UNIT 01.02 003

Question 1

The provisions of the Securities Act of 1933 include all of the following except

A) requirement that an issuer provide full and fair disclosure about an offering.
B) regulation of offerings of new securities.
C) prospectus requirements for municipal issues.
D) prohibition of fraud in the sale of new securities.

Answer 1

prospectus requirements for municipal issues.

The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934.

Question 2

Which of the following securities are exempt from the 1933 Act?

A) A 20-year corporate bond being offered nationwide
B) Stocks being issued in more than one state
C) Unprofitable entities
D) Federal and state governmental issues

Answer 2

Federal and state governmental issues

Federal and municipal issues are exempt from registration. Corporate securities being offered in more than one state are not. Not-for-profit entities are exempt. “Unprofitable” just means they are losing money.

Question 3

Which of the following is not issued by an exempt issuer?

A) College community scholarship fund bond
B) City of Marysvale GO bond
C) Countywide Bank certificate of deposit
D) Countywide Bank Holding Company preferred stock

Answer 3

Countywide Bank Holding Company preferred stock

Banks are exempt issuers, bank holding companies are not. Municipalities and charities are also exempt issuers.

Question 4

Qualified investors for a Regulation A Tier 2 offering must meet certain requirements. Which of the following is not one of those requirements?

A) Be a registered investment advisor
B) The investment is not more than 10% of the investor’s net worth or the investor’s net income, whichever is greater
C) Be an accredited investor under the criteria in Rule 501 of Regulation D
D) Be an insider of the issuer

Answer 4

Be a registered investment advisor

There is no requirement that investors in Regulation A issues be RIAs. Note that someone who is an insider of the issuer would be an accredited investor under Regulation D.

Question 5

If the SEC has cleared an issue, which of the following statements is true?

A) The SEC has guaranteed the issue.
B) The issuer has filed a standard registration statement.
C) The SEC has guaranteed the accuracy of the information in the prospectus.
D) The SEC has endorsed the issue.

Answer 5

The issuer has filed a standard registration statement.

The SEC does not approve, disapprove, endorse, or guarantee a registration statement’s accuracy.

Question 6

Which of the following certifications would qualify an individual as an accredited investor?

A) Series 4
B) Series 63
C) Series 7
D) Series 6

Answer 6

Series 7

Holders in good standing of the Series 7, Series 65, and Series 82 licenses are considered accredited investors. It is expected that FINRA will add to this list in the future but has not yet done so.

Question 7

A broker-dealer participating in a sale of a new offering may do which of the following?

A) Promise a customer shares of the new security in return for other business
B) Take deposits for the purchase of the security
C) Provide a red herring
D) Produce an annotated prospectus to highlight important points

Answer 7

Provide a red herring

During registration you may provide a preliminary prospectus. All of the other activities listed here are prohibited.

Question 8

A resident of a state who acquires stock pursuant to Rule 147 (intrastate offerings) is prohibited from selling the stock to a nonresident of that state for how many months?

A) 12
B) 9
C) 6
D) 18

Answer 8

6

Rule 147 stock cannot be sold to a nonresident of the state for a period of six months from the investor’s purchase date.

Question 9

The managing underwriter has indicated that it is unlikely the issuer can sell $100 million of common stock to the public. In which of the following types of offerings does a syndicate have no financial obligation for unsold securities?

A) Firm commitment
B) Best efforts
C) Standby
D) Rights

Answer 9

Best efforts

In a best efforts underwriting, the underwriter serves as an agent with no financial obligation for unsold securities. In a standby underwriting, the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment).

Question 10

During the cooling-off period of a securities registration, the underwriters will generally distribute a preliminary prospectus. This document

A) may be accompanied by a special report on the security, prepared for the occasion by the underwriter’s research department.
B) may contain incomplete information.
C) will state the effective date.
D) may be used to solicit indications of interest, as long as payment of postdated checks only is accepted.

Answer 10

may contain incomplete information.

A preliminary prospectus is frequently called a red herring. This is due to the statement, printed in red ink, that information contained therein may undergo change, completion, or amendment. The effective date is found in the final prospectus as it is determined by the SEC. No payment of any kind may be accepted from potential investors, and special research reports or other promotional material on the new issue are prohibited.

Question 11

Which of the following securities is not required to register with the SEC based on who issued the security?

A) BigCo, Inc., guaranteed bonds
B) BigCo, Inc., 90-day commercial paper
C) Treasury Bonds
D) Cumulative preferred stock

Answer 11

Treasury Bonds

All securities issued by the U.S. Treasury are exempt from registration. Corporations are not exempt issuers. The commercial paper is exempt because of its short term, not because of its issuer.

Question 12

Which of the following is permitted during the cooling-off period?

A) Demonstrate SEC approval of the issue
B) Obtain indications of interest
C) Accept orders from investors
D) Solicit orders from investors

Answer 12

Obtain indications of interest

A preliminary prospectus may be used to gather indication of interest. No orders may be taken and the SEC never approves an offer.

Question 13

In order to advertise a private placement offering, the issuer must do which of the following?

A) Take reasonable care to only reach accredited investors
B) Take reasonable steps to insure all investors are accredited investors
C) Sell to no more than 35 non-accredited investors
D) Sell only to institutional investors

Answer 13

Take reasonable steps to insure all investors are accredited investors

In order to advertise a private placement, the issuer must take reasonable care to only sell to accredited investors. “Reasonable care” would include, but not be limited to, performing background checks to ascertain the potential investor’s sophistication and financial situation. Though selling to institutional investors would certainly meet the requirement, the rule allows sales to any accredited investor.

Question 14

Which of the following securities are exempt from registration under the Securities Act of 1933?

A) Short term notes with maturities of less than 270 days
B) Banker’s acceptance for use in import/export trading
C) Commercial paper issued by a listed corporation
D) All of these

Answer 14

All of these

All of these are examples of exempt securities under the act.

Question 15

All of the following must be sold with a prospectus except

A) closed-end funds in the secondary market.
B) closed-end funds in the primary market.
C) open-end funds in the primary market.
D) an IPO of common stock.

Answer 15

closed-end funds in the secondary market.

Securities sold in the secondary market do not have a prospectus delivery requirement.

Question 16

ABC Corporation is selling shares of the company in a private placement under Regulation D. All of the following investors would be accredited investors except

A) Quincy, a Series 7 registered representative.
B) Chris, who owns 4% of ABC Corporation.
C) Tom, who sits on the board of ABC Corporation.
D) Sarah, an investor with a liquid net worth of $3.2 million.

Answer 16

Chris, who owns 4% of ABC Corporation.

Chris does not own a large enough percentage of the shares of ABC Corporation to be considered an accredited investor for this offer. The others all meet at least one of the criteria.

TRUE
Quincy, a Series 7 registered representative.
Tom, who sits on the board of ABC Corporation.
Sarah, an investor with a liquid net worth of $3.2 million.

Question 17

If your firm is in the process of underwriting a new issue, sales literature, including a record of past performance, may be included in a mailing of

A) the red herring prospectus.
B) either preliminary or final prospectus.
C) the preliminary prospectus.
D) the final prospectus.

Answer 17

the final prospectus.

No literature may accompany a preliminary prospectus or red herring. All such information may only be used with a final or statutory prospectus.

Question 18

To be exempt under Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of

A) agents authorized to sell the security.
B) broker-dealers who offer the securities.
C) nonaccredited investors to whom the security is sold.
D) shares issued.

Answer 18

nonaccredited investors to whom the security is sold.

Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued or the number of accredited investors who may purchase the shares.

Question 19

After the filing of a registration for a new issue with the Securities and Exchange Commission (SEC), and prior to the effective date, broker-dealers may

A) give a red herring to prospective investors.
B) distribute sales literature with the preliminary prospectus.
C) never publish tombstone advertisements.
D) take binding indications of interest received from prospective investors.

Answer 19

give a red herring to prospective investors.

During the cooling-off period, red herrings (preliminary prospectuses) may be distributed and tombstone advertisements may be published. Indications of interest can be taken but are nonbinding on all parties. Sales literature may not be distributed during the cooling-off period.

Question 20

Where must the SEC’s no-approval clause appear in a prospectus?

A) Anywhere, as long as it is conspicuous
B) On the first page, although not mandatory
C) On the cover
D) On the last page, under the name of the fund

Answer 20

On the cover

The SEC wants investors to know that it does not approve or disapprove new issues. The disclaimer statement must appear on the cover of all prospectuses.