Investment Banking Flashcards
Once a registration statement has been filed with the SEC and it becomes effective, which of the following statements by an issuer would be ACCEPTABLE?
[A] “The issue has now been approved by the SEC.”
[B] “The SEC has verified the accuracy of statements filed with them about the issue.”
[C] “The SEC provides an objective review of the quality of the investment.”
[D] “The SEC has completed its review and no additional information is required from the issuer at this time.”
[D] “The SEC has completed its review and no additional information is required from the issuer at this time.”
The SEC does not approve or disapprove of any issue and does not pass on the accuracy or adequacy of statements filed with them. They review the issue in an attempt to determine that full and fair disclosure has been made but take responsibility for nothing.
Ch5: Sec3
A prospectus states “Shares offered include 400,000 from authorized but previously unissued stock and 300,000 sold by certain officers of the firm.” Which of the following is NOT correct regarding this statement?
[A] A primary distribution of 400,000 shares is made.
[B] The entire proceeds of 700,000 shares are paid to the corporation.
[C] A secondary distribution of 300,000 shares is made.
[D] The 400,000 shares are offered for the first time.
[B] The entire proceeds of 700,000 shares are paid to the corporation.
Primary means new shares offered by the corporation. A primary distribution of 400,000 shares is made. Secondary means outstanding shares reoffered for sale in a large block. The 300,000 shares sold by officers is a secondary distribution. The entire proceeds of the sale of 700,000 shares is not paid to the corporation. The 300,000 shares sold by the officers may be selling on the secondary market, and the officers would receive the proceeds from the sale of the shares, not the issuing corporation.
Ch5: Sec1
A corporation intends to offer a new issue of common stock. A dealer solicits indications of interest from prospective buyers for the corporation. Which of the following is TRUE of this situation?
[A] Neither the corporation, dealer, or the prospective buyers are bound to any type of performance.
[B] If the corporation and dealer solicit indications of interest and the buyers show interest, both parties are bound to go ahead with the new issue and purchase thereof.
[C] If prospective buyers have a positive response to the solicitation of interest, the corporation and dealer are bound to go ahead with the new issue.
[D] If the new issue comes to pass, a prospective buyer who indicated interest to the corporation or dealer is bound to buy.
[A] Neither the corporation, dealer, or the prospective buyers are bound to any type of performance.
Indications of interest are not binding to the dealer, the issuer, or to the prospective buyers.
Ch5: Sec3
Which of the following is an example of permissible stabilization activities (buying and selling) by an underwriter?
PUBLIC OFFERING PRICE UNDERWRITER'S BID OFFER I. 40 39.87 40.12 II. 20 20.00 20.25 III. 30 29.50 29.75 IV. 25 24.75 25.00
[A] I
[B] II
[C] III
[D] IV
[D] IV
The managing underwriter is permitted to stabilize by buying at or below the public offering price. Also, the managing underwriter is only then allowed to sell at the public offering price. What the chart shows is a managing underwriter reoffering shares which it purchased during stabilization. We need to look at two items: first, we look at the bid price, then second, we look at the offer price. Both need to be correct.
The manager can stabilize (buy) AT OR BELOW the public offering price, but once purchased, the shares can only be REOFFERED “at” the public offering price. Here, the manager is buying at $24.75, which is below the offering price of 25. This is the manager’s bid. This is okay.
Now, the managing underwriter can only sell (offer) the shares at the offering price of $25. This is good, which makes answer D correct. Let’s look at answer C; stabilizing activities can only take place at or below the offering price. Here, the manager is buying at $29.50, which is below the offering price of 30. This is the manager’s bid. This part is okay. Now, the managing underwriter can only sell (offer) the shares at the offering price of 30, however, the offer price is 29.75. This is not okay, so it is an incorrect answer.
Ch5: Sec3
After carefully reviewing a preliminary prospectus (Red Herring) on an upcoming issue, an investor gives the registered representative an indication of interest for 200 shares. Which two of the following would be true:
The indication is binding on the customer. The indication is binding on the firm. The indication may not be filled. Subscription payments are not allowed with the indication [A] I and III [B] II and III [C] II and IV [D] III and IV
[D] III and IV
Choice III is correct because indications of interest are not binding on the firm or customer and may never be filled due to a limited number of shares available. IV is correct.
Ch5: Sec3
A large cap company has filed a registration statement with the SEC for a new securities offering. The registration has not yet become effective. What can the RR do at this time?
[A] Get indications of interest from potential buyers.
[B] Take subscription payments from investors.
[C] Send research reports to interested parties.
[D] Send highlights taken from the preliminary prospectus to investors.
[A] Get indications of interest from potential buyers.
An RR may only take indications of interest and send red herrings to potential purchasers as the registration has been filed but not yet effective.
No payments can be accepted.
No research reports can be sent on the issuer
Cannot take and send excerpts or highlights from the preliminary prospectus.
Ch5: Sec3
Which of the following is NOT a type of underwriting contract?
[A] Firm
[B] Best Efforts
[C] All or None
[D] Rights Offering
[D] Rights Offering
Firm, Best Efforts, and All or None are types of underwriting contracts that syndicates may enter into with an issuer in the distribution of a new issue. A Rights Offering is not a type of underwriting contract.
Ch5: Sec3
Which of the following is not required in the prospectus for a new issue under the provisions of the Securities Act of 1933?
[A] The statement that the SEC neither approves nor disapproves of the securities being offered
[B] The date of the prospectus
[C] Copies of underwriting contracts and opinions of council
[D] A statement related to possible stabilizing transactions made by the managing underwriter
[C] Copies of underwriting contracts and opinions of council
Copies of underwriting contracts and opinions of counsel are not required to be in the prospectus for a new issue. They are summarized in the prospectus, but not included in their entirety.
Ch5: Sec3
All of the following are required to be included in a preliminary prospectus according to the 1933 Act EXCEPT:
[A] The financial status and history of the company
[B] The final offering price
[C] The purpose for which the funds that are being raised will be used
[D] A written statement in red on the left border of a preliminary prospectus (Red herring) that states that the prospectus may be subject to changes
[B] The final offering price
The Final Offering price will be in the final prospectus but would not be in the preliminary prospectus because it has not yet been determined at the time the preliminary prospectus is distributed.
Ch5 Sec3
When a syndicate is formed on an IPO of common stock there is a 20-day cooling period after the registration statement is filed with the SEC. During the cooling period, which of the following would a syndicate member be allowed to do?
[A] take pre-sale orders on the new issue
[B] send out research reports produced by the managing underwriter
[C] send out a preliminary prospectus to clients that request them
[D] accept a deposit with an indication of interest from an existing client
[C] send out a preliminary prospectus to clients that request them
During the cooling period the syndicate members would only be allowed to send out a preliminary prospectus to customers that request them or have given an indication of interest on the new issue but syndicate members are never allowed to accept money with indications of interest, send out research reports or take actual pre-sale orders (pre-sale orders are only allowed on municipal bond offerings).
Ch5 Sec3
A company wishing to raise new capital to expand its plant by selling new shares of stock can accomplish this by engaging in a(n)
[A] agency issue
[B] primary issue
[C] secondary issue
[D] refunding
[B] primary issue
The selling of new shares of stock is called a primary issue. A secondary issue is the redistribution of outstanding stock by large shareholders.
Ch5 Sec1
When reviewing the prospectus and registration statements of an issuer the SEC
[A] passes on the merits of the particular security covered by the registration statement.
[B] guarantees the adequacy of the disclosures made in a prospectus.
[C] guarantees the accuracy of the disclosures made in a prospectus.
[D] does not approve securities registered with it and offered for sale.
[D] does not approve securities registered with it and offered for sale.
The SEC does not assume responsibility for any security issue in any way.
Ch5 Sec3
Billy works at ABC Broker-Dealer. He hears about an upcoming IPO and really likes the company that is going public. He wants to own the company’s stock, so he enters an order to buy 1,000 shares during the IPO in his wife’s account, over which he has discretionary authority. Which of the following is TRUE in this scenario?
[A] A violation has taken place due to the use of discretionary authority.
[B] A violation of SEC regulations on restricted persons has taken place.
[C] The order should be processed immediately, and no violation has taken place.
[D] The order must be approved prior to entry by Billy’s wife, but no violation has taken place.
[B] A violation of SEC regulations on restricted persons has taken place.
In this situation, Billy and his wife are considered “restricted persons” and a violation of SEC regulations has taken place. Restricted persons and their immediate family members, including a spouse, are prohibited from participating in new offerings, such as IPOs. The violation was not in relation to Billy’s use of discretionary authority.
Ch5 Sec4
An investment banker generally does all of the following EXCEPT:
[A] Distributes large blocks of already-outstanding securities.
[B] Underwrites new issues.
[C] Makes a secondary market for new issues.
[D] Provides financing for industrial corporations.
[C] Makes a secondary market for new issues.
Investment Bankers handle the distribution of shares. These distributions can be for Primary Distributions (new shares) or for Secondary Distributions (existing shares). However, these distributions are not considered to be “making a market” which falls more into the category of market makers, specialists, and exchanges. Investment Bankers do not make a secondary market for primary issues. Investment Bankers distribute primary and secondary market issues of securities.
Ch5 Sec1. 132
When shares of stock are being sold to the public for the first time, which of the following is TRUE?
[A] This would be an example of primary market activities.
[B] This would be an example of secondary market activities.
[C] This would be an example of third market activities.
[D] This would be an example of fourth market activities.
[A] This would be an example of primary market activities.
The primary market is the market for new securities that are being sold to the public for the first time. The secondary market is where securities change hands from shareholder to shareholder after the securities have already been issued. The third and fourth markets are subsets of the secondary market. The third market is where exchange-listed securities trade off of an exchange, while the fourth market is where institutions trade directly with one another off of the exchange.
Ch5 Sec1
