Unit 7 Quiz Deck

Question 1

For nonexempt securities being offered to the public for the first time by a corporate issuer, which of the following would be applicable?

A) Securities Act of 1934 regulating securities that must be offered by prospectus

B) Securities Act of 1934 regulating issues that must be offered by prospectus

C) Securities Act of 1933 regulating issues that must be offered by prospectus

D) Securities Act of 1933 regulating securities traded in the secondary market

Answer 1

C) Securities Act of 1933 regulating issues that must be offered by prospectus

Nonexempt securities are those that must be registered with the Securities and Exchange Commission (SEC) under the Securities Act of 1933. The Securities Act of 1933 mandates that offerings of these securities must be made by prospectus.

Question 2

Rules regarding restricted persons state that each of the following is considered immediate family except

A) parents.
B) an aunt or an uncle.
C) a brother or a sister.
D) a mother-in-law or a father-in-law.

Answer 2

B) an aunt or an uncle.

Rules regarding restricted persons define immediate family as spouses, parents, siblings, in-laws, and children. Aunts and uncles and grandparents are excluded (not considered immediate family).

Question 3

Capital markets can be characterized by all of the following except

A) they are utilized by the public sector only.

B) securities traded in them can be bought and sold by both individuals and institutions.

C) entities can utilize them to finance both long- and short-term capital needs.

D) they would include stock and bond markets.

Answer 3

B) securities traded in them can be bought and sold by both individuals and institutions.

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 4

Private placements are primarily sold to

A) general public investors.

B) individuals who do not meet the definition of accredited investor.

C) investment bankers.

D) institutional investors.

Answer 4

D) institutional investors.

Institutional investors are the overwhelming majority of buyers in private placements, although private placement securities may be sold to small numbers of wealthy individuals who meet certain criteria (accredited investors).

Question 5

A preliminary prospectus is used to solicit

A) sales after the effective date.

B) sales before the effective date.

C) indications of interest before the registration filing date.

D) indications of interest before the effective date.

Answer 5

D) indications of interest before the effective date.

A preliminary prospectus cannot be distributed before the registration date. Between the registration and effective dates, it is used to solicit or gauge indications of interest. After the effective date, sales can be solicited and a final prospectus would be available and must be used to do so.

Question 6

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

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

Answer 6

A) A preliminary prospectus

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 7

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

Answer 7

C) Private (nonpublic) securities offering

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 8

Regarding primary offerings, which of the following is true?

A)After its initial public offering (IPO), a corporation can have only one more primary offering—its subsequent primary offering (SPO).

B)A corporation can have two primary offerings—the initial public offering (IPO) and an additional public offering (APO).

C)There is no limit to the number of primary offerings a corporation can issue.

D)A corporation can have only one primary offering—the initial public offering (IPO).

Answer 8

C) There is no limit to the number of primary offerings a corporation can issue.

While a corporation can have only one IPO, there is no limit to the number of SPOs or APOs it can issue. IPOs, SPOs, and APOs are all primary offerings—those where the offering proceeds go to the issuer.

Question 9

Which of the following securities is exempt from the Securities Act of 1933?

A) Preferred stock
B) Municipal note
C) Debenture
D) Common stock

Answer 9

B) Municipal note

Municipal debt securities, including short-term notes, are exempt from the Securities Act of 1933.

Question 10

Primary market transactions would include which of the following?

A)Sale of $10 million of corporate stock by a broker-dealer acting as a market maker

B)Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter

C)Sale of $10 million of municipal bonds by a broker-dealer acting as a market maker

D)Sale of $10 million of U.S. Treasury bonds by a broker-dealer acting as a market maker

Answer 10

B) Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter

Market makers are broker-dealers who sell out of their own account in the secondary market. Underwriters are broker-dealers who help issuers bring their securities to market in the primary market.

Question 11

The access equals delivery rule applies to

A) the final prospectus and aftermarket delivery obligations.

B) all prospectuses delivered before the registration date.

C) the final prospectus delivery requirements during the cooling-off period.

D) the preliminary prospectus delivery requirements during the cooling-off period.

Answer 11

A) the final prospectus and aftermarket delivery obligations.

The access equals delivery rule applies to the final prospectus and aftermarket prospectus delivery obligations. It does not apply to preliminary prospectuses. No prospectus can be delivered before the registration date.

Question 12

Which of the following would be applicable to nonexempt securities (those that must be registered) being offered to the public by a corporate issuer?

I. Securities Act of 1933
II. Prospectus
III. Securities Act of 1934
IV. Secondary market

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

Answer 12

B) I and II

Offering nonexempt securities [those that must be registered with the Securities and Exchange Commission (SEC)] such as common stock to the public requires the registration of the securities under the Securities Act of 1933. The offering must be made by prospectus.

Question 13

State registration is not required if the transaction is exempt. An example of an exempt transaction would be

A) one that is solicited.
B) one that is unsolicited.
C) one involving U.S. government bonds.
D) one involving municipal bonds.

Answer 13

B) one that is unsolicited.

Purchases and sales that are unsolicited (unsolicited transactions) are exempt under the blue-sky (state securities) laws. Municipal bonds and U.S. government bonds are examples of exempt securities, not transactions.

Question 14

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

Answer 14

A) a private placement.

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 15

The aftermarket prospectus requirement for the IPO of nonlisted securities is

A) 90 days.
B) 25 days.
C) 40 days.
D) not specified in the Securities Act of 1933.

Answer 15

A) 90 days.

For the first 90 days following the IPO, a prospectus must be provided to purchasers in the secondary market

Question 16

Regarding the issuance of new securities to the public, which of the following is true?

A) The Securities Act of 1933 provides criminal penalties for fraud.

B) The Securities and Exchange Commission (SEC) review of a new issues filing must always be longer than 20 days.

C) Underwriters are permitted to accept orders for securities during the Securities and Exchange Commission (SEC) review period.

D) Registrations become effective within 10 business days of Securities and Exchange Commission (SEC) filing.

Answer 16

A) The Securities Act of 1933 provides criminal penalties for fraud.

The Securities Act of 1933, which provides for criminal penalties for fraud in the issuance of new securities, ensures that investors are fully informed about a security and its issuer when the security is offered to the public. The SEC review or cooling-off period must last a minimum of 20 days before the SEC releases the securities for sale to the public (effective date). Solicitations and the acceptance of orders may never occur before the effective date.

Question 17

A person who looks to provide advice to a city government concerning the issuance of municipal debt securities would best be described as

A) a municipal securities representative.
B) a market maker.
C) a municipal advisor.
D) an investment adviser.

Answer 17

C) a municipal advisor.

A municipal advisor is a person that provides advice to or on behalf of a municipal entity with respect to municipal products or the issuance of municipal securities.

Question 18

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

A) In the secondary market, securities transactions cannot take place on an exchange.

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

C) In the secondary market, all sales proceeds go to the issuer.

D) In the primary market, securities are purchased from and sold to individual investors.

Answer 18

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

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 19

Mrs. Jones is an employee of a member firm and as such is a restricted person regarding the purchase of new issues. She belongs to an investment club and has a 1% interest in the club’s brokerage account. The investment club

A) is not a restricted account but will not be allowed to purchase equity shares of an IPO.

B) is a restricted account but will be allowed to purchase equity shares of an IPO.

C) is a restricted account and will not be allowed to purchase equity shares of an IPO.

D) is not a restricted account and will be allowed to purchase equity shares of an initial public offering (IPO).

Answer 19

D) is not a restricted account and will be allowed to purchase equity shares of an initial public offering (IPO).

Because the restricted person’s interest in the club’s brokerage account does not exceed 10%, the investment club account is not considered a restricted account. If not restricted, the club can purchase shares of an equity issue at the public offering price if it chooses to.

Question 20

An offering is defined as the sale of a security. Regarding offerings, all of the following are true except

A) offerings of bonds can be made to the investing public.

B) offerings can be identified by who is selling the securities issuer or investor.

C) corporate securities can only be offered in public securities offerings.

D) offerings of stocks can be made to the investing public.

Answer 20

C) corporate securities can only be offered in public securities offerings.

Both stocks and bonds can be made available to the investing public through an offering. Different types of offerings are identified by who is selling the securities—an issuer or another investor. Securities offered by corporations for sale to the investing public are sold to investors through either public or private securities offerings.

Question 21

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

Answer 21

B) II and IV

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 22

Which of the following choices would best describe a follow-on offering?

A) An initial public offering (IPO) that has additional shares added by the issuer on the effective date

B) An issue of shares by a public company that is already listed on an exchange

C) An offering to the employees of the issuing company

D) The common stock that is issued attached to a rights offering

Answer 22

B) An issue of shares by a public company that is already listed on an exchange

A follow-on public offer (FPO) is an issue of shares by a public company [registered and reporting to the Securities and Exchange Commission (SEC)] that is currently listed on an exchange and has previously gone through the IPO process. FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue.

Question 23

Private placements are primarily sold to

A) institutional investors.

B) general public investors.

C) individuals who do not meet the definition of accredited investor.

D) investment bankers.

Answer 23

A) institutional investors.

Institutional investors are the overwhelming majority of buyers in private placements, although private placement securities may be sold to small numbers of wealthy individuals who meet certain criteria (accredited investors).

Question 24

An offering in which one or more stockholders in the corporation are selling all or a portion of their own shares to the investing public for the first time is known as

A) an initial public offering.
B) a secondary offering.
C) a subsequent offering.
D) a primary offering.

Answer 24

B) a secondary offering

A secondary offering is one in which one or more stockholders in the corporation are selling all or some of their shares to the public. The sale proceeds for these shares are paid to the selling stockholders rather than to the corporation.

Question 25

The Securities Act of 1933 requires that

A) a new issue, unless specifically exempted from the Act, be registered with the Securities and Exchange Commission (SEC) before public sale.

B) registration with the Securities and Exchange Commission (SEC) before public sale can be made be an option for all new issues.

C) all new issues be exempted from registration with the Securities and Exchange Commission (SEC) so that they may be sold to the public.

D) both exempt and nonexempt new issues be registered with the Securities and Exchange Commission (SEC) before public sale.

Answer 25

A) a new issue, unless specifically exempted from the Act, be registered with the Securities and Exchange Commission (SEC) before public sale.

While some new issues can be exempt from registration, the Securities Act of 1933 requires that a new issue, unless it is specifically exempted from the act, be registered with SEC before public sales can be made.

Question 26

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

Answer 26

B) II and IV

Indications of interest are binding on neither buyers nor sellers.

Question 27

Regarding the issuance of new securities to the public, which of the following is true?

A) The Securities and Exchange Commission (SEC) review of a new issues filing must always be longer than 20 days.

B) Underwriters are permitted to accept orders for securities during the Securities and Exchange Commission (SEC) review period.

C) Registrations become effective within 10 business days of Securities and Exchange Commission (SEC) filing.

D) The Securities Act of 1933 provides criminal penalties for fraud.

Answer 27

D) The Securities Act of 1933 provides criminal penalties for fraud.

The Securities Act of 1933, which provides for criminal penalties for fraud in the issuance of new securities, ensures that investors are fully informed about a security and its issuer when the security is offered to the public. The SEC review or cooling-off period must last a minimum of 20 days before the SEC releases the securities for sale to the public (effective date). Solicitations and the acceptance of orders may never occur before the effective date

Question 28

The XYZ Company is looking to offer shares of its common stock to the public. Which of the following laws enacted by Congress would have the most relevance to the issuance of these securities?

A) The Securities Act of 1933
B) The Trust Indenture Act of 1939
C) The Securities Investors Protection Act of 1970
D) The Investment Company Act of 1940

Answer 28

A) The Securities Act of 1933

The Securities Act of 1933, also known as the Paper Act or Prospectus Act, is the bedrock of all modern securities law. It requires issuers looking to make a public offering of securities to provide full and fair disclosure of all material facts about the company and the securities being offered. The company does this by registering its securities with the U.S. Securities and Exchange Commission (SEC), often with the aid of accountancy firms, securities attorneys, and underwriters. Part of the registration process for newly offered securities is the publishing of a prospectus which all prospective investors must receive at or prior to purchase.

Question 29

Each of the following provides for an exemption from the registration requirement of the Securities Act of 1933 except

A) Regulation D.
B) Rule 147.
C) Regulation A+.
D) access equals delivery rule.

Answer 29

D) access equals delivery rule

Securities offerings may qualify for exemption from the registration statement and prospectus requirements of the Securities Act of 1933 under Regulation A+, Regulation D, Rule 147 and Regulation S.

Question 30

A corporate issuer of common stock has decided that it wants an agreement that its underwriter must either raise all of the capital needed or cancel the underwriting. To best accommodate this the underwriting should b

A) an all or none (AON).
B) an immediate of cancel.
C) a firm commitment.
D) a mini-max

Answer 30

A) an all or none (AON).

In an AON underwriting, the issuing company has determined that it wants the underwriter to sell all of the shares required to raise all of the capital needed 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.

Question 31

Which of the following acts requires the registration of most new issues?

A) The Securities Investor Protection Act of 1970
B) The Securities Act of 1933
C) The Securities Market Improvement Act of 1975
D) The Securities Exchange Act of 193

Answer 31

B) The Securities Act of 1933

The Securities Act of 1933 requires the registration of most new issues; the Securities Exchange Act of 1934 created the SEC; the Securities Investor Protection Act of 1970 created the SIPC; the Securities Market Improvement Act of 1975 created the MSRB.

Question 32

Certain investors are deemed accredited when they have a net worth of

A) $500,000, not including net equity in the primary residence.

B) $1 million, not including net equity in the primary residence.

C) $200,000.

D) $1 million.

Answer 32

B) $1 million, not including net equity in the primary residence.

An accredited investor is defined as a natural person who has a net worth of $1 million or more, not including net equity in a primary residence; or has had an annual income of $200,000 or more in each of the two most recent years (or $300,000 jointly with a spouse) and who has a reasonable expectation of reaching the same income level during the current year.

Question 33

During the cooling-off period, underwriters may not

A) distribute a preliminary prospectus.
B) place a tombstone advertisement.
C) distribute sales literature or advertising material.
D) take indications of interest.

Answer 33

C) distribute sales literature or advertising material.

During the cooling-off period, underwriters may not distribute sales or advertising literature regarding the securities to be offered. However, they may distribute a preliminary prospectus intended to gather indications of interest and place tombstone ads.

Question 34

A prospectus displays which of the following?

A) The Securities and Exchange Commission (SEC) endorsement

B) A guarantee insuring against loss

C) Performance predictions for a minimum of three years

D) Description of how the proceeds will be used

Answer 34

D) Description of how the proceeds will be used

A prospectus will not contain performance predictions, may not imply endorsement of the SEC, nor will it contain guarantees of gains or guarantees against loss.

Question 35

A company’s board of directors has agreed that the company should be prepared to have shares of common stock ready to be issued that are intended to be distributed in the form of a one-time employee bonus. Not knowing exactly when the one-time bonus plan will be implemented and the shares will be needed, the type of registration or offering that would best suit the scenario is

A) a shelf registration.
B) a bonus share plan.
C) an ESOP registration.
D) a shadow registration.

Answer 35

A) a shelf registration.

The Securities Act of 1933 permits issuers to quickly raise money in the capital markets when needed via a shelf registration. This type of registration allows the company to, in essence, take the securities from the shelf without the delay of registering with the Securities and Exchange Commission (SEC), because the actual registration has already been done ahead of time.

Question 36

Which of the following offerings is most likely exempt from the registration requirements of the Securities Act of 1933?

A) Shelf offerings
B) Additional public offerings (APOs)
C) Private (nonpublic) securities offerings
D) Initial public offerings (IPOs)

Answer 36

C) Private (nonpublic) securities offerings

Public securities offerings must be registered under the Securities Act of 1933. These would include IPOs, APOs, and shelf offerings. Issuers choosing to offer securities privately may find relief (are exempt) from the registration provisions of the Securities Act of 1933.

Question 37

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

A) Placing a tombstone add
B) Allocating shares to investors
C) Taking orders
D) Distributing a final prospectus

Answer 37

A) Placing a tombstone add

No selling or soliciting is allowed during the cooling off period. Publishing a tombstone is considered an announcement, not a solicitation. The final prospectus is not available during the cooling off period.

Question 38

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

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

Answer 38

D) advertise the issue.

During the cooling off period sales, solicitations and advertising are not allowed. The tombstone ad, which is more of an announcement than a solicitation, is an exception to the rule.

Question 39

A person who looks to provide advice to a city government concerning the issuance of municipal debt securities would best be described as

A) a municipal advisor.
B) a market maker.
C) an investment adviser.
D) a municipal securities representative.

Answer 39

A) a municipal advisor.

A municipal advisor is a person that provides advice to or on behalf of a municipal entity with respect to municipal products or the issuance of municipal securities.

Question 40

The ATOP Company is planning to offer shares of both common and preferred stock to the investing public in order to raise operating capital intended to be used for expansion. Which of the following laws enacted by Congress would be the most relevant when issuing these equity securities to the public?

A) The Securities Investors Protection Act of 1970
B) The Investment Company Act of 1940
C) The Trust Indenture Act of 1939
D) The Securities Act of 1933

Answer 40

D) The Securities Act of 1933

The Securities Act of 1933, is also known as the Paper Act, Prospectus Act, or New Issues Act. This federal law requires that issuers who want to raise capital by making a public offering of securities to the public, provide full and fair disclosure of all material facts about the company and the securities being offered.