SIE Chapter 1 Flashcards
Which of the following statements about rights and warrants is true?
A)Rights are short term; warrants are long term.
B)Rights are long term; warrants are short term.
C)Rights and warrants are both long term.
D)Rights and warrants are both short term.
A
security with a termination, maturity, or expiration date that is one year or less from the date of issue is said to be short term. Rights offerings have a lifetime of four to six weeks, which makes them short term. If the end date is more than a year from the issue date, the security is long term. Warrants have expiration dates typically two to five years from the date of issue, which makes them long term. LO 1.f
Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144?
A) Stock acquired by a corporate affiliate in a private placement
B)Unregistered stock acquired by a nonaffiliate under an investment letter
C)Unregistered stock acquired by a corporate affiliate in a stock option program
D)Stock acquired on the NYSE by a corporate affiliate
d)
The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.
Mr. Smith purchases 2% of MES Corporation’s common stock. Four years later Mrs. Smith purchases 9% for her own account. Which of the following is true?
A) Because she owns more shares, only Mrs. Smith is considered a control person.
B) Neither Mr. or Mrs. Smith is considered a control person.
C) Only Mr. Smith, as the initial shareholder, would be considered a control person.
D) Both Mr. and Mrs. Smith are considered control persons.
d)
If a 10% or more interest is held by immediate family members, then all those family members owning voting stock are control persons. In this instance the combined ownership is more than 10% (2% + 9% = 11%). LO 1.g
Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days?
A) 1%
B) 3%
C) 6%
D) 4%
a)
Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last four weeks’ trading volume (whichever is greater), every 90 days. LO 1.g
An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place?
A) Warrants will be distributed to existing stockholders and they will have two to five years to decide whether or not to buy the stock at the strike price.
B) Rights will be distributed to existing stockholders with an exercise price lower than the current market value.
C) Warrants will be distributed to existing stockholders with an exercise price equal to the current market value.
D) Rights will be distributed to existing stockholders; they have only two options: exercise the rights or let them expire.
B)
Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30–45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription. LO 1.f
A nonaffiliated owns 3% of an issuer’s common stock. This person will be considered a control person if a spouse owns
A) any shares of the issuer’s common stock.
B) 2% of the issuer’s common stock.
C) 5% of the issuer’s common stock.
D) 8% of the issuer’s common stock.
d) If there is a 10% or more interest held by immediate family members, then all those family members owning voting stock are considered to be control persons. LO 1.g
For registered shares held by an affiliate (known as control stock), which of the following applies?
A) No holding period, but volume limits always apply
B) Six-month holding period, with sales allowed freely thereafter
C) Six-month holding period, with volume limits thereafter
D) No holding period or any volume restrictions
a) Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate. LO 1.g
Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144?
A) Unregistered stock acquired by a corporate affiliate in a stock option program
B) Unregistered stock acquired by a nonaffiliate under an investment letter
C) Stock acquired by a corporate affiliate in a private placement
D) Stock acquired in the OTC market by a corporate affiliate
D) The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired in the OTC market by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions. LO 1.g
Restricted shares, those that are unregistered, meaning that they were not attained in a public offering, may be sold by a nonaffiliate
A) at any time but with volume restrictions.
B) after holding them for six months and freely thereafter.
C) freely, with no holding period or volume restrictions.
D) after holding them for six months but then subject to volume restrictions.
b)
Nonaffiliates holding unregistered shares must wait six months before divesting of those shares, but because they are nonaffiliates, they may sell freely (without volume restrictions) thereafter. LO 1.g
A corporation is issuing a bond with an interest rate below that which is commonly being offered for this type of bond. To improve the bond’s marketability without reducing the capital to be obtained, which of the following actions might the corporation take? A) Conduct a rights offering for potential bond buyers B) Offer a warrant on the stock with each bond C) Offer the bond at a discount D) Offer a stock dividend to the current shareholders
b) Warrants are sometimes offered as sweeteners attached to bond issues to improve the marketability of bond. Rights offerings and stock dividends do not apply in this case, and selling the bonds at a discount would be self-defeating because the issuer wouldn’t be able to raise the needed capital. LO 1.f
An affiliate holding unregistered shares can sell under Rule 144
A) two times a year.
B) as often as wished.
C) one time a year.
D) four times a year.
d)
Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks’ trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year. LO 1.g
For restricted stock (unregistered) held by a nonaffiliated, which of the following applies?
A) Six-month holding period, with sales allowed freely thereafter
B) No holding period, but volume limits always apply
C) Six-month holding period, with volume limits thereafter
D) No holding period or any volume restrictions
a) For restricted stock (unregistered) held by a nonaffiliated, a six-month holding period before any sales can be made applies. After the holding period, sales can be made freely. LO 1.g
Defenition
Securities and Exchange Commission Rule 144 regulates
Securities and Exchange Commission Rule 144 regulates the sale of control and restricted securities in the secondary market. The rule stipulates the holding period, quantity limitations, manner of sale, and filing procedures when divesting of control or restricted shares.
A certificate issued by a company granting its owner the right to purchase securities from the issuer at some specified price years into the future would best be described as
A) a proxy.
B) a rights certificate.
C) a warrant.
D)a call option.
C)
A rights certificate is a very short-term security that grants the holder the right to buy the common stock of the company at a price lower than the current market price. A warrant is a long-term security that grants its owner the right to purchase securities from the issuer at a specified price that is higher than the current market price at the time the warrants are issued and at some point, in the future. Note that while the exercise price is higher than the current market value when the warrants are issued, it is hoped that the exercise price will be below current market value when the warrants are eventually exercised. LO 1.f
An affiliate has held restricted shares fully paid for six months. In anticipation of the desire to divest the shares, the affiliate should know that
A) the shares are no longer restricted, having been held fully paid for six months.
B) while no longer restricted, all sales of these shares must be approved by the issuer’s board of directors (BOD).
C) no limit on the number of shares that can be sold will be imposed.
D) any shares sold will be subject to volume restrictions if still an affiliate.
d) Although held fully paid for six months, the sales of these shares would be subject to volume restrictions for as long as this individual is an affiliate. If the individual was not an affiliate, the shares held fully paid for six months could now be sold completely unrestricted. LO 1.g
