Unit 7

An underwriting group is currently assisting an issuer with the preparation and filing of the registration statement for a new issue. Who is responsible for the accuracy of the information within the registration statement? A) Lead underwriter B) Issuing corporation C) Both the underwriters and the issuing corporation D) Underwriting group

B) Issuing corporation While underwriters can assist with preparation and filing, the accuracy and adequacy of these documents is the responsibility of the issuer.

Which of the following acts requires the registration of most new issues? A) The Securities Market Improvement Act of 1975 B) The Securities Act of 1933 C) The Securities Investor Protection Act of 1970 D) The Securities Exchange Act of 1934

B) The Securities Act of 1933 The Securities Act of 1933 requires the registration of most new issues; the Securities Exchange Act of 1934 created the SEC; the Securities Investor Protection Act of 1970 created the SIPC; the Securities Market Improvement Act of 1975 created the MSRB.

The ATOP Company is planning to offer shares of both common and preferred stock to the investing public in order to raise operating capital intended to be used for expansion. Which of the following laws enacted by Congress would be the most relevant when issuing these equity securities to the public? A) The Trust Indenture Act of 1939 B) The Securities Act of 1933 C) The Securities Investors Protection Act of 1970 D) The Investment Company Act of 1940

B) The Securities Act of 1933 The Securities Act of 1933, is also known as the Paper Act, Prospectus Act, or New Issues Act. This federal law requires that issuers who want to raise capital by making a public offering of securities to the public, provide full and fair disclosure of all material facts about the company and the securities being offered.

When an issuing company sells securities to primarily institutional investors and a small number of wealthy individuals, as opposed to the general investing public in an exempt offering, this is known as A) a secondary offering. B) a private placement. C) a primary placement. D) a secondary placement.

B) a private placement. A private placement occurs when the issuing company sells securities that are exempt from registration to private investors, as opposed to the general investing public. These investors tend to be institutional investors and small groups of wealthy individuals who meet certain net worth and income criteria.

Each of the following may be traded on an exchange except A) bonds. B) life insurance. C) options. D) equities.

B) life insurance. All types of financial assets and investment instruments are traded among buyers and sellers on securities exchanges. Stocks (equity securities), bonds (debt securities), options (derivative securities), currencies, and more are traded on exchanges and other securities markets every business day. Life insurance is not a security and may not be traded.

Which of the following would take place in the primary market? A) Securities sold on both the OTC and NYSE B) Securities sold to the public by the issuer C) Securities bought and sold on the NYSE D) Securities bought and sold on the OTC

B) Securities sold to the public by the issuer When an issuer is selling its securities, that is a primary market transaction.

All of the following names describe the Securities Act of 1933 except A) The Full and Fair Disclosure Act. B) The Exchange Act. C) The Prospectus Act. D) The Truth in Securities Act.

B)The Exchange Act. The Exchange Act is the Securities Exchange Act of 1934 and covers the secondary markets. The Securities Act of 1933 covers the primary market and requires full and fair disclosure on new issues by providing a prospectus to the investor.

A final prospectus contains all of the following except A) sales after the effective date. B) sales before the effective date. C) indications of interest before the registration filing date. D) indications of interest before the effective date.

D) SEC approval. The SEC neither approves nor disapproves a final prospectus; they allow the issue to become effective. Beware of any approval language when referring to a regulator.

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 A) 10%. B) 20%. C) 25%. D) 5%.

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

Which of the following would be allowed during the cooling off period? A) Taking indications of interest B) Distributing a prospectus C) Taking orders D) Allocating shares to investors

A) Taking indications of interest No selling or soliciting is allowed during the cooling off period. Taking indications of interest is permitted.

The requirement for a supplemental prospectus to be filed before each sale is applicable to A) shelf registration sales. B) initial public offering sales. C) additional issues. D) sales of shares in the secondary market.

A) shelf registration sales. Through a shelf offering, an issuer who is already a publically traded company can register new securities without selling any of the shares until later or waiting to sell a portion of the shares. For securities offered via a shelf registration, a supplemental prospectus must be filed with the Securities and Exchange Commission (SEC) before each sale.

Raising funds is generally accomplished by corporations through the issuance of stock (equity) or bonds (debt). This is done in A) the capital market. B) the funding market. C) the currency market. D) the secondary market.

A) the capital market. The issuance of stock or bonds by corporations to raise new funds takes place in the capital market.

Which of the following statements with regard to the issuance of securities is true? A) The Securities Act of 1933 provides criminal penalties for fraud. B) The cooling-off period beginning when a registration statement is filed with the Securities and Exchange Commission (SEC) can't last longer than 20 days. C) While the Securities and Exchange Commission (SEC) is reviewing a registration statement for a new offering of securities, the underwriters are permitted to solicit and accept orders for the securities from the public. D) Once a registration statement has been filed with the Securities and Exchange Commission (SEC) it should be expected that the securities could be sold to the public within two business days.

A) 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.

Regarding primary offerings, which of the following is true? A) There is no limit to the number of primary offerings a corporation can issue. B) A corporation can have two primary offerings—the initial public offering (IPO) and an additional public offering (APO). C) After its initial public offering (IPO), a corporation can have only one more primary offering—its subsequent primary offering (SPO). D) A corporation can have only one primary offering—the initial public offering (IPO).

A) There is no limit to the number of primary offerings a corporation can issue. While a corporation can have only one IPO, there is no limit to the number of SPOs or APOs it can issue. IPOs, SPOs, and APOs are all primary offerings—those where the offering proceeds go to the issuer.

A corporate issuer of common stock has decided that it wants an agreement that its underwriter must either raise all of the capital needed or cancel the underwriting. To best accommodate this the underwriting should be A) an all or none (AON). B) an immediate of cancel. C) a firm commitment. D) a mini-max.

A) an all or none (AON). In an AON underwriting, the issuing company has determined that it wants the underwriter to sell all of the shares required to raise all of the capital needed or cancel the underwriting. Because of the uncertainty over the outcome of an AON offering, any funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting.

After the issuer files a registration statement with the Securities and Exchange Commission (SEC), the time known as the cooling-off period begins. This allows a registration to become effective as early as A) 40 business days after the date the SEC has received it. B) 20 calendar days after the date the SEC has received it. C) 20 business days after the date the SEC has received it. D) 40 calendar days after the date the SEC has received it.

B) 20 calendar days after the date the SEC has received it. Once the registration statement has been received by the SEC, a cooling-off period begins and it must last at least 20 calendar days. This allows the registration to become effective as early as 20 calendar days after the date the SEC has received it.

Underwriters who are assisting an issuer in bringing securities to the investing public can do which of the following between the time the registration was filed with the Securities and Exchange Commission (SEC) and the effective date? A) Solicit orders from investors to purchase the securities. B) Make a binding offer to sell the securities. C) Distribute a preliminary prospectus to the investing public. D) Mail sales literature to those who have expressed an interest in purchasing the securities.

C) Distribute a preliminary prospectus to the investing public. The time between the registration filing date with the SEC and the effective date is known as the cooling-off period. During this time, a preliminary prospectus may be distributed to gauge investor interest but no offers to sell the securities can be made and no orders to purchase the securities can be taken. While a preliminary prospectus and tombstone ad can be used, sales and advertising literature specific to the securities cannot be.

Which of the following would be allowed during the cooling off period?

C) Placing a tombstone ad No selling or soliciting is allowed during the cooling off period. Publishing a tombstone is considered an announcement, not a solicitation. The final prospectus is not available during the cooling off period.

Rules regarding restricted persons state that each of the following is considered immediate family except A) a mother-in-law or a father-in-law. B) parents. C) an aunt or an uncle. D) a brother or a sister.

C) an aunt or an uncle. Rules regarding restricted persons define immediate family as spouses, parents, siblings, in-laws, and children. Aunts and uncles and grandparents are excluded (not considered immediate family).

A member firm receives an order to purchase shares in a common stock initial public offering (IPO) from another broker-dealer for a customer. Regarding restricted persons, the member must A) obtain a list of all of the broker-dealer clients to determine eligibility. B) obtain a statement witnessed by a notary representing that the buyer is not restricted. C) obtain a written representation that the buyer is not a restricted person. D) refuse to accept the order.

C) obtain a written representation that the buyer is not a restricted person. When receiving an order to buy a new equity issue, a member must obtain a written representation that purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons).

Regarding the issuance of new securities to the public, which of the following is true? A) Underwriters are permitted to accept orders for securities during the Securities and Exchange Commission (SEC) review period. B) Registrations become effective within 10 business days of Securities and Exchange Commission (SEC) filing. C) The Securities and Exchange Commission (SEC) review of a new issues filing must always be longer than 20 days. D) The Securities Act of 1933 provides criminal penalties for fraud.

D) The Securities Act of 1933 provides criminal penalties for fraud. The Securities Act of 1933, which provides for criminal penalties for fraud in the issuance of new securities, ensures that investors are fully informed about a security and its issuer when the security is offered to the public. The SEC review or 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.

Each of the following provides for an exemption from the registration requirement of the Securities Act of 1933 except A) Regulation A+. B) Regulation D. C) Rule 147. D) access equals delivery rule.

D) access equals delivery rule. Securities offerings may qualify for exemption from the registration statement and prospectus requirements of the Securities Act of 1933 under Regulation A+, Regulation D, Rule 147 and Regulation S.

A preliminary prospectus is used to solicit A) sales after the effective date. B) sales before the effective date. C) indications of interest before the registration filing date. D) indications of interest before the effective date.

D) indications of interest before the effective date. A preliminary prospectus cannot be distributed before the registration date. Between the registration and effective dates, it is used to solicit or gauge indications of interest. After the effective date, sales can be solicited and a final prospectus would be available and must be used to do so.

Six days into the cooling-off period, an issuer receives a deficiency letter from the Securities and Exchange Commission (SEC) requesting clarification and corrections. Once the issuer submits these, and assuming that they satisfy the deficiency, the cooling-off period will resume. With no other deficiencies arising, the issue should become effective in A) 14 days. B) 8 days. C) 20 days. D) 15 days.

A) 14 days. When the issuer submits the corrections necessary to satisfy the deficiency letter, the 20-day cooling-off period picks up where it left off; in this case, from six days, which means that the issue should be effective 14 days later. LO 7.d

A final prospectus contains all of the following except A) SEC approval. B) history of the business. C) the use of the proceeds. D) description of the management.

A) SEC approval. The SEC neither approves nor disapproves a final prospectus; they allow the issue to become effective. Beware of any approval language when referring to a regulator.

Primary market transactions would include which of the following? A) Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter B) Sale of $10 million of U.S. Treasury bonds by a broker-dealer acting as a market maker C) Sale of $10 million of corporate stock by a broker-dealer acting as a market maker D) Sale of $10 million of municipal bonds by a broker-dealer acting as a market maker

A) Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter Market makers are broker-dealers who sell out of their own account in the secondary market. Underwriters are broker-dealers who help issuers bring their securities to market in the primary market.

For nonexempt securities being offered to the public for the first time by a corporate issuer, which of the following would be applicable? A) Securities Act of 1933 regulating issues that must be offered by prospectus B) Securities Act of 1934 regulating issues that must be offered by prospectus C) Securities Act of 1934 regulating securities that must be offered by prospectus D) Securities Act of 1933 regulating securities traded in the secondary market

A) Securities Act of 1933 regulating issues that must be offered by prospectus Nonexempt securities are those that must be registered with the Securities and Exchange Commission (SEC) under the Securities Act of 1933. The Securities Act of 1933 mandates that offerings of these securities must be made by prospectus.

An issuer that is already a publically traded company wants to register new securities without selling any of the shares until later when it anticipates it will be retooling all of its existing manufacturing plants. Which of the following applies? A) This can be accomplished by utilizing a shelf registration specifically designed to register shares presently to be sold later. B) This can be accomplished by utilizing a new initial public offering, which is necessary for registration of all new shares. C) This cannot be done because newly registered securities must be made available for sale immediately. D) This can be accomplished by utilizing an additional issue offering, which is specifically for publically traded companies wanting to register new shares to be issued later.

A) This can be accomplished by utilizing a shelf registration specifically designed to register shares presently to be sold later. A shelf offering (registration), allows an issuer that is already a publically traded company to register new securities without selling any of the shares until later or waiting to sell a portion of the shares later when the capital might be needed.

A company that offers sales of another company's securities in a primary market transaction would best be described as A) an underwriter. B) a market maker. C) an issuer. D) a transfer agent.

A) an underwriter. A broker-dealer (investment banker) that works with an issuer to bring the issuer's securities to the market by offering the securities for sale to investors is best described in this context as an underwriter.

For nonlisted and non-Nasdaq securities, a prospectus must be provided to all those who purchase securities as part of an APO for how many days after the effective date? A) 30 days B) 40 days C) 60 days D) 10 days

B) 40 days For nonlisted and non-Nasdaq securities, the prospectus delivery requirement period in the aftermarket is 40 days (90 days for an IPO). The requirement is 25 days for an IPO for a Nasdaq or exchange listed security (zero days for an APO).

All the following are exempt from the Securities Act of 1933 except A) U.S. Treasury securities. B) fixed annuity contracts. C) limited partnership. D) debt securities issued by religious organization.

C) limited partnership. Limited partnership interests are not exempt securities. The exempt securities include U.S. government securities, municipal bonds, commercial paper and banker's acceptances that have maturities of less than 270 days, insurance policies and fixed annuity contracts (but not variable annuities), charitable, religious, educational, and nonprofit association issues and more.

In an underwriting where fixing a minimum dollar amount to be sold in order to move forward with the entire offering is most commonly referred to as A) de minimis. B) all or none (AON). C) mini-max. D) firm commitment.

C) mini-max. A mini-max offering is a best efforts underwriting setting a floor or minimum, which is the least amount the issuer needs to raise in order to move forward with the underwriting, and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell.

For a new issue that qualifies for listing on an exchange, a prospectus must be provided to all purchasers for how many days after the effective date? A) 40 days B) 90 days C) 60 days D) 25 days

D) 25 days For new issues that qualify for listing on an exchange or Nasdaq (NMS securities), the prospectus delivery requirement period in the aftermarket (after the effective date) is 25 days. For nonlisted and non-Nasdaq (non-NMS) securities, the period is 90 days. For an APO, the reqquirement for NMS securities is 0 days (no requirement). The APO of a non-NMS security is 40 days.

A company with previously issued shares outstanding wants to issue more shares to the public. These new shares are issued in what is known as A) a secondary registration. B) an initial public offering (IPO). C) a secondary market offering. D) An additional public offering (APO).

D) An additional public offering (APO). The first time that a company issues shares to the public, it engages in an IPO. Later offerings are known as subsequent primary offerings (SPOs) or APOs. The IPO and any SPO or APO are all issuer transactions and are, therefore, done in the primary market.

Which of the following best describes a final prospectus? A) Must be refiled with the SEC on an annual basis B) Filed with the Securities and Exchange Commission (SEC) but is never made available to the general public C) Used to solicit indications of interest in a new issue during the cooling-off period D) Meets the full and fair disclosure requirements of the Securities Act of 1933

D) 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.

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) Securities Exchange Act of 1934 B) Investment Company Act of 1940 C) Uniform Securities Act D) Securities Act of 1933

D) Securities Act of 1933 Companies looking to offer securities to the public must provide a prospectus to those who are approached to purchase the shares. This requirement ensures that the investing public is fully informed about a new security and its issuing company.

Shelf offerings are covered under which if the following? A) The Bank Secrecy Act B) The Trust Indenture Act of 1939 C) The Investment Company Act of 1940 D) The Securities Act of 1933

D) The Securities Act of 1933 The shelf offering (registration) provision under the Securities Act of 1933 allows issuers to quickly raise capital when needed or when market conditions are favorable.