Unit 7 - Practice Exam 2 (Issuing Securities)

A member firm receives an order from an investment adviser to purchase shares in a common stock IPO. Regarding restricted persons, the member must: A) obtain a representation from the conduit that the purchaser is not a restricted person. B) obtain a list of the client(s) whose account(s) will be credited with the shares in order to determine eligibility. C) obtain a list of all of the adviser's clients to determine eligibility. D) refuse to accept the order.

When receiving an order to buy a new equity issue from a bank, investment adviser, or other conduit, a member must obtain a representation from the conduit that all purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons). Reference: 7.6.3.1 in the License Exam Manual

The maximum amount of securities that can be offered under Regulation A is: A) $5 million per issuer but no more than $1.5 million for each selling affiliate. B) $500,000 per issue but no more than $500,000 per selling affiliate. C) $500,000 per issue but no more than $100,000 per selling affiliate. D) $1 million per issuer but no more than $500,000 for all selling affiliates.

Your answer, $5 million per issuer but no more than $1.5 million for each selling affiliate., was correct!. *<Not in textbook >* Under Regulation A, the dollar limit on sales is $5 million per issuer in any 12-month period. *Persons affiliated with the issuer may sell up to $1.5 million each.* Reference: 7.6.2.1 in the License Exam Manual.

Under the provisions of Rule 147, what percentage of an issuer's gross business revenues must be derived from sales within the company's home state? A) 1. B) 0.9. C) 0.8. D) 0.7.

Your answer, 0.8., was correct!. One of the provisions of Rule 147 states that at least 80% of an issuer's revenues must be derived from the company's home state. Reference: 7.6.2.3 in the License Exam Manual.

An investor files the necessary forms to sell stock under Rule 144. The filing is effective for a maximum of how many days? A) 60. B) 120. C) 30. D) 90.

Your answer, 90., was correct!. Investors who wish to sell stock under Rule 144 must file Form 144 with the SEC. The filing is effective for 90 days. Reference: 7.6.2.4 in the License Exam Manual.

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

Your answer, None of these., was incorrect. The correct answer was: Nine months from the end of the distribution. In an intrastate offering, a *purchaser of the issue may not sell the securities to a resident of another state for at least nine months from the end of the distribution.* Reference: 7.6.2.3 in the License Exam Manual.

An officer of a broker/dealer firm would be categorized as a restricted person if he attempted to purchase: A) call options on a stock he believed was going down in price. B) closed-end funds on the secondary market. C) a municipal bond in a state where he does not reside. D) a new issue.

Your answer, a new issue., was correct!. As restricted persons officers of broker/dealer firms or other institutional investors are prohibited from purchasing a new issue. Reference: 7.6.3.1 in the License Exam Manual.

The largest portion of an underwriting spread is the: A) underwriting fee. B) manager's fee. C) stabilizing bid. D) concession.

Your answer, concession., was correct!. The largest portion of the spread is the concession. Reference: 7.5.4 in the License Exam Manual.

Corporate debt securities (such as commercial paper) are exempt from registration under the Securities Act of 1933 if their maturities do not exceed how many days? A) 365. B) 90. C) 30. D) 270.

Your answer, 270., was correct!. *<Not in textbook >* Corporate debt securities (such as commercial paper) with maturities of 270 days or less are exempt from registration; longer maturities would subject them to the act's registration and disclosure requirements. Reference: 7.6.1 in the License Exam Manual.

Question 25 of 25ID: 25563 -------------------------------------------------------------------------------- A resident of a state who acquires stock pursuant to Rule 147 (intrastate offerings) is prohibited from selling the stock to a nonresident of that state for how many months? A) 9. B) 6. C) 18. D) 12.

Your answer, 9., was correct!. Rule 147 stock cannot be sold to a nonresident of the state for a period of nine months from the last date of sale by the issuer. Reference: 7.6.2.3 in the License Exam Manual.

If an investment representative gave her retail customers copies of sales literature for a variable annuity she was recommending and promised to send the prospectus soon, which of the following statements are TRUE? She should not have distributed sales literature without the prospectus. It was okay to distribute the sales literature and send the prospectus later to those who were interested. She should not have recommended a specific variable annuity without having the prospectus available. Because she only answered questions about the investment, she was not required to provide a prospectus. A) I and II. B) I and III. C) III and IV. D) II and IV.

Your answer, I and III., was correct!. A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers. Reference: 7.2.2.4 in the License Exam Manual.

Which of the following actions of XYZ Corporation would raise additional capital? Issue callable preferred stock. Declare a stock dividend. Make a rights offering. Encourage convertible bondholders to convert to common stock. A) II and IV. B) II and III. C) I and III. D) I and II.

Your answer, I and III., was correct!. Issuing new stock either through an underwriting or a rights offering allows a corporation to raise capital. Stock dividends represent more shares given to existing shareholders, but no money is raised. Conversion results in the exchange of one security for another and no money is raised. Reference: 7.3.2.2 in the License Exam Manual.

Under Regulation D, accredited investors in a private placement must meet minimum standards that may include which of the following? Annual income in excess of $200,000 for at least the last two years Annual income in excess of $100,000 for at least the last two years. Net worth in excess of $1 million not including net equity in a primary residence. Net worth in excess of $200,000. A) I and III. B) I and IV. C) II and IV. D) II and III.

Your answer, I and III., was correct!. The requirement for an accredited investor under the private placement exemption is either a net worth in excess of $1 million not including net equity in a primary residence or annual income in excess of $200,000 in the last two years and the same or more income expected this year, or $300,000 for joint incomes. Reference: 7.6.2.2 in the License Exam Manual.

Which of the following securities are exempt from the registration and disclosure provisions of the Securities Act of 1933? Any interest in a railroad equipment trust certificate. Municipal bonds. U.S. government securities. Commercial paper maturing in 270 days or less. A) I and III. B) I, II, III and IV. C) II and III. D) I and II.

Your answer, I, II, III and IV., was correct!. All the securities listed are exempt from the registration and disclosure provisions of the Securities Act of 1933. Reference: 7.6.1 in the License Exam Manual.

*Which of the following are considered to be nonexempt offerings according to the Securities Act of 1933?* Government securities. Private placements. Public offering of $6 million by a brokerage firm. Sales of corporate bonds of $10 million. A) II and III. B) III and IV. C) I and III. D) I and II.

Your answer, III and IV., was correct!. The Securities Act of 1933 exempts U.S. government bonds and private placements from registration. Public offerings of less than $5 million are also exempt (under Regulation A), so an offering of $6 million and sales of corporate bonds are not exempt; they must be registered with the SEC. Reference: 7.6.2.2 in the License Exam Manual.

*Which of the following securities is NOT exempt from the Securities Act of 1933?* A) Municipal issues. B) U.S. government issues. C) U.S. government agency issues. D) Real estate investment trusts.

Your answer, Real estate investment trusts., was correct!. REITs are nonexempt securities subject to the registration and new issue disclosure provisions of the Securities Act of 1933. Agency issues, U.S. government issues, and municipals are exempt. Reference: 7.6 in the License Exam Manual.

*Your customer informs you that he has shares of stock restricted under Rule 144. He suggests that he wants to sell covered calls against the shares he owns to bring additional income into his account. Which of the following should you advise?* A) This is permitted because there is no restriction against using covered calls to bring income into any account. B) This is prohibited because the customer may need to sell the stock before the restriction is lifted. C) Selling calls against restricted (Rule 144) shares is prohibited because the restricted shares could not be delivered if the calls were exercised by the buyer. D) This is permitted, as the calls would be considered covered by the restricted shares.

Your answer, Selling calls against restricted (Rule 144) shares is prohibited because the restricted shares could not be delivered if the calls were exercised by the buyer., was correct!. *Restricted shares under Rule 144 are considered illiquid until the restriction is lifted.* They may never be used to cover short calls because the shares, due to the restriction, could not be sold if the owner of the calls were to exercise the right to buy the stock. Reference: 7.6.2.4 in the License Exam Manual.

During the 20-day cooling-off period for an initial public offering, all of the following are permitted EXCEPT: A) mailing a red herring to a customer. B) publishing a tombstone advertisement. C) accepting a deposit from a customer to purchase the new issue. D) accepting indications of interest.

Your answer, accepting a deposit from a customer to purchase the new issue., was correct!. Accepting a deposit from a customer during the cooling-off period is tantamount to accepting an order, which is prohibited until the offering is effective. Reference: 7.2.2 in the License Exam Manual.

A customer must present a signed representation letter stating that he is not a restricted purchaser prior to buying a new issue of: A) municipal bonds. B) corporate bonds. C) U.S. government bonds. D) common stock.

Your answer, common stock., was correct!. New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Prior to buying an IPO, a customer must present a representation letter stating they are not a restricted person. Reference: 7.6.3.1 in the License Exam Manual.

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

Your answer, concession., was correct!. *<Not in textbook >* If selling-group members liquidate into the stabilizing bid, they may be required to return the concession they were originally paid. Reference: 7.3.5.3.1 in the License Exam Manual.

All of the following must be part of a registration statement EXCEPT: A) a statement as to whether the company is involved in any legal proceedings. B) identification of investors who own 5% or more of the company. C) a prospectus. D) the signatures of CEO, CFO, CAO, and majority of the board.

Your answer, identification of investors who own 5% or more of the company., was correct!. The registration statement must identify investors who own 10% or more of the company. Reference: 7.2.1.1 in the License Exam Manual.

Under FINRA rules, if a member firm receives an order to buy a new equity issue on behalf of an undisclosed principal from a bank, the member must: A) determine the identity of the purchaser. B) accept the order. C) reject the order. D) obtain a representation from the bank that the purchaser is not restricted.

Your answer, obtain a representation from the bank that the purchaser is not restricted., was correct!. If a member receives an order from a conduit such as a bank, the member must make an inquiry as to whether the ultimate purchaser is restricted. It is not necessary to determine the identity and business affiliations of the purchaser. Reference: 7.6.3.1 in the License Exam Manual.

All of the following statements regarding corporate insiders are true EXCEPT: A) purchases may not be made through the exercise of options. B) short selling is prohibited. C) only public information may be used to make transactions. D) reports of changes in holdings must be filed with the SEC.

Your answer, purchases may not be made through the exercise of options., was correct!. A corporate insider is defined as an officer, director, 10% stockholder, or family member of an insider. Insiders are required to report any changes in their holdings to the SEC within two business days. The Securities Exchange Act of 1934 also prohibits short selling of company shares by company insiders. They cannot use inside (nonpublic) information for their own benefit. Reference: 7.6.2.4 in the License Exam Manual.

All of the following may occur during the mandatory 20-day cooling-off period EXCEPT: A) soliciting transactions for the security. B) publishing a tombstone ad. C) forwarding a preliminary prospectus to a customer. D) the performance of due diligence by the underwriters.

Your answer, soliciting transactions for the security., was correct!. During the 20-day cooling-off period, only unsolicited requests for information may be honored. Soliciting sales is prohibited. Reference: 7.2.2 in the License Exam Manual.

Rule 144A regulates: A) the sale of restricted stock by control persons. B) personal trading by research analysts. C) companies traded on the NASDAQ Global Select Market. D) the sale of restricted stock to institutional investors.

Your answer, the sale of restricted stock to institutional investors., was correct!. Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs). Reference: 7.6.2.5 in the License Exam Manual.

In the case of an unsolicited order, a prospectus must be delivered to the purchaser of a unit investment trust: A) before the purchase. B) before the month's end. C) with the purchase confirmation. D) between 45 days and 18 months following the initial deposit.

Your answer, with the purchase confirmation., was correct!. A purchaser of newly issued securities must receive a prospectus no later than by receipt of the purchase confirmation. However, any solicitation must be preceded or accompanied by a prospectus. Reference: 7.2.2.4 in the License Exam Manual.