Series 79 Unit 7 - Registration Process

A deficiency letter issued by the SEC indicates that A) a preliminary prospectus needs to be modified. B) the issuer has not paid the required filing fees. C) the price range specified in its registration statement is unrealistic. D) a final prospectus needs to be modified.

A Explanation If a registration statement, which is the base document for preparing a preliminary prospectus, is found by the SEC to be deficient, the SEC will issue a deficiency letter to the issuer. Until the deficiencies are corrected, the 20-day cooling-off period is halted.

Once an investment banker has been engaged, but prior to filing any documentation with the SEC, the CEO of the issuer gives an interview to a business newspaper that appears three days before the effective date. In this interview, the CEO does not mention the offering but does say that the company is "attractive" because of the recent earnings. Under these circumstances, which of the following is true regarding her comment? A) It is a projection that may be considered gun-jumping. B) The CEO is engaged in a conflict of interest. C) It is permissible because no "numbers" are mentioned. D) It is permissible because the CEO did not specifically discuss the new issue.

A A gun-jumping violation is considered conditioning the market, which may involve an offer to sell securities prior the securities receiving their effective date by the SEC. Issuers and related parties can commit gun-jumping violations even if they do not explicitly offer to sell securities. Therefore, making projections of company performance during this period can be considered gun-jumping.

If QRS, Inc., makes a new offering not registered with the SEC to accredited investors, this arrangement is called A) a private placement. B) an intrastate offering. C) a Rule 144 offering. D) a secondary offering.

A A private placement, which is exempt from registration with the SEC, is an offering of a new issue to an unlimited number of accredited investors and, for larger offerings, a maximum of 35 nonaccredited investors.

Which of the following private placement promotions is permitted under Rule 506(c)? A) Announcement of an investment seminar target-mailed to a group of accredited investors B) Advertising copy approved by FINRA within 10 days of initial use C) No advertising or sales promotion material of any kind is permitted D) No general distribution of reprints of a favorable news article

A Advertisements for private placements under Regulation D, Section 506(c), are only allowed if the advertising is limited to potential qualified investors, in this case, an investment seminar open only to accredited investors.

Under FINRA Rule 5121, to be qualified to set the offering price, an independent underwriter must A) have been engaged in the investment banking or securities business for at least five years. B) have been approved by the SEC to act as such. C) not be located in the same general marketing territory as a firm issuing the securities. D) have been approved by FINRA to act as such.

A Among other criteria, a qualified independent underwriter is one that has been in the investment banking business for at least five years.

All of the following statements are true regarding Regulation A+ offerings except A) exhibits may not be used in connection with the offering. B) all purchasers must receive the offering circular at least 48 hours prior to confirmation of sale. C) information on the offering must be filed with the Corporate Financing Department. D) Form 1-A must be filed with the SEC at least 20 days prior to the effective date.

A Exhibits may be used in connection with Regulation A+ offerings, and copies must be filed with the SEC prior to use.

Which of the following state securities registration methods do issuers generally use when filing a Form S-1 with the view to offer nonexempt securities in multiple states? A) Coordination B) Qualification C) Shelf D) Filing

A Filing by coordination is available for many U.S. first-time securities issuers. The information filed with the SEC is also filed with the states in which the issue is to be sold. Once effective with the SEC, it is effective with the states. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Wallace, a registered representative working for LMNO Broker-Dealer, lives with his brother James. James is considering purchasing an IPO that Wallace's firm will be underwriting. May James follow through with the purchase? A) No, because he is an immediate family member living in the same household as Wallace. B) Yes, if the purchase represents less than 10% of James's investment portfolio. C) No, because Wallace is an immediate family member. D) Yes, but not through Wallace's firm.

A Immediate family members of a FINRA member firm's employee who live with their relative are judged by the same standards as their family member. FINRA Rule 5130 prohibits restricted persons and their immediate family members from investing in an IPO.

The responsibility for filing the required information with the Corporate Financing Department rests with A) the syndicate manager. B) the legal counsel for the issuer. C) the issuer. D) the legal counsel for the syndicate.

A Information to be filed with the Corporate Financing Department is filed by the syndicate manager on or about the date the registration statement is filed with the SEC.

All of the following securities trade in the over-the-counter (OTC) market except A) open-end investment companies. B) Nasdaq securities. C) American depositary receipts. D) government and agency securities.

A Municipal bonds, government and agency securities, and corporate securities (listed and unlisted) all trade in the OTC market. Foreign securities trade in the United States if the companies comply with SEC registration and disclosure requirements. Mutual fund shares (open-end companies) do not trade.

If a public offering of ABC common stock is to be immediately listed and traded on one or more securities exchanges, the maximum number of stabilizing bids that may be maintained by the underwriters per exchange is A) one. B) three. C) two. D) four.

A Only one stabilizing bid is allowed per market.

Under Regulation A, when must a broker-dealer furnish an offering circular to purchasers? A) 48 hours before the sale B) 72 hours before the sale C) 24 hours before the sale D) Concurrently with the mailing of the customer sale

A Regulation A requires that an offering circular be provided to purchasers at least 48 hours before the sale. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Which of the following underwritings may be used to "test the waters" before making a full registration with the SEC? A) Regulation A B) Regulation X C) Regulation D D) Regulation T

A Regulation A would allow an issuer to test the waters by providing factual information about the issuer, factual information about the management team, and a disclaimer that no money should be sent.

Reimbursement by the issuer of which of the following expenses borne by the underwriter would be considered compensation by the Corporate Financing Department? A) Solicitation costs B) Printing costs C) Blue-sky fees D) Legal fees

A Reimbursement from issuer to underwriter is commonplace and is not considered compensation if the expense is normally borne by the issuer. Blue-sky fees, legal fees, and printing costs are expenses normally paid by the issuer. Therefore, if paid by the underwriters and subsequently reimbursed, this is not considered compensation. However, the underwriters generally pay solicitation costs. If the underwriters are reimbursed for these expenses, the Corporate Financing Department will consider the reimbursement to be compensation.

Under NASD Rule 2711, a syndicate manager or co-manager may NOT publish a research report on the subject issuer for how many days following an IPO? A) 40 B) 30 C) 10 D) 20

A Rule 2711 imposes a quiet period of 40 days for IPOs and 10 days for additional issue offerings.

A passive institutional investor who acquires 5% or more of the outstanding stock of a public reporting company must file which of the following? A) Form 13G B) Form 144 C) Form 13D D) Schedule TO

A The Form 13G is filed by those institutions, such as mutual funds, that are statutorily restricted to form an aggressive posture against another company. It is less restrictive than the Form 13D.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who has violated the prohibition against insider trading is liable for a civil penalty of A) 3 times the amount of the profit gained or loss avoided on the transaction. B) twice the amount of the profit gained or loss avoided on the transaction. C) 10 times the amount of the profit gained or loss avoided on the transaction. D) the amount of the profit gained or loss avoided on the transaction.

A The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that the SEC may seek triple damages through the courts for violations of the insider trading rules. This means that the SEC may seek court action that imposes civil penalties of 3 times the profit gained or 3 times the loss avoided as a result of inside information.

A special meeting of the shareholders of LMN Corp. has been called to meet on June 10 for the expressed purpose of voting on a merger. When must LMN shareholders be given a prospectus describing terms and risk of the proposed transaction? A) Prior to June 10 B) Within 30 days after the merger vote is announced C) At least 10 business days before June 10 D) With sufficient advance notice to be able to read and understand the proposed transaction

A The SEC requires prospectus delivery for securities transactions involving corporate mergers, acquisitions, reclassifications, or asset transfers. Securities may not be sold or delivered in these transactions unless preceded by a prospectus, which means prior to the vote of securities holders.

Under NASD Rule 2711, a firm publishing a research report must disclose all of the following except A) whether the firm owns 1% or more of the subject company's debt securities. B) whether the firm managed or co-managed a public offering for the subject company within the past 12 months. C) whether the firm received investment banking fees from the subject company within the past 12 months. D) whether the firm expects to receive any investment banking fees from the subject company in the 3 months following publication.

A The firm must disclose whether it owned, at the close of the previous month, 1% or more of any class of the subject issuer's equity securities. Firms must also explain their rating systems and disclose whether analyst compensation is tied to the firm's investment banking revenues, the analyst or household members have any financial interest in the subject company, the firm has received fees for investment banking services or has managed or co-managed a public offering for the subject issuer within the past 12 months, and the firm either expects to receive or intends to seek any investment banking fees from the subject issuer in the 3 months following publication.

If a registered representative is found to have engaged in insider trading, the member firm can be fined up to three times the profit gained or loss avoided, or A) $1 million, whichever is greater. B) $2.5 million, whichever is greater. C) $500,000, whichever is greater. D) $5 million, whichever is greater.

A The member firm, which must have procedures in place to prevent insider trading, can be fined up to three times the profit gained or loss avoided, or $1 million, whichever is greater. The representative found guilty of insider trading could suffer criminal penalties up to $5 million and 20 years in prison.

Under SEC rules, a well-known seasoned issuer must have a public float value of at least A) $75 million. B) $250 million. C) $500 million. D) $100 million.

A The minimum threshold is $75 million.

SEC Rule 104 permits stabilization in which of the following offerings? A) Firm-commitment offerings B) Best efforts offerings C) Variable-price offerings D) At-the-market offerings

A Under Rule 104 of Regulation M, stabilization can occur only with regard to fixed-price offerings underwritten on a firm-commitment basis.

Under FINRA Rule 5121, all customer checks received to purchase newly issued shares of a member firm A) must be placed in an escrow account. B) must be placed in a reserve account under SEC Rule 15c3-3. C) may be pledged to a bank to support member indebtedness. D) may be immediately placed in a syndicate account of the member firm.

A When a member firm itself goes public, customer checks must be placed in an escrow account pending a net capital computation. If the firm's capital is below 120% of minimum or its AI-to-NC ratio exceeds 10:1, the offering is canceled, and the checks must be returned to the purchasers.

Under Regulation FD, if an officer of an issuer makes an unintentional disclosure of nonpublic, material information to an institutional investor, the issuer A) must promptly make public disclosure of the same information. B) must file Form 8-K at or prior to month end. C) is not required to take any specific action because the disclosure was unintentional. D) must prepare and distribute a press release by the close of business on the following day.

A Whenever an issuer unintentionally discloses nonpublic, material information to any person outside the issuer, the issuer must promptly make public disclosure of the same information.

ABC company is issuing new shares as part of a stock split. These new shares A) do no need to be registered. B) must be registered within 30 days of distribution. C) must be registered prior to distribution. D) must be registered only in the state where ABC is headquartered.

A SEC Rule 145 exempts shares being issued as part of a stock dividend, stock split, or change in par value of existing shares from the registration process of the Securities Act of 1933.

According to Regulation M, a syndicate manager may reserve the right to reclaim a selling concession from a syndicate member when securities originally sold by the syndicate member are purchased in a stabilizing bid transaction. This is known as A) a penalty-free bid. B) a penalty bid. C) primary market making. D) passive market making.

B A penalty bid is used to minimize sellbacks of public offering stock at the stabilizing bid. The penalty is a return of the concession earned.

Which of the following statements regarding red herrings are true? - They may be used to obtain indications of interest. - They may be sent out with sales literature. - They contain the final offering price. - Their use ends when the offering becomes effective. A) II and IV B) I and IV C) I and III D) II and III

B A preliminary prospectus, or red herring, is used only during the cooling-off period. The red herring does not contain the final price; offerings are priced immediately before the effective date.

Form 8-K must be filed by A) registered broker-dealers. B) registered domestic issuers. C) registered investment advisers. D) registered investment companies.

B Form 8-K filings are required for domestic issuers, registered under the Act of 1933, to report newsworthy events to the SEC. Issuers of ADRs, as well as investment companies and investment advisers, are exempt from having to file.

If the customers of a selling group member sell into a penalty stabilizing bid, the selling group member must pay back to the underwriter A) the reallowance. B) the concession. C) the spread. D) the give up.

B If selling group members liquidate into the stabilizing bid, they may be required to return the concession they were originally paid.

Which of the following best describes a PIPE transaction? A) A self-underwriting where issuer employees sell the issue B) An offering in which the securities are restricted (once they are sold and the registration is effective, public resale may begin) C) An offering sold principally to non-U.S. residents D) An offering that complies with Rule 504 of Regulation D

B In a PIPE (private investment in public equity), investors purchase securities directly from a publicly traded issuer in a private placement. The securities are restricted and cannot be immediately resold. After the closing of this transaction, the issuer prepares and files a registration statement with the SEC for the securities issued in the PIPE. Once effective, public resale of the PIPE securities may begin.

Under the intrastate offering rule (Rule 147), when may a resident purchaser of securities resell them to a nonresident? A) None of these B) At least nine months from the end of the distribution C) Three months after the first sale made in that state D) Six months after the last sale made in that state

B In an intrastate offering, a purchaser of the issue may not sell the securities to a resident of another state for at least nine months from the end of the distribution.

A company has filed a registration statement with the SEC for an initial public offering of its common stock. A registered representative can - send a research report on the company to customers. - take indications of interest from customers. - send a preliminary prospectus to each of customers. - take orders for the stock from customers in cash accounts only.

B New issues can be sold only by prospectus, and indications of interest can be taken when the issue is in registration. During the registration period, only the preliminary prospectus may be sent to clients. Sales literature, such as research reports, may not be distributed, nor may orders be taken while the IPO is in registration.

All of the following are considered insiders under the Securities Exchange Act of 1934 except A) nonaffiliated directors. B) owners of 10% or more of the corporation's debt securities. C) corporate officers. D) owners of 10% or more of the corporation's equity securities.

B Officers, directors, major shareholders (equity owners), and their immediate family members are insiders.

A senior official of an issuer learns that nonpublic information was disclosed to an institutional shareholder of the issuer and/or an analyst covering the issuer at a private meeting. To avoid violating Regulation FD, the issuer must do which of the following? A) Nothing need be done as long as no trading is done based on the selective disclosure. B) Promptly disclose the information no later than 24 hours after discovery. C) Disclose the selective disclosure in its next SEC filing. D) Obtain affidavits from those who the information was disclosed to.

B Regulation FD prohibits selective disclosure to analysts and institutional shareholders. The disclosures must be made to all shareholders of the issuer.

Refer to Exhibit 9. A nonaffiliated investor purchasing units of Albacore Industries, Inc., may sell their securities A) immediately. B) after 6 months. C) after 12 months. D) 90 days after the last sale.

B Restricted securities sold to nonaffiliates pursuant to Regulation D have a 6-month holding period.

An offering of securities in compliance with Rule 144A is sold primarily to A) foreign individual investors. B) qualified institutional buyers (QIBs). C) American individual investors. D) all of these.

B Rule 144A allows securities to be sold to QIBs without having to meet the holding period or volume requirements of Rule 144.

SEC Rule 145 exempts which of the following from registration? - Stock resulting from a stock split - Stock resulting from a stock dividend - Stock issued in connection with an acquisition - IPO in which the entire amount is being sold by officers A) I and III B) I and II C) II and IV D) III and IV

B Rule 145 exempts (from registration) additional shares resulting from stock splits or stock dividends. Stock issued in connection with an acquisition must be registered, as must stock in an IPO.

Under Sarbanes-Oxley (SOX), who must certify that the annual and quarterly reports are accurate and complete? - The chief executive officer - The board of directors - The chief financial officer - The corporate treasurer A) I, II, and III B) I and III C) II, III, and IV D) I, II, III, and IV

B SOX mandates that senior executives take individual responsibility for the accuracy and completeness of their corporate financial reports. They may not claim that they were the victims of incompetent subordinates.

Shares sold to a U.K. resident in a Regulation S offering may not be resold to a U.S. resident for A) 3 months from the offering date. B) 12 months from the offering date. C) 6 months from the offering date. D) 9 months from the offering date.

B Shares sold in a Regulation S offering are generally restricted for resale to a U.S. resident for 12 months from the offering date.

The Sarbanes-Oxley Act of 2002 deals with all of the following issues except A) internal control assessment. B) standardization of financial reporting to the SEC. C) auditor independence. D) corporate conflicts of interest.

B Standardization of financial reporting to the SEC is covered under Regulation SK. Sarbanes-Oxley, however, established enhanced standards for company boards, management, and public accounting firms and covered such issues as auditor independence, corporate governance, internal controls assessment, and enhanced financial disclosure.

According to FINRA's Corporate Financing Department, stock acquired as compensation will not be considered unreasonable if the amount does not exceed what percentage of the total offering? A) 15% B) 10% C) There is no limitation D) 5%

B The Corporate Financing Department considers shares acquired by an underwriter in excess of 10% of the total offering to be unreasonable compensation.

The over-the-counter (OTC) market could be characterized as what type of market? A) Auction B) Dealer C) Primary D) First

B The OTC market is a dealer market.

Which of the following acts requires corporate public issuers to send annual reports to their shareholders? A) Trust Indenture Act of 1939 B) Securities Exchange Act of 1934 C) Securities Investors Act of 1970 D) Securities Act of 1933

B The Securities Exchange Act of 1934 requires public issuers to inform the shareholders of their operations at least on an annual basis. Said reports should include a statement of the company's financial condition (i.e., balance sheet and income statements). The act further requires public companies to provide proxies to all shareholders regarding any action that requires a vote of the shares outstanding.

A research analyst attends an analyst-only meeting sponsored by ABC Corp. After listening to presentations made by various ABC officers, the analyst changes his opinion of the company. Under Regulation FD, which statement is true? A) The analyst can share his revised opinion with other analysts in attendance at the meeting. B) The analyst can share his revised opinion with his supervisor when he returns to his firm. C) The analyst cannot revise his opinion until the information obtained at the meeting has been publicly disseminated. D) The analyst cannot revise his opinion without the consent of his employer.

B The analyst can revise his opinion at any time but cannot share it with anyone outside of his firm until the information on which it is based is available for public evaluation. Other analysts are considered part of the general public.

Reasons why a corporation might issue a convertible preferred stock would include A) tax savings to the issuer. B) giving those shareholders an opportunity to participate in the future success of the company. C) a lower cost to the issuer than would be incurred by the issuance of convertible bonds. D) giving those shareholders the ability to convert into the issuer's bonds.

B The benefit of any convertible security, bond or preferred stock, is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond and, because preferred dividends are an after-tax outlay, there are no tax savings as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.

A security purchased under the provisions of Regulation S may be resold A) in the United States after being held for two years. B) immediately in any SEC-designated offshore securities market. C) only after regulatory approval from the SFA. D) in any non-U.S. jurisdiction after being held for 180 days.

B There is a holding period of 12 months before a security sold pursuant to Regulation S may be resold in the United States. However, the security may be resold immediately in any SEC-designated offshore securities market.

If XYZ Corporation intends to offer stock in a public offering, it must do all of the following except A) file a registration statement. B) publish a tombstone advertisement. C) register the securities with the SEC. D) issue a prospectus.

B Tombstones are advertisements often appearing in business newspapers to publicize new issues and are generally placed by a syndicate manager. They are not required.

The maximum amount of securities that can be offered under Tier 1 Regulation A+ is A) $50 million per issue but no more than $15 million per selling affiliate. B) $20 million per issuer but no more than $6 million for selling affiliates. C) $20 million per issuer but no more than $15 million for all selling affiliates. D) $50 million per issue but no more than $6 million per selling affiliate.

B Under Regulation A+, the dollar limit on Tier 1 sales is $20 million per issuer in any 12-month period. Persons affiliated with the issuer may sell up to $6 million.

Which of the following regarding forward-looking statements are true? They may be used in preliminary prospectuses. They may not be used in preliminary prospectuses. They may be used in final prospectuses. They may not be used in final prospectuses. A) I and IV B) I and III C) II and IV D) II and III

B Under Section 21E of the Act of 1934, the SEC allows issuers to use forward-looking statements in annual reports to shareholders, as well as in prospectuses and proxy material.

Which of the following is(are) true of the cooling-off period? - It is a minimum of 20 days. - During the cooling-off period, the syndicate may forward a preliminary prospectus, also known as a red herring. - The syndicate may accept indications of interest, which are nonbinding on all parties. - The syndicate may place a tombstone. A) I only B) II, III, and IV C) I, II, III, and IV D) I, II, and III

C Once the registration statement is filed, the issuer enters into a 20-day cooling-off period, sometimes called the waiting period. During this period, the SEC reviews the statement for full and fair disclosure. The waiting period is intended to provide time during which the investing public and other member firms will have the opportunity to become informed about the new issue without having to make an immediate decision.

Which of the following statements are true regarding Regulation D, Section 506 (b) exempt offerings? - There are limitations on the number of purchasers, either accredited or nonaccredited. - There are no limitations on the number of accredited purchasers but are for nonaccredited. - General solicitation or advertising is permitted for marketing securities. - All purchasers must receive "restricted securities." A) I and III B) I and IV C) II and IV D) II and III

C A Rule 506(b) offering can raise an unlimited amount of money and sell securities to an unlimited number of accredited investors. But the offering can sell to no more than 35 nonaccredited investors. The offering under Rule 506(b) is subject to the following requirements: Securities may not be sold to more than 35 nonaccredited investors. Purchasers in the offering receive "restricted securities." The offerings are subject to "bad actor" disqualification provisions. They may not use general solicitation or advertising for marketing the securities. SEC Form D must be filed within 15 days after the first sale of the securities.

According to the Insider Trading and Securities Fraud Enforcement Act, contemporaneous traders are all of the following except A) noninsiders. B) persons who make trades at approximately the same time as inside traders. C) corporate employees. D) persons granted the right to sue inside traders for damages under the act.

C According to the Insider Trading and Securities Fraud Enforcement Act of 1988, contemporaneous traders are corporate outsiders who make trades at about the same time as insiders. They are granted the right to sue inside traders for damages sustained.

Which of the following statements are true regarding a Rule 147 offering? - All shares being offered must be primary shares. - Sales by affiliates are permitted. - Form 147 must be filed with the SEC at least 10 business days prior to the effective date. - Form 147 must be filed with the SEC at least 20 calendar days prior to the effective date. A) I and IV B) II and IV C) I and III D) II and III

C All shares must be primary shares. In addition, Form 147 must be filed with the SEC at least 10 business days prior to the effective date.

For a new issuer, notification of a sale under Regulation A+ in the form of an offering circular must be filed with the SEC how many calendar days before the initial offering? A) 30 B) 10 C) 21 D) 5

C Companies that have not previously sold securities under a qualified Regulation A+ offering may submit a draft offering statement for confidential SEC staff review. The nonpublic draft offering statement and any amendments to it must be publicly filed on EDGAR no less than 21 calendar days before the qualification of the public filing.

C XYZ Company files a registration statement on June 15 with the SEC for its IPO. Fifteen days prior to filing, the company met with two industry professionals and updated them on its plans for the offering. After receiving a favorable analysis, the company officials felt more convinced of the price target. Is this allowed? A) Yes, provided the same information is added to an amended registration. B) Yes, provided a free-writing prospectus is filed in a timely manner. C) No, it is considered gun-jumping. D) No, it is considered a cooling-off period violation.

C During the 30-day period prior to an issuer's filing a registration statement, some communications by issuers are allowed, but they may not mention a securities offering connected to the registration. This is considered a gun-jumping violation. Note that the registration and prospectus have not yet been filed, so this type of communication cannot be corrected by filing a free-writing prospectus.

Under the Securities Act of 1933, the Securities and Exchange Commission has the authority to - issue stop orders, - approve new issues, - review standard registration forms, - review new issue pricing, A) I and II B) II and III C) I and III D) II and IV

C During the cooling-off period, the SEC reviews registration statements and may issue stop orders. The SEC does not approve securities; it only clears them for distribution to the public.

Which of the following statements regarding a member firm going public are true? - Employees of the member may purchase shares at the offering price. - Employees of the member are prohibited from purchasing shares at the offering price. - The member is permitted to negotiate repurchase agreements with customers who purchase the shares. - The member is not permitted to negotiate repurchase agreements with customers who purchase the shares. A) II and IV B) I and III C) I and IV D) II and III

C FINRA Rule 5130 does not apply to the issuing member and its employees, and repurchase agreements are never permitted with respect to nonexempt securities.

If the syndicate manager is advised by the Corporate Financing Department that the underwriter's compensation in a proposed offering is unfair or unreasonable, the manager must immediately A) cancel the offering. B) notify the issuer. C) notify the other members of the underwriting group. D) notify Nasdaq.

C If notified by the Corporate Financing Department that the compensation is unreasonable, the syndicate manager must immediately notify the other members of the underwriting group.

Changes in stock ownership by insiders must be reported to the SEC A) by the 15th day of the following month. B) by the 10th day of the following month. C) within 2 business days of the change. D) within 10 calendar days of the change.

C Insiders are required to report changes in their holdings to the SEC on Form 4 within two business days of the change.

Each of the following activities is permissible during a public securities underwriting waiting period except A) printing and distributing red herrings. B) a registered representative offering securities by telephone. C) publishing or broadcasting general newspaper and/or radio advertisements. D) publishing tombstone advertisements in a financial daily newspaper.

C It is not permissible during the 20-day cooling-off period to publish and distribute general advertisements. Each other activity is acceptable.

Ten days before going public, an online media company releases financial projections for future subscriber growth. Is this a violation? A) Yes, it is a gun-jumping violation. B) No, because the company is not yet public. C) It depends on whether the projections are part of normal business activities and are accurate. D) Yes, it is a cooling-off period violation.

C It usually is not a violation for an issuer to engage in normal business activities before an IPO. Examples include publishing regular financial updates, factual reports, and communications involving marketing activities. However, releasing information that specifically references the upcoming offering is not allowed during the quiet period. Releasing sensitive or overly optimistic financial projections also could be problematic.

Under Section 13(d) of the Securities Exchange Act of 1934, a person who acquires more than 5% of a class of securities registered under the act must, within 10 days, file a report of beneficial ownership with all the following except A) the exchange where traded. B) the issuer. C) FINRA. D) the SEC.

C Persons who own more than 5% of the outstanding equity securities of a registered issuer are known as interested persons under the act. These persons are required to file a Schedule 13D report of beneficial ownership with the issuer, the exchanges, and the SEC within 10 days of reaching the greater than 5% level.

Under Regulation D, Rule 504 offerings deal with a sale of securities A) without regard to dollar amount. B) not exceeding $1 million. C) not exceeding $10 million. D) not exceeding $5 million.

C Regulation D offerings are exempt transactions under the Act of 1933. Rule 504 deals with private placements in which the dollar amount to be sold is $10 million or less. Rule 506(b) and 506(c) deal with private placements in which there is no ceiling on the dollar amount sold.

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) 6 B) 18 C) 9 D) 12

C Rule 147 stock cannot be sold to a nonresident of the state for a period of 9 months from the last date of sale by the issuer.

An issuer or broker-dealer selling private placement securities under Rule 506(b) is permitted to advertise A) in a general news medium. B) through a seminar or meeting that is open to the public. C) under none of the these circumstances. D) through a letter, circular, or any other written communication sent to the general public.

C Rule 506(b) prohibits general advertisements. These advertisements usually take the form of seminars open only to qualified investors.

Under the Sarbanes-Oxley Act of 2002, the officers signing the financial statements of a reporting company must certify that they have evaluated their internal controls within the previous A) 60 days. B) 120 days. C) 90 days. D) 30 days.

C Section 302 of SOX requires that signing officers certify that they have reviewed all periodic financial reports, that they do not contain any material untrue statements or omissions of material facts, and that they have evaluated their internal controls within the previous 90 days and have reported on their findings.

The Sarbanes-Oxley Act of 2002 requires publicly traded companies to do all of the following except A) disclose all material off-balance sheet liabilities. B) require that newly appointed officers file Form 3 with the SEC. C) review the collateral underlying all loans made by the company to officers. D) publish information concerning the adequacy of their internal accounting controls.

C Section 402 of SOX prohibits personal loans made to officers by the company. All of the other statements are true.

At a social gathering, an officer of a publicly traded company confides to his neighbor, a registered representative, that his company will announce a major acquisition in the coming week. Which of the following statements regarding the SEC's insider trading rules is true? A) The officer is in violation. B) The registered representative is in violation. C) Neither the officer nor the registered representative is in violation. D) Both the officer and the registered representative are in violation.

C Simply giving someone material, nonpublic information (while imprudent) is not a violation. However, if the information is used to trade for profit or to avoid a loss, both the tipper and the tippee would have violated the law.

Under Sarbanes-Oxley, the statute of limitations for bringing a suit alleging fraud in connection with an offering of securities is A) three years. B) two years. C) five years. D) six years.

C Suits alleging fraud in connection with any offering of securities must be brought within two years after the discovery of the violation but no later than five years after such violation.

The Corporate Financing Department will not attempt to evaluate which of the following? - The fairness and reasonableness of the terms and conditions of members' participation in an underwriting - The fairness and reasonableness of the public offering price - The fairness and reasonableness of a compensation arrangement between underwriters and an issuer - The investment merits of securities being underwritten A) I and III B) I and IV C) II and IV D) II and III

C The Corporate Financing Department specifically does not pass on the fairness of the POP or the merits of an underwriting.

Which of the following statements regarding the sale of securities under the provisions of Rule 144 are true? Adequate current information regarding the issuer must be available. If restricted stock acquired under an investment letter agreement is involved, the stock must have been held for at least three years. The stock must be fully paid. There are no volume restrictions for control persons. A) II and III B) II and IV C) I and III D) I and IV

C To sell unregistered stock under Rule 144, the shares must be held fully paid for six months and there must be current information available regarding the issuer (e.g., the issuer is filing reports with the SEC). Control stock is always subject to volume restrictions.

An issuer of securities under Rule 147 must do all of the following except A) place a legend on the securities stating that they have not been registered under the Securities Act of 1933 and that resale is limited. B) issue stop transfer instructions to the transfer agent barring certificate cancellation and reissuance in the name of any nonresident of the state, with such in effect for 9 months. C) obtain the purchaser's signature on an investment letter in which the buyer agrees to hold the securities for a minimum of 9 months, after which they may only be sold in accordance with volume limitations imposed under Rule 144. D) obtain a written representation from each purchaser as to that person's residence.

C Under Rule 147, a written statement as to state of residence must be obtained and the securities will be restricted for a nine-month period. The transfer agent must be notified, and the fact that the securities are unregistered must be noted on the certificates. Rule 147 securities must be held for nine months before being sold out of state, but they can be sold immediately to another resident. Rule 144 does not apply.

Under SEC Rule 134, a tombstone advertisement includes all of the following except A) the public offering price. B) number of shares to be sold. C) net proceeds to the issuer. D) names of the syndicate members.

C Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.

Institutional investment managers must disclose their holding on Form 13F with the SEC if they have A) a portfolio of at least $100 million. B) more than 10% of the outstanding voting securities of a reporting company. C) an equity portfolio of at least $100 million. D) a portfolio of at least $50 million.

C When an institutional money manager with at least $100 million in equity securities under discretionary management acquires at least 5% of the outstanding voting securities of a reporting company, the requirement for filing Form 13F is triggered. This form must be filed within 45 days of the end of the quarter.

A new issue of common stock has been filed with the SEC, and a final prospectus can be found on the SEC website. This information has been given to a customer interested in the securities. In this instance, the access-equals-delivery requirements regarding that prospectus A) have been met for equity issues only. B) have not been met, as a prospectus must always be physically delivered. C) have been met for mutual funds only. D) have been met.

D A prospectus must precede or accompany a security for sale and will be deemed so if the final prospectus has been filed with the SEC. Because prospectuses filed with the SEC can be viewed on the SEC website, the access-equals-delivery requirement is satisfied.

A person must file a statement with the SEC if which of the following occurs? - When an unaffiliated entity acquires more than a 5% equity interest in a reporting company. - When a person obtains more than a 5% interest in the equity securities of an issuer with no view or purpose of effecting a change or influence in the control of a public reporting company. - When a registered investment company acquires more than a 5% equity interest in a public reporting company. - When an issuer purchases more than 3% of its common stock through a 10b-18 corporate buyback. A) I and II B) I only C) I, II, III, and IV D) I, II, and II

D Each of these persons must file a statement. Schedules 13D and 13G are referred to as a "beneficial ownership report." When a person or persons acting in concert acquire beneficial ownership of more than 5% of a company's equity securities registered under the SEA of 1934, they are required to file a Schedule 13D with the SEC. If a person is, for example, a bank, a broker-dealer, or an investment company, they too have to file but only the abbreviated Schedule 13G because they are largely precluded from purposefully effecting changes in control or influencing control of the company. Schedule 13D reports must be filed within 10 days after the purchase. The schedule is filed with the SEC and the issuer, as well as each exchange where the security is traded. Any material changes in the facts contained in the two schedules require a prompt amendment.

The XYZ Firm is brought into a new underwriting syndicate and as part of this association will be doing a follow-on offering for a mid-sized company. There will be a total of 10,000,000 new shares, of which XYZ will be taking 1,000,000. According to Rule 5130, which of the following is true? A) All XYZ's representatives are restricted. B) XYZ's portion of 10% requires the managing underwriter to sign off on any XYZ representative to participate as an investor. C) Any broker-dealer except the underwriters may freely participate. D) There are no 5130 restrictions to the representative's participation as investors.

D FINRA Rule 5130 only applies to a new issue, which is defined by FINRA as any initial public offering of equity securities. The rule does not apply to additional issue offerings.

All of the following statements regarding Regulation A+ offerings are true except A) the cooling-off period is 20 calendar days. B) sales by affiliates are limited to $1.5 million. C) any retail communication to be used must be filed with the SEC. D) information on the offering is not filed with the Corporate Financing Department.

D Form 1-A is filed with the SEC 20 calendar days prior to the effective date. Any exhibits to be used must be filed with the SEC. Information on the offering must be filed with FINRA's Corporate Financing Department.

When is a Form 13-D filing made? - When an unaffiliated entity acquires a 5% or more interest in an issuer - When an insider acquires a 5% or more interest in the employing issuer's securities - When an investment company acquires a 5% or more interest in an issuer - When the issuer repurchases 5% of its securities A) I, II, and III B) I, II, III, and IV C) I and II D) I only

D Form 13-D is filed when an unaffiliated entity acquires a 5% or more interest in an issuer. Investment companies would file Form 13-G. Insiders would file Form 4.

Standby purchasers are not subject to FINRA Rule 5130 provided which of the following is done? - The standby arrangement is disclosed in the final prospectus. - The standby arrangement is in writing. - The syndicate manager represents, in writing, that it was unable to find any other purchasers for the securities. - The securities are locked up for three months. A) II and III B) II and IV C) I and III D) I, II, III, and IV

D If the issue is not moving well, the syndicate manager may allow standby purchasers (individuals or firms who would otherwise be restricted under FINRA Rule 5130) to buy at the offering price. Securities purchased in a standby arrangement are not subject to FINRA Rule 5130, provided the arrangement is disclosed in the final prospectus and the syndicate manager represents in writing that it was unable to find any other purchasers for the new issue. Securities purchased pursuant to a standby arrangement are subject to a three-month lockup.

A research report distributed by a member firm need not disclose that the firm A) was a managing underwriter of the company's stock within the past 12 months. B) has a 1% interest in the issuer. C) is a market maker in the issue. D) was a selling group member in an underwriting of the company's stock within the past 12 months.

D In its research report on a company, the member firm must disclose whether it has any financial interest in the company (e.g., owning the company's stock, owning call options, or having acted as an underwriter in an offering of the company's stock). However, the member firm need not disclose that it was a selling group member in an underwriting of the company's stock.

Your firm is the managing underwriter for a new issue of ABC common stock. Certain information relating to the terms of the offering must be filed with FINRA within A) seven business days of filing a registration statement. B) three business days of filing a registration statement. C) five business days of filing a registration statement. D) one business day of filing a registration statement.

D In order to allow FINRA to determine the fairness and reasonableness of the compensation to be received by the underwriters, the syndicate manager, within one business day of filing a registration statement with the SEC, must file information on the terms of the offering with FINRA.

Officers and directors of a publicly traded issuer are prohibited from doing which of the following? - Shorting the issuer's stock - Shorting the issuer's stock against the box - Taking short-swing profits on the issuer's stock - Writing covered calls on the issuer's stock A) II and IV B) I and II C) III and IV D) I and III

D Insiders cannot short the issuer's stock, nor can they take short-swing profits. A short-swing profit is a profit earned by buying and selling the issuer's stock in a six-month period or less, and any short-swing profit must be returned to the issuer. Insiders are permitted to short the issuer's stock against the box provided the position is closed out within 20 days. Writing calls against a long stock position is an acceptable income strategy.

A broker-dealer delivered a live research presentation to a group of prospective investors. The presentation consisted of a Q&A "chat" with the investors in real-time about an accompanying offer. During the chat, everyone is made aware that the chat portion is being recorded. The recording is then replayed the next business day for a different group of potential investors. Which of these events would be considered "graphic communications?" A) Neither the live chat nor the tape recording B) The live chat only C) Both the live chat and the tape recording D) The tape recording only

D Live real-time communication is not considered graphic communication, which is treated the same as written communications for securities offering and prospectus delivery requirements. However, an electronic or taped version of a live presentation, not delivered in real time, is considered graphic communication. As such, it would be considered a free-writing prospectus and will be filed with the SEC.

All of the following offerings must be filed with the Corporate Financing Department except A) offerings where a member firm is going public. B) direct participation programs. C) rights offerings. D) unit trusts.

D Nonconvertible debt and nonconvertible preferred stock offerings are exempt if they are rated as investment grade. Also exempt are Regulation D offerings, U.S. government and agency securities, municipal securities, mutual funds, and unit trusts.

Under SEC rules, a Form 13-D filing is made to all of the following except A) the market where the security principally trades. B) the SEC. C) the issuer. D) shareholders of the issuer.

D Once an unaffiliated investor accumulates a 5% or more interest in an issuer, a Form 13-D filing is required. The filing is made to the issuer, the SEC, and the market where the security primarily trades. It is not made to shareholders of the issuer.

In determining the number of purchasers under Regulation D, which of the following are excluded? - A purchaser's relative whose home address is the same as the purchaser's - A trust or estate in which a purchaser owns 100% of the beneficial interest - A limited partnership formed for the express purpose of acquiring the securities - A person whose net worth exceeds $1 million A) II, III, and IV B) II and IV C) I and II D) I, II, and IV

D Only Rule 506 (b) offerings are limited to 35 nonaccredited investors. Excluded from this count are the relatives of an investor who shares the same household with the investor and trusts or estates owned 50% or more by the investor. Also excluded is anyone classified as an accredited investor. In addition, a business entity or partnership where the investor owns 50% or more of the equity is excluded from the count unless it was formed solely for the purpose of purchasing the offering's securities.

Regarding the purchase of new equity issues, restricted persons may A) purchase shares of a new issue only if they are employed by a broker-dealer as a registered representative on a part-time basis. B) purchase shares of a new issue only if they work for a bank. C) purchase shares of a new issue only in amounts that are not substantial in relation to the total number of shares being issued. D) not purchase shares of a new issue.

D Persons characterized as restricted persons are prohibited from purchasing shares of new issues.

With regard to private placement transactions under Regulation D, which of the following statements regarding a purchaser representative are true? - The representative must not be an affiliate, director, officer, or employee of the issuer or a 10% shareholder in the company. However, this prohibition is lifted if the representative is related to the purchaser by blood, marriage, or adoption. - The representative must be knowledgeable and experienced in financial matters and business affairs. - The representative must be acknowledged by the purchaser in writing as being that person's representative. - The representative must inform the purchaser of any affiliation with the issuer or any ownership relationship that may exist. A) III and IV B) I and III C) II and III D) I, II, III, and IV

D Regarding private placements, a purchaser representative may not be an affiliate, director, or employee of the issuer unless the person is related to the purchaser. A purchaser representative cannot own 10% or more of the issuer's stock and must be knowledgeable and acknowledged in writing by the purchaser.

Regulation S permits the sale of unregistered securities by A) U.S.-based issuers to U.S. residents. B) non-U.S.-based issuers to U.S. residents. C) non-U.S.-based issuers to non-U.S. residents. D) U.S.-based issuers to non-U.S. residents.

D Regulation S provides a safe harbor for U.S.-based issuers that sell securities outside the United States. As long as the provisions of Regulation S are met, the securities are exempt from registration with the SEC. To get the exemption, the issue must be sold in an offshore transaction to non-U.S. residents.

Under the provisions of Rule 144, what is the minimum holding period for the sale of control stock acquired through an open-market purchase? A) One year B) Six months C) Two years D) No holding period required

D Rule 144 governs sales by two different categories of people-affiliates (control persons) and nonaffiliates. The rule also applies to two categories of stock—registered and unregistered. Therefore, to answer questions concerning restrictions on stock sales under Rule 144, two issues are involved. In this question, the seller is an affiliate and the stock is registered. Therefore, the sale is subject to the volume restrictions imposed by Rule 144, but no holding period is required.

A broker-dealer issues research reports on a number of issuers on a quarterly basis. One of these issues is currently undergoing an underwriting when its scheduled research report is due. The broker-dealer does not engage in any investment banking activities nor receive compensation from any other broker-dealers. This broker-dealer A) may issue the report only to established business relationships. B) may not issue the report. C) may issue the report 30 days after the offering is complete. D) may issue the report.

D SEA Rule 137 allows nonparticipating broker-dealers to issue research reports on companies undergoing an offering if it is routine and they are not compensated by the investment bank

An issuer sells unregistered securities under the exemption provisions of Regulation D. If the entire issue is sold immediately, reports of sales on Form D must be made to the SEC within how many days of the first sale? A) 10 B) 20 C) 30 D) 15

D SEC Rule 503 requires that issuers of unregistered securities file Form D (Notice of Sales Made) with the SEC within 15 days of the first sale.

Which of the advertising or sales promotion activities described below would be permitted in conjunction with a Regulation D, Section 506 private placement? A) Staging of an investment seminar open to the public at which a number of private placement securities currently in distribution will be promoted B) Display advertisement to be run in the local newspapers announcing a private placement and inviting inquiries for more information C) Blanket mailing of a magazine reprint sent by a broker-dealer to all of the firm's customers that is highly favorable to the issuing corporation D) Announcement of a private placement and invitation to attend an investment information meeting sent to a select group of institutional investors

D The SEC's rule centers on keeping private placements out of the general public's view. Any advertisement or promotion that solicits buying interest in private placement securities and can be freely seen or read by average investors violates SEC rules governing the terms under which these distributions are permitted.

If a U.S. issuer conducts an offshore distribution of unregistered debt securities made in compliance with Regulation S, the minimum distribution compliance period to prevent flowback of the offered securities is A) 45 days. B) 10 days. C) 30 days. D) 40 days.

D The distribution compliance period for transactions involving nonreporting debt securities is 40 days. Equity securities that are registered have a DCP of 6 months if the issuer is a 1934 Act‒reporting company or one year if not.

None of the following transactions would be required to register under the Securities Act of 1933 except A) the sale of treasury securities to individual investors. B) a new issue of municipal bonds to individual investors. C) the sale of a private placement. D) the sale of open-end investment companies to individual investors.

D There are a number of exemptions available under the 1933 Act. Exempt securities include treasuries, municipal bonds, commercial paper, and commercial bank. Exempt transactions include small offerings (Regulation A), private placements (Regulation D), intrastate offerings (Rule 147) and overseas offerings (Regulation S). Open-end funds (i.e., mutual funds) are required to be registered.

To qualify for an exemption under Rule 147 (intrastate offering exemption), an issuer can hold no more than what percentage of its gross assets outside its home state? A) 40% B) 60% C) 80% D) 20%

D To qualify for a Rule 147 exemption, an issuer must meet the 80% tests: at least 80% of its assets must be located in the state, at least 80% of the proceeds must be used within that state, and at least 80% of its revenue must be derived in that state.

A member firm may sell a new equity issue of its own securities to all of the following except A) public customers. B) family members of owners, officers, and employees of the firm. C) owners, officers, and employees of the firm. D) employees of other full-service member firms.

D When member firms sell their own securities, FINRA Rule 5130 does not apply to the issuer's employees, but it does apply to the employees of other full-service member firms.