Series 7 Chapter 7

The letter of intent in a corporate underwriting is typically signed by which of the following parties? Issuer. Managing underwriter. Syndicate members. Selling group members. A) I and III. B) II and IV. C) I and II. D) III and IV.

Your answer, II and IV., was incorrect. The correct answer was: I and II. The letter of intent initiates the underwriting process and is signed by the issuer and managing underwriter.

The Act of 1933 applies to all of the following EXCEPT: A) prospectus preparation. B) regulation of insider trading. C) registration of new issues . D) full and fair disclosure.

Your answer, full and fair disclosure., was incorrect. The correct answer was: regulation of insider trading. The regulation of insider trading is covered under the Act of 1934. The Act of 1933 deals with new issues and related disclosures.

Under which of the following circumstances will an investor be considered accredited under Regulation D? A) $1 million net worth excluding net equity in a primary residence or $100,000 annual income. B) $1 million net worth including any equity in a primary residence and $100,000 annual income. C) $1 million net worth excluding net equity in a primary residence or $200,000 annual income. D) $200,000 net worth and $200,000 annual income.

Your answer, $1 million net worth excluding net equity in a primary residence or $200,000 annual income., was correct!. Under Regulation D, the SEC defines an accredited investor as an individual who either has a net worth of at least $1 million (excluding net equity in a primary residence), or has had annual income of at least $200,000 ($300,000 joint return) in the last two years with the same or more expected this year.

An affiliate holding restricted stock wishes to sell shares under Rule 144. He has held the shares, fully paid, for 6 months, and the issuer has 2.4 million outstanding shares. Form 144 is filed on Monday, April 10, and the average weekly trading volume for the last four weeks is 24,500 shares per week. The maximum number of shares the customer can sell with this filing is: A) 24,250. B) 24,000. C) 23,000. D) 24,500.

Your answer, 24,000., was incorrect. The correct answer was: 24,500. Under Rule 144, after holding the fully paid restricted shares for 6 months, the affiliate can begin selling. For affiliates, volume restrictions always apply. They can sell the greater of 1% of the total shares outstanding or the weekly average of the prior 4 weeks' trading volume (the 4 weeks preceding the Form 144 filing). In this case, 1% of the total shares outstanding is 24,000 (1% × 2.4 million). The weekly average of the prior 4 weeks' trading volume is 24,500. Therefore, the most the affiliate can sell during the 90 days following the Form 144 filing is 24,500 shares.

Which of the following statements regarding a red herring is NOT true? A) A red herring is used to accept indications of interest from investors. B) The final offering price does not appear in a red herring. C) An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser. D) Additional information may be added to a red herring at a later date.

Your answer, An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser., was correct!. An agent is not permitted to accept funds from potential purchasers of a new issue before the effective date.

Where must the SEC's no-approval clause appear in a prospectus? A) On the cover. B) On the last page, under the name of the fund. C) Anywhere as long as it is conspicuous. D) It is not mandatory, but, if used, it must appear on the first page.

Your answer, Anywhere as long as it is conspicuous., was incorrect. The correct answer was: 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.

In a corporate underwriting, the syndicate letter is signed by which of the following? Issuer. Managing underwriter. Syndicate members. Selling group members. A) I and IV. B) I and II. C) II and III. D) II and IV.

Your answer, I and II., was incorrect. The correct answer was: II and III. The syndicate letter is signed by the managing underwriter and syndicate members and identifies these parties' rights and responsibilities.

Smith and Company, a FINRA member firm, is preparing to underwrite securities to be issued by KLC Corporation for a new business venture. For which of the following will Smith and Company be responsible? Filing the registration statement with the SEC and state regulatory bodies. Providing advice on the type of security to be issued. Distributing the security to the public. Providing advice on how KLC can best utilize the funds raised. A) I and IV. B) II and III. C) II and IV. D) I and III.

Your answer, I and IV., was incorrect. The correct answer was: II and III. The issuer is ultimately responsible for filing registration statements with federal and state regulatory bodies and has already determined how the money will be used. The underwriter confines his activities and advice to the type and sale of the securities.

Which of the following statements regarding a firm commitment underwriting are TRUE? An underwriting syndicate is a group of broker/dealers who have banded together to distribute new issue securities to the public and whose members have made financial commitments to the issuer. A selling group consists of 2 or more broker/dealers who have agreed to participate in the distribution of new issue securities to the public and have made financial commitments to the underwriting syndicate in advance. An underwriting syndicate is a group of broker/dealers who have banded together to buy new issue securities to be held by the syndicate members for investment purposes. A selling group consists of 2 or more broker/dealers who have agreed to participate in the distribution of new issue securities as selling agents only, without principal risk. A) II and IV. B) I and III. C) II and III. D) I and IV.

Your answer, II and IV., was incorrect. The correct answer was: I and IV. Members of an underwriting syndicate buy securities from issuers in principal transactions, assuming financial risk (in a firm commitment underwriting). Members of a selling group act merely as agents and assume no financial risk.

Under SEC Rule 145, which of the following events require(s) a corporation to receive the approval of its stockholders? Merger. Consolidation. Acquisition. Transfer of assets. A) I and IV. B) III only. C) I and II. D) I, II, III and IV.

Your answer, III only., was incorrect. The correct answer was: I, II, III and IV. Rule 145 requires that a corporation have its stockholders' consent in the event of a merger, consolidation, acquisition, reclassification, or transfer of corporate assets.

Within a firm commitment underwriting, which document details the responsibilities and liabilities of each firm? A) Underwriting agreement. B) Registration statement. C) Agreement among underwriters. D) Letter of intent.

Your answer, Letter of intent., was incorrect. The correct answer was: Agreement among underwriters. The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly-issued securities.

Which of the following acts requires full and fair disclosure of all material information about equity and debt securities offered for the first time to the public? A) Trust Indenture Act of 1939. B) Securities Investor Protection Act of 1970. C) Securities Act of 1933. D) Securities Exchange Act of 1934.

Your answer, Securities Act of 1933., was correct!. The Securities Act of 1933 regulates new issues of nonexempt securities sold to the public.

If a customer owns 7% of a publicly traded company's stock and his spouse owns 6% and wants to sell her shares, which of the following statements is TRUE? A) The spouse is an affiliate and Rule 144 applies. B) The spouse is not an affiliate and Rule 144 applies. C) The spouse is an affiliate and Rule 144 does not apply. D) The spouse is not an affiliate and Rule 144 does not apply.

Your answer, The spouse is not an affiliate and Rule 144 applies., was incorrect. The correct answer was: The spouse is an affiliate and Rule 144 applies. Together, the client and wife own 13% of the company's stock, so the spouse is considered an affiliate and is bound by Rule 144. If there is a 10% or more ownership interest among members of an immediate family, then all members are considered control persons (affiliates) subject to Rule 144.

Which of the following securities is NOT exempt from the Securities Act of 1933? A) U.S. government agency issues. B) Municipal issues. C) U.S. government issues. D) Real estate investment trusts.

Your answer, U.S. government agency issues., was incorrect. The correct answer was: Real estate investment trusts. REITs are nonexempt securities subject to the registration and new issue disclosure provisions of the Securities Act of 1933. Agency issues, U.S. government issues, and municipals are exempt.

A company is offering a private placement with the intent of selling shares to nonaccredited investors up to the 35 allowed for in Regulation D. Which of the following is TRUE? A) While the offering can be advertised to anyone, only accredited investors could be solicited to purchase shares B) The offering may not be advertised C) The offering can be advertised to all except the 35 nonaccredited investors D) Anyone may be solicited

Your answer, While the offering can be advertised to anyone, only accredited investors could be solicited to purchase shares, was incorrect. The correct answer was: The offering may not be advertised Advertising private placements is considered a solicitation to sell. If the securities are advertised, all purchasers must be accredited or the company must reasonably believe they are. In this instance, the intent is to sell to up to 35 allowable nonaccredited investors and with that intent clearly stated the offering could not be advertised to anyone.

All of the following would be excluded from raising capital under Regulation A+ EXCEPT A) a hedge fund specializing in small startup companies B) a private equity fund C) a venture capital firm raising money for small and medium size companies D) a small manufacturing company

Your answer, a private equity fund, was incorrect. The correct answer was: a small manufacturing company Under Reg. A+ intended to facilitate small to medium size companies raise investment capital, venture capital firms, private equity funds and hedge funds are specifically excluded.

All of the following must be part of a registration statement EXCEPT: A) the signatures of CEO, CFO, CAO, and majority of the board. B) identification of investors who own 5% or more of the company. C) a prospectus. D) a statement as to whether the company is involved in any legal proceedings.

Your answer, a prospectus., was incorrect. The correct answer was: identification of investors who own 5% or more of the company. The registration statement must identify investors who own 10% or more of the company.

If a broker/dealer is assisting in the registration of a stock issue, a registered representative of the firm may: A) accept an order. B) perform a private transaction for a customer. C) promise a specific number of shares. D) accept an indication of interest.

Your answer, accept an indication of interest., was correct!. When an issue is in registration during the cooling-off period, no sales may take place. The registered representative may, however, distribute preliminary prospectuses and accept nonbinding indications of interest.

Under FINRA rules, if a member firm receives an order to buy a new equity issue on behalf of an undisclosed principal from a bank, the member must: A) determine the identity of the purchaser. B) accept the order. C) reject the order. D) obtain a representation from the bank that the purchaser is not restricted.

Your answer, accept the order., was incorrect. The correct answer was: obtain a representation from the bank that the purchaser is not restricted. If a member receives an order from a conduit such as a bank, the member must make an inquiry as to whether the ultimate purchaser is restricted. It is not necessary to determine the identity and business affiliations of the purchaser.

During the 20-day cooling-off period for an initial public offering, all of the following are permitted EXCEPT: A) publishing a tombstone advertisement. B) accepting a deposit from a customer to purchase the new issue. C) accepting indications of interest. D) mailing a red herring to a customer.

Your answer, accepting a deposit from a customer to purchase the new issue., was correct!. Accepting a deposit from a customer during the cooling-off period is tantamount to accepting an order, which is prohibited until the offering is effective.

An intrastate offering is exempt from: A) blue-sky registration. B) state registration. C) federal registration. D) all registrations.

Your answer, blue-sky registration., was incorrect. The correct answer was: federal registration. An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration.

The Securities Act of 1933 requires securities issued by all of the following to register and be subject to prospectus provisions EXCEPT: A) foreign governments with which the United States maintains diplomatic relations. B) the U.S. government. C) investment companies. D) corporations involved in interstate commerce.

Your answer, investment companies., was incorrect. The correct answer was: the U.S. government. The Securities Act of 1933 does not require U.S. government securities to be issued by prospectus. The act covers the issuance of securities by companies engaged in interstate commerce. Investment company shares must be sold by prospectus. The exemption for securities issued by foreign governments is found in the Uniform Securities Act, not the federal law.

Private placements A) may be advertised if all of those solicited are accredited investors B) may be advertised under all circumstances C) may never be advertised under any circumstance D) can only be advertised when 35 or fewer of the investors are nonaccredited

Your answer, may never be advertised under any circumstance, was incorrect. The correct answer was: may be advertised if all of those solicited are accredited investors In order to solicit or advertise private securities offerings, all purchasers of the advertised securities must be accredited investors or the business must reasonably believe that the investors are accredited investors at the time of the sale.

A customer must present a signed representation letter stating that he is not a restricted purchaser prior to buying a new issue of: A) corporate bonds. B) U.S. government bonds. C) municipal bonds. D) common stock.

Your answer, municipal bonds., was incorrect. The correct answer was: common stock. New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Prior to buying an IPO, a customer must present a representation letter stating they are not a restricted person.

Rules regarding restricted persons state that each of the following is considered immediate family EXCEPT: A) parents-in-law. B) brothers and sisters. C) aunts and uncles. D) parents.

Your answer, parents-in-law., was incorrect. The correct answer was: aunts and uncles. Rules regarding restricted persons define "immediate family" as spouses, parents, brothers, sisters, in-laws, and children. Aunts and uncles are among those excluded.

A corporate offering of 200,000 additional shares to existing stockholders may be made through a: A) tender offer. B) secondary offering. C) warrant. D) rights offering.

Your answer, secondary offering., was incorrect. The correct answer was: rights offering. A rights offering is an offering of additional shares of stock to existing shareholders.

All of the following are required to be registered with the SEC EXCEPT: A) national stock exchanges. B) securities analysts. C) insurance companies offering fixed annuities to investors. D) securities associations, such as FINRA.

Your answer, securities associations, such as FINRA., was incorrect. The correct answer was: insurance companies offering fixed annuities to investors. Insurance companies are generally not required to be registered with the SEC.

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

Your answer, shares issued., was incorrect. The correct answer was: 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 nor the number of accredited investors who may purchase the shares.

The names of all of the following are included on tombstone ads EXCEPT: A) a syndicate member. B) the issuer. C) the managing underwriter. D) a member of the selling group.

Your answer, the managing underwriter., was incorrect. The correct answer was: a member of the selling group. A tombstone ad lists the syndicate manager(s) in bold print and all syndicate members in smaller print. Selling group members are not included on the tombstone.

A customer requests information on a new mutual fund and asks her registered representative to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted: A) if accompanied by an unmarked prospectus. B) under no circumstances. C) without restriction. D) if approved by a principal.

Your answer, without restriction., was incorrect. The correct answer was: under no circumstances. The prospectus is a legal document and may not be altered.