Units 7-9

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) Receipt of it is a commitment that the underwriters will sell securities to the recipient. C) It is made available between the registration date and the effective date. D) The final price for the securities is published within it.

C) 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.

A company is considering raising capital without going through the registration process requirements mandated by the Securities Act of 1933. To be exempt from the act, which of the following offerings might they employ? A) Additional public offering (APO) B) Shelf offering C) Initial public offering D) Private (nonpublic) securities offering

D) Private (nonpublic) securities offering Issuers wanting relief (exemption) from the registration provisions of the Securities Act of 1933 can offer securities privately. These securities offerings are often called private placements.

Under the Securities Act of 1933, which of the following is a nonexempt security? A) Commercial paper B) Shares issued by a U.S. government bond fund C) U.S. government bonds D) Municipal bonds

B) Shares issued by a U.S. government bond fund This is a mutual fund. Mutual funds are not exempt securities under the Securities Act of 1933.

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

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

A corporation sells shares to the investing public in order to raise capital. This is known as A) a primary, or investor-to-investor, transaction. B) an issuer transaction. C) a secondary market transaction. D) an exchange market execution.

B) an issuer transaction. 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.

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) 8 days. B) 15 days. C) 14 days. D) 20 days.

C) 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.

Regarding primary and secondary offerings, which of the following are true? I: An offering can only be either a primary or secondary. II: An offering can be a combination of primary and secondary. III: An initial public offering (IPO) is a secondary offering. IV: An additional primary offerings (APO) is a primary offering. A) I and III B) I and IV C) II and IV D) II and III

C) II and IV An offering can be a combination of primary and secondary. These are known as split offerings. Both IPOs and APOs are primary offerings, where the issuer receives the sale proceeds.

The XYZ Company is looking to offer shares of its common stock to the public. Which of the following laws enacted by Congress would have the most relevance to the issuance of these securities? A) The Trust Indenture Act of 1939 B) The Investment Company Act of 1940 C) The Securities Act of 1933 D) The Securities Investors Protection Act of 1970

C) The Securities Act of 1933 The Securities Act of 1933, also known as the Paper Act or Prospectus Act, is the bedrock of all modern securities law. It requires issuers looking to make a public offering of securities to provide full and fair disclosure of all material facts about the company and the securities being offered. The company does this by registering its securities with the U.S. Securities and Exchange Commission (SEC), often with the aid of accountancy firms, securities attorneys, and underwriters. Part of the registration process for newly offered securities is the publishing of a prospectus which all prospective investors must receive at or prior to purchase.

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.

Regarding a shelf registration filed with the Securities and Exchange Commission (SEC), which of the following statements are true? I: A supplemental prospectus must be filed before each sale. II: This registration is for issuers who want to issue securities for the first time. III: Portions of a shelf offering can be sold over a 10-year period without having to reregister the security. IV: Portions of a shelf offering can be sold over a three-year period without having to reregister the security. A) II and III B) I and III C) II and IV D) I and IV Shelf offerings are for issuers who already have publicly traded securities in the marketplace. This type of offering registration allows the issuers to register additional shares to be offered and then issue the securities when the need for raising capital arises—taking the securities off the shelf and selling them when needed. While portions of the issue can be sold over a three-year period, a supplemental prospectus must be filed with the SEC before each sale.

D) I and IV Shelf offerings are for issuers who already have publicly traded securities in the marketplace. This type of offering registration allows the issuers to register additional shares to be offered and then issue the securities when the need for raising capital arises—taking the securities off the shelf and selling them when needed. While portions of the issue can be sold over a three-year period, a supplemental prospectus must be filed with the SEC before each sale.

A registered representative provides financial support and housing at her home for her grandfather. Regarding the purchase of new issues, A) the registered representative is restricted, but her grandfather is not. B) neither are considered restricted. C) the grandfather is restricted, but the registered representative is not. D) both persons are considered restricted.

D) both persons are considered restricted. Working for a broker-dealer, the registered representative is considered restricted. While grandparents of restricted persons are generally not considered restricted, anyone being provided financial support and/or living under the same roof as a restricted person (as is the case here) is also restricted.

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

D) not purchase shares of a new issue. Persons characterized as restricted persons are prohibited from purchasing shares of new issues in any quantity. If one is already restricted, working for a bank or a broker-dealer does not exempt them from the rule.

When the Securities and Exchange Commission (SEC) clears securities for sale to the investing public, this is A) the exudate. B) the due date. C) the time upon which the SEC approves the securities. D) the effective date.

D) the effective date. The effective date is when the SEC clears an issue to be sold to the public; the registration becomes effective. At no time does the SEC approve, disapprove, or make any representation that the information in the registration documents is accurate.

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 market offering. B) An additional public offering (APO). C) an initial public offering (IPO). D) a secondary registration.

B) 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.

A corporation increases capitalization by selling shares of stock which can either come from a new issue or previously authorized but unissued shares. Total stock outstanding must A) always be greater than the number of shares issued. B) never exceed the number of shares authorized. C) always equal the number shares authorized. D) never equal the number of shares issued.

B) never exceed the number of shares authorized. A corporation's bylaws state the maximum number of shares authorized to be issued. Therefore, issued shares, those in the hands of public shareholders (outstanding shares) can never exceed the number of shares that were authorized. While those outstanding shares can therefore never be greater than the number of shares issued they could equal the number of shares issued.

The primary purpose of the Securities Act of 1933 is to A) regulate all persons associated with industry member firms. B) require full and fair disclosure in connection with the sale of securities to the public. C) provide a basis for the regulation of exchanges and electronic trading venues. D) authorize the designated self-regulatory organizations (SROs) to enforce securities rules and regulations.

B) require full and fair disclosure in connection with the sale of securities to the public. 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.

The Securities Act of 1933 protects investors who buy new issues by doing all of the following except A) requiring an issuer to provide full and fair disclosure. B) regulating the underwriting and distribution of primary and secondary issues. C) providing criminal penalties for fraud in the issuance of new securities. D) requiring the licensing of persons affiliated with broker-dealers.

D) requiring the licensing of persons affiliated with broker-dealers. Licensing of individuals associated with broker-dealers is mandated under the Securities Exchange Act of 1934. The Securities Act of 1933 protects investors who buy new issues regulating, among other things, registration of new issues, underwriting, full disclosure, and the potential for fraud in the issuance of securities.