deliver the official statement to Horton
A) No later than the settlement date
B) At the time of the trade
C) Within 24 hours of the delivery of the bonds
D) Prior to the execution of the trade
Correct Answer:
A) No later than the settlement date
Answer Explanation
When purchasing a new issue of municipal bonds, your client must receive a copy of the final official statement no later than the settlement date of the transaction.
Textbook Reference
Please see textbook section 8.4.3
SEC Rule 144 provides an exemption from registration for
A) municipal bonds
B) preferred stock
C) restricted stock
D) securities issued by banks
Correct Answer:
C) restricted stock
Answer Explanation
SEC Rule 144 provides an exemption for restricted stock. Restricted stock is stock that has not been registered. It may have been issued through a private placement or an employee stock-ownership plan.
Textbook Reference
Please see textbook section 8.2.4.1
Restricted and control securities under Rule 144 are
A) acquired only via open market transactions
B) Acquired only through exchange offers
C) acquired only in private placements
D) acquired in the open market or in a private placement
Correct Answer:
D) acquired in the open market or in a private placement
Answer Explanation
Investors traditionally are granted or receive restricted securities through private placement offerings, Regulation D offerings, Employee Stock Ownership Plans (ESOPs), as compensation for professional services, or in exchange for providing venture capital funding. Control securities are owned by a corporate insider and can be acquired either via a private sale or in the open market.
Textbook Reference
Please see textbook section 8.2.4
In an underwriting of new securities, the parties to a selected dealer agreement are
A) the issuer and the managing underwriter
B) the issuer and the selling group members
C) the managing underwriter and the syndicate members
D) the managing underwriter and the selling group members
Correct Answer:
D) the managing underwriter and the selling group members
Answer Explanation
A selected dealer agreement is used between the managing underwriter and selling group members that assist in the sale of a new issue without financial responsibility for any of the unsold securities.
Textbook Reference
Please see textbook section 8.3.4.2
During an IPO, when must a final prospectus be delivered to an investor who purchases securities?
A) On the effective date
B) Before the purchase is completed
C) During the cooling-off period
D) When there is an indication of interest
Correct Answer:
B) Before the purchase is completed
Answer Explanation
A financial prospectus must be delivered to any investor who purchases securities in an IPO, before the purchase is completed. Also, a prospectus must be given to anyone who makes a written request after the registration becomes effective.
Textbook Reference
Please see textbook section 8.1.3
In an IPO, the public offering price is $42 per share. Assuming a $3 spread per share, what price do the underwriters pay the issuer for the securities?
A) $45
B) $42
C) $39
D) between $39 and $42
Correct Answer:
C) $39
Answer Explanation
Underwriters buy shares from the issuing company at the public offering price minus the spread.
Textbook Reference
Please see textbook section 8.3.5
Which of the following information would be included in a prospectus?
A) A list of employees of the issuing corporation who earned in excess of $1 million dollars in the previous year.
B) A statement that the SEC has approved the securities for sale.
C) Proposed use of the issue’s proceeds.
D) A statement that the SEC has confirmed the accuracy of all financial information included in the prospectus.
Correct Answer:
C) Proposed use of the issue’s proceeds
Answer Explanation
Among the information included in the prospectus is a description of the issuer’s business, biographical data on officers and directors; the company’s capitalization, supported with certified financial statements; and the proposed usage of the issue’s proceeds. The SEC does not approve new issues of securities; it releases them for sale based on the availability of sufficient information for customers to make informed investment decisions.
Textbook Reference
Please see textbook section 8.1.3
Under the terms of a selected dealer agreement, participant firms
I. act as principal
II. act as agent
III. may distribute registered securities only
IV. may distribute either registered or unregistered securities
A) II and IV
B) I and IV
C) II and III
D) I and III
Correct Answer:
A) II and IV
Answer Explanation
A selected dealer agreement specifies the terms between the managing underwriter and the selling group members. Selling group members act as agents because they have no financial responsibility for unsold securities. Distributions subject to a selected dealer agreement include both registered and exempt securities (e.g. municipal bonds).
Textbook Reference
Please see textbook section 8.3.4.2
SEC Rule 147 provides for which of the following?
A) The use of an offering circular
B) The provision for the type of sales materials to be offered
C) An exemption from the ‘33 Act for certain types of offerings
D) A simplified registration requirements
Correct Answer:
C) An exemption from the ‘33 Act for certain types of offerings
Answer Explanation
According to SEC Rule 147, for an intrastate offering to be exempt from the registration requirements of the ‘33 Act, the issuer must be incorporated in the state and sell 100% of the securities to state residents. In addition, the issuer must meet one of the following requirements: 80% of the proceeds must be used in the state, 80% of the assets must be located in the state, 80% of the revenues must be derived from the state, or a majority of the employees must work in the state.
Textbook Reference
Please see textbook section 8.2.2
In a tender offer, the price that the acquiring party is offering to pay to existing investors is
A) At least 5% above current market value
B) About the same as the current market value of the company’s shares
C) A discount to current market value
D) A premium to current market value
Correct Answer:
D) A premium to current market value
Answer Explanation
The acquiring party will typically offer shareholders a premium to the current market value of the stock, as an incentive to sell their shares, and thereby take greater control of the business.
Textbook Reference
Please see textbook section 8.2.6.1
A NY based company can avoid SEC registration by utilizing Rule 147, which requires the sale of
A) of at least 80% of the securities to NY residents, who must wait at least six months before selling them to out of state residents.
B) 100% of the securities to NY residents, who cannot resell the securities to non NY investors for 90 days.
C) 100% of the securities to NY residents, who cannot resell the securities to non NY investors for six months.
D) 100% of the securities to NY residents, who may then sell them in the open market using Rule 144.
Correct Answer:
C) 100% of the securities to NY residents, who cannot resell the securities to non NY investors for six months.
Answer Explanation
SEC Rule 147 permits a company to sell its securities exclusively to residents of its home state without going through the SEC registration process. These investors must hold the securities for six months prior to selling them to out of state residents.
Textbook Reference
Please see textbook section 8.2.2
The market place in which business enterprises and governments raise long-term funds is the
A) derivative market
B) capital market
C) money market
D) interbank market
Correct Answer:
B) capital market
Answer Explanation
Securities are bought and sold to raise funds for long-term business and governmental projects in the capital market. The money market is the source of short-term debt financing (less than 1 year).
Textbook Reference
Please see textbook section 8.1
Investors typically receive restricted securities through which of the following?
I. Open market transactions
II. Regulation D offerings
III.Exercising listed options contracts
IV. Compensation for professional services
A) I and IV
B) II and III
C) II and IV
D) I and III
Correct Answer:
C) II and IV
Answer Explanation
Any stock received that has not been SEC registered is, by definition, restricted stock. In addition, venture capital firms providing start-up funds for the issuer may also receive restricted shares.
Textbook Reference
Please see textbook section 8.2.4.1
A standby underwriting is used
A) in a secondary offering
B) in a rights offering
C) in a best-efforts underwriting
D) for a company going public for the first time
Correct Answer:
B) in a rights offering
Answer Explanation
A standby underwriting is used in a rights offering. In a standby underwriting, a bank stands ready to sell any unsold shares after all shareholders have exercised their right to maintain a proportionate interest in the company.
Textbook Reference
Please see textbook section 8.3.3
What is the typical sequence for the order period:
I. Designated Orders
II. Group Orders
III. Member Orders
IV. Presale Orders
A) IV, I, III, II,
B) IV, III, II, I,
C) IV, II, I, III,
D) I, II, III, IV,
Correct Answer:
C) IV, II, I, III
Answer Explanation
The typical sequence during the order period is Presale Orders, then Group Orders, then, Designated Orders, and finally member orders.
Textbook Reference
Please see textbook section 8.4.1.1
Which of the following activities occurs prior to the cooling-off period?
A) Filing of the registration statement
B) Investors give non-binding indications of interest
C) The effective date
D) Securities begin trading
Correct Answer:
A) Filing of the registration statement
Answer Explanation
The cooling-off period begins once the issuer files the registration statement with the SEC. Indications of interest can be made by potential investors during the cooling-off period.
Textbook Reference
Please see textbook section 8.1.4
For a public offering of securities, when does the cooling-off period begin?
A) On the filing date
B) 20 days after the filing date
C) 20 days after the effective date
D) On the effective date
Correct Answer:
A) On the filing date
Answer Explanation
The filing date is when the issuer or lead underwriter delivers the registration to the SEC. The minimum cooling-off period is 20 days.
Textbook Reference
Please see textbook section 8.1.2
Shares offered in a public equity offering that provide proceeds directly to selling shareholders refer to
A) secondary shares
B) issuer shares
C) dilutive shares
D) primary shares
Correct Answer:
A) secondary shares
Answer Explanation
Secondary shares are sold by existing shareholders seeking to cash in their holdings. Issuing secondary shares does not have a dilutive effect on existing shareholders, nor do they increase the number of shares outstanding.
Textbook Reference
Please see textbook section 8.3.1
The SEC rule that provides an exemption from the registration requirements of the Securities Act of 1933 for intrastate offerings is
A) Rule 144A
B) Rule 147
C) Rule 144
D) Regulation A
Correct Answer:
B) Rule 147
Answer Explanation
Rule 147 offers an intrastate offering exemption from Section 3(a)(11) of the Securities Act of 1933.
Textbook Reference
Please see textbook section 8.2.2
The process that stirs up interest in an IPO among large institutions and helps the underwriter determine the public offering price is
A) Syndication
B) Stabilization
C) Gun-jumping
D) Book-building
Correct Answer:
D) Book-building
Answer Explanation
The book-building process generates interest and enthusiasm in an offering ahead of its effective date, especially among large institutional investors. It also can help to determine the optimum public offering price for shares.
Textbook Reference
Please see textbook section 8.3.4.3
Regulation M is an SEC rule that is designed to
A) prevent the use of material non-public information.
B) cause a customer order to be routed to the market center offering the best current price.
C) prevent manipulation of new offerings of securities.
D) ensure that all customer sell orders are marked either long or short.
Correct Answer:
C) prevent manipulation of new offerings of securities
Answer Explanation
Regulation M is specifically designed to prevent market manipulation during the offering process of a security.
Textbook Reference
Please see textbook section 8.3.7.1
Rule 144 applies to the sale of securities that
I. were acquired by investors through unregistered, private transactions
II. are considered control securities because they are held by an affiliate of the issuer
III. were acquired by non-affiliates through an open market transaction
IV. must under all circumstances satisfy a holding period before they can be sold
A) I and IV
B) II and IV
C) I and II
D) II and III
Correct Answer:
C) I and II
Answer Explanation
Rule 144 allows public resale of restricted and control securities if a number of conditions are met. Restricted securities are those securities that have been acquired through a private placement or other exempt transaction (i.e. Regulation S for overseas offerings), and are not registered. Control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as a director or large shareholder, in a relationship of control with the issuer. Control securities are not always subject to a holding period. They must satisfy a holding period only if they are also restricted. Securities acquired by non-affiliates through an open market transaction are neither restricted nor control stock, and are not subject to Rule 144.
Textbook Reference
Please see textbook section 8.2.4
An issuer intending to distribute securities under Regulation D
A) can sell no more than $5 million without a full registration statement
B) may sell securities without filing a registration statement with the SEC
C) must file an offering notice with FINRA no later than 2 business days prior to distribution
D) may sell securities only to residents of that state
Correct Answer:
B) may sell securities without filing a registration statement with the SEC
Answer Explanation
Regulation D permits issuers to distribute securities in a private placement without filing a registration statement with the SEC provided they are not offered to the general public and follow the other rules as specified under Regulation D.
Textbook Reference
Please see textbook section 8.2.3
A Qualified Institutional Buyer (QIB), under Rule 144A, is an entity that manages at least
A) $10 million in assets
B) $100 million in assets
C) $150 million in assets
D) $50 million in assets
Correct Answer:
B) $100 mn in assets
Answer Explanation
A QIB manages at least $100 million in assets, under SEC Rule 144A.
Textbook Reference
Please see textbook section 8.2.5
A transaction involving the sale of new securities from an issuer to an investor is a(n)
A) Initial public offering
B) Restricted transaction
C) Secondary offering
D) Primary offering
Correct Answer:
D) Primary offering
Answer Explanation
A primary offering takes place when new securities are sold by an issuer to investors. The first sale of new securities is an IPO (initial public offering). An IPO can be a primary offering (if the company is selling shares) or a secondary offering (if a shareholder is selling shares)
Textbook Reference
Please see textbook section 8.3.1
A preliminary prospectus is being prepared for an upcoming new corporate issue. Which of the following items will not appear in this document?
A) Offer price of the new issue
B) Business background of the principal officers of the business
C) Statement of business policy
D) Address of company headquarters
Correct Answer:
A) Offer price of the new issue
Answer Explanation
The preliminary prospectus will typically not include the time sensitive details of the offering, such as the final offer price, as well as the total number of shares sold. These items would appear in the final prospectus.
Textbook Reference
Please see textbook section 8.1.2
For the purposes of Regulation D, an accredited investor is defined as someone who meets which of the following qualifications?
I. Annual income of at least $200,000
II. Annual income of at least $1,000,0000
III. Net worth of at least $1,000,000
IV. Net worth of at least $10,000,000
A) II or IV
B) I or III
C) I or IV
D) II or III
Correct Answer:
B) I or III
Answer Explanation
Under the Securities Act of 1933, an accredited investor is any natural person who had income in excess of $200,000 or individual net worth, or joint net worth with that person’s spouse, at the time of the purchase, in excess of $1,000,000. A married couple with $300,000 in income is also an accredited investor.
Textbook Reference
Please see textbook section 8.2.3
Grace owns 2,000 shares of ABC Corporation common stock long and she is short 800 shares of the same stock. She holds no “equivalent securities.” What is the maximum number of shares she can tender, in response to a tender offer?
A) 1200
B) 2000
C) None
D) 800
Correct Answer:
A) 1200
Answer Explanation
Security holders are prohibited from tendering more shares in a tender offer than they hold net long. In this case, the holder is net long 1,200 shares (2,000 long - 800 short.)
Textbook Reference
Please see textbook section 8.2.6.1
