Chapter 1
What type of offering? What type of offering is it when an Investment Banker sells to public on behalf of the issuer
Best Efforts
What type of offering? ABC Corp sells $15,000,000 in bonds
Regulation A Tier 1
What is rule 147
Rule 147 is a rule created by the U.S. Securities and Exchange Commission (SEC) that allows companies to sell securities (like stocks or bonds) within a single state without having to go through the usual process of federal registration. This is known as an "intrastate offering."
Treasuries settle ?
T+1 (next business day after the trade)
Regular stock trades in how many days?
T+2
Buy Limit order trigger does what
Once triggered (i.e., elected), a buy limit order becomes a limit order to buy. Limit orders may be executed at the specified limit price or better.
Buy stop order trigger does what (rises to or above the number)
Once triggered (i.e., elected), a buy stop order becomes a market order to buy. Market orders may be executed at any price.
Shares that are to be sold by a person, not the issuer is what type of offering?
a secondary offering
Seabird Airlines common stock is listed on the NYSE. Appalachia Securities is an over-the-counter market maker and has a posted quote for Seabird of 55.25-55.50. If Appalachia wants to enter a new quote, the smallest incremental change is A) $ 0.01. B) $ 0.001. C) $ 0.25. D) $ 0.05.
A) The correct answer is $0.01. This stock is quoted in increments of no less than one cent ($0.01). Sub-penny pricing is only allowed on stocks trading below a dollar.
Which equity security allows the owner to vote for the board of directors? I. Common stock II. Convertible preferred III. Straight preferred IV. cumulative preferred A. I only B. I, Il, and III C. I, II, III, and IV D. I, II, III, and IV
A) The equity security that allows the owner to vote for the board of directors
Ensuring that the investing public is fully informed about a security and its issuing company when shares are first sold in the primary market is covered under which of the following federal acts? A) Uniform Securities Act B) Securities Exchange Act of 1934 C) Securities Act of 1933 D) Investment Company Act of 1940
C)
How long is the prospectus delivery requirement period for a new issue specifically quoted by the OTC Markets Group? (IPOs of non-NMS securities)
90 days
What is a Fiduciary?
A fiduciaries is a person that manages assets (usually financial) for another person, a beneficiary. A fiduciary has a legal and moral obligation to perform her duties in best interest of the beneficiary, placing the beneficiary's interest before her own
Fourth Market
A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers 1) Trading activity that occurs through electronic communication networks (ECN) 24hrs a day 2) Sometimes called dark pools
Broker-dealers who incorporate proprietary trading into their business model are known as?
A market maker
What is a market maker
A market maker is typically a firm or individual that quotes both a buy and a sell price in a financial instrument, hoping to make a profit on the bid-offer spread. Market makers facilitate trading by providing liquidity.
Mini-max
A mini-max underwriting sets a minimum amount that the issuer needs to raise to move forward with the underwriting, as well as a maximum amount of securities the issuer is willing to sell. The underwriter must locate enough interested buyers to support the minimum (floor) issuance requirement. Once the minimum is met, the underwriter can expand the offering up to the maximum (ceiling) amount of shares the issuer specified.
Municipal Advisor
A municipal advisor is a person that provides advice to or on behalf of a municipal entity with respect to municipal products or the issuance of municipal securities.
What is Private Placement ?
A private placement refers to the sale of securities to a specific group of investors in a private offering, rather than through a public offering. In a private placement, the issuer of the securities (such as a company or investment fund) sells them directly to a limited number of investors without making a public offering on a securities exchange. This method is commonly used by companies to raise capital without the extensive regulatory requirements associated with a public offering. 1) Unlimited capital can be raised 2) Ex. Lettered stock, legend stock
Buy stop or Sell Stop turns into a ______?
Market order
During cooling off period
No Solicitations No binding contracts A RED HERRING MAY BE DELIVERED TO PROSPECTIVE INVESTORS
Regulation D
Regulation D is a set of federal regulations governing certain aspects of the offering and sale of securities in the United States. It is part of the Securities Act of 1933 and is administered by the U.S. Securities and Exchange Commission (SEC). Regulation D provides exemptions from the registration requirements that are typically required for the public offering of securities.
What type of offering? Sierra Verde Coffee offers shares exclusively to residents of its home state
Rule 147 Offering
Primary Purpose of the Act of 1933
The primary purpose of the Securities Act of 1933 is to require full and fair disclosure in connection with the sale of securities to the public. The act requires that a new issue, unless specifically exempted from the act, be registered with the SEC before public sale. All investors must receive a detailed disclosure document known as a prospectus before purchase.
A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction is called a
clearing agency
When a BD acts as a principal (dealer, market maker)...
they are selling securities from the firm's inventory to a customer or buying a security from a customer for the dealer's inventory. The firm profits on the difference between what the firm paid for the security and what the customer pays, which is called the spread (or mark-up). There is no commission when a firm acts in a principal capacity.
The exercise of an equity option settles in how many days?
two business days (T+2)
If the broker-dealer sourced the shares from another broker-dealer that maintains an inventory, what is he acting as?
it suggests that the customer's firm is acting as an intermediary or middleman in facilitating the transaction. In this context, the term "agent" would be more appropriate.
Trades for government securities settle in ?
one business day
What is a self-clearing (or carrying) firm
self-clearing (or carrying) firm holds funds and securities of the fully-disclosed or introducing firm's customers and performs related functions, such as sending confirmations and statements for them.
Terms that go with Primary Market
Act of 1933 New Issues IPO Syndicate Underwriting all or non min maxi
Limit Order
Executed at specified price or better
Buy Stop Limit or Sell Stop limit will turn into a______?
Limit Order
Selling group
Broker-Dealers with no financial commitment
Third Market
1) Market makers in the OTC market may deal in exchage-listed stocks (OTC trading of listed securities) 2) This trading activity is called the third market
Regulation D Rule 506(c) JOBS Act of 2009
1) Securities are offered under Regulation D exemption 2) All purchasers must be accredited investors 3) Business must take reasonable steps to verify purchases are accredited
Regulation D Rule 506(b) Original Rule- Still available
1) Securities are offered under regulation D Exemption (dont have to register) 2) Up to 35 non-accredited investors 3) No general solicitations (advertising) allowed
when it says Size 3x2 it means
1) Someone is willing to purchase at the bid price for 300 shares 2) Someone is willing to sell at the ask price for 200 shares
OTC market (over-the-counter market)
1) Unlisted stocks and bonds trade 2) Not a Physical Location 3) Dealers buy and sell a security from inventory to provide liquidity
Which securities are exempt from the Securities Act of 1933
1. The U.S Government 2. Municipalities 3. National and State Banks (but not bank holding companies) 4. building and loans and saving 5. Charitable, religious, educational, and nonprofit associations 6. common carriers (e.g., railroad equipment reuse certificates). 7. Maturities cant go greater than 270 days or you would have to register
Days for a listed APO security? Days for a listed IPO security?
25 days 0 days
Days for a non-listed APO security? Days for a non-listed IPO security?
40 days 90 days
80% rule
80% of revenue from the state 80% of the proceeds are used within the state 80% of company assets in the state majority of the company's employees work in state
What is a Market Maker?
A dealer in the OTC market (member of the exchange) that maintains an inventory in a stock and provides liquidity for customers seeking to buy and sell the security.
All of the following are benefits of using a prime broker except A) research. B) multiple executing brokers. C) consolidation of records. D) cost savings.
A) An institutional investor may select one firm (the prime broker) to provide custody and financing of securities while other firms, called executing brokers, handle all trades placed by the customer. It is not unusual for large companies to use dozens of executing broker-dealers. Trade confirmations from the many executing broker-dealers are consolidated and are provided along with account statements by the prime broker. Prime brokerage is efficient and saves the customer time and money. Research is not associated with prime brokerage accounts.
A customer's confirmation shows that they paid a commission of $74 on a purchase of 100 shares of a $35 stock. The broker-dealer is acting in what capacity? A) Agency B) Market maker C) Underwriter D) Principal
A) If a BD charges a commission for service provided, the firm is acting as an agent (also called an agency basis or broker.)
A broker-dealer firm that maintains an inventory of a security and does transactions in the secondary market in that security is functioning in which of the following capacities? A) Principal B) Broker C) Agent D) Agency
A) If the BD maintains an inventory, the firm is transacting as a principal (also called a market maker).
A customer placed an order to purchase 100 shares of Sierra Verde Corp. common stock. The broker-dealer sourced the shares from another broker-dealer that maintains an inventory in the stock. The customer's firm acted as A) an agent. B) a dealer. C) an underwriter. D) a market maker.
A) In this example, the customer's firm acted as an agent (broker), a go-between that sources the shares from a dealer.
Which of the following would be applicable to nonexempt securities (those that must be registered) being offered to the public by a corporate issuer? I. Securities Act of 1933 II. Prospectus III. Securities Act of 1934 IV. Secondary market A) I and II B) II and IV C) II and III D) III and IV
A) Offering nonexempt securities [those that must be registered with the Securities and Exchange Commission (SEC)] such as common stock to the public requires the registration of the securities under the Securities Act of 1933. The offering must be made by prospectus.
The Sierra Verde Coffee Company files a registration statement with the SEC for the sale of new securities. While reviewing the registration statement, the SEC determines that it has not been filed properly and issues a deficiency letter. Sierra Verde submits a corrected registration statement. Which of the following is trueregarding the 20-day cooling-off period? A) It is halted on the day the deficiency letter is issued and may resume where it left off on the day the corrected registration is received. B) It is halted on the day the deficiency letter is issued and must begin anew from that same date once the corrected registration is received. C) It continues and is not impacted by the issuance of the deficiency letter by the SEC. D) It is halted and does not resume until 20 days after the corrected registration is received.
A) When a deficiency letter is issued by the SEC to an issuer, the 20-day cooling-off period is halted. It may resume where it left off when the corrected registration statement is filed. In other words, the days that the cooling-off period are suspended do not count toward the 20 days. Note that the regulators may halt the entire process if they believe fraud may be involved.
Terms that go with secondary Market
Act of 1934 1st Market exchanges (NYSE, NASDAQ, Listed) 2nd Market (OTC equity, OTC Debt) 3 rd Market (OTC trading of listed securities) 4th Market (institution to institution trading) Dark pools, private transactions between institutions (non Broker-Dealer)
An order that when triggered becomes a limit order is called a
An order that triggers the entry of a limit order is a stop limit order. A stop order triggers a market order.
What is an underwriter
An underwriter is a type of broker-dealer (BD) (also called an investment banker) that works with an issuer to bring its securities to the market and sell them to the investing public. Investment bankers help the issuer to structure new issues and, at times, form syndicates with other underwriters to facilitate this capital-raising process. (Syndicates are explained in more detail later in this section.)
A clearing corporation agent or depository for securities transactions A) can be a bank or corporation only if they are also a broker-dealer. B) can be a commercial bank. C) can never be a corporation. D) must be a broker-dealer.
B) A clearing agent can be a broker-dealer but doesn't have to be. In addition to broker-dealers, commercial banks can act as clearing agencies and depositories, as can corporations that are set up specifically to clearing securities transactions and taking custody of funds and securities.
The prospectus delivery requirement, access equals delivery, is satisfied when A) the final prospectus has been filed with Financial Industry Regulatory Authority (FINRA) and is available on FINRA's website for investors to see. B) the final prospectus has been filed with the Securities and Exchange Commission (SEC) and is available on the SEC's website for investors to see. C) a red herring is initially sent by mail to investors during the cooling-off period. D) the preliminary prospectus has been filed with FINRA and is therefore available on FINRA's website for investors to see.
B) Beyond physical delivery of a paper prospectus, access equals delivery is the industry standard for meeting the final prospectus delivery requirements. It is deemed to be satisfied when the final prospectus has been filed with the SEC and is therefore available on the SEC's website for investors to log in and see. This standard does not apply to delivery of a preliminary prospectus before the effective date.
Your customer places a buy limit at $70 on XYZ stock while it is trading at $65 per share. After the order is elected, your customer may buy additional shares at which of the following prices? $68 $69 $70 $71 A) I and II B) I, II, and III C) III and IV D) I, II, III, and IV
B) I, II, and III Explanation: Once triggered (i.e., elected), a buy limit order becomes a limit order to buy. Limit orders may be executed at the specified limit price or better. So, your customer may buy additional shares at $68, $69, and $70 (the specified limit price) in this scenario.
TTEST TOPIC ALERT
BD's make money from passing transactions. A BD may act as a broker or as a dealer on a transaction, but they may never be both on the same transaction.
Other names for Broker Dealers
Broker = Agent = Gets a commission Dealer = Principal = Gets the spread
Which of the following is true regarding a member firm operating under Financial Industry Regulatory Authority (FINRA) membership or the membership of another self-regulatory organization (SRO)? A) Member firms may never incorporate proprietary trading into their business model. B) Member firms are required to be full-service broker-dealers. C) Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options, and others or limit the products they offer to only a few. D) Member firms must always accommodate dealing with retail investors and not limit business to that done with other industry professionals.
C) Member firms can offer all types of investment products such as stocks, bonds, mutual funds, and derivatives like options and others (be full service) or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise, they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors.
Which of the following statements is not true? A. Common stock is an equity security that represents ownership in the issuer. B. Convertible preferred stock can be converted to the issuer's common stock at any time. C. Preemptive rights obligate the stockholder to maintain his percentage of ownership when additional shares are issued. D. Preferred stock dividends must be satisfied before common dividends can be paid.
C. Preemptive rights obligate the stockholder to maintain his percentage of ownership when additional shares are issued. Preemptive rights actually give stockholders the option (but not the obligation) to purchase additional shares before they are offered to the public, with the goal of maintaining their percentage of ownership. It is not an obligation but a privilege for existing shareholders.
All option trades settle in how many days?
Calls and puts* One Business day (T+1)
What is a Custodian?
Custodian refers to a person who manages a minor's account under the uniform transfers to minors Act (UTMA). Custodian may also refer to a firm that holds assets in a qualified retirment account such as an IRA
On Tuesday, July 3, your customer bought 15 SBRD 30 September calls at 4. On Friday, August 10, the calls are in the money and your customer issues exercise instructions. On which days did the trade and the exercise settle? A) July 6 and August 13 B) July 5 and August 12 C) July 4 and August 11 D) July 5 and August 14
D) All option trades settle next business day. The exercise of an equity option settles in two business days. July 4 is a holiday. August 11 and 12 are on a weekend. July 4 and December 25 are the only holidays we expect you to see on the test.
An opening transaction can be A) a short sale only. B) a sell only. C) a buy only. D) either a buy or a sell.
D) An opening transaction can be either a buy or a sell. Which one will determine the investor's market attitude—bullish when buying to open a position and bearish when selling to open a position (selling short).
In a split offering, A) shares are issued to existing shareholders only. B) all shares are issued to the public from existing shareholders. C) shares are sold by existing shareholders only. D) shares are issued from the corporation and sold by existing shareholders.
D) In a split offering, shares are sold to the public. These shares come from both the corporation (issuer) and existing shareholders. These offers are also called combination offers.
Your customer places a sell stop at 60 on ABC stock while it is trading at $63 per share. After the order is elected, your customer may sell her shares at which of the following prices? I. $58 II. $59 III. $60 IV. $61 A) I and II B) I, II, and III C) III and IV D) I, II, III, and IV
D) Once triggered (i.e., elected), this becomes a market order to sell. Market orders may sell at any price.
Your client, Teresa Jenson, calls and wants to purchase T-bills and wants to know when payment is due. You should tell her A) trade date. B) trade date plus 3 business days. C) trade date plus 2 business days. D) trade date plus 1 business day.
D) Regular way settlement is T + 2 for everything except treasuries and money market securities. Option trades and treasuries settle next business day (T + 1 ).
BuyStuff, Inc., common stock is listed on the NYSE. Great Plains Securities is an over-the-counter market maker and has a posted quote for BuyStuff common of 250.10-255.50. If Great Plains wants to enter a new quote, the smallest incremental change is A) $ 0.05. B) $ 0.50. C) $ 0.25. D) $ 0.01.
D) This stock is quoted in increments of no less than one cent ($0.01).
Which of the following phrases is not associated with a broker-dealer acting as a market maker? A) "profits on spread." B) "trades with customers from own inventory." C) "maintains inventory." D) "performs the transaction on behalf of the customer."
D) When a BD acts as a principal (dealer, market maker), they are selling securities from the firm's inventory to a customer or buying a security from a customer for the dealer's inventory. The firm profits on the difference between what the firm paid for the security and what the customer pays, which is called the spread (or mark-up). There is no commission when a firm acts in a principal capacity. When acting as a broker (agent), the firm is acting on behalf of the customer and charges a commission for the service.
Market Orders
Executed immediately at best available price. Price not guaranteed
What is a Trustee?
Fiduciary that overseas a trust
What type of offering? Underwriters sells IPO shares from its own inventory
Firm Commitment
For a new issue that qualifies for Nasdaq listing, a prospectus must be provided to all purchasers within how many days after the effective date? A) 40 days B) 60 days C) 90 days D) 25 days
For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is 25 days. If the new issue will be specifically quoted by the OTC Markets Group the period is 90 days. An additional public offering (APO) for a non-NMS security, the requirement for delivery is 40 days. There is no requirement for an APO of an NMS security.
de minimis exemption
If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue. In other words, restricted persons will be able to have an interest in an account that purchases new equity issues as long as no more than 10% of the account's beneficial owners are restricted persons.
Best Efforts underwriting
In a best efforts underwriting the underwriters (syndicate) buy securities from the issuer acting simply as an agent, not as principal.
difference between equity and preferred stock
In summary, while both common stock and preferred stock represent ownership in a company, common stock comes with voting rights and variable dividends, while preferred stock typically has limited or no voting rights, but offers fixed dividends and higher priority in case of liquidation. Investors choose between the two based on their risk tolerance, income needs, and preference for voting influence.
What is Rule 147 ?
Intrastate offering rule. 1) Offerings that take place in one state 2) Securities may not be resold to non residents for six months after initial purchase. 3) 80% rule
What type of offering? Buystiff, Inc., sells $45,000,000 in preferred stock
Regulation A Tier 2
Sell limit order trigger does what
Once triggered (i.e., elected), a sell limit order becomes a limit order to buy. Limit orders may be executed at the specified limit price or better.
Sell stop order trigger does what (rises to or above the number)
Once triggered (i.e., elected), a sell stop order becomes a market order to sell. Market orders may sell at any price.
What is an option?
Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a predetermined time frame. The underlying asset can be a stock, index, commodity, or other financial instruments. There are two types of options: call options and put options.
What is preemptive rights
Preemptive rights refer to the privilege that existing shareholders have to maintain their proportional ownership in a company by purchasing additional shares before they are offered to the public. When a company decides to issue new shares, existing shareholders may be given the opportunity to buy these shares first, usually at a discounted price.
What type of offering? Lil' Gym Corp offers shares exclusively to accredited investors
Private Placement
Inside quote
The highest bid and lowest ask is called the inside market or the inside quote.
Inside Quote
The highest bid and the lowest ask
Inside Bid
The inside bid is the highest bid, or the most someone is willing to pay.
Securities Act of 1933
The main purpose of the Securities Act of 1933 (also called the Paper Act) is to ensure that the investing public is fully informed about a security and its issuing company when the security is first sold in the primary market. The Securities Act of 1933 protects investors who buy new issues by: requiring registration of new issues (unless exempt under the act); requiring an issuer to provide full and fair disclosure about itself and the offering; requiring an issuer to make available all material information necessary for an investor to judge the issue's merit; regulating the underwriting and distribution of primary issues; and providing criminal penalties for fraud in the issuance of new securities.
the cooling-off period.
The period of time after the offering is filed, but before the SEC releases the security for sale, is called the cooling-off period.
What type of settlement is this? Ron buys 522 shares of Narcissus, Inc., common stock in a cash account on Monday, March 19. He deposits cash in the account sufficient to cover the trade on March 20. How soon would he be able to withdraw those s es?
This is a regular way settlement of a corporate security (T+2). The trade is fully paid for so the customer may request the shares be moved on or after settlement In the example you provided, the mention of Ron buying 522 shares of Narcissus, Inc., common stock in a cash account and depositing cash in the account to cover the trade suggests that this is a regular-way settlement. In a cash settlement, the focus would be on the exchange of cash without the need for the physical delivery of shares.
Regulation A
Tier 1: Max offer of $20 million Tier 2: Max offer of $75million
Stop Order
Trigger- first trade at or through stop price
A broker-dealer that concentrated its business efforts on proprietary trading would most likely be functioning as
a market maker