Lesson 1.1 New Issues and the Primary Market

Member firms violate rules regarding sales of new equity issues to restricted persons when they do which of the following? I. Sell a new issue to one of their own customers. II. Sell blocks of the new issue to accounts of partners or officers of the member firm. III. Sell shares to the grandparent of a member affiliate. IV. Sell to accountants or attorneys acting on behalf of the underwriters.

II AND IV - Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their immediate or supported family members. For purposes of this rule, aunts, uncles, and grandparents are not considered immediate family.

Assets offered and traded in the securities markets can include all of the following except A)life insurance. B)currencies. C)equities. D)derivative products.

life insurance. -Equities (stocks), bonds, currencies, and derivative products like options can be offered and traded in the financial markets. Insurance is not an asset that can be traded in the financial markets.

If it finds that the registration statement needs revision, expansion, or to have corrections made, the Securities and Exchange Commission (SEC) may suspend the review of the new issue and issue a deficiency letter. Once the issuer submits a corrected registration statement, the 20-day cooling-off period

resumes where it had left off. -If the SEC issues a deficiency letter suspending its review of the new issue, the 20-day cooling-off period is halted and resumes where it had left off once the corrected registration statement is received.

An underwriter is placing a tombstone advertisement for a company's new issue. A prospective investor might expect to see all of the following information on the advertisement except

the names of the company's officers. - Information on a tombstone, those advertisements allowed to be placed prior to the effective date, is limited to; name of issuer, type of security, number of shares to be sold, public offering price or expected range, and names of the underwriters or group.

Capital markets can be characterized by all of the following except

they are utilized by the public sector only. - In capital markets, both public and private sectors sell securities (stocks and bonds) to raise funds to finance both long-and short-term initiatives. Both individuals and institutions can trade securities in these markets.

Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does not exceed

10% If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.

The Big Shoe Sneaker Company is a small manufacturer of athletic shoes. It is selling $100 million of its stock. This will be its first public offering. It will use the money to enhance both marketing and production with a plan to grow the business and obtain a Nasdaq listing in two or three years. After the initial sale of the new shares, buyers of the stock in the over-the-counter market should expect to receive the final prospectus for how many days?

90 -This is the initial public offering of an unlisted, non-Nasdaq, security. The requirement is that the prospectus be made available to buyers in the secondary market for 90 days after the release date.

Which of these will be found in the final prospectus but is not in the preliminary prospectus?

Public offer price - The public offer price may vary up until the release date. Next year's sales are counted next year, and could not be in the prospectus. The issuer's history and planned use of the proceeds is in both documents.

Which of the following would not be found in a final prospectus?

The list of all investors in the offering. - While a description of the underwriting is required (this would include a list of the underwriters provided in the preliminary prospectus), the actual names of the investors are not required in a final prospectus. Also, a disclaimer from the SEC would be found on the front of the document.

A corporation sells shares to the investing public in order to raise capital. This is known as

The primary market is where securities are sold to the investing public by the issuer wishing to raise capital. These are known as primary market or issuer transactions.

A prospectus displays which of the following?

Description of how the proceeds will be used -A prospectus will not contain performance predictions, may not imply endorsement of the SEC, nor will it contain guarantees of gains or guarantees against loss.

Which of the following is not a characterization of the Securities Act of 1933? A)Prospectus Act B)Truth in Securities Act C)Paper Act D)Exchange Act

Exchange Act -The act that regulates exchanges and members is the Exchange Act of 1934. The Securities Act of 1933 regulates new issues (New Issues Act) requiring registration (Paper Act), along with full disclosure (Prospectus or Truth in Securities Act).

Which of the following is an exempt issue?

Fixed annuity -Fixed annuities are exempt from registration. Variable insurance products and investment companies are required to register.

For initial public offerings (IPOs) of common stock, all of the following would be considered restricted persons except A)a person owning at least 5% of the member firm. B)a member firm. C)employees of the member firm. D)fiduciaries acting on behalf of the underwriters.

An individual person or entity would have to own 10% or more of a member firm before they would be considered a restricted person.

Which of the following calls for the underwriters to buy securities from the issuer acting as an agent, not as principal?

Best efforts underwriting -In a best efforts underwriting the underwriters (syndicate) buy securities from the issuer acting simply as an agent, not as principal. This means that the underwriter is not committed to purchasing the shares and is therefore not at risk. The underwriter acts as an agent contingent on its ability to sell shares in either a public offering or a private placement.

Which of the following best describes a final prospectus?

Meets the full and fair disclosure requirements of the Securities Act of 1933 - A prospectus is a disclosure document meant for distribution to the public. It must constitute full and fair disclosure of all material facts about the issuer and the security. Only a preliminary prospectus or tombstone ads can be used during the cooling-off period.

To qualify as an exempt transaction under Tier 1 of Regulation A, an issuer may offer a maximum of which of the following?

Securities offerings up to $20 million in a 12-month period will be allowed in Tier 1. Of the $20 million, no more than $6 million can be sold on behalf of existing selling shareholders (similar to a combination offering). The offering would be subject to a coordinated review by individual states and the SEC.

In order to qualify to invest in a Regulation A Tier 2 offering, a customer must do which of the following?

Self-certify that they meet the requirements - Tier 2 investors must be qualified investors, and there are two ways to qualify: Be an accredited investor as defined in Rule 501 of Regulation D; or Limit the investment to a maximum of the greater of 10% of the investor's net worth or 10% of the investor's net income per offering. Note that self-certification of net worth and income is all that is required for Tier 2 qualification, with no burdensome filings.

Which of the following statements with regard to the issuance of securities is true?

The Securities Act of 1933 provides criminal penalties for fraud. - The Securities Act of 1933 (also known as the Paper Act, Full Disclosure Act, New Issues Act, Truth in Securities Act, and Prospectus Act) ensures that the investing public is fully informed about a security and its issuer when the security is offered on the primary market. The act provides criminal penalties for fraud in the issuance of new securities. The SEC review period, known as the cooling-off period, must last a minimum of 20 days before the SEC releases the securities for sale to the public (effective date). Solicitations and the acceptance of orders may never occur before the effective date.

The Securities Act of 1933 requires that all of the following be offered by a prospectus except A)unit investment trusts. B)mutual fund shares. C)Treasury bonds. D)variable annuities.

Treasury securities are exempt from registration requirements and therefore do not require a prospectus.

A company, in order to raise capital for expansion, wants to sell shares of stock to investors. The company's common stock is not currently trading in the secondary market. This offering is known as

an initial public offering (IPO).

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.

Public offerings of securities are regulated under

the Securities Act of 1933. -In a public offering, securities are offered and sold to the investing public. Public offerings of securities are regulated under the Securities Act of 1933.

Which of the following prospectus delivery requirements for negotiable securities sold in the secondary markets is not accurate? A)For an additional issue if the security is non-Nasdaq there is no delivery requirement. B)For an additional issue listed on an exchange or Nasdaq there is no delivery requirement. C)For an initial public offering (IPO) if non-Nasdaq the delivery requirement is 90 days. D)For an IPO if listed on an exchange or Nasdaq the delivery requirement is 25 days.

For an additional issue if the security is non-Nasdaq there is no delivery requirement. - REASON: For an additional issue, if the security is non-Nasdaq the delivery requirement is 40 days.

The access equals delivery rule applies to

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

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

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

All of the following issuers are exempt issuers except

ABC Railroad Power Systems, Inc. - The hint that leads to the correct response is "Inc." A for-profit corporation is not likely to be an exempt issuer. Common carriers (railroad), charities, and S&Ls are exempt issuers.

Regarding the purchase of new equity issues by restricted persons, which statements are true? II. An investment club is permitted to buy a new equity issue at the offering price. II. An investment club is not permitted to buy a new equity issue at the offering price. III. An investment club that has eight members with equal ownership, one of which is a registered representative, is permitted to buy a new equity issue at the offering price. IV. An investment club that has 12 members with equal ownership, one of which is a registered representative, is permitted to buy a new equity issue at the offering price.

I and IV -As long as an investment club has no restricted persons as members, it may purchase new equity issues at the public offering price. An investment club that has restricted persons as members may still participate in an initial public offering (IPO) so long as the total ownership of the club's assets by restricted persons does not exceed 10%. A registered representative is a restricted person under the rules regarding the purchase of new equity issues. In III the registered representative owns 12 ½ % (100% ÷ 8 = 12 ½) of club's assets. In IV the registered representative owns 8 1/3% (100% ÷ 12 = 8 1/3), under the 10% maximum allowed.

Which of these may be found in the final prospectus that is not in the preliminary prospectus? I. Next year's sales II. Public offer price III. Release date IV. Planned use of the proceeds

II AND III The public offer price may vary up until the release date. The SEC determines the release date, not the issuer. Next year's sales are counted next year, and could not be in the prospectus. Planned use of the proceeds is in both documents.

Underwriters acting as principals and committing to purchase any unsold shares for the syndicate account would best be described as being engaged in

a firm commitment. - In a firm commitment underwriters contract with the issuer to buy its securities, acting as principals rather than agents. They are committing to purchase any unsold shares for the syndicate account. In this type of underwriting, it is the underwriters who are at risk for any shares they cannot sell to the public, not the issuer. The issuer knows that ultimately all of the securities will be sold, and all of the capital needed will be raised.

A new registered representative receives a memo discussing the distribution of a red herring. The registered representative knows that the memo is referencing

a preliminary prospectus. -The term red herring is derived from the disclaimer printed in red on the cover page of a preliminary prospectus. Some key information that would be found in a final prospectus, such as price, is not found in the preliminary prospectus.

During the cooling-off period, underwriters may not

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

An investor requests a preliminary prospectus for a new issue. Regarding the document which of the following is true? A)It can be deemed an offer to sell securities to the public. B)The final price for the securities is published within it. C)It is made available between the registration date and the effective date. D)Receipt of it is a commitment that the underwriters will sell securities to the recipient.

It is made available between the registration date and the effective date. -The preliminary prospectus (red herring) is a prospecting tool used to gauge indications of interest. It is made available to those who request it between the registration date and the effective date (cooling-off period). Receiving it is not a commitment to purchase shares and making it available is not a commitment to sell shares to the recipient. No final price would be found on a preliminary prospectus.