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