UNIT 7 QBANK

Question 1

Ensuring that the INVESTING PUBLIC is FULLY INFORMED about a SECURITY AND ITS ISSUING COMPANY when shares are FIRST SOLD IN THE PRIMARY MARKET is covered under which of the following FEDERAL ACTS?

A) Securities Act of 1933
B) Uniform Securities Act
C) Investment Company Act of 1940
D) Securities Exchange Act of 1934

Answer 1

A) Securities Act of 1933

Explanation
Companies looking to offer securities to the PUBLIC must provide a PROSPECTUS to those who are approached to purchase the shares. This requirement ensures that the investing public is fully informed about a NEW SECURITY and its ISSUING COMPANY.

Question 2

SECURITIES REGULATIONS that are called BLUE-SKY LAWS refer to those at

A) the federal level.
B) the state level.
C) neither the state nor the federal level.
D) both the state and the federal level.

Answer 2

B) the STATE LEVEL.

Explanation
These are STATE LAWS that pertain to the ISSUANCE AND TRADING of securities WITHIN THAT STATE.

They are known as blue-sky laws because of a statement made by a KANSAS SUPREME COURT JUSTICE who referred to “SPECULATIVE SCHEMES that have NO MORE BASIS than SO MANY FEET OF BLUE SKY.”

Question 3

A TOMBSTONE ADVERTISEMENT placed BEFORE THE EFFECTIVE DATE can

A) only be placed by the issuing company.
B) be placed by the issuer directly or by the underwriters.
C) only be placed by those assisting the issuing company in the underwriting.
D) always be deemed to be an offer to sell the securities.

Answer 3

B) be placed BY THE ISSUER DIRECTLY or BY THE UNDERWRITERS.

TOMBSTONE ADVERTISEMENTS can be placed by EITHER the ISSUER or the UNDERWRITERS and are the ONLY ADS that can be placed BEFORE THE REGISTRATION’S EFFECTIVE DATE. They are NOT AN OFFER OR SOLICITATION to sell the securities.

Question 4

SHELF OFFERINGS are covered under which if the following?

A) The Bank Secrecy Act
B) The Trust Indenture Act of 1939
C) The Securities Act of 1933
D) The Investment Company Act of 1940

Answer 4

C) The Securities Act of 1933

The shelf offering (REGISTRATION) provision under the Securities Act of 1933 allows ISSUERS to QUICKLY RAISE CAPITAL when needed or when market conditions are favorable.

Question 5

RULES to PROTECT THE INVESTING PUBLIC during the PUBLIC OFFERING PROCESS include all of the following EXCEPT

A) limiting the number of shares of an initial public offering (IPO) that may be purchased by the issuing company’s employees.
B) member firms may not withhold securities in a public offering for their own benefit.
C) securities industry insiders may not take advantage of their insider status to gain access to new issues for their own benefit.
D) members must offer the securities at the public offering price.

Answer 5

NOT TRUE
A) limiting the number of shares of an initial public offering (IPO) that may be purchased by the issuing company’s employees.

EXPLANATION
NO RULE limits the NUMBER OF SHARES that an issuer can direct to persons who are EMPLOYEES OF THE ISSUER.

ALL THESE ARE TRUE
B) member firms MAY NOT withhold securities in a public offering FOR THEIR OWN BENEFIT.
C) securities industry insiders MAY NOT take advantage of their INSIDER STATUS to gain access to new issues FOR THEIR OWN BENEFIT.
D) MEMBERS must offer the securities at the PUBLIC OFFERING PRICE.

Question 6

All of the following NAMES DESCRIBE the SECURITIES ACT OF 1933 EXCEPT

A) The Truth in Securities Act.
B) The Prospectus Act.
C) The Full and Fair Disclosure Act.
D) The Exchange Act.

Answer 6

D) The Exchange Act.

The EXCHANGE ACT is the SECURITIES EXCHANGE ACT OF 1934 and covers the SECONDARY MARKETS.

The SECURITIES ACT OF 1933 covers the PRIMARY MARKET and REQUIRES FULL AND FAIL DISCLOSURE on NEW ISSUES by providing a PROSPECTUS to the investor.

TRUE
A) The Truth in Securities Act.
B) The Prospectus Act.
C) The Full and Fair Disclosure Act.

Question 7

Which of the following PROSPECTUS DELIVERY REQUIREMENTS for NEGOTIABLE SECURITIES sold in the SECONDARY MARKETS is NOT ACCURATE?

A) For an additional issue listed on an exchange or Nasdaq there is no delivery requirement.
B) For an initial public offering (IPO) if non-Nasdaq the delivery requirement is 90 days.
C) For an IPO if listed on an exchange or Nasdaq the delivery requirement is 25 days.
D) For an additional issue if the security is non-Nasdaq there is no delivery requirement.

Answer 7

D) For an additional issue if the security is non-Nasdaq there is no delivery requirement.

Explanation
For an additional issue, if the security is non-Nasdaq the delivery requirement is 40 days.

–TRUE–
A) For an ADDITIONAL ISSUE listed on an EXCHANGE OR NASDAQ there is NO DELIVERY REQUIREMENT.

B) For an INITIAL PUBLIC OFFERING (IPO) if NON-NASDAQ the DELIVERY REQUIREMENT is 90 days.

C) For an IPO if listed on an exchange or Nasdaq the delivery requirement is 25 days.

Question 8

During the COOLING-OFF period, UNDERWRITERS OF NEW SECURITIES may

I. accept orders to purchase shares.
II. not accept orders to purchase shares.
III. not accept indications of interest regarding potential purchases of shares.
IV. accept indications of interest regarding potential purchases of shares.

A) I and III
B) I and IV
C) II and IV
D) II and III

Answer 8

C) II and IV
II. not accept orders to purchase shares.
IV. accept indications of interest regarding potential purchases of shares.

Explanation
Orders for shares may never be taken before the effective date; therefore, no orders to purchase shares may be taken during the cooling-off period. Indications of interest, however, are allowed to be taken but are not binding on either party.

Question 9

For primary and secondary markets, which of the following is true?

A) In the primary market, securities are sold to the public and the issuer receives the sale proceeds.
B) In the secondary market, securities transactions cannot take place on an exchange.
C) In the primary market, securities are purchased from and sold to individual investors.
D) In the secondary market, all sales proceeds go to the issuer.

Answer 9

A) In the primary market, securities are sold to the public and the issuer receives the sale proceeds.

Explanation
In the primary market, the issuer of the securities receives the proceeds generated by the sale of the securities. In the secondary markets, such as an exchange or over-the-counter (OTC) securities trade between investors, one sells securities to another, and the issuer is not involved in the transaction.

Question 10

When an investor receives a final prospectus, the expectation should be that one of the following would not be found. Which is it?

A) the Securities and Exchange Commission’s (SEC’s) verification of accuracy
B) all known risks to purchasers of the stock
C) the intended use of the proceeds raised in the offering
D) the effective or offering date

Answer 10

A) the Securities and Exchange Commission’s (SEC’s) verification of accuracy

Explanation
The SEC does not verify the adequacy or accuracy of any information found in the prospectus. To the contrary, the prospectus will contain the SEC disclaimer which reads: “These securities have not been approved or disapproved by the SEC nor have any representations been made about the accuracy or the adequacy of the information.

Question 11

In a combination (or split) offering,

A) all shares are issued from existing shareholders to the public.
B) shares are issued to existing shareholders only.
C) shares are issued from existing shareholders only.
D) new shares are issued from the corporation and existing shares are sold by shareholders.

Answer 11

D) new shares are issued from the corporation and existing shares are sold by shareholders.

Explanation
In a split offering, shares are issued to the public. These shares come from both the corporation and existing shareholders—hence the split.

Question 12

The aftermarket prospectus requirement following an APO for exchange-listed securities is

A) 90 days.
B) 0 days.
C) 40 days.
D) 25 days.

Answer 12

B) 0 days.

Explanation
For exchange-listed additional public offerings, there is no aftermarket prospectus requirement.

Question 13

An issuer that is already a publically traded company wants to register new securities without selling any of the shares until later when it anticipates it will be retooling all of its existing manufacturing plants. Which of the following applies?

A) This can be accomplished by utilizing a shelf registration specifically designed to register shares presently to be sold later.
B) This can be accomplished by utilizing an additional issue offering, which is specifically for publically traded companies wanting to register new shares to be issued later.
C) This cannot be done because newly registered securities must be made available for sale immediately.
D) This can be accomplished by utilizing a new initial public offering, which is necessary for registration of all new shares.

Answer 13

A) This can be accomplished by utilizing a shelf registration specifically designed to register shares presently to be sold later.

Explanation
A shelf offering (registration), allows an issuer that is already a publically traded company to register new securities without selling any of the shares until later or waiting to sell a portion of the shares later when the capital might be needed.

Question 14

In an underwriting where fixing a minimum dollar amount to be sold in order to move forward with the entire offering is most commonly referred to as

A) firm commitment.
B) de minimis.
C) all or none (AON).
D) mini-max.

Answer 14

D) mini-max.

Explanation
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.

Question 15

Indications of interest taken during the cooling-off period are

I. binding on the selling issuer and underwriters.
II. nonbinding on the issuer and underwriters.
III. binding on the investor.
IV. nonbinding on the investor.

A) I and III
B) II and IV
C) II and III
D) I and IV

Answer 15

B) II and IV

II. nonbinding on the issuer and underwriters.
IV. nonbinding on the investor.

Explanation
Indications of interest are binding on neither buyers nor sellers.

Question 16

Regarding the registration statement filed with the Securities and Exchange Commission (SEC) when new securities are to be issued, all of the following are true except

A) underwriters may assist the issuer in preparing and filing the registration statement.
B) a description of how the proceeds raised from the sale will be used must be disclosed.
C) the accuracy and adequacy of the registration documents is the responsibility of the underwriters.
D) the names and addresses of company officers and directors, their salaries, and a five-year business history of each must be shown.

Answer 16

C) the accuracy and adequacy of the registration documents is the responsibility of the underwriters.

Explanation
While underwriters (broker-dealers and investment bankers) may assist the issuer in preparing and filing the registration statement, the accuracy and adequacy of the registration documents is the responsibility of the issuer. Full disclosure is also made on a number of issues, including but not limited to names and addresses of company officers and a description of how the sale proceeds will be used.

Question 17

Capital markets can be characterized by all of the following except

A) they would include stock and bond markets.
B) entities can utilize them to finance both long- and short-term capital needs.
C) securities traded in them can be bought and sold by both individuals and institutions.
D) they are utilized by the public sector only.

Answer 17

D) they are utilized by the public sector only.

Explanation
In capital markets, both public and private sectors sell securities (stocks and bonds) to raise funds to finance both long-and short-term initiatives. Both individuals and institutions can trade securities in these markets.

Question 18

In a split offering,

A) all shares are issued to the public from existing shareholders.
B) shares are sold by existing shareholders only.
C) shares are issued from the corporation and sold by existing shareholders.
D) shares are issued to existing shareholders only.

Answer 18

C) shares are issued from the corporation and sold by existing shareholders.

Explanation
In a split offering, shares are sold to the public. These shares come from both the corporation (issuer) and existing shareholders. These offers are also called combination offers.

Question 19

All of the following are restricted persons except

A) employees of members.
B) finders and fiduciaries acting on behalf of the underwriters.
C) individual owning 5% of a member firm.
D) portfolio managers.

Answer 19

C) individual owning 5% of a member firm.

Explanation
Rules prohibit member firms from selling public offering stock in equities to any account in which restricted persons are beneficial owners. Restricted persons include Financial Industry Regulatory Authority (FINRA) members, employees of member firms, finders and fiduciaries acting on behalf of the underwriters, portfolio managers, and any person owning 10% or more of a member firm. Also included are the immediate family members of any restricted persons.

Question 20

The prospectus delivery requirement, access equals delivery, is satisfied when

A) a red herring is initially sent by mail to investors during the cooling-off period.
B) the final prospectus has been filed with the Securities and Exchange Commission (SEC) and is available on the SEC’s website for investors to see.
C) the final prospectus has been filed with Financial Industry Regulatory Authority (FINRA) and is available on FINRA’s website for investors to see.
D) the preliminary prospectus has been filed with FINRA and is therefore available on FINRA’s website for investors to see.

Answer 20

B) the final prospectus has been filed with the Securities and Exchange Commission (SEC) and is available on the SEC’s website for investors to see.

Explanation
Beyond physical delivery of a paper prospectus, access equals delivery is the industry standard for meeting the final prospectus delivery requirements. It is deemed to be satisfied when the final prospectus has been filed with the SEC and is therefore available on the SEC’s website for investors to log in and see. This standard does not apply to delivery of a preliminary prospectus before the effective date.

Question 21

When an issuing company sells securities to primarily institutional investors and a small number of wealthy individuals, as opposed to the general investing public in an exempt offering, this is known as

A) a secondary placement.
B) a private placement.
C) a primary placement.
D) a secondary offering.

Answer 21

B) a private placement.

Explanation
A private placement occurs when the issuing company sells securities that are exempt from registration to private investors, as opposed to the general investing public. These investors tend to be institutional investors and small groups of wealthy individuals who meet certain net worth and income criteria.

Question 22

Indications of interest taken during the cooling-off period are

I. binding on the selling issuer and underwriters.
II. nonbinding on the issuer and underwriters.
III. binding on the investor.
IV. nonbinding on the investor.

A) II and III
B) I and III
C) II and IV
D) I and IV

Answer 22

C) II and IV

II. nonbinding on the issuer and underwriters.
IV. nonbinding on the investor.

Explanation
Indications of interest are binding on neither buyers nor sellers.

Question 23

A final prospectus contains all of the following except

A) SEC approval.
B) description of the management.
C) history of the business.
D) the use of the proceeds.

Answer 23

A) SEC approval.

Explanation
The SEC neither approves nor disapproves a final prospectus; they allow the issue to become effective. Beware of any approval language when referring to a regulator.

Question 24

Securities sold in an issuer-related transaction would best be described as

A) a primary offering.
B) a balance of payments.
C) a split offering.
D) a secondary offering.

Answer 24

A) a primary offering.

Explanation
When an issuer offers stock and the proceeds from the sale are added to the company’s capital, it is called a primary offering. By contrast, a secondary offering is one in which one or more shareholders in the corporation sell all or a portion of their equity holdings to the public. The proceeds of a secondary offering are paid to the selling shareholder(s), not the company.

Question 25

A company is considering raising capital without going through the registration process requirements mandated by the Securities Act of 1933. To be exempt from the act, which of the following offerings might they employ?

A) Initial public offering
B) Shelf offering
C) Additional public offering (APO)
D) Private (nonpublic) securities offering

Answer 25

D) Private (nonpublic) securities offering

Explanation
Issuers wanting relief (exemption) from the registration provisions of the Securities Act of 1933 can offer securities privately. These securities offerings are often called private placements.

Question 26

An indication of interest given by an investor during the cooling-off period is

A) an investor’s declaration of potential interest in purchasing some of the issue immediately.
B) an investor’s binding commitment to purchase some of the issue after the security comes out of registration.
C) an investor’s binding commitment to purchase some of the issue immediately.
D) an investor’s declaration of potential interest in purchasing some of the issue after the security comes out of registration.

Answer 26

D) an investor’s declaration of potential interest in purchasing some of the issue after the security comes out of registration.

Explanation
An indication of interest given by an investor during the cooling-off period is the investor’s declaration of a nonbinding potential interest to purchase some of the issue after the security comes out of registration (after the effective date).

Question 27

A new registered representative receives a memo discussing the distribution of a red herring. The registered representative knows that the memo is referencing

A) a registration statement.
B) a tombstone advertisement.
C) a preliminary prospectus.
D) a final prospectus.

Answer 27

C) a preliminary prospectus.

Explanation
The term red herring is derived from the disclaimer printed in red on the cover page of a preliminary prospectus. Some key information that would be found in a final prospectus, such as price, is not found in the preliminary prospectus.

Question 28

Underwriters who are assisting an issuer in bringing securities to the investing public can do which of the following between the time the registration was filed with the Securities and Exchange Commission (SEC) and the effective date?

A) Solicit orders from investors to purchase the securities.
B) Mail sales literature to those who have expressed an interest in purchasing the securities.
C) Distribute a preliminary prospectus to the investing public.
D) Make a binding offer to sell the securities.

Answer 28

Explanation
The time between the registration filing date with the SEC and the effective date is known as the cooling-off period. During this time, a preliminary prospectus may be distributed to gauge investor interest but no offers to sell the securities can be made and no orders to purchase the securities can be taken. While a preliminary prospectus and tombstone ad can be used, sales and advertising literature specific to the securities cannot be.

Question 29

Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does not exceed

A) 10%.
B) 25%.
C) 20%.
D) 5%.

Answer 29

A) 10%.

Explanation
If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.

Question 30

Regarding the purchase of new equity issues (IPOs), restricted persons may

A) not purchase shares of a new issue.
B) purchase shares of a new issue only if they are employed by a broker-dealer as a registered representative.
C) purchase shares of a new issue only if they work for a bank.
D) purchase shares of a new issue only in amounts that are not substantial in relation to the total number of shares being issued.

Answer 30

A) not purchase shares of a new issue.

Explanation
Persons characterized as restricted persons are prohibited from purchasing shares of new issues in any quantity. If one is already restricted, working for a bank or a broker-dealer does not exempt them from the rule.

Question 31

Which of the following would be allowed during the cooling off period?

A) Distributing a prospectus
B) Taking orders
C) Allocating shares to investors
D) Distributing a red herring

Answer 31

D) Distributing a red herring

Explanation
No selling or soliciting is allowed during the cooling off period. Distributing a red herring (a preliminary prospectus) is allowed.

Question 32

A registered representative provides financial support and housing at her home for her grandfather. Regarding the purchase of new issues,

A) the registered representative is restricted, but her grandfather is not.
B) neither are considered restricted.
C) the grandfather is restricted, but the registered representative is not.
D) both persons are considered restricted.

Answer 32

D) both persons are considered restricted.

Explanation
Working for a broker-dealer, the registered representative is considered restricted. While grandparents of restricted persons are generally not considered restricted, anyone being provided financial support and/or living under the same roof as a restricted person (as is the case here) is also restricted.

Question 33

For a new issue that qualifies for Nasdaq listing, a prospectus must be provided to all purchasers within how many days after the effective date?

A) 90 days
B) 25 days
C) 40 days
D) 60 days

Answer 33

B) 25 days

Explanation
For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is 25 days. If the new issue will be specifically quoted on the Over-the-Counter Bulletin Board or the electronic over-the-counter Pink (thus non-NMS), the period is 90 days. An additional public offering (APO) for a non-NMS security, the requirement for delivery is 40 days. There is no requirement for an APO of an NMS security.

Question 34

A corporation needs to build a new manufacturing facility costing several hundred million dollars. In which of the following markets could this new capital be raised?

A) Municipal bond market
B) Secondary market
C) Government bond market
D) Capital market

Answer 34

D) Capital market

Explanation
Capital markets are a source of financing for corporations, municipalities, and governments. Capital can be raised by issuing equities or debt and offering the securities to investors in an initial public offering (IPO) or an additional public offering (APO). Note that bonds might be issued by a municipality or the federal government to raise money, but corporations (as noted in this question) do not issue government bonds, either federal or municipal.

Question 35

Which of the following would take place in the primary market?

A) Securities bought and sold on the OTC
B) Securities sold to the public by the issuer
C) Securities sold on both the OTC and NYSE
D) Securities bought and sold on the NYSE

Answer 35

B) Securities sold to the public by the issuer

Explanation
When an issuer is selling its securities, that is a primary market transaction.

Question 36

All of the following are true of tombstone advertisements except

A) they are mandatory and must be placed during the cooling-off period.
B) they are not an offer to sell or solicit sales for the securities.
C) they would be expected to show the number of shares to be offered.
D) they can be placed by the underwriters.

Answer 36

A) they are mandatory and must be placed during the cooling-off period.

Explanation
Tombstone advertisements are not mandatory. They can be placed by the issuer or the underwriters and contain only bare bones facts about the new issue that is limited in scope and detail. However, expected information to be found there would include the name of the issuer and underwriters, type of security, number of shares to be offered, and the offering price or expected price range. All must have a disclosure or advisory that the ad is not an offer to sell or solicit sales for the shares.

Question 37

Shelf offerings are covered under which if the following?

A) The Investment Company Act of 1940
B) The Bank Secrecy Act
C) The Securities Act of 1933
D) The Trust Indenture Act of 1939

Answer 37

C) The Securities Act of 1933

Explanation
The shelf offering (registration) provision under the Securities Act of 1933 allows issuers to quickly raise capital when needed or when market conditions are favorable.

Question 38

Which of the following would most closely match the meaning of a red herring?

A) A preliminary prospectus
B) A tombstone advertisement
C) Prospectus
D) A registration statement

Answer 38

A) A preliminary prospectus

Explanation
A preliminary prospectus is also known as a red herring. The red herring does not include key information about the issue such as price and the number of shares offered. The term is derived from the disclaimer printed in red on the cover page.

Question 39

During the cooling off period, underwriters would be allowed to do all of the following except

A) take orders.
B) distribute a preliminary prospectus.
C) publish a tombstone.
D) take indications of interest.

Answer 39

A) take orders.

Explanation
During the cooling off period, sales are not allowed.

Question 40

A corporation increases capitalization by selling shares of stock which can either come from a new issue or previously authorized but unissued shares. Total stock outstanding must

A) never exceed the number of shares authorized.
B) always equal the number shares authorized.
C) never equal the number of shares issued.
D) always be greater than the number of shares issued.

Answer 40

A) never exceed the number of shares authorized.

Explanation
A corporation’s bylaws state the maximum number of shares authorized to be issued. Therefore, issued shares, those in the hands of public shareholders (outstanding shares) can never exceed the number of shares that were authorized. While those outstanding shares can therefore never be greater than the number of shares issued they could equal the number of shares issued.