Series 7 Chapter 7: Issuing Securities

Under which of the following circumstances will an investor be considered accredited under Regulation D? A) $200,000 net worth and $200,000 annual income. B) $1 million net worth including any equity in a primary residence and $100,000 annual income. C) $1 million net worth excluding net equity in a primary residence or $200,000 annual income. D) $1 million net worth excluding net equity in a primary residence or $100,000 annual income.

Your answer, $1 million net worth including any equity in a primary residence and $100,000 annual income., was incorrect. The correct answer was: $1 million net worth excluding net equity in a primary residence or $200,000 annual income. Under Regulation D, the SEC defines an accredited investor as an individual who either has a net worth of at least $1 million (excluding net equity in a primary residence), or has had annual income of at least $200,000 ($300,000 joint return) in the last two years with the same or more expected this year.

ABC Corporation is offering 500,000 units to the public at $5 per unit. Each unit consists of 2 shares of ABC preferred stock and 1 perpetual warrant for ½ common share of ABC exercisable at $5. How much capital was raised by the initial sale of the issue? A) $2.5 million. B) $1.25 million. C) $5 million. D) $7.5 million.

Your answer, $2.5 million., was correct!. Since the issuing corporation is offering 500,000 units to the public at $5 per unit, the total amount of capital to be raised by this sale will be $2.5 million (500,000 units x $5 per unit).

An affiliate holding restricted stock wishes to sell shares under Rule 144. He has held the shares, fully paid, for 6 months, and the issuer has 2.4 million outstanding shares. Form 144 is filed on Monday, April 10, and the average weekly trading volume for the last four weeks is 24,500 shares per week. The maximum number of shares the customer can sell with this filing is: A) 23,000. B) 24,250. C) 24,500. D) 24,000.

Your answer, 24,000., was incorrect. The correct answer was: 24,500. Under Rule 144, after holding the fully paid restricted shares for 6 months, the affiliate can begin selling. For affiliates, volume restrictions always apply. They can sell the greater of 1% of the total shares outstanding or the weekly average of the prior 4 weeks' trading volume (the 4 weeks preceding the Form 144 filing). In this case, 1% of the total shares outstanding is 24,000 (1% × 2.4 million). The weekly average of the prior 4 weeks' trading volume is 24,500. Therefore, the most the affiliate can sell during the 90 days following the Form 144 filing is 24,500 shares.

Which of the following will NOT be found in a final prospectus? A) Agreement among underwriters. B) Business plan. C) Statement that the SEC neither approves nor disapproves of the issue. D) Date and offering price.

Your answer, Business plan., was incorrect. The correct answer was: Agreement among underwriters. The agreement among underwriters is a separate document and is not included in a prospectus.

Which of the following securities issue is nonexempt, requiring registration under the Securities Act of 1933? A) Debt instruments with maturities of 270 days or less B) Municipal bonds C) Corporate bonds D) Treasury bonds

Your answer, Corporate bonds, was correct!. Nonexempt means that under the act the securities are required to be registered with the SEC. Corporate bonds require registration. All of the remaining answer choices are exempt securities meaning that they do not require registration. In general, exempt issues include municipal securities, U.S. government securities, bank issues, short term debt issues, and nonprofit organization securities

Which of the following are TRUE of an over-allotment option or provision for a new issue? One is found in every underwriting agreement. It allows the underwriters to sell up to 15% more than the original number of shares offered. It allows the underwriters to sell up to 2 times the original number of shares offered. It is a way for underwriters to address demand exceeding the number of shares originally offered. A) II and IV B) I and IV C) I and III D) III and IV

Your answer, I and III, was incorrect. The correct answer was: II and IV The over-allotment option found in the underwriting agreement is a process allowed by the SEC to handle demand for new issues exceeding the number of shares originally intended to be offered by the issuer. Not all underwriting agreements contain an over-allotment option, but for those that do, the option or provision allows the underwriters to sell up to 15% more than the original number of shares offered.

Which of the following factors is (are) considered when determining whether underwriting compensation is fair and reasonable? The size of the offering. The type of underwriting commitment. The market conditions. The profitability of the underwriter. A) I and II. B) I and III. C) II and III. D) II and IV.

Your answer, I and III., was incorrect. The correct answer was: I and II. Relevant factors considered by FINRA in determining the fairness of underwriting compensation include the size of the offering (total dollar amount), the type of commitment (firm commitment or best efforts), the type of securities (i.e., stocks or bonds), the form of compensation (i.e., cash or stock), the total value of all forms of compensation, the underwriter's relationship to the issuer, and any form of potential conflicts of interest.

Which of the following two are NOT included in a preliminary prospectus? Final public offering price Effective (release) date. Intended purpose for the funds being raised. Financial statements and history of the company. A) I and II B) II and III C) I and IV D) III and IV

Your answer, I and IV, was incorrect. The correct answer was: I and II Neither, the final public offering price or the effective date (date the SEC releases the securities to be sold) are found in a preliminary prospectus.

Which of the following describe indications of interest secured during the 20-day cooling-off period? Binding on the customer. Nonbinding on the customer. Binding on the broker/dealer. Nonbinding on the broker/dealer. A) II and IV. B) I and IV. C) I and III. D) II and III.

Your answer, I and IV., was incorrect. The correct answer was: II and IV. Indications of interest are not binding on either party.

Under the Securities Act of 1933, an accredited investor is defined as one having: an annual income of at least $1 million. an annual income of at least $200,000 for the last two years and anticipating an income of $200,000 in the current year. a net worth of $1 million exclusive of net equity in a primary residence a net worth of $1 million. A) II or IV. B) II or III. C) I or IV. D) I or III.

Your answer, I or III., was incorrect. The correct answer was: II or III. To qualify as an accredited investor under Regulation D of the Securities Act of 1933, the investor must be either an institutional investor or an individual with a net worth of at least $1 million (not to include net equity in a primary residence), or have an income of at least $200,000 for each of the past two years with the same expected in the current year.

In a corporate underwriting, the syndicate letter is signed by which of the following? Issuer. Managing underwriter. Syndicate members. Selling group members. A) II and III. B) I and IV. C) II and IV. D) I and II.

Your answer, II and III., was correct!. The syndicate letter is signed by the managing underwriter and syndicate members and identifies these parties' rights and responsibilities.

In which of the following types of offerings does a brokerage firm have no financial obligation for unsold securities? All-or-none. Best efforts. Standby. A) I, II and III. B) II and III. C) I and II. D) I and III.

Your answer, II and III., was incorrect. The correct answer was: I and II. In a best efforts underwriting, the underwriter serves as an agent with no financial obligation for unsold securities. In an all-or-none (AON) offering, the underwriter agrees to devote its best efforts to sell the issue, but the entire offering is canceled if all shares cannot be sold. In a standby underwriting, the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment).

Which of the following statements regarding red herrings are TRUE? They may be used to obtain indications of interest. They may be sent out with sales literature. They contain the final offering price. Their use ends when the offering becomes effective. A) I and III. B) II and III. C) I and IV. D) II and IV.

Your answer, II and III., was incorrect. The correct answer was: I and IV. A preliminary prospectus, or red herring, is used only during the cooling-off period. The red herring does not contain the final price; offerings are priced immediately before the effective date.

Underwriters and selling group members violate rules regarding sales of new equity issues to restricted persons when they do which of the following? Sell a new issue to one of their own customers. Sell blocks of the new issue to accounts of partners or officers of the member firm. Sell to member firms that deal only in investment company products. Sell to brokers and dealers outside the selling group who position the securities for later resale at higher prices. A) II and IV. B) II and III. C) I and III. D) I and IV.

Your answer, II and III., was incorrect. The correct answer was: 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 supported family members. Firms selling only investment company products and/or direct participation programs, and their employees, are exempt from these rules.

To which of the following firms could a member grant concessions or other allowances? Another member firm. A suspended member firm. A foreign nonmember broker/dealer ineligible for FINRA membership. A U.S. nonmember broker/dealer. A) III and IV. B) I and III. C) II and IV. D) I and II.

Your answer, III and IV., was incorrect. The correct answer was: I and III. A member can grant discounts and other concessions only to other member firms. A suspended member must be treated like a member of the general public (no discounts or concessions). The only exception is that a member firm can grant concessions to a foreign nonmember firm that is ineligible for FINRA membership.

Which of the following underwriting arrangements allows an issuer whose stock is already publicly traded to structure the timing of sales for an additional issue? A) Shelf. B) Negotiated. C) Standby. D) Competitive.

Your answer, Negotiated., was incorrect. The correct answer was: Shelf. A shelf registration with the SEC allows an issuer to sell the registered securities for up to 3 years from the effective date. This allows an issuer to time its sales with market conditions.

All of the following identify exemptions from the registration statement and prospectus provisions of the Securities Act of 1933 EXCEPT: A) Regulation A. B) Rule 147. C) Regulation D. D) Regulation U.

Your answer, Regulation D., was incorrect. The correct answer was: Regulation U. Regulation U regulates loans from lenders other than broker/dealers for the purpose of purchasing securities and is not related to exempt transactions under the Securities Act of 1933.

Using a prospectus to sell a security eliminates a salesperson's responsibility to disclose: A) None of these. B) speculative factors about the security. C) a company's poor growth potential. D) a company's negative financial information.

Your answer, a company's negative financial information., was incorrect. The correct answer was: None of these. Distributing the prospectus may satisfy the prospectus delivery requirements of the Securities Act of 1933, but it does not negate the antifraud rules, or the provisions and regulations set forth under the Securities Exchange Act of 1934.

To be exempt under Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of: A) nonaccredited investors to whom the security is sold. B) agents authorized to sell the security. C) shares issued. D) broker/dealers who offer the securities.

Your answer, agents authorized to sell the security., was incorrect. The correct answer was: nonaccredited investors to whom the security is sold. Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued nor the number of accredited investors who may purchase the shares.

If an officer of a public company buys 400 shares of the company's registered stock in the open market, he A) may sell under Rule 144 only after a 6-month holding period B) may sell immediately without restriction C) may not sell until he leaves the company D) may sell immediately subject to Rule 144 volume limitations

Your answer, may sell immediately subject to Rule 144 volume limitations, was correct!. If purchased in the open market, the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144.

Under SEC Rule 134, a tombstone advertisement includes all of the following EXCEPT: A) names of the syndicate members. B) number of shares to be sold. C) the public offering price. D) net proceeds to the issuer.

Your answer, names of the syndicate members., was incorrect. The correct answer was: net proceeds to the issuer. Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.

Your customer wishes to purchase shares of an IPO. During the cooling- off period, the customer can: A) pay in advance for shares to be purchased when the cooling-off period ends. B) enter an order to sell the new issue short upon the effective date. C) purchase shares in limited amounts. D) indicate an interest in the offering.

Your answer, pay in advance for shares to be purchased when the cooling-off period ends., was incorrect. The correct answer was: indicate an interest in the offering. During the cooling-off period, neither purchases or sales can be made, and orders for either cannot be accepted by the broker/dealer, However, indications of interest can be made by customers and accepted by broker/dealers. Indications of interest are non-binding for both parties.

If a customer purchases a new issue of stock from a syndicate member, the customer will pay the public offering price: A) plus a mark-up. B) plus a commission. C) with no mark-up or commission. D) plus the spread.

Your answer, plus a mark-up., was incorrect. The correct answer was: with no mark-up or commission. New issues are sold at the public offering price without a commission or mark-up. In the secondary market, securities are traded on an agency basis (commission) or on a principal basis (mark-up or mark-down).

The provisions of the Securities Act of 1933 include all of the following EXCEPT: A) regulation of offerings of new securities. B) prohibition of fraud in the sale of new securities. C) requirement that an issuer provide full and fair disclosure about an offering. D) regulation of the secondary market.

Your answer, prohibition of fraud in the sale of new securities., was incorrect. The correct answer was: regulation of the secondary market. The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934.

A member firm broker/dealer wishing to go public may sell a new equity issue of its own securities to all of the following EXCEPT: A) employees of other full-service member firms. B) family members of owners, officers, and employees of the firm. C) public customers. D) owners, officers, and employees of the firm.

Your answer, public customers., was incorrect. The correct answer was: employees of other full-service member firms. Rules regarding restricted persons generally prohibit member firms from selling new issue securities to employees of member firms including their own. However, when member firms sell their own securities, rules regarding restricted persons do not apply to the issuer's own employees but still apply to the employees of other full-service member firms.

Regarding the purchase of new equity issues, restricted persons may: A) purchase shares of a new issue only if they are employed by a broker/dealer as a registered representative on a part-time basis. B) purchase shares of a new issue only if they work for a bank. C) not purchase shares of a new issue. D) purchase shares of a new issue only in amounts that are not substantial in relation to the total number of shares being issued.

Your answer, purchase shares of a new issue only if they work for a bank., was incorrect. The correct answer was: not purchase shares of a new issue. Persons characterized as restricted persons are prohibited from purchasing shares of new issues.

A Tier 1 securities offering under Regulation A+ allows small to medium sized companies to A) raise up to a maximum of $10 million in a 12-month period B) raise up to a maximum of $5 million in a 12-month period C) raise up to a maximum of $20 million in a 12-month period D) raise up to a maximum of $15 million in a 12-month period

Your answer, raise up to a maximum of $5 million in a 12-month period, was incorrect. The correct answer was: raise up to a maximum of $20 million in a 12-month period Tier 1 of Regulation A+ allows small to medium sized companies to raise up to a maximum of $20 million in a 12-month period

The smallest component of a corporate underwriting spread is usually the: A) underwriter's fee. B) manager's fee. C) selling concession. D) takedown.

Your answer, underwriter's fee., was incorrect. The correct answer was: manager's fee. The syndicate manager's fee is typically the smallest percentage of the underwriting spread.

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

Your answer, underwriting fee., was incorrect. The correct answer was: concession. The largest portion of the spread is the concession.

A registered representative opens a new account for an investment club. His spouse is a member of the club and owns 15% of the club's assets. The registered representative wants to sell shares of a common stock IPO to the investment club. This is allowed: A) only if the IPO is suitable for the investment club. B) under no circumstances. C) with written notice to the SEC. D) with written principal approval.

Your answer, with written notice to the SEC., was incorrect. The correct answer was: under no circumstances. Rules prohibit member firms from selling common stock IPOs to restricted persons. Under the rules the account would not be restricted if the assets owned by the spouse composed less than 10% of the club's assets. Because the registered representative's spouse is a member of the investment club and owns more than 10% of the club's assets, the registered representative cannot sell shares of the IPO to the club.