Wrong Questions ( Lesson 2)
Correct Answer: Written communication Explanation: By definition, a free writing prospectus is written communication other than a formal prospectus. The text of speeches and media events can be free writing prospectuses (written communications), even if the communications themselves are oral. Textbook Reference: See textbook section 9.6
A "free writing prospectus" is defined as any communication, other than a formal prospectus, that is also
Correct Answer: the company's internal controls have been certified Explanation: Sarbanes-Oxley Section 404 requires that, on an annual basis, the company's CEO certifies the firm's internal controls for financial reporting. Textbook Reference:
A Section 404 approval means
Correct Answer: Transfer Explanation: A pro rata distribution of securities is considered a transfer. Other examples of transfers include an exchange of assets in a dissolution, adoption of a board resolution within one year of a board vote, and a pre-existing plan for securities distribution.
A board of directors approves a pro rata distribution of securities, so that each existing shareholder of ABC corp. receives 10 shares of a spin-off company. This type of business combination is considered a
Correct Answer: This is a violation because no public market for the shares actually exists Explanation: "At the market" means that a clear public market exists, and that market is not controlled by the broker dealer making the offer, or a syndicate in which they participate. Under SEC Rule 15c1-8, such an offer is considered manipulative, deceptive or fraudulent if another market does not exist.
A broker offers to sell an investor shares in an oil and gas drilling program "at the market." The shares are sold by prospectus and all fees, commissions and costs are disclosed. The prospectus states that shares are only available from the offering syndicate, and they may only be redeemed by direct tender to the program sponsor. Which of the following is TRUE regarding this activity?
Correct Answer: The tape recording only Explanation: 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.
A broker-dealer delivers a live presentation to a group of prospective investors. The presentation consists of a "chat" with the investors in real-time about an offering. A tape recording of the chat is made, and it is then played one day later for another group of investors. Which of these events would be considered "graphic communications?"
Correct Answer: The research does not represent the dealer's initial coverage on the issuer or its securities Explanation: The Rule 139 exclusion is available only for research coverage that is ongoing and does not represent a broker dealer's initial coverage on the issuer or its securities.
A broker-dealer distributes issuer-specific research for a company that meets the requirements for using Form S-3 and which has filed all periodic reports required for the last 12 months. Under Rule 139, this research will not be considered an offer if the dealer distributes research in the regular course of business and
Correct Answer: I and II only Explanation: Under Rule 137, a provider or publisher of research will not be considered to be offering securities provided the provider/publisher is not connected to the issuer, the research is factual and not overly promotional, and similar research is published in the regular course of business. The research must be both independent and factual not a sales piece in disguise.
A broker-dealer publishes research that relates to an offering, but the broker-dealer does not have an arrangement or understanding with the issuers, selling security holders, or any other interested parties. Under Rule 137, such a research publisher will not be considered to be offering securities, provided that I. The broker-dealer publishes such research in the regular course of its business II. The research is not overly promotional III. The research does not express personal opinions
Correct Answer: Use a broker-dealer as intermediary Explanation: Only broker-dealers are allowed to offer investment advice or recommendations on crowdfunding offerings. Funding portals may not offer this service; neither may the issuer provide it directly. Before making a recommendation, the broker-dealer must conduct full suitability on the issue, as with any other security.
A crowdfunding issuer wishes to offer its stock to the public in a way that prospective investors will have access to investment advice and recommendations before committing. How can this be done?
Correct Answer: Form F-3 Explanation: The short-form for domestic issuers is Form S-3. The equivalent for foreign issuers is F-3. In SEC filings, the initial "F" designates a form for foreign issuers that corresponds to the "S" version for domestic issuers.
A foreign issuer wishing to file a "short-form" registration statement for newly issued securities would complete a
Correct Answer: I and II Explanation: Generally, corporate insiders are limited in the amount of securities they can sell over any 90 day period. However, if the individual has not been an insider for a period of at least 3 months and the shares have been held for at least one year, they can be freely sold. This is an exception to the rule.
A former affiliate of an issuer may sell their shares under Rule 144 after meeting which of the following conditions? I. The individual has not been an affiliate of the issuer for three months II. The individual has held the restricted securities for at least one year III. The individual has not been an affiliate of the issuer for six months IV. The individual has held the restricted securities for at least two years
Correct Answer: By affirmatively indicating a desire to forego suitability protections Explanation: The rule allows institutions that are subject to customer suitability information requirements to opt out by affirmatively indicating that it is willing to forego suitability protections.
A foundation has assets of $30 million and is subject to the customer suitability information-gathering standards of FINRA Rule 2111. How can the foundation "opt out" of providing this information?
Correct Answer: Due diligence is required of broker-dealers but not funding portals Explanation: Only broker-dealers are required to conduct extensive due diligence on issuers and the offering, prior to participating in the offering or making any recommendations. For funding portals, due diligence is optional. However, all intermediaries, including funding portals, must conduct background checks on the issuer's officers, directors and participants to identify any bad actors, as defined by the SEC.
A prospective investor wants to know if a crowdfunding offering in which she is interested has been vetted by an intermediary in an extensive "due diligence" process. The answer is
Correct Answer: I and III Explanation: In the proxy statement, the company must include information about the entities making the solicitation, the cost of the solicitation, and how costs of the solicitation are being paid.
A public company hires an independent firm to solicit shareholder votes for a proxy contest. The company wants shareholders to vote "yes." In its proxy statement, the company must disclose I. Information about the entities making the solicitation II. Why the firm is soliciting "yes" votes III. Information about the cost of the solicitation IV. Balanced information explaining consequences of voting "no"
Correct Answer: $7.5 million Explanation: Total O&O in DPP programs is limited to 15% of the deal's gross proceeds. For a $50 million offering, the limit would be $7.5 million.
A real estate Direct Participation Program raises $50 million in gross proceeds. What is the maximum amount that it may spend on total organization and offering expenses (O&O)?
Correct Answer: Only if it involves a vote of security holders Explanation: Any exchange offers made under tender rules, and involving a vote of securities holders, must also be made under proxy rules.
ABC Corporation is conducting an "exchange offer" with its own shareholders under tender rules. Under what circumstance is it required to comply with proxy rules?
Correct Answer: Unlimited Explanation: Crowdfunding is a very flexible way to raise capital, especially among an existing base of customers, acquaintances, investors, etc. There is no limit on the number of investors who can participate or the maximum or minimum amount of stock that each investor may purchase (subject to an annual limit per issuer). An unlimited number of investors can participate.
ABC Grocers, Inc. is a private company that wishes to raise investment capital from its thousands of customers in small amounts via crowdfunding. Its target raise is $500,000. By regulation, what is the maximum number of investors to whom it can sell stock in a crowdfunding offering, assuming the target is reached?
Correct Answer: 5 business days before pricing Explanation: "Restricted period" as defined in Rule 100 of Regulation M states that securities with an ADTV value of $100,000 or more of an issuer whose common equity has a public float value of $25 million or more is subject to a 1 business day restricted period. Those securities below this threshold are subject to a 5 day restricted period.
According to Regulation M, the restricted period for distributors of a common stock with an ADTV value of less than $100,000 and a public float of less than $25 million begins
Correct Answer: II and IV Explanation: Rule 506 says that if investors are non-accredited, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
According to the specifications of Rule 506 of Regulation D, a sophisticated investor is I. Accredited II. Accredited or non-accredited III.Credentialed as a professional in the financial or legal industry IV. Capable of evaluating the merits and risks of the prospective investment
Correct Answer: a natural person who has individual net worth of $500,000 at the time of purchase Explanation: Under Regulation D, a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase is an accredited investor.
Accredited investors include all of the following EXCEPT
Correct Answer: I, II and III only Explanation: Although Congress has not outlawed Golden Parachute payments or even excess golden parachute payments, they have added punitive measures to the tax law to discourage making excess payments. The formula shown in one of the answer choices is correct in terms of determining whether an excess golden parachute payment exists any amount in excess of three times the average compensation. The excess amount is subject to a 20% excise tax.
After a merger in which a change of control takes place an officer of the firm receives a golden parachute payment. Which of the following statements is true with regard to a golden parachute? I. If a termination payment is considered excissive, that amount will not be a tax-deductible expense to the party that pays it. II. If an excess parachute payment has been made the officer must also pay a 20% excise tax. III. An officer of a firm receives a golden parachute payment of $900,000. Her average compensation over the last five years was $200,000. In this situation, an excess golden parachute payment has been made. IV. Excess parachute payments can no longer be made.
Correct Answer: support for selective disclosure Explanation: Regulation FD, or Full Disclosure, is designed to improve transparency by prohibiting selective disclosure of inside information to analysts and institutional investors. It does this by requiring immediate public disclosure of information that is shared with analysts. The objective is to remove any information advantage from insiders.
All of the following are objectives of Regulation FD EXCEPT
Correct Answer: An individual investor with a securities portfolio of $75 million. Explanation: Under Rule 144A, Qualified Institutional Buyers (QIBs) are defined as: -Insurance Companies -Investment Companies -Business Development Companies -Investment Advisers -Broker dealers owning and investing discretionary assets of at least $10 million -Any other institution with discretionary assets of at least $100 million
All of the following investors would be considered Qualified Institutional Buyers EXCEPT
Correct Answer: If the underwriter chooses to purchase the entire amount of the offering, it is responsible for the unsold inventory Explanation: In a best efforts agreement, the underwriter agrees to sell as much of an issue as possible to the public at the public offering price. The underwriter can purchase only the amount required to fulfill its client's order, or the entire issue. However, if the underwriter is unable to sell all of the securities, it is not responsible for any unsold inventory. Best efforts underwritings are typically used when securities are considered relatively high risk.
All of the following statements describe a best efforts underwriting EXCEPT
Correct Answer: a shareholder who owns 7% of a company's voting stock Explanation: Affiliates, also called corporate insiders, are defined as officers, directors, or 10% shareholders of an issuer. The spouse of a corporate insider is also considered a corporate insider.
All of the following would be defined as affiliates EXCEPT
Correct Answer: 1,000,000 shares are considered to be primary shares. Explanation: A primary offering is where newly minted shares are being created. This will increase the total number of shares in the company and the company receives additional capital for their corporate treasury. In a secondary offering, the shares pre-exist. They were owned by others who will now be cashing out some of their previous interest. The CEO's shares and the shares being sold by ABC are secondary in nature. Note, there may still be other shares owned in private hands and not part of the public float.
An IPO of ZZZ Corporation will register 1,600,000 shares. ZZZ Corporation will sell 1,000,000 shares to the public and receive proceeds of $49,000,000 net of the underwriting spread. As part of the same offering ZZZ Corporation registers and sells on behalf of the CEO of the firm, 500,000 shares for $24,500,000 net of the underwriting spread. In addition, ABC Corporation's 100,000 shares of ZZZ will be registered and sold for $4,900,000 net of the underwriting spread. ABC had previously purchased the shares in a private placement. Which of the following choices is true regarding this deal?
Correct Answer: 3,000 shares Explanation: During the restricted period, a passive market maker's per day limit on net purchases is the greater of 30% of average daily trading volume or 200 shares.
An OTC issue has an average daily trading volume of 10,000 shares. During a restricted period, a passive market maker may not exceed what level of net purchases per day?
Correct Answer: I and IV Explanation: An affiliate must file notice with the SEC on Form 144 if he/she wishes to sell 5,000 shares or $50,000 in aggregate in any three-month period. In addition, the sale must take place within three months of filing the Form.
An affiliate must file a notice of a proposed sale under Rule 144 with the SEC under which of the following scenarios? I. The sale involves more than 5,000 shares in any three-month period II.The sale involves an unaccredited investor III. The sale takes place six months after the original allocation of shares IV. The aggregate dollar amount is greater than $50,000 in any three-month period
Correct Answer: $5,000 Explanation: Unless both income and net worth are $107,000 or above, the limit is the greater of $2,200 or 5% of the lesser of annual income or net worth. In this case, income is below the threshold and 5% of $100,000 = $5,000
An investor has an annual income of $100,000 and a net worth of $1 million. What is the annual limit that this investor can invest in all crowdfunding offerings?
Correct Answer: may sell securities without filing a registration statement with the SEC Explanation: Regulation D permits issuers to distribute securities in a private placement without filing a registration statement with the SEC provided they are not offered to the general public and follow the other rules as specified under Regulation D.
An issuer intending to distribute securities under Regulation D
Correct Answer: Direct Participation Program Explanation: FINRA Rule 2810 covers underwritings of Direct Participation Programs (DPPs) offered to the public. These programs typically are structured as partnerships to pass revenues and tax deductions directly through to limited partners.
An oil and gas drilling deal structured with a general partner who makes management decisions and several passive limited partner investors is referred to as a
Correct Answer: Quantitative suitability Explanation: Quantitative suitability is included in FINRA Rule 2111 as an expansion of existing suitability standards. Even if a series of transactions is separately suitable, it imposes suitability requirements on the pattern or series of trades.
An underwriter with "actual or de facto control" over a customer account must have reasonable basis for believing that a series of recommended transactions are not excessive or unsuitable. This is known as
Correct Answer: Yes, at least twice over the course of an offering Explanation: Any material changes in Form C disclosures must be updated twice: Once within five business days of reaching 50% of the company's target raise and then again within five days after reaching 100% of the target raise. Remember that the target raise amount is the key, because it triggers Form C updating requirements.
Are crowdfunding issuers required to update any material changes in the information contained in their Form C disclosures filed with the SEC?
Correct Answer: 214,250 Explanation: Under Rule 144, a corporate insider can seller the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks. In this case, 1% of the outstanding shares = 150,000 while the average weekly trading volume over the previous four weeks = 214,250. Therefore, a corporate insider could sell 214,250 shares.
Company N has 15,000,000 shares outstanding and the following trading data over the previous five weeks: Five weeks ago: 192,000 shares traded Four weeks ago: 200,000 shares traded Three weeks ago: 245,000 shares traded Two weeks ago: 187,000 shares traded Last week: 225,000 shares traded What is the maximum number of shares that could be sold by a corporate insider over the next three months?
Correct Answer: Reasonable basis suitability Explanation: The due diligence that the firm must conduct at the security level or product level, prior to recommending an investment to any investor, is called "reasonable basis suitability."
Each member firm must establish, based on adequate due diligence, that a recommendation to buy a given security or product is suitable for at least some investors. This requirement is known as
Correct Answer: I and IV Explanation: Underwriting compensation includes all types of compensation, from any source, paid as compensation to underwriters, broker-dealers, registered representatives and their affiliates. The one exception is for non-transaction based compensation paid to registered persons who perform only clerical or ministerial functions, not sales activities. Also, the expense associated with printing the prospectus or offering document is paid by the issuer.
In a Direct Participation Program, which of the following types of compensation paid to brokers are considered underwriter's compensation? I. Sales commissions II. Non-transaction compensation for clerical or ministerial functions III. Printing fees IV. Continuing fees and trail commissions
Correct Answer: Three days after the offering date Explanation: FINRA Rule 5130 requires the book-running manager to file an initial list of distribution participants and their underwriting commitments and also a final list. The final list is due not later than three business days after the offering date.
In a fixed price IPO, FINRA Rule 5130 requires the book-running underwriter to file with FINRA a final list of distribution participants and their commitments, by what deadline?
Correct Answer: the managing underwriter and the selling group members Explanation: A selected dealer agreement is used between the managing underwriter and selling group members that assist in the sale of a new issue without financial responsibility for any of the unsold securities.
In an underwriting of new securities, the parties to a selected dealer agreement are
Correct Answer: by primary dealers when purchasing government securities in Treasury auctions Explanation: Competitive bids are used by primarily dealers when purchasing government securities in Treasury auctions. In a competitive bid the issuer awards the contract to the underwriter with the best price and contract terms. Competitive bids may be used in IPOs and other offerings, though they are typically structured on a negotiated basis. Underwriters retain the risk of distributing the securities if their competitive bids are filled.
In an underwriting, a competitive bid is generally used
Correct Answer: II and IV Explanation: Any stock received that has not been SEC registered is, by definition, restricted stock. In addition, venture capital firms providing start-up funds for the issuer may also receive restricted shares.
Investors typically receive restricted securities through which of the following? I. Open market transactions II. Regulation D offerings III.Exercising listed options contracts IV. Compensation for professional services
Correct Answer: $475,000 Explanation: The total spread is the manager's fee of $.25 plus the $.85 full takedown, for a total of $1.10. The underwriting fee is a component of the full takedown, so is not taken into account in the calculation. As an underwriter, Jane Securities has a total allocation of 15% of 5 million shares, or 750,000 shares. It receives the full takedown for the shares that it sells and the underwriting fee for the shares sold by the selling group: 2/3 of allocation x 750,000 shares x $.85 = $425,000 1/3 of allocation x 750,000 shares x $.20 = $50,000 Total = $475,000
Jones Securities, Inc. is the lead underwriter for NewCo, which plans to sell 5 million shares of stock to the public at an offering price of $27.00 per share. The manager's fee is $.25, the underwriting fee is $.20 and the full takedown is $.85. Jane Securities is an underwriter in the transaction and has a 15% allocation. Of its allocation, it sells 2/3 of the shares directly to clients and the remaining third are sold by its selling group. What is the total compensation received by Jane Securities?
Correct Answer: $2.10 million Explanation: The total spread is the manager's fee of $.25 plus the $.85 full takedown, for a total of $1.10. The underwriting fee is a component of the full takedown, so is not taken into account in the calculation. As the syndicate manager, Jones Securities receives the full spread for the 1 million shares it sells and the manager's fee of $.25 for the remaining 4 million shares: 1 million shares x $1.10 = $1.1 million 4 million shares x $.25 = $1.0 million Total = $2.1 million
Jones Securities, Inc. is the lead underwriter for NewCo, which plans to sell 5 million shares of stock to the public at an offering price of $27.00 per share. The manager's fee is $.25, the underwriting fee is $.20 and the full takedown is $.85. Jones Securities successfully places 20% of the issue, with the remaining securities sold by other underwriters. What is the total compensation to Jones Securities?
Correct Answer: $129.5 million Explanation: The total spread to the syndicate is the manager's fee of $.25 plus the $.85 full takedown, for a total of $1.10. The underwriting fee is a component of the full takedown, so is not taken into account in the calculation. The issuer receives the offering price minus the spread: $25.90 per share x 5 million shares = $129.5 million
Jones Securities, Inc. is the lead underwriter for NewCo, which plans to sell 5 million shares of stock to the public at an offering price of $27.00 per share. The manager's fee is $.25, the underwriting fee is $.20 and the full takedown is $.85. What is the total proceeds received by NewCo?
Correct Answer: $1.10 Explanation: The total spread is the manager's fee of $.25 plus the $.85 full takedown, for a total of $1.10. The underwriting fee is a component of the full takedown, so is not taken into account in the calculation. The takedown includes both the underwriting fee and the selling concession.
Jones Securities, Inc. is the lead underwriter for NewCo, which plans to sell 5 million shares of stock to the public at an offering price of $27.00 per share. The manager's fee is $.25, the underwriting fee is $.20 and the full takedown is $.85. What is the total spread?
Correct Answer: Money market mutual funds Explanation: For non-institutional clients, the only type of transaction in which customer suitability information is not required is in money market mutual funds.
Part (b) of the Suitability Rule requires reasonable effort to obtain customer information for all non-institutional customers, except when the investment is limited to
Yes. Although Marty and Judy are immediate family members, Judy may purchase the IPO, but not through Marty's firm. Explanation: Although Marty and Judy are immediate family members, they do not materially support each other. Judy may purchase the IPO, but she cannot purchase the shares through Marty's firm, and Marty may not control the allocation of any shares to Judy,
Question: Marty is a registered rep with JKL Financial Inc. His sister Judy is an editor for a publishing house. May Judy purchase an IPO?
Correct Answer: Corporate insiders owning more than 10% of the company's securities Explanation: Rule 144 pertains to owners of securities that were not originally sold under SEC registration. Corporate insiders include officers or directors of the issuers, as well as any entity owning greater that 10% of the company's outstanding common stock.
Rule 144 applies to which of the following?
Correct Answer: 10% or more of any class of any equity Explanation: The disclosure must be filed by directors or officers of the issuer and any stockholder who holds (directly or indirectly) 10% or more of any equity security.
Section 403 of the Sarbanes-Oxley Act requires disclosures by any stockholder who holds a beneficial interest (directly or indirectly) in
Correct Answer: Master Agreement Among Underwriters Explanation: The MAAU is a generic agreement that investment banks adapt and distribute to other banker to execute. Most investment banking firms have their own MAAU and most investment banks have signed on to each other's forms.
The agreement the governs the relationship between the various underwriters in an SEC offering is known as the
Correct Answer: Operating Company Explanation: Debt obligations at the Operating Company, where the company's assets are located, are structurally senior to debt obligations at the Holding Company. In the event of bankruptcy at OpCo, its obligations must be satisfied in full before a distribution or dividend can be made to its sole shareholder (i.e. HoldCo).
The legal entity where an issuer's assets are typically located is known as the
Correct Answer: Prevents the pledge of assets as collateral Explanation: The limitations on liens provision prevents the borrower from pledging additional assets as collateral. As such, it limits the amount of secured debt in the capital structure, thereby sustaining implied recovery levels for existing secured debt holders.
The limitations on liens negative covenant performs which of the following?
Correct Answer: making certain payments such as dividends, investments, and prepayments of junior debt Explanation: The limitations on restricted payments covenant prohibit the issuer from making certain payments such as dividends, investments, and prepayments of junior debt except for a defined "basket" (subject to certain exceptions). The restricted payments basket is typically calculated as a small set dollar amount ("starting basket") plus 50% of cumulative consolidated net income of the issuer since issuance of the bonds, plus the amount of new equity issuances by the issuer since issuance of the bonds, plus cash from the sale of unrestricted subsidiaries (i.e. those that do not guarantee the debt).
The limitations on restricted payments covenant prohibits the borrower/issuer from
Correct Answer: He must disclose the control relationship in writing prior to the sale's completion Explanation: For purposes of the "interest in distribution" rule, a verbal disclosure of a control relationship is not sufficient to avoid a manipulative and deceptive transaction. The broker must disclose the relationship in writing prior to completing the transaction. Textbook Reference:
Tim is a registered representative who has a control relationship with the issuer of securities. He makes an offer of the issuer's securities to his clients, the Howells. At the time of the offer, he makes a verbal disclosure of his control relationship. Assuming the Howells want to buy the securities, what else must he do to avoid deception and manipulation?
Correct Answer: manage at least $100 million in total assets Explanation: Investors in private offerings under Section 4(2) of the Securities Act must be "sophisticated investors," who can evaluate the risk and merits of the investment and bear the investment's economic risk. They must also receive detailed information about the offering, but they are not required to be Qualified Institutional Buyers ($100mm in assets).
To qualify for an exemption under Section 4(a)(2) of the Securities Act, the purchasers of the securities must do/have all of the following EXCEPT
Correct Answer: II and IV Explanation: Preliminary proxies can be kept from public disclosure until they become definitive, but only if they adhere to certain rules. They must be marked confidential and public communication must have been limited to a basic Rule 135 announcement. Confidentiality is not allowed in going private and rollup transactions.
To qualify for confidential treatment, a preliminary proxy filing must fulfill which of the following requirements? I. Shareholders must vote to make the proxy confidential II. Public communications must not have been made, other than a basic announcement III. Shareholders must vote in public IV. It must not be a "going private" or rollup transaction
Correct Answer: 1 business day prior to pricing Explanation: Under Rule 101 of Regulation M, for a distribution of a security with an ADTV value of at least $100,000, whose issuer has outstanding common equity securities having a public float value of at least $25 million, the restricted trading period begins 1 day prior to pricing.
Under Rule 101 of Regulation M, for a distribution of a security with an ADTV value of at least $100,000, whose issuer has outstanding common equity securities having a public float value of at least $25 million, the restricted trading period begins
Correct Answer: Filed within 15 days of the effective date of the registration Explanation: A preliminary prospectus may be filed as part of the registration statement and omit certain timely details such as the public offering price and amount of proceeds raised. In this case, the omitted material may be included in a final prospectus filed within 15 days of the effective date.
Under Rule 430A, a preliminary prospectus may be filed as part of a registration statement, and omit timely details of the offering, if the securities are offered for cash and the omitted information is contained in a prospectus
Correct Answer: I, II and III Explanation: A registered representative is permitted to purchase an IPO, if their spouse works for the company. Even when this is true, the broker-dealer is still precluded from participating in the offering. This exception is only available for immediate family members of the spouse who works for the issuer.
Under certain circumstances a broker-dealer or a registered representative is permitted to purchase shares in an IPO. Which of the following scenarios are true? I. A broker-dealer may purchase the offering as part of a written stand-by agreement. II. A broker-dealer might receive shares as part of their compensation for an underwriting. III. If a registered representative's spouse works for the issuing company, then the registered representative is permitted to subscribe to the IPO. IV. If a registered representative is permitted to purchase an IPO, then their broker-dealer employer can piggyback on that privilege and will also be permitted to purchase the IPO.
Correct Answer: The investment bank rendering the fairness opinion can avoid being sued by the selling shareholders if it discloses it relied on the information provided by the company and did not independently verify that information. Explanation: Selling shareholders who remain unsatisfied with the price the company was sold for, can still sue the board. The board is permitted to share the fairness opinion with the selling shareholders. The investment bank rendering the fairness opinion can only avoid being sued if it discloses it relied on the information provided by the company and did not independently verify that information.
What is true about the aftermath of a firm's board of directors commissioning a fairness opinion from an investment bank?
Correct Answer: fair and reasonable Explanation: When examining the fairness of compensation to the underwriter(s), FINRA's Corporate Financing Department will ensure that the spread is fair and reasonable. Generally, this number will be no more than 7% of the gross proceeds of the new issue.
When reviewing the offering documents for a new issue, the FINRA Corporate Financing Department will only permit a new issue to be sold by a member firm if the offering spread is
Correct Answer: The issuer and both types of intermediaries funding portals and broker-dealers Explanation: Companies in which any of the issuer's officers, directors, senior managers or promoters ("participants") are bad actors may not raise equity crowdfunding. It is the responsibility of the issuer and both types of intermediary to investigate backgrounds and identify such situations before the offering is made. Bad actors include convicted felons, subjects of a finance-related injunction or restraining order, or cease-and-desist orders.
Which entities have a responsibility to identify any bad actors associated with a crowdfunding issuer, before offering the investment to the public?
Correct Answer: II and IV Explanation: Specified types of fiduciaries are covered under FINRA Rule 2060. They consist of transfer agents, paying agents, trustees and others who have privileged access to information about ownership of the issuer's securities.
Which of the following are "fiduciaries" covered under FINRA Rule 2060's restrictions on using information about the ownership of an issuer's securities to solicit transactions? I. Broker-dealers II. Transfer agent III. Registered Representative IV. Trustee
Correct Answer: XYZ Corporation is acquiring ABC Corporation in an all cash deal. Explanation: Voting on normal decisions, such as those for the election of directors, executive compensation and shareholder proposals do not require a preliminary proxy. A merger proxy requires a preliminary proxy to be filed with the SEC at least 10 days prior to the definitive proxy being filed.
Which of the following circumstances would require ABC Corporation to file a preliminary proxy with the SEC?
Correct Answer: 8-K report that is used to ensure that the earnings announcement becomes public information on a timely basis. Explanation: Where an 8-K report is used to announce earnings, a full income statement is not disclosed. The 8-K will disclose Selected Financial Data. Full financials for the relevant period can be found in the 10K or 10Q.
Which of the following disclosure documents would lack a full copy of an income statement?
Correct Answer: II and III Explanation: NYSE Rule 42 defines a public appearance as a seminar, forum, media interview, speaking engagement or print media article in which an analyst makes recommendations or offers opinions about equity securities. The definition also includes conference calls and interactive Internet forums presented to 15 or more people and non-password protected Webcasts.
Which of the following events are considered "public appearances" under NYSE Rule 472, assuming a research analyst makes recommendations on equity securities at each? I. Print media article which does not offer a specific opinion on the security II. Speaking engagement III. Seminar IV. Conference call to 5 people
Correct Answer: If a CEO intentionally discloses material information to a group of research analysts, the company must disclose the same information in a 8K report within 24 hours rather than the normal 4-day time frame required in an 8K report. Explanation: Intentional disclosure would require a company to make a simultaneous disclosure, knowing they were about to release material information.
Which of the following statements is false regarding disclosure requirements under Regulation FD?
Correct Answer: Data on the issuer's most recent quarterly earnings per share Explanation: "Forward-looking" information involves projections about the future. Communications made by or on behalf of issuers can fall under an exemption if the information is either factual or forward-looking.
Which one of the following types of information would not be considered "forward-looking," for purposes of a Rule 168 exemption?
Correct Answer: Only a basic notice directing investors to the intermediary Explanation: Issuers can't advertise crowdfunding offers. Optionally, they can only provide a basic notice that directs investors to the intermediary. The notice may disclose the amount being raised, price per share, and basic information about the issuer.
Which type of advertising or public notice is allowed by issuers for their registered crowdfunding offers?
Correct Answer: The intermediary Explanation: The intermediary is responsible for ensuring an investor does not exceed the annual limit. This applies to both broker-dealers and registered funding portals. The issuer does not have this responsibility, unless it has reason to know an individual has exceeded the limit.
Who is responsible for assuring that an investor does not exceed the annual limit (for individual investors) on crowdfunding investment in a calendar year?
