STC Chapter 11

Keystone Chocolate Co. plans to sell, only in the state of Pennsylvania, shares of a new issue. In order to qualify for a registration exemption under Rule 147, what percentage of the corporation's assets must be located in Pennsylvania, and what percentage of its revenues must be derived from Pennsylvania sources, at the time of the offering?

80% Keystone is eligible to offer shares in Pennsylvania (PA) under the intrastate exemption (Rule 147) if 80% of its assets are located in PA, or 80% of its revenues are derived from PA sources, or 80% of the proceeds from the sale are used in PA. In addition, to qualify for the exemption, 100% of the purchasers of the offering must be residents of PA.

A type of offering in which whatever is not sold is retained by the issuing corporation is:

A best-efforts underwriting A type of offering in which whatever is not sold is returned to the issuing corporation is a best-efforts underwriting.

Which of the following entities is considered an eligible purchaser for a Rule 147 offering?

A corporation that has its principal office located in the state of the offering SEC Rule 147 covers an exemption from registration for the sale of securities on an intrastate basis. The issuer under Rule 147 is not allowed to sell the securities to a nonresident of the state. 100% of the purchasers must be residents of the state where the issuer is located. The purchaser may be an individual (who is a resident of the state), or a corporation, partnership, trust, or other business organization that has its principal office in the state. The business organization may not be formed for the specific purpose of purchasing the securities sold under this exemption.

Which statement best summarizes the difference between a primary and secondary distribution?

A primary distribution involves the sale of new shares by the issuer, while a secondary distribution involves the sale of shares that are already issued and outstanding. A primary issuance (distribution) of stock is when a company creates and sells brand new shares. The goal is to provide the company with additional capital (money) to expand their business or improve the financial health of the firm. Secondary distributions are for existing shareholders, typically large investors and insiders, to sell a large block of stock in one transaction. Secondary issuances don't create any new shares and instead provide money to the selling shareholders rather than the company.

A firm is the managing underwriter of a follow-on offering of a security that's listed on the NYSE. The aftermarket prospectus delivery rule:

Does not require the firm to deliver a prospectus If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there's no aftermarket prospectus delivery requirement for dealers. An issuer that's listed on the NYSE or Nasdaq is required to file reports with the SEC (a reporting issuer). If the issuer was filing for an IPO (a non-reporting issuer) and the securities will be subsequently listed on the NYSE or Nasdaq, the firm is required to deliver a prospectus to any purchaser in the aftermarket within 25 days of the effective date.

Which of the following is found in a fund's summary prospectus?

Fee table Summary prospectuses can only be used by mutual funds and are used to summarize the full or statutory prospectus. The summary prospectus will contain information concerning the investment objectives/goals, fees and expense tables (including any applicable sales charges), the principal investment strategy and risks, the fund's performance and management information, purchase and sale information, as well as tax information. Since the summary prospectus is primarily a static document, up-to-date information (e.g., the number of shares issued, the net asset value, or the public offering price) is NOT included and neither is the structure of the mutual fund organization (board of directors)

For how long must prospectuses continue to be delivered on an IPO of a company that will not be listed?

For 90 days in the aftermarket The prospectus delivery requirement for an IPO that will not be listed continues for 90 days after the deal closes. If the IPO will be listed, the prospectus delivery requirement continues for 25 days.

Which of the following securities is exempt from registration?

Government agency securities U.S. government agency securities (e.g., GNMA, FNMA, FHLMC bonds) are exempt from registration under the Securities Act of 1933. Corporate securities that are to be sold publicly are typically required to be registered. Keep in mind, treasury stock is simply stock that was issued by a corporation which has since been repurchased by the corporation.

The type of securities distribution that would be completely cancelled if not fully subscribed to is a(n):

All-or-none There are several different methods that can be used to underwrite securities. In an all-or-none deal, if the entire issue is not sold, it will be returned to the issuer. An underwriting done on a best-efforts basis allows the underwriter to return to the issuer any unsold securities after the transaction takes place. In a firm-commitment underwriting, the broker-dealer is required to keep any unsold shares for itself.

Which of the following securities are required to be registered under the Securities Act of 1933?

American Depositary Receipts (ADRs) Securities that are sold to U.S. investors are generally required to be registered with the SEC. ADRs are a way for American investors to buy foreign stocks and, since ADRs are traded on U.S. exchanges, they need to be registered under the Act of 1933. Eurodollars are bonds that pays interest in U.S. dollars, but they're sold to foreign investors. As a result, they don't need to be registered with the SEC. Both municipal bonds and bonds that are issued by the U.S. government are exempt from registration with the SEC.

Which of the following may NOT occur during the waiting period of the securities registration process?

An RR accepts a cash deposit for the offering from an interested customer During the waiting period (cooling-off-period), RRs may send customers the preliminary prospectus (red herring), discuss the issue with them, and accept (nonbinding) indications of interest. However, no part of the purchase price can be accepted until on or after the effective date.

A type of offering in which the offering is cancelled if the entire amount of the shares is not sold is:

An all-or-none underwriting A type of offering in which the offering is cancelled if the entire amount of shares is not sold is an all-or-none underwriting.

A scientist, who works for the government, posted material, non-public information (MNPI) about a corporation's drug trial on an online bulletin board. A trader, who was aware of the nature of the information, took the information on the bulletin board and placed trades based on it. In this case, who violated the insider trading law?

Both the scientist who posted the MNPI and the trader who used MNPI In this question, since the scientist is in possession of misappropriated (i.e., stolen) information regarding the corporation and disseminated the information on the bulletin board, the scientist could be found in violation of insider trading. Also, since the trader was aware of the nature of the information and used it to place trades, the trader is also considered to have violated insider trading laws.

Which of the following choices would NOT be subject to the holding period restriction under Rule 144?

Control stock acquired through an open-market purchase There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period.

The investment banking department of a broker dealer is generally involved in which of the following activities?

Coordinating the offering of securities between the issuer and investors to raise capital. The investment banking department, also referred to as the underwriting department, works with issuers that intend to raise capital by structuring the offerings and finding potential investors.

Which of the following statements is NOT TRUE regarding a private placement?

It is usually a very liquid investment Private placements are exempt from registration requirements under the Securities Act of 1933. Generally, the number of nonaccredited investors permitted to purchase the securities is limited to 35. General solicitation (i.e., cold calling) of investors is normally not allowed. A disadvantage of buying securities issued in a private placement is that it is usually an illiquid investment.

All of the following would be sold with a prospectus, EXCEPT:

Municipal general obligation bonds Municipal bonds are exempt from the registration requirements of the Securities Act of 1933. Therefore, a municipal issuer does not file a registration statement and prospectus with the SEC.

Which of the following securities are exempt from registration?

Municipal securities Municipal bonds are exempt from registration under the Securities Act of 1933. Corporate securities that are to be sold publicly are typically required to be registered.

Official statements are the disclosure documents for what type of bond offering?

Municipals Official statements are the primary disclosure documents for municipal bond offerings.

For a competitive offering of municipal bonds, which document notifies potential bidders of the general features of the offering?

Notice of Sale For a competitive offering of municipal bonds, the Notice of Sale is created by the issuer to provide potential bidders with information regarding the general characteristics of a proposed bond offering.

Which of the following disclosure documents is used for a private placement?

Offering memorandum Disclosure documents are often required when selling newly issued stocks and bonds (i.e., in the primary market). If securities are being sold privately (e.g., through a Reg. D offering), broker-dealers may provide investors with an offering memorandum or private placement memorandum. Broker-dealers must provide investors with a prospectus when selling corporate stocks and/or bonds in a public offering. For a municipal bond issuance, the offering's disclosure document is referred to as the official statement.

Which of the following is used as the disclosure document for a private placement?

Offering memorandum The offering memorandum (also referred to as the private placement memorandum) is the primary disclosure document for a private placement.

Which of the following disclosure documents is used for a municipal bond offering?

Official statement Disclosure documents are often required when selling newly issued stocks and bonds (i.e., in the primary market). For a municipal bond issuance, the offering's disclosure document is referred to as the official statement. Broker-dealers must provide investors with a prospectus when selling corporate stocks and/or bonds in a public offering. If securities are being sold privately (e.g., through a Reg. D offering), broker-dealers may provide investors with an offering memorandum or private placement memorandum.

What is the primary disclosure document for a municipal offering?

Official statement Official statements are the primary disclosure documents for municipal bonds. Although the MSRB cannot force a municipal issuer to create an official statement, if it is created, firms and salespersons must distribute it to customers.

Which of the following statements is TRUE regarding the approval of an official statement?

Official statements are not required to be approved by a regulator. Official statements are neither approved nor required by any regulator. However, if official statements are created, they must be distributed to purchasers.

A customer owns shares of restricted stock and now intends to sell them. If the proper forms are filed with the SEC, the customer may sell these shares:

Over a 90-day period Under Rule 144, an investor who intends to sell either restricted or control stock must notify the SEC by filing Form 144 at the time the sell order is placed. Once the filing is made, the customer may sell these shares within 90 days.

Which of the following disclosure documents is used for a public offering of corporate securities?

Prospectus Disclosure documents are often required when selling newly issued stocks and bonds (i.e., in the primary market). Broker-dealers must provide investors with a prospectus when selling corporate stocks and/or bonds in a public offering. If securities are being sold privately (e.g., through a Reg. D offering), broker-dealers may provide investors with an offering memorandum or private placement memorandum. For a municipal bond issuance, the offering's disclosure document is referred to as the official statement.

If an issuer intends to sell restricted stock under the provisions of Rule 144A, which of the following investors is permitted to make the purchase?

Qualified institutional buyers (QIBs) Rule 144A permits the sale of restricted (i.e., unregistered) securities, but only if the sale is made to qualified institutional buyers (QIBs). On the other hand, institutional and accredited investors can buy unregistered shares from the issuer, but must do so through a Regulation D private placement.

DCH, Inc., an investment banker, has entered into a firm-commitment underwriting with ABC Company to sell 10,000,000 shares of stock. What are the requirements of this arrangement for the investment banker?

Sell the entire issue or retain any shares left unsold In a firm-commitment underwriting, an underwriter is required to sell the entire offering and keep anything that remains unsold. DCH, Inc. is required to sell all 10,000,000 shares, or keep the shares that are left unsold. Firm-commitment arrangements ensure the issuer (ABC Company) of receiving the full amount of the offering.

A corporation that intends to issue new shares within the next two years and wants to satisfy the registration provisions in advance could use:

Shelf registration Shelf registration permits new shares to be issued under the same registration for a period up to three years. In this way, the issuer can adjust its offering price to reflect current market conditions. Regulation A, Rule 147, and Regulation D also relate to raising capital, but not over an extended period.

All of the following must be included in a preliminary prospectus according to the Securities Act of 1933, EXCEPT:

The final offering price A preliminary prospectus (red herring) is issued to obtain indications of interest on a prospective new issue of securities. This document will have a written statement on it that states that the prospectus may be subject to change. This statement will be on the left border of the cover page. The red herring will state the purpose for which the funds are being raised as well as the financial history of the issuing company. The item that will not appear is the final offering price. Only a price range is provided.

Who is responsible for creating the official statement for a municipal bond offering?

The issuer Although assistance may be provided by others, the issuer is ultimately responsible for creating the official statement. If created, the underwriting syndicate is responsible for providing the official statement to investors who purchase the new offering.

Who has the responsibility to investigate the accuracy of the information in a prospectus for a DPP?

The managing underwriter The SEC reviews only the information in a prospectus. It never attests to its accuracy. The managing underwriter is responsible for investigating the accuracy of the information.

Which of the following is found in a preliminary prospectus?

The number of shares being issued A preliminary prospectus (i.e., red herring) can be used by an issuer of stocks and/or bonds during its cooling-off period. These documents typically have most of the information that's found in a final prospectus, including the number of shares being issued by the company, its business, financial statements, risk disclosures, and ownership structure. However, the SEC doesn't permit an issuer to include the effective date or a definitive public offering price (POP) in a preliminary prospectus. Instead, an issuer may include a price range for the offering (e.g., from $20 to $25) in the red herring. Since the securities have not yet been offered, there's no fee disclosure that's required.

All of the following statements are TRUE concerning the underwriting of a new issue, EXCEPT:

The preliminary prospectus (red herring) will contain all the relevant information including the final price of the issue in order to obtain indications of interest All of the items listed are TRUE concerning the underwriting of a new issue except that the preliminary prospectus (red herring) will contain all the relevant information including the final price of the issue. The preliminary prospectus does not include the final price.

Volume and holding-period restrictions do NOT apply to the resale of private placements when:

The purchaser is a qualified institutional buyer Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable assets.

If a company is utilizing a shelf registration, it is only required to file one registration statement to cover all of the securities to be issued during the next:

Three years Shelf registration allows the issuer to file a registration statement with the SEC and then, over a three-year period, sell the securities when the issuer considers the time appropriate.

When is an underwriting broker-dealer able to accept payment from an investor for the purchase of a new issue?

When the registration is declared effective. Broker-dealers can only accept payment for a new issue after a security's registration is declared effective. The red herring is also referred to as the preliminary prospectus and is given to investors before the effective date. The cooling-off period lasts between the date on which an issuer files its registration statement with the SEC and the effective date of the offering. During the cooling-off period, no sales can be confirmed and no payment can be accepted.