Series 7 Top off exam

Question 1

Retail communication

Answer 1

“any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.” What would commonly be thought of as “advertisements” and “sales literature” generally fall under this definition.

What is a retail investor? Any person—other than an institutional investor

An appropriately qualified registered principal of the member must approve each retail communication before the earlier of its use or filing with FINRA’s Advertising Regulation Department.

The requirement to have a principal approve retail communication does not apply if, at the time that a member intends to distribute it:
■ another member has filed it with FINRA’s advertising department and has received a letter from the department stating that it appears to be consistent with applicable standards; and
■ the member using it in reliance upon the letter has not materially altered it and will use it in a manner that is consistent with the conditions of the department’s letter.

Question 2

Finra is what type of organization

Answer 2

Self Regulatory

Question 3

General securities principals (Series 24) may review and/or approve

Answer 3

communications for all securities except options.

Question 4

Limited securities principals (Series 26) may only review or approve

Answer 4

may only review and/or approve communications for investment company products.

Question 5

institutional communication

Answer 5

is any written communication that is distributed or made available only to institutional investors but does not include a member firm’s internal communications.
Keep in mind that when regulators talk about written communication, they always include electronic communications, too.

Question 6

correspondence

Answer 6

is written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.

Question 7

public appearance

Answer 7

is participation in a seminar, webinar, forum (including an interactive electronic forum such as a chat room), radio or television interview, or other public appearance or public-speaking activity.

preapproval of a principal may be required but is not mandated.

If an associated person recommends a security in a public appearance, the associated person must have a reasonable basis for the recommendation. The associated person also must disclose any conflicts of interest that may exist, such as a financial interest in any security being recommended.

Question 8

Independently prepared reprint

Answer 8

consists of any article reprint that meets certain standards designed to ensure that the reprint was issued by an independent publisher and was not materially altered by the member.

A member may alter the contents of an IPR only to make it consistent with applicable regulatory standards or to correct factual errors.

An article reprint qualifies as an IPR under the rules only if, among other things, its publisher is not an affiliate of the member using the reprint or any underwriter or issuer of the security mentioned in the reprint. Also, neither the member using the reprint nor any underwriter or issuer of a security mentioned in the reprint may have commissioned the reprinted article. IPRs must be preapproved by a principal and are exempted from the FINRA filing requirements.

Question 9

research reports

Answer 9

A research report is a document prepared by an analyst or strategist, typically as a part of a research team for an investment bank or BD. The report may focus on an individual stock or sector of the economy and generally, but not always, will recommend buying, selling, or holding an investment.

Question 10

quiet period

Answer 10

A member must not publish or distribute research reports and research analysts may not make public appearances if the member has participated as an underwriter or a dealer in the issuer’s initial public offering (IPO) or, with respect to the quiet periods after a secondary offering, a minimum of 10 days following the date of an IPO, and a minimum of three days following the date of a secondary offering.

FINRA interprets the date of the offering to be the later of the effective date of the registration statement or the first date on which the securities were bona fide offered to the public.

Question 11

websites are what kind of communication

Answer 11

retail

Question 12

electronic bulletin boards

Answer 12

considered retail communications, but a registered representative using one, or a chat room, need not identify himself as a registered person. Use of an online interactive forum by a registered representative must be approved by a principal, although each post does not require principal approval. The communications must be held to normal standards of accuracy and completeness.

Question 13

Generic advertising

Answer 13

promotes securities as an investment medium, but does not refer to any specific security. Generic advertising often includes information about:
■ the securities investments that companies offer;
■ the nature of investment companies;
■ services offered in connection with the described securities;
■ explanations of the various types of investment companies;
■ descriptions of exchange and reinvestment privileges; and
■ where the public can write or call for further information.

All generic advertisements must contain the name and address of the sponsor of the advertisement but never include the name of any specific security. A generic advertisement may be placed only by a firm that offers the type of security or service described.

Question 14

required approvals of public communications

Answer 14

Institutional- no preaproval of principal required

public appearance- preapproval may be required but is not mandated

retail-preaproval required

IPR- must be preapproved by principal if meets definition of retail

research reports-Approval requirements are based on if meets definition of retail.

electronic- website preapproval required

electronic bulleton boards- forums are but not individual posts

email based on if its retail

generic ads-preapproval required

Question 15

when a firm becomes registered with finra during the first year of operation

Answer 15

FINRA will require the member to file any retail communication that is published or used in any electronic or other public media, including any generally accessible website, newspaper, magazine or other periodical, radio, television, telephone or audio recording, video display, signs or billboards, motion pictures, or telephone directories (other than routine listings) with FINRA at least 10 business days before first use (pre-filing).

Question 16

Whether a first-year firm or not, retail communications for investment companies (including mutual funds, variable contracts, and unit investment trusts) that include
a ranking or a comparison that is generally not published or is the creation of the investment company or the member

Answer 16

must be filed with FINRA at least 10 business days before first use (pre-filing).

In addition, there is a 10-day pre-filing requirement for any retail communication involving option contracts (for all BDs).

Question 17

how long does retail communication have to be held for

Answer 17

3 years

Question 18

ranking entity

Answer 18

ranking entity refers to any entity that provides general information about investment companies to the public, that is independent of the investment company and its affiliates, and whose services are not procured by the investment company or any of its affiliates to assign the investment company a ranking

Members may not use investment company rankings in any retail communication other than:
■ rankings created and published by Ranking Entities or
■ rankings created by an investment company or an investment company affiliate but based
on standard performance measurements.

Question 19

A headline or other prominent statement must not state or imply that

other disclosures include

Answer 19

an investment company or investment company family is the best performer in a category unless it is actually ranked first in the category.

the name of the category (e.g., growth);
■ the name of the ranking entity and, if applicable, the fact that the investment company or an affiliate created the category or subcategory;
■ criteria on which the ranking is based (e.g., total return, risk-adjusted performance);
■ the fact that past performance is no guarantee of future results; and
■ a ranking based on total return must be accompanied by rankings based on total return for one year, five years and 10 years, or since inception, if shorter.

Question 20

bond mutual fund volatility rating

Answer 20

is a description issued by an independent third-party, relating to the sensitivity of the net asset value of a portfolio of an open-end management investment company that invests in debt securities to changes in market conditions and the general economy, and is based on an evaluation of objective factors, including the credit quality of the fund’s individual portfolio holdings, the market price volatility of the portfolio, the fund’s performance, and specific risks, such as interest rate risk, prepayment risk, and currency risk. These ratings may not describe volatility as a risk rating.

Question 21

Required Disclosures of Bond Mutual Fund Volatility Rating

Answer 21

The name of the entity that issued the rating must be disclosed, along with:
■ the date of the current rating;
■ a link to a website that includes the criteria and methodology used;
■ a statement that there is no standard method to determine the rating;
■ a description of the types of risk the rating measures (e.g., short-term volatility); and
■ a statement that there is no guarantee the fund will continue to have the same rating or perform in the future as rated.

Question 22

All communications must clearly describe the product as either

Answer 22

variable life or variable annuity

Question 23

Illustrations are sometimes used to show how an existing fund would have performed as an investment option within a variable life or variable annuity policy. Performance that predates a fund’s inclusion may be used only if

Answer 23

no significant changes occurred to the fund at the time or after it became a part of the variable product.

Question 24

Communications regarding single premium variable life may only emphasize investment features of this product if

Answer 24

an adequate explanation of the life insurance features is also provided.

Question 25

When a life insurance policy is funded with too much money within a seven-year period, it is defined as

Answer 25

a modified endowment contract (MEC). MECs have restricted access to cash values and also lose some tax advantages that other cash value polices have. Therefore, few
single premium life insurance policies are issued.

Question 26

Hypothetical illustrations showing assumed rates of return may be used to demonstrate the performance of variable life policies. Rules that apply to the use of these illustrations include the following.

Answer 26

Hypothetical illustrations may not be used to project or predict investment results.
■ Illustrations may use any combination of assumed investment returns up to and including a gross rate of 12%, provided that one of the returns is a 0% gross rate. The maximum rate illustrated should be reasonable, considering market conditions and the available investment options.
■ Illustrations must reflect the maximum mortality and expense charges associated with the policy for each assumed rate of return illustrated. Current charges may also be illustrated.

Question 27

securities act of 1933

Answer 27

require issuers of new securities to file registration statements with the SEC in order to provide investors with complete and accurate information in the form of a prospectus when soliciting sales. Think of the Securities Act of 1933 as the Paper Act because of the registration statement and prospectus. It will remind you of the paperwork requirements for full and fair disclosure.
New securities that are subject to the act’s requirements are called nonexempt issues. Exempt securities are not subject to these requirements.

Question 28

exempt issuers and securities

Answer 28

The Securities Act of 1933 provides specific exemptions from federal registration provisions.
Among the exemptions are the following issuers:
■ The U.S. government
■ U.S. municipalities and territories
■ Nonprofit religious, educational, and charitable
organizations
■ Banks and savings and loans
■ Public utilities and common carriers whose activities are regulated as to rates and other items by a state or federal regulatory body

commercial paper
bankers acceptance
restricted stock

Question 29

qualification

Answer 29

The issuer files with the state, independent of federal registration, and must meet all state requirements.

Question 30

coordination

Answer 30

The issuer registers simultaneously with the state and the SEC. Both registrations become effective on the same date.

Question 31

notice filing

Answer 31

Securities listed on the major stock exchanges and on Nasdaq, as well as investment companies registered under the Investment Company Act of 1940, are known as federal covered securities. State registration is not required, but most states require the filing of a notice that the issuer intends to offer its securities for sale in that state and the state may assess a filing fee.

Question 32

main participants in a new issue are the

Answer 32

company selling the securities and the BD acting as the underwriter.

Question 33

due diligence process : investment bankers must

Answer 33

examine the use of the proceeds;
■ perform financial analysis and feasibility studies;
■ determine the company’s stability; and
■ determine whether the risk is reasonable.

Question 34

issuer

Answer 34

the party selling the securities to raise money

Question 35

underwriter

Answer 35

business or municipal government that plans to issue securities usually works with an underwriter, a broker-dealer specializing in investment banking—the process of underwriting new issues. An investment bank’s functions may include:
■ advising corporations on the best ways to raise long-term capital;
■ raising capital for issuers by distributing new securities;
■ buying securities from issuers and reselling them to the public;
■ distributing large blocks of stock to the public and to institutions; and
■ helping issuers comply with securities laws.

Question 36

underwriting manager or syndicate manager

Answer 36

The investment banker who negotiates with the issuer

The underwriting manager directs the entire underwriting process, including signing the underwriting agreement with the issuer and directing the due diligence meeting and distribution process. A syndicate may have more than one manager.

Question 37

negotiated underwriting

Answer 37

, the issuer and the investment banker negotiate the offering terms, including the amount of securities to be offered, offering price or yield, and underwriting fees.

Negotiated underwritings are standard in underwriting corporate securities because of close business relationships between issuing corporations and investment banking firms.

Question 38

competitive bid underwriting

Answer 38

are the standard for underwriting most municipal securities and are often required by state law. In a competitive bid, a state or municipal government invites investment bankers to bid for a new issue of bonds. The issuer awards the securities to the underwriter(s) whose bid results in the lowest net interest cost to the issuer.

Question 39

syndicates are formed to

Answer 39

spread the risk among several underwriters instead of one underwriter taking all the risk of an offering

Question 40

selling group members act as

they sign a

Answer 40

as agents with no commitment to buy securities.

selling group agreement contains

a statement that the manager acts for all of the underwriters;
■ the amount of securities each selling group member will be allotted and the tentative public offering price at which the securities will be sold (this price is firmed up just before the offering date);
■ provisions as to how and when payment for shares is to be made to the managing underwriter; and
■ legal provisions limiting each selling group member’s liability in conjunction with the underwriting.

Question 41

syndicate members take on

Answer 41

financial liability and act in a principal capacity.

Question 42

selling group member

Answer 42

have no financial liability and act as agent because they have no commitment to buy securities from the issuer

Question 43

firm commitment

Answer 43

In a firm commitment underwriting, the underwriter takes on the financial risk because the securities are purchased from the issuer. Because of this risk, the underwriter is acting in a principal capacity.

is the most commonly used type of underwriting contract. Under its terms, the underwriter(s) (investment bank[s]) commit to buy the securities from the issuer and resell them to the public. The underwriters assume the financial risk of incurring losses in the event they are unable to distribute all the shares to the public.

A firm commitment underwriting can be either a negotiated underwriting contract or a competitive bid arrangement. Negotiated underwriting contracts are used in most corporate issues. The issuer selects an underwriter and negotiates the conditions of the underwriting contract. A competitive bid arrangement is the standard for new issue offering in the municipal securities market. The underwriting contract is awarded to the underwriter who presents the most competitive bid, or lowest net interest cost, to the issuer. Sales begin on the effective date of the offering.

Question 44

stand by

Answer 44

is a firm commitment offering involving unexercized preemptive rights.

When a company’s current stockholders do not exercise their preemptive rights in an additional offering, a corporation has an underwriter standing by to purchase whatever shares remain unsold as a result of rights expiring.
Because the standby underwriter unconditionally agrees to buy all shares that current stockholders do not subscribe to at the subscription price, the offering is a firm commitment.

Question 45

best efforts

Answer 45

In a best efforts underwriting, the underwriter sells as much as possible, without liability for what cannot be sold. The underwriter is acting in an agent capacity with no financial risk.

In a best efforts arrangement, the underwriter acts as an agent for the issuing corporation. The deal is contingent on the underwriter’s ability to sell shares to the public. In a best efforts underwriting, the underwriter sells as much as possible, without financial liability for what remains unsold. The underwriter is acting in an agency capacity with no financial risk.

Question 46

all or none underwriting

Answer 46

In an all-or-none (AON) underwriting, the issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all of the shares or cancel the underwriting. Because of the uncertainty over the outcome of an AON offering, any funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting.
Brokers engaged in an AON distribution are prohibited from deceiving investors by stating that all the securities in the underwriting have been sold if it is not the case.

Question 47

mini max offering

Answer 47

A mini-max offering is a best efforts underwriting setting a floor or minimum, which is the least amount the issuer needs to raise in order to move forward with the underwriting, and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell. The underwriter must locate enough interested buyers to support the minimum (floor) issuance requirement. Once the minimum is met, the underwriter can expand the offering up to the maximum (ceiling) amount of shares the issuer specified. Mini-max underwriting terms are most frequently found in limited partnership program offerings, and funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting.

Question 48

securities act of 1933

Answer 48

requires new issues of corporate securities to be registered with the SEC. The corporate issuer does so by filing a registration statement. Most of the registration statement becomes the prospectus.

Question 49

20 day cooling off period

Answer 49

After an issuer files a registration statement with the SEC, a 20-day cooling-off period begins. During the cooling-off period, the SEC reviews the security’s registration statement and can issue a stop order if the statement does not contain all of the required information.

Question 50

red herring

Answer 50

The red herring (preliminary prospectus) is used to gauge investor reac- tions and gather indications of interest for corporate securities. A registered representative may discuss the issue with prospects during the cooling-off period and provide them with preliminary information through the red herring. It must carry a legend, printed in red, that declares that a registration statement has been filed with the SEC but is not yet effective. The final offering price and underwriting spread are not included in the red herring.

Question 51

during cooling off period things that can and can’t be done

Answer 51

may
distribute red herrings
publish tombstone ads
gather indications of interest

may not offer securities for sale
Distribute final prospectuses ■ Disseminate advertising
material
■ Disseminate sales literature ■ Take orders
■ Accept postdated checks

Question 52

tombstone ads

Answer 52

During the cooling-off period, sales of the security and related activities are prohibited. Nonbinding indications of interest may be gathered with a preliminary prospectus. In addition, tombstone advertisements are allowed to be published. These announcements, typically published after the offering has been cleared for sale, offer information to investors. However, they do not offer the securities for sale. Issuers are not required to publish tombstones, but they may appear either before or after the effective date of the sale.

on tombstone ad includes

■ name of issuer,
■■ type of security,
■■ underwriter,
■■ price, and
■■ effective date of sale.

Question 53

The following variables may be considered when pricing new issues:

Answer 53

Indications of interest from the underwriter’s book
■ Prevailing market conditions, including recent offerings and the prices of similar new
issues
■ Price that the syndicate members will accept
■ Price-to-earnings (P/E) ratios of similar companies and the company’s most recent earnings report (at what price the shares must be offered so that the P/E ratio is in line with the P/E ratios of other similar publicly traded stocks)
■ The company’s dividend payment record (if any) and financial health
■ The company’s debt ratio

Question 54

stabilizing price

Answer 54

In the case of a stock offering, when demand is considerably lower than supply for a new issue, the price in the aftermarket is likely to fall. Under these circumstances, the underwriter can stabilize the security by bidding for shares in the open market. These bids may be placed at or just below the public offering price. The managing underwriter can enter or appoint a syndicate member to enter stabilizing bids for the security until the end of the offering period.

Question 55

stabilizing penalty bid

Answer 55

Stabilizing after an issue is sold out is not permitted. If syndicate members’ clients turn in shares on a stabilizing bid after the issue is sold out, the syndicate manager will levy a syndicate penalty bid against those members.

**Stabilizing bids must not be made at a price higher than the public offering price (POP). Stabilization is not illegal; however, if the stabilization bid is made at a price higher than the POP, it is called pegging, or fixing, and is strictly prohibited. If public buying interest does not increase, the managing underwriter may have no choice but to abandon the POP, pull the stabilizing bid, and let the stock find its own price level.

Question 56

underwriting proceeds

Answer 56

The price the issuer receives

Question 57

public offering price

Answer 57

price investors pay

Question 58

underwriting spread

Answer 58

the difference between the two prices

Question 59

underwriting fee

Answer 59

for assuming the risk of buying securities from the issuer without assurance that the securities can be resold

Question 60

managers fee

Answer 60

for negotiating the deal and managing the underwriting and distribution process;

Question 61

selling concession

Answer 61

placing the securities with investors.

Question 62

final prospectus

Answer 62

A copy of the final prospectus must precede or accompany all sales confirmations. However, if the prospectus has been filed with the SEC and is available through its website, access to the prospectus equals delivery of the prospectus.
The prospectus must include:
■ a description of the offering;
■ the offering price;
■ selling discounts;
■ the offering date;
■ use of the proceeds;
■ a description of the underwriting, but not the actual contract;
■ a statement of the possibility that the issue’s price may be stabilized;
■ a history of the business;
■ risks to the purchasers;
■ a description of management;
■ material financial information;
■ a legal opinion concerning the formation of the corporation;
■ an SEC disclaimer; and
■ an SEC review.

Question 63

sec disclaimer

Answer 63

SEC Disclaimer. The SEC reviews the prospectus to ensure that it contains the neces- sary material facts, but it does not guarantee the disclosure’s accuracy. Furthermore, the SEC does not approve the issue but simply clears it for distribution. Implying that the SEC has approved the issue violates federal law. Finally, the SEC does not pass judgment on the is- sue’s investment merit.
The front of every prospectus must contain a clearly printed SEC disclaimer specifying the limits of the SEC’s review procedures. A typical SEC disclaimer clause reads as follows:
These securities have not been approved or disapproved by the SEC or by any State Securities Commission nor has the SEC or any State Securities Commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The information supplied to the SEC becomes public once a registration statement is filed.

Question 64

sec does not

Answer 64

approve or disprove, they clear .

it clears or releases issues of securities for sale. When the SEC has completed its review, the registration becomes effective.
Issuers and underwriters are responsible for the information found in the prospectus and will conduct due diligence meetings to ensure that the prospectus is true and accurate.

Question 65

sec rule 498(summary prospectus)

Answer 65

A mutual fund can provide a summary prospectus to investors that may include an application investors can use to buy the fund’s shares.
The summary prospectus is a standardized summary of key information found in the fund’s statutory (full) prospectus. Investors who receive the summary have the option of either purchasing fund shares using the application found therein or requesting a statutory prospectus. An investor who purchases fund shares on the basis of the summary prospectus must be able to access a statutory prospectus online. Remember, customers can always request and receive a paper copy.
The summary must provide specific information in a particular sequence. Following is a list of required disclosures:
■ Risk/return summary: investments, risks, and performance
■ Risk/return summary: fee table
■ Investment objectives, principal investment strategies, related risks, and disclosure of portfolio holdings
■ Management, organization, and capital structure
■ Shareholder information
■ Distribution arrangements
■ Financial highlights information

Question 66

statement of additional information

Answer 66

Although a prospectus is always sufficient for the purpose of selling shares, some investors may wish to have additional information not found in the prospectus. This additional information is not necessarily needed to make an informed investment decision but may be useful to the investor.
An SAI must be available to investors upon request without charge. Investors can obtain a copy by calling or writing to the investment company via a company website, contacting a broker that sells the investment company shares, or contacting the SEC.
The SAI affords the fund an opportunity to have expanded discussions on matters such as the fund’s history and policies. It will also typically contain the fund’s consolidated financial statements.

Question 67

trust indenture act of 1939

Answer 67

The Trust Indenture Act of 1939 applies to corporate bonds (nonexempt) with the following characteristics:
■ Issue size of more than $50 million within 12 months
■ Maturity of nine months or more
■ Offered interstate
This act was passed to protect bondholders and requires that issuers of these bonds appoint a trustee to ensure that promises (covenants) between the issuer and the trustee who acts solely for the benefit of the bondholders are carried out. The document is filed at the office of a custodian so that investors may review it if they choose.

*****trust indenture is a series of promises between the issuer and the trustee for the benefit of the bondholders

Question 68

official statement

Answer 68

The full and fair disclosure document for municipal securities

Question 69

preliminary official statement

Answer 69

There is no preliminary prospectus either for municipal securities, but there is a preliminary official statement.

Question 70

official notice of sale

Answer 70

In addition, when a municipality wants to raise money through a bond offering, an official notice of sale is published in the Daily Bond Buyer. This is the notice that is used to obtain an underwriter for municipal bonds. Underwriters who are interested in bidding on municipal offerings will review the official notice of sale to determine if they would like to submit a bid to the issuer.

Question 71

exempt transactions

Answer 71

Securities offered by industrial, financial, and other corporations may qualify for exemp- tion from the registration statement and prospectus requirements of the Securities Act of 1933 under one of the following exclusionary provisions:
■ Regulation A+: small and medium corporate offerings
■ Regulation D: private placements
■ Rule 147: securities offered and sold exclusively intrastate
■ Regulation S: offers and sales made outside the United States by U.S. issuers
■ Other exempt transactions, including Rule 144, Rule 144A, and Rule 145

Question 72

accredited investor someone who

Answer 72

has a net worth in excess of $1 million, not including net equity in a primary residence;
■ has had an annual income in excess of $200,000 in each of the two most recent years (or in excess of $300,000 jointly with a spouse) and who has a reasonable expectation of reaching the same income level during the current year;
■ is an insider of the issuer such as officers and director; or
■ has institutions such as a pension plan.

Question 73

regulation a+

Answer 73

With the passage of the Jumpstart Our Business Startups Act, a capital formation scheme was called for that would further ease the requirements for small- and medium-sized companies to raise capital. Previously known as Regulation A, the new rule is Regulation A+.
Regulation A+ provides two offering tiers for small- and medium-sized companies that will allow the companies to raise capital in amounts substantially more than the $5 million previ- ously allowed under Regulation A.
■ Tier 1: Securities offerings up to $20 million in a 12-month period will be allowed. Of the $20 million, no more than $6 million can be sold on behalf of existing selling shareholders. The offering would be subject to a coordinated review by individual states and the SEC.
■ Tier 2: Securities offerings up to $50 million in a 12-month period will be allowed. Of the $50 million, no more than $15 million can be sold on behalf of existing selling share- holders. These offerings are subject to SEC review only and none at the state level. Tier 2 offerings are still subject to rigorous disclosure requirements to the SEC including audited financial statements, annual, semiannual and current reports.

Question 74

regulation d+

Answer 74

The SEC does not require registration of an offering if it is privately placed with:
■ accredited investors that do not need SEC protection or
■ a maximum of 35 individual (non-accredited) investors.
An accredited investor is defined as one who:
■ has a net worth in excess of $1 million, not including net equity in a primary residence;
■ has had an annual income in excess of $200,000 in each of the two most recent years (or in excess of $300,000 jointly with a spouse) and who has a reasonable expectation of reaching the same income level during the current year;
■ is an insider of the issuer such as officers and director; or
■ has institutions such as a pension plan.

Question 75

private placement stock is called

Answer 75

lettered stock due to this investment letter. The certificate may bear a legend indicating that it cannot be transferred without registration or exemption; therefore, private placement stock is also called legend stock.
The SEC requires that all companies raising capital in a nonpublic offering that qualify under the Regulation D exemption file the information on Form D electronically via the internet.
The SEC also specifies the instances when an amended Form D should be filed, such as to correct a mistake of fact or error or to reflect a change in information.

Question 76

***sometimes it is difficult to identify private placement stock in aa question because of the many terms that can be used to describe it.

all of the following synonymous with private placement stock

Answer 76

Restricted (because it must be held for a six-month period)
■■ Unregistered (no registration statement on file with the SEC)
■■ Letter stock (investor agreed to terms by signing an investment letter) ■■ Legend stock (bear a restrictive legend on the certificate)

Question 77

rule 506

Answer 77

the exemption can be approached in one of two ways.
■ The company cannot use general solicitation or advertising to market the securities and
limits the number of non-accredited investors to 35 (Rule 506(b)).
■ The company can advertise as long as it sells exclusively to accredited investors (Rule 506(c)). There are heightened verification rules regarding the accredited investor if advertising.

Question 78

under rule 501

Answer 78

an accredited investor can be
■ an insider at the issuer;
■ a professional, sophisticated, or institutional investor; or
■ an individual who meets one of two criteria: at least $1 million net worth (excluding the net value of his primary residence) or at least $200,000 in adjusted gross income (AGI) for the last two years with good prospects of reaching that level in the current year ($300,000 if the investor is a married couple).
Note that assets held jointly with another person who is not the purchaser’s spouse may be included in the calculation for net worth, but only to the extent of percentage of ownership.

Question 79

rule 147

Answer 79

, offerings that take place entirely in one state are exempt from registration when:
■ the issuer has its principal office and receives at least 80% of its income in the state;
■ at least 80% of the issuer’s assets are located within the state;
■ at least 80% of the offering proceeds are used within the state;
■ a majority of the issuers’ employees are based within the state; and
■ all purchasers are residents of the state.

to qualify under this rule 1 of the 3 80% tests must be met

Question 80

rule 144

Answer 80

rule 144 regulates the sale of control and restricted securities, stipulating the holding period, quantity limitations, manner of sale, and filing procedures.

Question 81

control securities

Answer 81

are those owned by directors, officers, or persons who own or control more than 10% of the issuer’s voting stock.

Question 82

restricted securities

Answer 82

are those acquired through some means other than a registered public offering. A security purchased in a private placement is a restricted security. Restricted securities may not be sold until they have been held fully paid for six months. According to Rule 144, after holding restricted stock fully paid for six months, an affiliate may begin selling shares by submitting Form 144 but is subject to the volume restriction rules as enumerated as follows. In any 90-day period, an investor may sell the greater of:
■ 1% of the total outstanding shares of the same class at the time of sale, or
■ the average weekly trading volume in the stock over the past four weeks on all exchanges
or as reported through Nasdaq.

Question 83

rule 144 chart

restricted stock held by non affiliate

restricted held by affiliate

control stock held by affiliate

Answer 83

6 month hold
no volume limits

6 month hold
volume limits

no hold
volume limits always apply

Question 84

disgorged means

Answer 84

profit is returned to issuer

Question 85

rule 144a allows

Answer 85

nonregistered foreign and domestic securities to be sold to certain institutional investors in the United States without holding period requirements.

Question 86

qualified institutional buyer must

Answer 86

A QIB must have a minimum of $100 million invested on a discretionary basis and cannot have any affiliation with the entity selling the securities.

Question 87

anti fraud regulations of the act of 1933 and 1934

Answer 87

Although a security may be exempt from the registration and prospectus requirements, no offering is exempt from the anti-fraud provisions of the Securities Act of 1933 or any other securities act, including the Securities Exchange Act of 1934. The anti-fraud provisions of the Act of 1933 apply to all new securities offerings, whether exempt from registration or not. Issuers must provide accurate information regarding any securities offered to the public.

Question 88

Protecting the Public and Restricted Persons Prohibitions (FINRA Rule 5130)

Answer 88

The rule is designed to protect the integrity of the public offering process by ensuring that:
■ members make a bona fide public offering of securities at the POP;
■ members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to the member; and
■ industry insiders, such as members and their associated persons, do not take advantage of their insider status to gain access to new issues for their own benefit at the expense of public customers.

The rule applies only to a new issue, which is defined to mean any IPO of equity securities. The rule does not apply to additional issue offerings, debt securities, restricted or exempt securities, convertible securities, preferred stock, investment company securities, offerings of business development companies, direct participation companies, and real estate investment trusts. Essentially, the rule applies to IPOs of common stock.
The rule prohibits member firms from selling a new issue to any account where restricted persons are beneficial owners. Restricted persons are defined as follows:
1. Member firms
2. Employees of member firms
3. Finders and fiduciaries acting on behalf of the managing underwriter, including attorneys, accountants, financial consultants, and so on
4. Portfolio managers, including any person who has the authority to buy or sell securities for a bank, savings and loan association, insurance company, or investment company
5. Any person owning 10% or more of a member firm
Furthermore, any immediate family member of any person in 2–5 as listed here is also
restricted. Immediate family includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support.

Question 89

Spinning

Answer 89

is the practice of allocating highly sought after IPO shares to individuals who are in a position to direct securities business to the firm. This is why portfolio managers are categorized as restricted persons. These individuals are in a position to direct business to a firm and may be willing to do so on the basis of the size of their allocation.
Before selling an IPO to any account, representatives are required to obtain a written representation from the account owner(s) that the account is eligible to purchase a new common stock issue at the POP. All representations must be obtained within the 12-month period before the sale of the new issue and must be retained for at least three years following the new issue sale.

Question 90

de minimis exception

Answer 90

If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue. In other words, restricted persons will be able to have an interest in an account that purchases new equity issues as long as no more than 10% of the account’s beneficial owners are restricted persons.