Public and Private Offerings

Question 1

A Well-Known Seasoned Issuer (WKSI) has filed a shelf registration statement with the SEC. The company will be offering senior debt securities, subordinated debt securities, common stock, preferred stock, and warrants. Which TWO of the following statements are TRUE?
For each offering of securities, the issuer is required to file an S-3 registration statement
For each offering of securities, the issuer is required to file a prospectus supplement
The issuer is permitted to use a term sheet for each offering, provided it is filed as a free writing prospectus
The issuer is permitted to use a term sheet for each offering and is not required to file it as a free writing prospectus

I and III
I and IV
II and III
II and IV

Answer 1

A Well-Known Seasoned Issuer (WKSI) is permitted to use an automatic shelf registration. The issuer must file an S-3 registration form for a specified dollar amount and type(s) of securities that it is planning to offer. Each time the issuer offers securities, it will file both a preliminary and then a final prospectus supplement with the SEC (for the specific securities being issued). According to SEC Rule 433, the issuer is permitted to use a term sheet for each offering, provided it is filed as a free writing prospectus. [61069]

Question 2

Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company?

There is a limit on the amount of registered stock the director may purchase
There is no limit on the amount of registered stock the director may purchase
There is a limit on the amount of unregistered stock the director may sell
There is no limit on the amount of unregistered stock the director may sell

I and III
I and IV
II and III
II and IV

Answer 2

C
Restricted stock is stock that is not registered and is typically acquired by an individual through a private placement. With regard to restricted stock, the purchaser must hold the stock for 6 months before she may dispose of it. Control stock is registered stock that is acquired in the secondary market by an affiliate (control) person, such as an officer or director. A control person who acquires stock through an open-market purchase may sell the stock anytime. There is no limit placed on the number of registered shares an insider may purchase. According to Rule 144, there is a restriction on the sale of both restricted and control stock. [60353]

Question 3

An issuer of an IPO has filed a registration statement and underwriters are currently using a red herring as the offering document. Which of the following actions would require the issuer to submit a final prospectus for this offering?

The offering price has been established
The financial statements are stale
The number of shares sold by selling shareholders decreased
The offering price is more than 15% higher than was anticipated

Answer 3

A
An issuer files an S-1 Form in the case of an IPO. Part of the S-1 Form is the preliminary registration statement or red herring that is used as a disclosure document for potential investors. In most cases, the offering price is omitted from the red herring (although a price range is permitted). Once this has been established, the issuer would file the final prospectus with the offering price, as well as other information based on the offering proceeds. If any material information is added or altered in respect to the original filing, an amended S-1 would be filed. Some of these events would include stale financial statements, a change in the number of shares being offered, material changes related to the issuer’s business, change of officers or directors, and additional required exhibits. Once the offering price is established, the issuer would file the final prospectus with the SEC. [61337]

Question 4

Lieberman’s Muffins, a privately held company, has been discussing ways in which to raise capital. The company’s board of directors has approved an initial public offering and now plans to interview potential investment banking firms to determine who will lead the offering. If the company has not yet filed a registration statement with the SEC, which of the following statements is TRUE?

Once the board has approved the offering, the company is required to file a registration statement with the SEC
Any communication must be filed with the SEC, since the company will be discussing the offering with investment banking firms
The company is not allowed to communicate with the public until it has filed a registration statement with the SEC
The company may communicate with the public provided it does not mention the offering

Answer 4

D
The term gun-jumping refers to a communication made by an issuer during a period in which it is planning to make a public offering of securities, which would be in violation of the Securities Act of 1933. During this period, the issuer should not be engaged in any communication that might be seen as preconditioning the market for an offering. Relating to an IPO, this period is sometimes referred to as the quiet period. One of the safe harbors, related to an IPO, refers to any communication made more than 30 days prior to the filing of the registration statement and does not make reference to the offering. Therefore, a company that is planning an IPO is permitted to communicate with the public at least 30 days prior to the filing of a registration statement and not make a reference to a securities offering. This would not violate the SEC’s gun-jumping provisions. [61396]

Question 5

Which of the following choices would NOT be subject to the holding period restriction under Rule 144?
Restricted stock acquired under an investment letter
Restricted stock acquired under a stock option plan
Control stock acquired under a private placement
Control stock acquired through an open-market purchase

Answer 5

D
There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period. [60357]

Question 6

Which of the following investment banking services clients would be eligible to raise capital through an intrastate offering conducted under Rule 147?
A corporation headquartered in New York that conducts 90% of its business in Ohio and that intends to sell 100% of the new issue to Ohio residents
A corporation headquartered in Illinois that derives 70% of its revenue from activities in Illinois and intends to sell 100% of the new issue to Illinois residents
A corporation domiciled in Wisconsin that intends to sell 100% of the new issue to residents of Wisconsin and use the proceeds to build a plant in Minnesota
A resident corporation of Idaho that derives 85% of its revenues from activities within Idaho and intends to sell 100% of the new issue to Idaho residents

Answer 6

80%!!!

D
Rule 147 of the 1933 Act provides an exclusion from federal registration, if certain conditions are met.

The corporation selling the securities must be domiciled within the state where the securities will be sold.
80% or more of the corporation’s assets must be located within the state.
80% or more of the issuer’s gross revenues are derived from activities within the state where the issuer is domiciled.
80% or more of the sales proceeds from the new issue must be used within the state where the issuer is domiciled.
100% of the sales of the new issue are made to residents of the state where the issuer is domiciled.
Choice (a) is incorrect because the corporation is domiciled in New York and wishes to sell its securities to Ohio residents. Choice (b) is incorrect because the corporation derives less than 80% of its revenues from its operations in Illinois. Choice (c) is incorrect because the sales proceeds will be used to build a plant in a nonresident state.

Question 7

An issuer that is eligible to register the sale of securities on Form S-3 has a public float of $850 million, but has not issued any debt. This is an example of:

A well-known seasoned issuer (WKSI)
A seasoned issuer
An ineligible issuer
An unseasoned issuer

Answer 7

A

A WKSI needs either $700 million of common equity outstanding (public float) or $1 billion of debt, but not both. (79593)

A well-known seasoned issuer (WKSI) is defined as a company that meets the following criteria:

• It is eligible to register on Form S-3 (short form registration statement) or Form F-3 (registration statement for certain foreign private issuers). In order to file these forms, an issuer must have been a reporting company for the previous 12 months.
• As of a date within 60 days of the date of determining eligibility, the company must have either:
  1) A worldwide market value of outstanding voting and non-voting common equity (public float) held by non-affiliates of $700 million or more, or
  2) In the last three years, has issued at least $1 billion aggregate principal amount of nonconvertible securities, other than common equity, in primary offerings for cash, not exchange, that are registered under the Securities Act of 1933.

Question 8

Securities purchased under a Rule 147 exemption may be sold to an out-of-state resident:

Immediately
After 30 days
After three months
After nine months

Answer 8

D
SEC Rule 147 of the Securities Act of 1933 provides an exemption from registration for securities being sold on an intrastate basis. If securities are sold only to residents of a state by an issuer that is also a resident of the same state, the securities are exempt from both the registration and prospectus requirements of the Act. A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a nonresident of the state for a period of nine months following the last date of sale by the issuer. If an individual intends to sell the securities prior to nine months, he may do so only to a resident of the same state. (79607)

Question 9

When can you use FWP

Answer 9

WKSI—may use an FWP at any time
Seasoned Issuer—may use an FWP after its registration statement has been filed, but there is no need for the FWP to be accompanied by, or preceded by, a statutory prospectus
Unseasoned and Non-reporting Issuer—may use an FWP after its registration statement has been filed provided the FWP is accompanied by, or preceded by, a statutory prospectus
Ineligible Issuer—may not use an FWP

Question 10

All of the following securities are exempt from registration under the Securities Act of 1933, EXCEPT:

American Depositary Shares issued by a company based in China selling securities in the U.S.
Municipal bonds issued by the city of San Francisco
U.S. dollar-denominated corporate bonds sold only to investors outside the United States
Commercial paper issues by a company listed on the NYSE

Answer 10

A

Common stock, or ADRs sold by foreign private issuers, are not considered exempt securities and, unless some other exemption is available, must be registered with the SEC under the Securities Act of 1933. Certain securities are exempt from the registration and prospectus requirements of the Act because of the nature of the issuer. Among the exempted securities are:

U.S. government and U.S. government agency securities
Municipal securities
Securities issued by nonprofit organizations
Short-term corporate debt instruments (such as commercial paper) that have a maturity not exceeding 270 days
Securities issued by domestic banks and trust companies (but not bank holding companies)
Securities issued by small business investment companies (exempted by federal legislation regarding small businesses)
Choice (c) is an example of a Eurodollar bond, which is issued outside the U.S. and is not offered to U.S. investors. Eurodollar bonds are considered exempt from registration under SEC Regulation S.

Question 11

An issuer would like to accelerate the effective date of its initial public offering. Which TWO of the following statements are TRUE?

The request must be made to the SEC in writing
The request is made by the issuer and the managing underwriter
The effective date may not be granted earlier than five business days after the request is made
The issuer may request a specific hour in the day when it wants the date to be effective

I and III
I and IV
II and III
II and IV

Answer 11

D
As a general rule, the effective date of a registration statement is the twentieth day after the filing date. Any amendment filed to a registration statement prior to the effective date will initiate the 20-day period. An exception is made if the issuer requests and receives approval for an accelerated effective date. The request may be oral or written, but if the request is made orally, it must be followed by a letter that accompanies an amended filing. The request is made by the issuer and the managing underwriter. The issuer may request a specific hour in the day when it wants the date to be effective, but the SEC must be notified no later than the second business day before the day they want the registration to become effective.

Question 12

Which TWO of the following choices would be permitted to use a Section 11 defense?

The managing underwriter
The issuer
A director who is also the CEO who signed the registration statement
An accountant hired by the issuer who did not sign the registration statement

I and III
I and IV
II and III
II and IV

Answer 12

B
Under Section 11 of the Securities Act of 1933, persons other than the issuer are exempt from liability if they can prove that they had no knowledge of the fraud and properly notified the SEC. This would include an accountant or other professional who resigned, or refused to sign or certify any of the documents used to prepare the registration statement. Rule 176 of the Securities Act of 1933 describes the circumstances affecting the determination of what constitutes reasonable investigation and reasonable grounds for belief under Section 11 (addressing civil liabilities). This is referred to as the Section 11 defense and may not be used by an issuer. Although a director can claim a Section 11 defense, it is less likely that a director who is also the CEO can prove that he had no knowledge of the fraud and that he conducted an investigation. (74348)

Question 13

An investment banking firm is assisting an issuer with its initial public offering. The issuer’s financial statements will NOT be considered stale if:

The issuer has not been a reporting company for more than 12 months
They are no more than 90 days old
They are no more than 120 days old
They are no more than 134 days old

Answer 13

According to Regulation S-X, financial statements in a registration statement become stale and may not be used based on the number of days between the date of the statements in the filing and the effective date of the registration statement. For IPO issuers, the period is 135 days and, in the case of an accelerated filer (a WKSI or seasoned issuer), the period is 130 days. Therefore, an IPO may not use a financial statement which is more than 134 days old. The number of days that the issuer has been a reporting company is not relevant. (79602)

Question 14

Which of the following securities would MOST likely be issued under Rule 144A?

Mutual funds
Unit Investments Trusts
Corporate debt
Exchange-traded funds

Answer 14

C
Rule 144A permits the sale of an unlimited dollar amount of restricted securities to qualified institutional buyers (QIBs) without SEC registration. Only certain types of institutions are eligible, including insurance companies, registered investment companies, pension plans, corporations, and registered investment advisers. The buyer must be purchasing for its own account or the account of other QIBs and must own and invest at least $100 million of securities of issuers not affiliated with the buyer. Issuers mainly use Rule 144A to offer corporate debt and, in some cases, equity securities. Mutual funds (open-end investment companies), unit investments trusts, and exchange-traded funds (ETFs) are sold to retail investors and the securities usually will be registered with the SEC. (74353)

Question 15

Which TWO of the following actions may delay the effective date of a registration statement filed with the SEC?

The issuer is filing a registration statement for additional shares of the same class of securities
The issuer is filing a registration statement for additional shares of a different class of securities
The issuer is filing a registration statement that registers additional shares, which represent no more than 20% of the securities originally filed
The issuer is filing a registration statement that registers additional shares, which represent more than 20% of the securities originally filed

I and III
I and IV
II and III
II and IV

Answer 15

D
As a general rule, the effective date of a registration statement is the twentieth day after the filing date. Any amendment filed to a registration statement prior to the effective date will initiate the 20-day period. If amendments are made under certain limited conditions, it will not delay the effective date. These conditions are:

Question 16

When must a red herring be amended and resubmitted to the SEC by an issuer?

On the effective date
When the price is readjusted downward
When the financial statements are outdated
When an underwriter exercises the overallotment provision

Answer 16

D
Financial statements of an issuer submitted as part of the registration statement may become outdated or stale. This would require the issuer to file an amendment which would include the updated financial statements. According to Regulation S-X, financial statements in a registration statement become stale and cannot be used, based on the number of days between the date of the statements in the filing and the effective date of the registration statement. For most issuers, this period cannot equal nor exceed 135 days (cannot be more than 134 days old) and, in the case of an accelerated filer (a WKSI or seasoned issuer), the period is 130 days. On the effective date, the final prospectus is prepared since the red herring is no longer relevant. (79522)

Question 17

LamoNate is a plastics company. It issued a communication 45 days before filing a new issue registration statement. Its communication failed to mention the future securities offering. Which of the following statements is TRUE regarding the LamoNate communication?

The communication is in conflict with the SEC registration requirements
The communication is defined as a free writing prospectus
It is not defined as an offer to sell
It is defined as an omitting prospectus

Answer 17

C
Any communication made by an issuer more than 30 days before the filing date of a registration statement does not constitute an offer to sell, if it does not mention the securities offering. This is an example of one of the safe harbors that would not violate the SEC gun-jumping restrictions. The term gun-jumping refers to a communication made by an issuer during a period in which it is planning to make a public offering of securities. This would be in violation of the Securities Act of 1933. During this period the issuer should not be engaged in any communication that would be seen as preconditioning the market for offering. This situation may occur if an issuer is planning an IPO and relies on this safe harbor when management makes a public comment concerning the company, at least 30 days prior to the filing of the registration statement. [60800]

Question 18

Which TWO of the following statements are TRUE concerning the audit committee of the board of directors of a public company?

All members of the audit committee must be independent
A majority of the members of the audit committee must be independent
The issuer must disclose the names of the persons who are financial experts
All of the members must be financial experts

I and III
I and IV
II and III
II and IV

Answer 18

A
There are a few different rules concerning the audit committee of an SEC reporting company.

According to SARBOX, in general, each member of the audit committee must be a member of the BOD of the issuer and be independent.
According to Regulation S-K, the issuer must disclose either
The issuer has at least one audit committee financial expert serving on its audit committee, or
The issuer does not have an audit committee financial expert serving on its audit committee.
If the issuer has a financial expert(s) on its audit committee, it must disclose the name(s).
A financial expert is generally defined as someone who understands GAAP and financial statements, has audit experience, can evaluate financial statements, can understand internal controls over reporting systems, and understands the audit committee functions.
According to the listing requirements of the NYSE and Nasdaq, an issuer must have at least one person on the audit committee who meets the definition of a financial expert.
As a matter of practice, most reporting issuers have at least one financial expert serving on its audit committee. [61363]

Question 19

A technology company based in Israel has hired your investment banking firm to raise capital in the U.S. Since many wealthy Israelis reside in the U.S., the issuer would like to target these investors as well as other high-net-worth and institutional investors. If the issuer does not want to file a registration statement with the SEC, you would recommend a:

Rule 144 filing
Rule 144A Offering
Regulation S Offering
Regulation D Offering

Answer 19

All of these choices do not require filing with the SEC. However, a private placement under Regulation D may be offered to an unlimited number of accredited investors. An accredited investor is defined as an institutional investor or a person with either a net worth of $1,000,000, or annual income of $200,000 (or $300,000 for a married couple). This would allow the issuer to raise capital from institutional investors and wealthy individuals.

Rule 144 is an exemption that allows for the resale of restricted or control stock, and no proceeds would be raised by an issuer.

Rule 144A permits the sale by an issuer or selling stockholders of an unlimited dollar amount of restricted securities to qualified institutional buyers (QIBs). A QIB may not be a natural person and, therefore, would not allow the issuer to offer securities to high-net-worth investors in the U.S.

Regulation S allows U.S., not foreign, issuers to raise capital outside the U.S. without filing a registration statement with the SEC. [99874]

Question 20

Rule 144, 144A Regulation S, Regulation D

Answer 20

ALL UNREGISTERED

144: resale of restricted/control stock
144A: sale by issuer or selling stockholder of unlimited dollar of restricted securities to QIBs
Regulation D: unlimited private placement to an accredited investor
Regulatoin S: raise capital outside US without registration

Question 21

Which of the following actions associated with a new issue of securities would violate the Securities Act of 1933 and constitute an unlawful activity?

An issuer has neglected to register a public offering of common stock that is offered interstate
A foreign government has conducted an offering of registered securities and has provided a prospectus to all purchasers
The sale of common stock by an issuer that has NOT provided a specific business plan to regulators, or investors
An offering of registered debt by a broker-dealer that fails to contain the opinion of a qualified independent underwriter

Answer 21

A
The Securities Act of 1933 requires nonexempt securities to be registered. The process of securities registration includes the filing of a registration statement with the SEC, and the preparation/distribution of a prospectus. Section 5 of the Act states that it is unlawful to use an instrument of interstate commerce to sell a security, unless a registration statement is in effect. Foreign governments may raise capital in the United States by way of the registration process. Companies are permitted to conduct offerings of securities without a specific business plan. Such entities are called a blank check companies. A broker-dealer that raises capital and engages in a self-underwriting must hire a qualified independent underwriter for the purpose of providing a pricing opinion. Failure to do so would violate FINRA rules, but would not constitute an unlawful activity. [60765]

Question 22

WKSI:
Which TWO of the following statements are TRUE concerning the minimum criteria that a company must meet in order to be considered a well-known seasoned issuer (WKSI)?

It must have been a reporting company for the previous12 months
It must have been a reporting company for the previous 36 months
The company must have a certain public float of debt or equity
The company must have a certain amount of annual revenue
I and III
I and IV
II and III
II and IV

Answer 22

A
A well-known seasoned issuer (WKSI) is an issuer that is defined as a company that meets the following requirements.

It must be eligible to register on Form S-3 (short form for the registration statement) or Form F-3 (registration statement for certain foreign private issuers). In order to file these forms, an issuer must have been a reporting company for the previous 12 months.
Within 60 days of the determination of eligibility, the company either must have:
—A worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more, or
—In the last three years, issued at least $1 billion aggregate principal amount of nonconvertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act of 1933
It may not be an ineligible issuer.

Question 23

If the SEC has entered an order temporarily suspending a Regulation A exemption, the underwriter, issuer, or the selling security holder may request a hearing within how many days?

10
20
30
45

Answer 23

C
The underwriter, selling security holder, or issuer may request a hearing within 30 days. If a hearing is not requested, the temporary order suspending the Regulation A exemption becomes permanent on the 30th day. If a hearing is requested, it will be held within 20 calendar days of the SEC’s receipt of the request. [60750]

Question 24

A regional sales executive with BiltFast Bikes, Inc. His company is preparing for its IPO. The executive has signed a lock-up agreement with his employer. When may this executive sell his shares?

At any time stipulated in the agreement
At any time after the deal closes
Six months following the closing of the deal
12 months following the closing of the deal

Answer 24

A
A lock-up agreement is a contract between an employer and its employee that dictates an amount of time the employee must wait to sell shares of his company’s securities after an offering. Generally, a lock-up agreement will expire within six months following the closing of the company’s IPO, but there is no statutory time limit. Also, the executive may be bound by additional limitations if he has insider status. [74398]

Question 25

Which of the following offerings would require company information to be filed with the SEC?

An offering of securities under Regulation A
An offering of securities under Regulation S
An offering of securities under Regulation D
A sale of securities under Rule 144A

Answer 25

A
Securities sold under Regulation A are required to be registered with the SEC. However, since the amount of capital being raised is limited, the issuer may conduct a public offering and follow a less expensive process than a regular initial public offering. The principal advantages of Regulation A offerings include:

Simpler financial statements that are not required to be audited
No Exchange Act of 1934 reporting obligations after the offering, unless the company has more than $10 million in total assets and more than 500 shareholders
The issuer being able to choose among three formats to prepare the offering circular, one of which is a simplified question-and-answer document
The issuer being able to test the waters to determine if there is adequate interest in its securities before going through the expense of filing with the SEC
The other three offerings are exempt from SEC registration.

Question 26

How many copies of a prospectus that is used after the effective date of a registration statement must be filed with the SEC?
Ten
Five
Three
One

Answer 26

A
Ten copies of any prospectus used after the effective date (final prospectus) must be included in the filing of a registration statement. If a prospectus is to be used prior to the effective date (i.e., a preliminary prospectus), five copies must be filed with the SEC. (79590)

Question 27

The Elm Company has begun business operations. It has not yet generated any significant revenue. The company intends to increase its capital base through an initial public offering of common stock. What is the appropriate description of the Elm Company? It is:
An unseasoned issuer
A development stage company
A WKSI
A blank check company

Answer 27

B
A development stage company is an enterprise without any significant track record or revenues. Such companies are eligible to have a public offering of shares, based on the conditions of the ‘33 Act. An unseasoned issuer is a reporting company under the ‘34 Act, but it does not meet the requirements to be classified as seasoned, or well-known seasoned issuer (WKSI). A blank check company is defined as an entity with either no specific business plan, or one that has indicated that it intends to merge with an unidentified company (or companies). The Elm Company has already begun business operations and would not be classified as a blank check company. [60781]

Question 28

Which of the following statements is TRUE concerning the audit committee of a public company?
The SEC requires all audit committee members to be financial experts
The NYSE and Nasdaq listing standards require all audit committee members to be financial experts
The SEC requires at least one member of the audit committee to be a financial expert
The NYSE and Nasdaq listing standards requires at least one member of the audit committee to be a financial expert

Answer 28

D: There are several different rules concerning the audit committee of an SEC reporting company.

According to the Sarbanes-Oxley Act (SARBOX), in general, each member of the audit committee must be a member of the board of directors of the issuer and be independent. All the members of this committee must be independent.
According to Regulation S-K, the issuer must disclose:
Whether the issuer has at least one financial expert serving on its audit committee, or
Whether the issuer does not have a financial expert serving on its audit committee
If the issuer has a financial expert on its audit committee, it must disclose the name.
A financial expert is generally defined as someone who understands generally accepted accounting principles (GAAP) and financial statements, has audit experience, can evaluate financial statements, can understand internal controls over reporting systems, and understands the audit committee functions.
According to the listing requirements of the NYSE and Nasdaq, an issuer must have at least one person on the audit committee who meets the definition of a financial expert.
As a matter of practice, most reporting issuers have at least one financial expert serving on their audit committee. (71285)

Question 29

A venture capital fund acquires 100,000 shares of restricted stock of an issuer quoted on the OTC Bulletin Board. In order to resell this stock under SEC Rule 144, all of the following steps would need to be taken, EXCEPT the fund:
Must hold the stock for at least 6 months
May sell the stock through a broker’s transaction only
Might be limited in the amount of stock it can sell during any 90-day period
Must file a notice with the SEC

Answer 29

B:Sales of securities under Rule 144 may be done through a broker’s transactions or in transactions made directly with market makers. [60363]

Question 30

Unless registration is delayed, the effective date of a registration statement is generally on the:
10th day after the registration statement is filed
10th business day after registration statement is filed
20th day after the registration statement is filed
20th business day after the registration statement is filed

Answer 30

20 DAYS!!!! NOT BUSINESS

Question 31

Which of the following securities must be registered with the SEC?
Convertible debt sold only to hedge funds
Commercial paper issued by a company listed on the NYSE
A company based in China offering securities to U.S. accredited investors
An open-end investment company offered to U.S. investors who invest in Treasury securities

Answer 31

D
Certain securities or transactions are exempt from the registration and prospectus requirements of the 1933 Act. Short-term corporate debt instruments, regardless of the issuer (such as commercial paper), that have a maturity not exceeding 270 days, choice (b), are exempt securities. Choices (a) and (c) are examples of exempt transactions under Regulation D. A hedge fund is an example of an accredited investor.

Open-end investment companies, such as mutual funds and exchange-traded funds (ETFs) are generally required to register with the SEC in order to offer securities in the U.S. The fact that the mutual fund invests in Treasury securities is not relevant. (71289)

Question 32

All of the following features are normally included in the placement agent agreement, EXCEPT:
The issuer agrees to provide business and financial information
The amount of cash and/or securities the issuer agrees to pay as compensation
The investment bank agrees to file the appropriate registration form with the SEC
Both the issuer and the investment bank agree not to disclose confidential information

Answer 32

C: The placement agent agreement specifies all the terms and conditions between a company that is planning on issuing securities in a private placement (the issuer) and the investment bank that has been hired to act as its agent. The role of the investment bank is to find institutional investors to purchase the securities. This agreement normally includes the following features.

The issuer agrees to provide business and financial information.
Both the issuer and the investment bank agree not to disclose confidential information unless they receive prior approval.
The amount of cash and/or securities the issuer agrees to pay as compensation
The fee could be based on a percentage of the securities, or may include warrants to purchase the company stock.
Other legal terms and conditions, including:
The length and termination date of the offering
Which state law governs the agreement
Expenses to be reimbursed by the issuer
The fact that each party agrees to comply with all applicable federal and state regulations
Since this agreement is normally used for a private placement, the issuer will not be required to file a registration statement with the SEC. If the securities are later resold to the public, a registration statement may need to be filed. [60460]

Question 33

An equity security that is distributed under Regulation S may be resold by:
Immediate sale into the U.S. market
Immediate sale in a designated offshore market
Regulatory approval from SROs
Waiting two years, then selling into the U.S. market

Answer 33

B: An overseas investor who acquires securities pursuant to Regulation S may sell the securities overseas immediately through a designated offshore securities market. There is a distribution compliance period (holding period) of 40 days for debt securities and a one-year period before an equity security sold pursuant to Regulation S may be resold in the U.S. [60349]

Question 34

Which of the following entities is considered an eligible purchaser for a Rule 147 offering?
A corporation that has its principal office located in the state of the offering
A partnership in which 90% of the partners are located in the state of the offering
A trust that is organized for the specific purpose of purchasing the securities and is located in the state of the offering
A qualified institutional buyer that has one of its offices located in the state of the offering

Answer 34

A: SEC Rule 147 covers an exemption from registration for the sale of securities on an intrastate basis. The issuer under Rule 147 is not allowed to sell the securities to a nonresident of the state. 100% of the purchasers must be residents of the state where the issuer is located. The purchaser may be an individual (who is a resident of the state), or a corporation, partnership, trust, or other business organization that has its principal office in the state. The business organization may not be formed for the specific purpose of purchasing the securities sold under this exemption. (99545)

Question 35

FWP:
Which of the following statements is TRUE concerning a well-known seasoned issuer (WKSI)?
It is not permitted to use a free writing prospectus (FWP)
It is permitted to use a free writing prospectus (FWP) at any time
It is permitted to use a free writing prospectus (FWP) after its registration statement has been filed and provided the FWP is accompanied by, or preceded by, a statutory prospectus
It is permitted to use a free writing prospectus (FWP) after its registration statement has been filed, but there is no need for the FWP to be accompanied by, or preceded by, a statutory prospectus

Answer 35

B:
A free writing prospectus (FWP) is any document that is used in connection with an offering, but it is not a statutory prospectus. The following is a summary on the use of an FWP by the different types of issuers:

WKSI—may use an FWP at any time
Seasoned Issuer—may use an FWP after its registration statement has been filed, but there is no need for the FWP to be accompanied by, or preceded by, a statutory prospectus
Unseasoned and Non-reporting Issuer—may use an FWP after its registration statement has been filed provided the FWP is accompanied by, or preceded by, a statutory prospectus
Ineligible Issuer—may not use an FWP

Question 36

All of the following statements are TRUE concerning an SEC
Rule 4(5) offering, EXCEPT:
The amount of the offering may not exceed $5,000,000
The offering may be sold to a limited number of nonaccredited investors
The offering may be sold to institutional investors
No advertising or public solicitation may be used to offer the securities

Answer 36

4(5): can only sell to accredited investors
According to Section 4(5) [formerly 4(6)] of the Securities Act of 1933, an offering by an issuer may be considered an exempt transaction if certain conditions are met. The amount of the offering may not exceed $5,000,000. No advertising or public solicitation may be used to offer the securities, and the offering may be sold only to accredited investors. Institutional investors are considered accredited and may purchase this type of offering. This exemption is different from Regulation D, where a limited number (35) of nonaccredited investors may participate. (79520)

Question 37

Veronica has acquired securities of the NJF Corporation, a nonreporting issuer, directly from the issuer. The transaction did not involve a public offering. Under Rule 144, Veronica may sell the securities:
Immediately
After 3 months
After 6 months
After 1 year

Answer 37

A person who acquires securities directly from an issuer, in a transaction that did not involve a public offering, has received restricted securities. The holding period for restricted securities in most circumstances is 6 months, unless the issuer is a nonreporting company, in which case the holding period is 1 year. [60355]

Question 38

Certain offerings of securities may be registered on a continuous or delayed basis. All of the following instruments may qualify for continuous or delayed offerings, EXCEPT:
Securities issued in connection with an exercise of a convertible instrument
Securities issued in connection with business combination transactions
U.S. Treasury instruments
Securities sold on behalf of a subsidiary of the registrant

Answer 38

C: Rule 415 of the 1933 Securities Act offers issuers the flexibility to offer securities on a continuous or delayed basis by filing a shelf registration. Securities that are guaranteed by the U.S. government are exempt securities. No registration of U.S. Treasury instruments is required. [60788]

Question 39

Which of the following choices BEST describes a placement agent in a private offering?
A firm that assists an issuer by agreeing to purchase its securities at a fixed price in order to resell the securities to investors
A firm that assists an issuer by finding institutional investors to purchase its securities
A firm that assists an issuer by finding both institutional and retail investors to purchase its securities
A firm that invests its own capital with an issuer by buying securities that it plans to resell at a later date

Answer 39

B: The term placement agent refers to a firm, usually a broker-dealer, that agrees to find institutional investors who, in turn, will purchase securities of an issuer in a private placement. The firm agrees to act in an agency (rather than a principal) capacity and will receive a fee for selling the securities. Since the term is used in connection with private placements, only accredited or institutional investors may purchase the securities. The offering will not be made available to nonaccredited investors. Choice (a) defines a firm commitment underwriter, while choice (d) refers to a private equity investor. [60459]

Question 40

An insider of XYZ Corp. buys company stock in the open market at $63 a share. Ten months later, the insider wishes to sell the stock at the current market price of $68 a share. Which TWO of the following statements are TRUE regarding this transaction?

The sale is subject to the 6-month holding period under Rule 144
The sale is not subject to the 6-month holding period under Rule 144
The sale is subject to the volume limitations under Rule 144
The sale is not subject to the volume limitations under Rule 144

I and III
I and IV
II and III
II and IV

Answer 40

144: volume is always limited
Rule 144 requires that restricted (unregistered) stock be held for 6 months before it can be resold. Control stock (registered stock purchased by insiders) is not subject to a holding period requirement under Rule 144. Both restricted and control stock are subject to the volume limitations under the Rule. [60352]

Question 41

A resale restriction does not apply to securities purchased through which of the following offerings?

Regulation S offerings
Regulation A offerings
Rule 147 offerings
Regulation D offerings

Answer 41

B: Since an offering under Regulation A is registered with the SEC, there is no required holding period or resale restriction.
Securities purchased under Regulation S (outside the U.S.) have either a 40 day resale restriction (for debt) or a one year resale restriction (for equities).
Under Rule 147, a purchaser is not permitted to sell the securities to a non-resident of the state for a period of nine months following the last date of sale by the issuer.
Securities purchased under Regulation D (private placements) generally have a six-month resale restriction. (79609)

Question 42

Full Throttle Semiconductors is currently going public. The issuer has required its employees and venture capital participants to sign lock-up agreements. Which TWO of the following statements concerning the lock-up agreements are TRUE?
The selling restriction typically lasts for 180 days
The selling restriction typically lasts for one year
Insiders will be free to sell at the cessation of the lock-up period
Insiders may still need to wait to sell at the cessation of the lock-up period
I and III
I and IV
II and III
II and IV

Answer 42

B: Lock-up agreements prohibit employees of the issuer (as well as their family members) and venture capitalists from immediately selling their shares when a company goes public. Although the shares are typically locked up for a period of 180 days from the public offering, there is no statutory time period. Additional limitations on the quantity of shares permitted to be sold may be detailed in these agreements. While federal laws do not govern the terms of lock-up agreements (duration and quantity), the resale provisions must still be disclosed in the initial registration documents and prospectus. Additionally, although the lock-up period may expire after 180 days, insiders may be bound by additional restrictions regarding the timing and volume of sales as codified under Rule 144 of the 1933 Act. [60726]

Question 43

An investment banking representative would require an authorized person of an institutional investor to sign which of the following documents to attest to, or determine, whether the institution has the status of an accredited investor?
The private placement memorandum
The subscription agreement
The confidentiality agreement
The engagement agreement

Answer 43

The subscription agreement is a sales contract for the sale of securities in a private placement. It sets forth the terms and conditions of the securities. The client, or an authorized person of an institutional investor, will sign the agreement attesting to the status of an accredited investor. [60469]

Question 44

The SEC may halt a Regulation A offering for all the following reasons, EXCEPT:
The issuer or its selling agent has failed to file the script of a radio or television broadcast soliciting interest in the offering
An issuer has advertised an issue prior to filing an offering statement with the SEC
An issuer has made a monetary solicitation related to a new issue prior to the SEC’s completion of its review of the filed offering statement
The issuer has begun the sale of a new issue 15 days after sending out a solicitation statement

Answer 44

B: It is acceptable to test the waters prior to filing an offering statement with the SEC. The materials that may be distributed when testing the waters are limited to factual information that must include a description of the company’s business, the background of the CEO, and a statement that no money should be sent by interested investors. The SEC may halt a Regulation A offering if any of the terms, conditions, or requirements of the regulation are deficient. This would include failure to provide the SEC with a copy of the script used in any radio or TV broadcast and the solicitation of money for the issue prior to completion of the review by the SEC. Additionally, there must be at least 20 days separating the use of a solicitation statement and the first sale of securities. [60748]

Question 45

A broker-dealer owns 60% of the Sloan Corporation which, in turn, owns 70% of Pirelli Industries. If the broker-dealer arranges a private placement for Pirelli Industries, it is:
Exempt from filing a disclosure document with the Corporate Finance Department
Required to file a disclosure document with the Corporate Finance Department, but is not required to provide this document to investors
Exempt from filing a disclosure document with the Corporate Finance Department, but is required to provide this document to investors
Required to file a compensation disclosure document with the Corporate Finance Department, but is not required to provide this document to investors

Answer 45

A: FINRA Rule 5122 relates to a private placement of securities where a member firm issues the securities and conducts the placement on its own behalf. It is also referred to as a Member Private Offering (MPO). Due to potential conflicts of interest when a member firm attempts to raise capital for itself, or for a firm it controls, the member firm is required to provide a term sheet, or a private placement memorandum, or a disclosure document that contains certain disclosures. The member firm is also required to file this document with the Corporate Finance Department. Control is defined as ownership of more than 50% of the company. With multiple levels of ownership, the rule uses a flow-through concept to determine control. Since the broker-dealer owns 60% of 70%, it would have only a 42% interest in Pirelli Industries and would be exempt from the filing requirements of the rule. [60366]

Question 46

Bob’s Circus Tents, Inc. (BCT) is a publicly traded company. It wants to raise additional capital through an offering of common stock. Your firm will be handling the underwriting. BCT would like to accomplish the issue quickly by filing an S-3 Registration Statement. Which TWO of the following events would disqualify an issuer from filing under an S-3 registration statement?
BCT has less than $500 million in voting and nonvoting common equity outstanding
BCT failed to pay a preferred stock dividend last year
The company cut its common dividend in half last year
The company is delinquent in its SEC filings
I and III
I and IV
II and III
II and IV

Answer 46

D: An S-3 registration statement is sometimes called short form registration. An issuer is precluded from filing an S-3 registration statement if it has failed to pay a dividend on an issue of preferred stock, failed to pay interest on a bond, or if it is delinquent in its filings with the SEC. The minimum requirement to file an S-3 is $75 million of public float in voting and nonvoting common equity. [61250]

Question 47

An investor purchasing securities under Section 4(5) of the Securities Act is required to receive:
A private placement memorandum
A prospectus
An offering circular
No disclosure document

Answer 47

D: According to Section 4(5) [formerly 4(6)] of the Securities Act, an offering by an issuer may be considered an exempt transaction if certain conditions are met. The amount of the offering may not exceed $5,000,000. No advertising or public solicitation may be used to offer the securities, and the offering may be sold only to accredited investors. There are no document delivery requirements, but the transaction is subject to the antifraud provision of the Act. This exemption is different from Regulation D where a limited number (35) of nonaccredited investors may participate. (79517)

Question 48

An issuer that is eligible to register its sale of securities on Form S-3 has a public float $950 million, but it has not issued any debt since it became a reporting company. Which of the following statements is TRUE?
It is permitted to use a free writing prospectus (FWP) at any time
It is permitted to use a free writing prospectus (FWP) after its registration statement has been filed and provided the FWP is accompanied by, or preceded by, a statutory prospectus
It is not permitted to use a free writing prospectus (FWP)
It is permitted to use a free writing prospectus (FWP) after its registration statement has been filed, but there is no need for the FWP to be accompanied by, or preceded by, a statutory prospectus

Answer 48

A: A WKSI needs either $700 million of common equity outstanding (public float) or $1 billion of debt, but not both.

Question 49

A company that manufactures tee-shirts used for promotional items is in the process of an initial public offering. The issuer has asked what action it would need to take in order to register the securities in seven states. It is important for the issuer to make sure the:
Registered persons offering the securities are registered in all seven states
Broker-dealers offering the securities are registered in all seven states
Issuer has registered the securities in all seven states
Issuer’s securities are exempt from state registration requirements prior to offering the securities in any of the seven states

Answer 49

C: State securities laws (blue-sky laws) are designed to protect investors from fraudulent securities dealings. In addition to federal filing requirements, issuers may be required to register the securities in any state where they anticipate sales. Often, state regulators simply require that the issuer make payment of a fee and provide copies of its federal filings. The issuer’s only requirement is to register the securities in all seven states. Broker-dealers and their representatives are required to register in any state in which they are offering the securities to clients residing in that state. [99929]

Question 50

There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities of XYZ Corporation, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks was:
1 week ago	25,000 shares
2 weeks ago	26,000 shares
3 weeks ago	27,000 shares
4 weeks ago	28,000 shares
5 weeks ago	27,000 shares
6 weeks ago	27,000 shares
How many shares of XYZ Corporation is Mr. Smith able to sell according to Rule 144?

26,000 shares
26,500 shares
27,250 shares
30,000 shares

Answer 50

B: Mr. Smith would be able to sell 26,500 shares. Under Rule 144, the amount that may be sold during any 90-day period is 1% of the outstanding shares, or the average weekly volume of trading for the four weeks prior to the sale, whichever is greater. One percent of the outstanding shares is 26,000. The average weekly volume from the prior four weeks was 26,500 shares.

Question 51

Which of the following documentation would be defined as a free writing prospectus?
A research report issued by a broker-dealer
A term sheet summarizing the securities being offered and prepared by an underwriter
The dissemination of factual information by an issuer
An advertisement by a firm indicating it makes a market or takes proprietary positions in the security

Answer 51

B: A free writing prospectus is any communication that does not meet the standards of a statutory prospectus. It is considered a solicitation of an offer to buy a security. Examples include term sheets, marketing materials, and press releases whether prepared by the issuer (which is usually the case) or an underwriter. The SEC requires that a legend be included within the free writing prospectus. The legend would indicate whether the issuer will file a registration statement and how a prospectus may be obtained. Research reports and advertisements are defined and subject to FINRA requirements, and are not considered free writing prospectuses. [61349]

Question 52

On September 1, an underwriter offers stock that has been registered with the SEC. This is the first offering of stock made by the issuing company. The issue will be listed on the New York Stock Exchange. A dealer that subsequently sells the stock in the secondary market will be required to furnish a prospectus:
Only if the dealer was a member of the underwriting syndicate or selling group
For a period of 25 days following the initial offering
For a period of 40 days following the initial offering
For a period of 90 days following the initial offering

Answer 52

IPO on exchange: 25 days
IPO NOT on exchange: 90 days
NOT IPO and NOT on exchange: 40 days

When a new issue is sold to the public, a prospectus must be given to all potential purchasers. In addition, dealers who sell the security in the aftermarket, even if they were not involved in the original distribution, are required to provide a copy of the prospectus. This lasts for a period of 25 days following the initial offering for issues to be listed on an exchange (including Nasdaq). If the offer is an IPO and the securities are not listed on an exchange, the prospectus must be provided for 90 days. If the issue is not an IPO, and the securities will not be listed on an exchange, dealers must deliver prospectuses for 40 days after the offering date. [61018]

Question 53

A prospectus would include all of the following communications,
EXCEPT a(n):
Advertisement that identifies the security, the price, and the name of the underwriters
Advertisement that contains a summary of information that is contained in the registration statement
Communication that contains information relating to the offer of a security
Television advertisement that offers a security for sale

Answer 53

A: According to the Securities Act of 1933, a prospectus is defined as any notice, circular, prospectus, advertisement, letter, or communication, whether written or on television or radio, that offers a security for sale. This is a very broad definition, but it includes an exemption if the information only identifies the security, the price, the name of the underwriters, and from whom a prospectus may be obtained. This type of advertisement is called a tombstone. This rule defines a prospectus, but it is not the same as SEC Rule 134, which defines a communication not deemed to be a prospectus. Rule 134 pertains to communications published after a registration statement has been filed. [61016]

Question 54

CF Eye Care is filing an S-1 shelf registration statement with the SEC. The securities are to be issued in connection with a business combination. The shelf registration will be valid for:
6 months
1 year
2 years
3 years

Answer 54

Most are 3 years, but ones not done with S-3 are 2 years

Question 55

Which of the following BEST defines an at-the-market offering?
It is an unregistered offering by a publicly traded company
It is a registered offering by a private company
It is a registered offering by a publicly traded company over a period of time
It is a registered offering by a publicly traded company at one time

Answer 55

C: An at-the-market offering permits a company to raise capital and issue shares over a period of time rather than all at once. This method of raising capital provides flexibility to the issuer when selling its shares, since it not limited to selling the securities at one time, as is the case in a registered secondary (follow-on) offering. An at-the-market offering is a registered issue of a publicly traded company. It may only be conducted by a company that is eligible to use Form S-3 or F-3, and sold pursuant to a shelf registration. [60888]

Question 56

Jacobsen & Daniels Household Products is offering additional stock through a secondary offering. The company may release which TWO of the following types of information according to the safe harbor provisions associated with gun-jumping?

Special business information regarding the issuer
Financial developments regarding the issuer
Earnings forecast
Material nonpublic information

I and III
I and IV
II and III
II and IV

Answer 56

C: There are two safe harbors from the gun-jumping provisions. The first allows the issuer (or someone acting on its behalf) to continue to publish or disseminate regularly released factual business information and the second one allows forward-looking information at any time. Information is considered to be regularly released if, in the past, the issuer has released or disseminated the same type of information in the ordinary course of its business.

Factual business information includes:

Information about the issuer
Information about business or financial developments of the issuer
Advertisements or information about the issuer’s products and/or services
Dividend notices
Information in reports filed with the SEC under the Securities Exchange Act of 1934
Forward-looking information includes:

Earnings forecasts (e.g., revenue projections, loss of income, loss of earnings per share, capital expenditures, dividends, and capital structure)
Future management operations plans (e.g., plans related to products or services)
Statements about future economic performance (e.g., statements from management discussion and analysis)
Information in reports filed with the SEC
The second safe harbor permits a non-reporting issuer (or someone acting on its behalf) to continue to publish, or disseminate regularly released factual business information that is meant for use outside of the scope of an investor or potential investor. Special business information would not fall under the description of regularly released factual business. Material nonpublic information must be released under the provisions of Regulation FD. This would require the issuer to make the information available publicly, rather than selectively, as would be the case of disclosure to those who are investing in the new issue of securities.

Question 57

Which TWO of the following activities are conducted while an issue is in registration?
The underwriters will accept firm commitments from purchasers
Potential buy-side clients are identified and are offered a preliminary prospectus
The SEC reviews the issuer’s registration statement and evaluates the investment merit of the issue
Investment banking representatives will assist the issuer in conducting due diligence
I and III
I and IV
II and III
II and IV

Answer 57

D: During the cooling-off period, an issue is described as being in registration. The SEC will review the issuer’s registration statement for completeness. The SEC does not evaluate (pass on) the investment merits of the issue. Also, during the cooling-off period, potential buy-side clients are identified and are offered a preliminary prospectus. Underwriters, however, are not permitted to offer the security for sale, or accept firm commitments from purchasers. Due diligence meetings between the issuer and underwriters are undertaken during the cooling-off period. [60655]

Question 58

Under Regulation D, general solicitation may be used in which of the following offerings?
An offering of $800,000 to non-accredited investors only
An offering of $3,000,000 to accredited investors and 40 non-accredited investors
An offering of $9,000,000 to accredited investors only
An offering of $150,000,000 to accredited investors and 34 non-accredited investors

Answer 58

C: Regulation D generally prohibits an issuer, or the securities firm that represents an issuer, from using any form of general solicitation or general advertising to promote an offering. However, under Rule 506(c), issuers and the securities firms that assist these issuers in raising an unlimited amount of capital through the private placement market may use general solicitation and general advertising if all of the purchasers are accredited investors. (79613)

Question 59

How to qualify as QIB:

All of the following choices are qualified institutional buyers under Rule 144A, EXCEPT:

An investment company that manages a $15 million portfolio but is part of a family of funds holding $400 million of qualifying securities
A bank that has a net worth of $50 million and which owns and invests $150 million of qualifying securities
A broker-dealer that owns and invests $5 million of securities of unaffiliated issuers and which is acting on a riskless principal basis for customers who are QIBs
An accredited individual investor who owns and invests $250 million of qualifying securities

Answer 59

Investors, generally, must pass a 3-part test in order to be considered a QIB.

(1) Only certain types of institutions are eligible, including insurance companies, registered investment companies, pension plans, corporations, and registered investment advisers.
(2) The buyer must be purchasing for its own account or the account of other QIBs.
(3) The buyer must own and invest at least $100 million of securities of issuers not affiliated with the buyer.

Certain buyers are subject to special tests as alternatives to this 3-part test. For example, a broker-dealer is a QIB if it owns and invests $10 million of securities of issuers not affiliated with the dealer, or if it acts as a riskless principal for other QIBs. Banks and S&Ls, in addition to meeting the $100 million portfolio test, must also have a net worth of $25 million. An investment company can be a QIB by being part of a family that, in aggregate, meets the $100 million portfolio test. Finally, any entity where all of its owners are QIBs is also a QIB. [60346]

Question 60

An investment banking representative has been asked by her client about the prospectus delivery requirement for a new issue by the company. If the company is listed on Nasdaq:

There is no prospectus delivery requirement
The requirement is for 25 days from the effective date
The requirement is for 40 days from the effective date
The requirement is for 90 days from the effective date

Answer 60

A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. Prospectuses must be delivered for 40 days after the effective date in the case of issuers with publicly traded securities already outstanding, or 90 days for IPOs. There are two exceptions.

If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there is no prospectus delivery requirement for dealers.
If the issuer was not a reporting company prior to filing, but will be listed on an exchange or on Nasdaq as of the effective date, the requirement applies for 25 days.
The main purpose of this rule is to provide investors with information concerning an issuer of securities. If the issuer was already a reporting company, existing information is assumed to be readily available to the public through the SEC’s EDGAR system. [61019]

Question 61

Christian and Nobel, a small investment banking firm, is underwriting an issue of common stock for Pearlman and Rabinowitz Diamond Wholesalers (PRDW), headquartered in New York City. PRDW has seven employees. They include two purchasing agents, one located in South Africa, and one in Mozambique, who purchase raw stones to be shipped back to the U.S. for cutting and polishing. PRDW sells the diamonds to various jewelry manufacturers around the world. The Company had $50,000,000 in gross revenues the previous year, based exclusively on Internet sales, primarily to foreign buyers. PRDW is hoping to raise $10,000,000 to increase its inventory and open a retail facility in NYC. It wants to keep registration costs to a minimum and would like to raise all the money from investors living in New York State. Does PRDW meet the requirements to issue its securities under the intrastate exemption found in SEC Rule 147?
It does not, due to its business with overseas vendors
It does not, due to its purchasing offices located outside New York State
It does, provided the company invests the proceeds from the offering entirely in its U.S. operations
It does, provided the company invests at least 80% of the proceeds from the offering in New York State

Answer 61

D: Rule 147 is an intrastate exemption from federal registration. In order to qualify for the exemption, the issue must meet a residency test for purchasers (coming to rest test) and various requirements based on the issue’s business (doing business within test). This issue meets both of these requirements. Securities will have come to rest within a state if no sales are made to nonresidents during the time the securities are being issued, or within nine months following the last sale by the issuer. In order to meet the doing-business test, the company’s principal office must not only be located within the state, but 80% of its gross revenues, assets, and proceeds from the offering must be generated, held, or invested within the state. [60743]

Question 62

BMC, a blank check company, wants to raise $950,000 of capital within the next 6 months. An investment banker suggests selling the securities in a private placement. Which TWO of the following statements are TRUE regarding this offering?

The issuer could rely on Rule 504 of Regulation D, and this would be an exempt transaction
The issuer could not rely on Rule 504 of Regulation D, and this would not be an exempt transaction
Since the issuer is a blank check company, all investors would need to receive a disclosure document
If the issuer was not a blank check company, all investors would not need to receive a disclosure document

I and III
I and IV
II and III
II and IV

Answer 62

D: Rule 504 of Regulation D allows an issuer to offer securities of up to $1,000,000 within a 12-month period. Provided the issuer complies with all the provisions of Regulation D, this private placement is exempt from SEC registration. There are three types of issuers that are not permitted to use this exemption: a company subject to the SEC’s reporting requirements (a reporting company), an investment company, and a development stage company that has no specific business plan or purpose (e.g., a blank check company). In addition, the issuer is not required to provide a disclosure document under Rule 504. Under Regulation D, if the issuer offers securities exceeding $1,000,000, any nonaccredited investor must receive a disclosure document. The SEC does, however, recommend that an issuer provide the same information to accredited investors to avoid the antifraud provisions of federal securities regulations. [60338]

Question 63

An offering of convertible securities is sold as a private placement. Which TWO of the following considerations would be required of a married couple to be classified as an accredited investor?
$2,000,000 net worth
$1,000,000 net worth
$200,000 annual income
$300,000 annual income

I or III
I or IV
II or III
II or IV

Answer 63

Net worth doesnt have to be double for a couple

D: To qualify as an accredited investor, an individual must have $1,000,000 net worth or $200,000 annual income ($300,000 for a married couple) in each of the last two years, with the anticipation that income will continue at that level. The type of security offered is not relevant to the classification of accredited investor. [60334]

Question 64

When a company raises capital, which TWO of the following securities are required to be registered with the SEC under the Securities Act of 1933?

A Master Limited Partnership (MLP) that will be listed on the NYSE
Commercial paper issued by a finance company maturing in one month
A Eurodollar bond issued by a U.S. corporation
An American Depositary Receipt issued by a British company

I and III
I and IV
II and III
II and IV

Answer 64

B: There is no specific exemption under the registration provisions of the Securities Act of 1933 for ADRs or MLPs. They both issue shares of common stock and, if sold to the public in the U.S., would require SEC registration. Corporate debt with a maturity of 270 days or less (commercial paper) is exempt from registration. Securities initially offered outside the U.S., for example, Eurodollar bonds, would also be exempt from SEC registration. [60634]

Question 65

A corporation is about to go public. Its shares will be quoted on the OTCBB. A broker-dealer selling the securities in the aftermarket is required to deliver a prospectus to purchasers for how many days following the effective date of registration?
25
40
90
120

Answer 65

C:
Will IPO in a regular exchange: 25 days
Will IPO in a non-regular exchange: 90 days
Already reporting to SEC: not required
Has publicly traded securities already outstanding: 40 days

A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. Prospectuses must be delivered for 40 days after the effective date in the case of issuers with publicly traded securities already outstanding, or 90 days for IPOs. There are two exceptions.

If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there is no prospectus delivery requirement for dealers.
If the issuer was not a reporting company prior to filing, but will be listed on an exchange or on Nasdaq as of the effective date, the requirement applies for 25 days.
The main purpose of this rule is to provide investors with information concerning an issue of securities. If the issuer was already a reporting company, information is readily available to the public through the SEC’s EDGAR system. The OTCBB is not an automatic quotation system and, therefore, the delivery requirement is 90 days for an IPO. [61017]

Question 66

Which TWO of the following statements are TRUE regarding Regulation A offerings?
The use of general solicitation and advertising is permitted prior to the filing of an offering statement with the SEC
The use of general solicitation and advertising is not permitted prior to the filing of an offering statement with the SEC
The financial statements filed with the SEC by an issuer do not need to be audited
The financial statements filed with the SEC by an issuer need to be audited
I and III
I and IV
II and III
II and IV

Answer 66

The features of Regulation A offerings are not identical to those of registered offerings. Similar features include:

Purchasers must be provided with an offering circular that is similar in content to a prospectus.
The securities can be offered publicly and are not restricted.
The principal advantages of Regulation A offerings are:

The financial statements are simpler and do not need to be audited.
There are no Exchange Act reporting obligations after the offering, unless the company has more than $10 million in total assets and more than 500 shareholders.
Companies may choose among three formats to prepare the offering circular, one of which is a simplified question-and-answer document.
You may test the waters to determine if there is adequate interest in your securities before going through the expense of filing with the SEC.
If a company intends to “test the waters,” it may use general solicitation and advertising prior to filing an offering statement with the SEC, thus offering the advantage of determining whether there is enough market interest in the securities before the company incurs the full range of legal, accounting, and other costs associated with filing an offering statement. The issuer may not solicit, or accept money, until the SEC staff completes its review of the filed offering statement, and the company delivers the prescribed offering materials to investors. [60747]

Question 67

A prospectus that is filed as part of an automatic shelf registration may omit which TWO of the following pieces of information?

Whether the offering is a primary offering or a secondary offering
The capitalization of issuer
The identities of the selling security holders
The location of company
I and III
I and IV
II and III
II and IV

Answer 67

A: A prospectus that is filed as part of an automatic shelf registration may omit information that is unknown, or is not available to the issuer. In addition, a form of prospectus filed as part of an automatic shelf registration statement may omit information as to whether the offering is a primary offering, or an offering on behalf of persons other than the issuer, or a combination of the two. Other information that may be omitted includes the plan of distribution for the securities; a description of the securities registered, other than an identification of the name or class of such securities; and the identification of other issuers. [60796]

Question 68

A term sheet concerning a private placement of convertible securities would contain which TWO of the following features?
The amount and type of securities that the issuer currently has outstanding
The anti-dilution adjustments
The conversion ratio and voting rights
The historic price of the issuer’s common stock
I and III
I and IV
II and III
II and IVD

Answer 68

D: The term sheet in a private placement will only contain information on the securities being offered. Some of the information found in this document includes: the name of the issuer, the types of securities that are being offered and their characteristics, the price, aggregate proceeds, the expected closing date, liquidation preference in the case of a bankruptcy, voting rights, and any other specific terms and conditions of the offering. Since the securities being offered are convertible, the anti-dilution features, conversion ratio, and the dividend or interest payments would also need to be disclosed. The amount and type of securities the issuer currently has outstanding and the historical pricing of the issuer’s common stock (if it has outstanding common stock) would be found in the private placement memorandum. [60468]

Question 69

Which of the following securities is required to be registered with the SEC?
Municipal revenue bonds issued by the New Jersey Sports & Exposition Authority
Commercial paper issued by a company listed on Nasdaq
Mutual funds that invest in foreign securities
An ADR of a company quoted in the OTC Pink Markets

Answer 69

Certain securities are exempt from the registration and prospectus requirements of the Act because of the nature of the issuer. Among the exempted securities are:

U.S. government and U.S. government agency securities
Municipal securities
Securities issued by nonprofit organizations
Short-term corporate debt instruments (such as commercial paper) that have a maturity not exceeding 270 days
Securities issued by domestic banks and trust companies (but not bank holding companies)
Securities issued by small business investment companies (exempted by federal legislation regarding small businesses)
The revenue bond is exempt (a municipal security), and commercial paper is exempt regardless of whether or not the issuer is listed on Nasdaq. Not all ADRs need to be registered with the SEC, only those issuers offering securities in the U.S. In addition, since the ADR is quoted in the OTC Pink Market, Inc. (the electronic Pink Sheets), it is most likely an unsponsored ADR. Only sponsored ADRs may issue and register securities with the SEC. Open-end investment companies such as mutual funds and exchange traded funds (ETFs) are generally required to register with the SEC in order to offer securities in the U.S. The fact that the mutual fund invests in foreign securities is not relevant. [79495]

Question 70

Under the Securities Act of 1933, the registration statement that the issuer of new securities files with the SEC must include all of the following information, EXCEPT:
Certified financial statements
Biographies of all the issuer’s officers and directors
Results of the due diligence meeting
The issuer’s capitalization

Answer 70

C: The due diligence meeting is customarily held after the registration statement is filed with the SEC. A final meeting known as bring down due diligence, is held prior to the issuance of the final prospectus. The term bring down refers to making sure all the parties involved in the offering (the underwriter, issuer, attorneys, and other interested parties) are brought up-to-date since the last due diligence meeting. The purpose of the meeting is to make certain that the information to be published in the final prospectus is complete and accurate. Its results are not required as part of the registration statement. All the other choices refer to information that the issuer must include in the registration statement. [60658]

Question 71

kinds of investors allowed:
Which of the following types of offerings would permit a U.S. public company to raise an unlimited amount of capital quickly from an unlimited number of retail and institutional investors, without filing any documentation with the SEC?
A Regulation S offering
A Regulation A offering
A Regulation D offering
An offering of securities under Rule 144A

Answer 71

A: According to Regulation S, a U.S. company may (quickly) issue an unlimited amount of securities outside the country without filing any documentation with the SEC. There are no restrictions as to the type of non-U.S. investors who may purchase the security. To qualify for a Regulation S exemption, the transaction must be offshore, which means no U.S. person may purchase the offering.

Regulation A limits the dollar amount of securities that may be raised by the issuer to $5,000,000.

Regulation D limits the number of nonaccredited investors to 35.

An offering under Rule 144A may be offered only to qualified institutional buyers. [60348]

Question 72

Your firm is assisting the Rembrandt Corporation in the preparation of an SEC registration statement. Your team leader has instructed you to make copies of the preliminary prospectus to be included in the filing. How many copies should be included?
One
Three
Five
Ten
Explanation:

Answer 72

Prelim: 5
Final: 10

D: Five copies of the preliminary prospectus must be included in the filing of a registration statement. [60793]