Unit 7 - Practice Exam 1 (Issuing Securities)

An affiliate of an issuer sells shares using a Form 144. This form is valid for: A) 180 days. B) 30 days. C) 90 days. D) 60 days.

Your answer, 60 days., was incorrect. The correct answer was: 90 days. Form 144, which is used for the sale of restricted and control stock, is valid for 90 days from the date of filing. Reference: 7.6.2.4 in the License Exam Manual

Which of the following investors would be exempt from filing form 144 when selling securities they own? A) An employee of the company selling unregistered shares. B) An affiliated person selling unregistered shares. C) An investor selling shares acquired in a Regulation D private placement. D) An employee of the company selling registered shares.

Your answer, An employee of the company selling registered shares., was correct!. Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply. Reference: 7.6.2.4 in the License Exam Manual.

The Securities Exchange Act of 1934: created the SEC. regulates trading in the secondary market. prohibits fraud in the distribution of new issues. A) II and III. B) I and II. C) I, II and III. D) I only.

Your answer, I and II., was correct!. The Securities Exchange Act of 1934 regulates secondary market activity. It created the SEC, which oversees all trading activity. The Securities Act of 1933 prohibits fraud in the distribution of new issues, whereas the Act of 1934 prohibits fraud in the trading of securities. Reference: 7.1.1.2. in the License Exam Manual.

Under the Securities Act of 1933, the Securities and Exchange Commission has the authority to: issue stop orders regarding a new issue registration filing. approve new issues. review standard registration forms. guarantee the accuracy of the information contained in the registration forms. A) I and III. B) II and III. C) I and IV. D) II and IV.

Your answer, I and III., was correct!. During the cooling-off period, the SEC reviews registration statements and can issue stop orders if the registration is not complete or was not filed properly. The SEC does not approve securities or guarantee that any information found within a prospectus is accurate; it only clears the securities for distribution (sale) to the public. Reference: 7.2.2.5 in the License Exam Manual.

Which of the following are SROs? FINRA. SIPC. SEC. Chicago Stock Exchange. A) II and III. B) II and IV. C) I and III. D) I and IV.

Your answer, I and III., was incorrect. The correct answer was: I and IV. Like FINRA, the exchanges are registered with the SEC. FINRA regulates the OTC market and members of the New York Stock Exchange, whereas the other exchanges regulate transactions occurring on their trading floors. The SEC is a federal commission, not an SRO. All SROs are subject to SEC oversight. Reference: 7.1.1.2 in the License Exam Manual.

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 IV. B) II and IV. C) II and III. D) I and III.

Your answer, I and IV., was correct!. 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. Reference: 7.2.2.1 in the License Exam Manual.

Which of the following securities issues must be registered with the SEC under the Securities Act of 1933? Public DPPs. Variable annuities. Open-end funds. Closed-end funds. A) II and III. B) III and IV. C) I and II. D) I, II, III and IV.

Your answer, I, II, III and IV., was correct!. The Securities Act of 1933 requires the registration of all new nonexempt issues of securities sold to the public. In general, exempt issues include municipal securities, U.S. government securities, bank issues, and nonprofit organization securities. The securities in this question are all nonexempt. Reference: 7.1.1.1 in the License Exam Manual.

*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) II and III. B) I only. C) I, II, III and IV. D) I and II. .

Your answer, I, II, III and IV., 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. Reference: 7.5.4 in the License Exam Manual.

*Before the filing of a registration statement for a new issue, an investment representative may NOT:* solicit indications of interest for the security. solicit orders. confirm the sale of the security to a customer. A) I only. B) II and III. C) I, II and III. D) II only.

Your answer, II and III., was incorrect. The correct answer was: I, II and III. Before the registration statement is filed, no sale, solicitations, or indications of interest in the issue may occur. Reference: 7.2.2 in the License Exam Manual.

*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) I and IV. C) II and III. D) I and III.

Your answer, II and IV., was correct!. 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. Reference: 7.6.3.1 in the License Exam Manual.

Your customer is interested in purchasing shares of a new issue where the demand for shares has already exceeded the number of shares the issuer intends to offer. Which of the following options might you look for that could allow your customer to receive shares? A) Selling group B) Over-allotment (Green Shoe Provision) C) Firm commitment offering D) Regulation A offering

Your answer, Over-allotment (Green Shoe Provision), was correct!. An over-allotment option (Green Shoe Provision), if one exists in the underwriting agreement, will allow the underwriters to sell up to 15% more shares than the issuer had originally intended to offer when demand exceeds supply. Reference: 7.5.5 in the License Exam Manual.

Regarding Regulation D (Private Placement) offerings, which of the following statements is TRUE? A) Registration with the SEC is not required. B) Purchasers need not be provided or have access to offering information normally provided by a prospectus. C) The amount of capital that can be raised via a private placement is limited. D) No filings with the SEC are required by the issuer.

Your answer, Registration with the SEC is not required., was correct!. Regulation D offerings are exempt transactions and therefore no SEC registration is required. However, issuers must still file information with the SEC on Form D regarding the issue. This filing will contain all of the information a potential investor might want to know, similar to the information contained on a prospectus. There is no limit to the amount of capital that can be raised via a Regulation D private placement transaction. Reference: 7.6.2.2 in the License Exam Manual.

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

Your answer, Rule 147., 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. Reference: 7.6 in the License Exam Manual.

Your answer, are considered to be offered in an exempt transaction, was correct!. Regulation S, a type of exempt transaction allowed by the SEC, permits US issuers to offer securities offshore to non-US residents only, without being registered with the SEC. Reference: 7.6.2.7 in the License Exam Manual.

Your answer, Securities Act of 1933., was incorrect. The correct answer was: Securities Exchange Act of 1934. The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC. Reference: 7.1.1.2 in the License Exam Manual.

A company without business operations that raises money through an IPO in order to have its shares publicly traded for the sole purpose of seeking out a business or combination of businesses is known as: A) a regulation D, Private Placement company. B) a special situation company. C) a special purpose acquisition company (SPAC). D) a growth company.

Your answer, a special purpose acquisition company (SPAC)., was correct!. Generally, with IPOs the business purpose and products or services offered by a company are clearly defined. However, both the NYSE and Nasdaq allow companies without a defined business purpose to raise capital through an IPO in order to have it's shares traded for the sole purpose of seeking out a business or combination of businesses that when located would be submitted to shareholders for their approval. These types of companies are known as special purpose acquisition companies (SPACs). Reference: 7.3.3.1 in the License Exam Manual.

Securities issued outside the United States by US issuers and sold to non-US residents A) are considered to be offered by an exempt issuer B) are considered to be offered in an exempt transaction C) are considered to be offered in a nonexempt transaction D) must be registered with the SEC

Your answer, are considered to be offered in an exempt transaction, was correct!. Regulation S, a type of exempt transaction allowed by the SEC, permits US issuers to offer securities offshore to non-US residents only, without being registered with the SEC. Reference: 7.6.2.7 in the License Exam Manual.

In reviewing prospectuses and registration statements, the SEC: A) passes on the merits of a particular security covered by a registration statement. B) certifies the accuracy of the disclosures made in a prospectus. C) guarantees the adequacy of the disclosures made in a prospectus. D) does not approve or disapprove of the issue.

Your answer, does not approve or disapprove of the issue., was correct!. The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue. Reference: 7.2.2.5 in the License Exam Manual.

*An offering of securities in compliance with Rule 144A is sold primarily to:* A) All of these. B) foreign individual investors. C) qualified institutional buyers. D) American individual investors.

Your answer, foreign individual investors., was incorrect. The correct answer was: qualified institutional buyers. Rule 144A allows securities to be sold to (qualified) institutional buyers without having to meet the holding period or volume requirements of Rule 144. Reference: 7.6.2.5 in the License Exam Manual.

***All of the following are covered under the Securities and Exchange Act of 1934 EXCEPT:*** A) margin. B) short sales. C) trust indentures. D) proxy solicitation.

Your answer, margin., was incorrect. The correct answer was: trust indentures. Trust Indentures are covered under the trust indenture act of 1939. Reference: 7.1.1.2 in the License Exam Manual.

A customer is interested in an IPO of a stock in registration. He requests that you highlight the important information on the preliminary prospectus and send an analysis of the company's past performance. You may: A) comply with the request because it involves an IPO in which little information is known about the issuer. B) not comply with the request because the stock is not yet listed for trading on any exchange. C) comply with the request because the customer solicited the information and analysis. D) not comply with the request because the preliminary prospectus may not be altered.

Your answer, not comply with the request because the preliminary prospectus may not be altered., was correct!. A prospectus, whether preliminary or final, is a legal document that cannot be altered by the registered representative. It is illegal for a registered representative to mark on or attach anything to a prospectus (even if requested by a client). Important information may be pointed out orally but not highlighted. Reference: 7.2.2.1 in the License Exam Manual.

*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) 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

Your answer, not purchase shares of a new issue., was correct!. Persons characterized as restricted persons are prohibited from purchasing shares of new issues. Reference: 7.6.3.1 in the License Exam Manual.

When the SEC rules that an offering has become effective, the SEC has: A) approved the offering for registration. B) cleared the offering for sale. C) verified the accuracy of the statements in the registration statement. D) not verified the accuracy of each statement in the registration statement but has approved of the offering.

Your answer, not verified the accuracy of each statement in the registration statement but has approved of the offering., was incorrect. The correct answer was: cleared the offering for sale. An offering is effective when released by the SEC for sale. The SEC does not approve or disapprove of new offerings; it releases them for sale after determining that enough information is available for public investors to make sound investment decisions. Reference: 7.2.2.5 in the License Exam Manual.

Underwriters that reserve the right to stabilize the price of securities distributed to the public under an SEC registration statement may do so: A) without restriction. B) only if notice is given in the prospectus. C) under no circumstances. D) only if the securities being distributed will be immediately listed for trading on the NYSE or other exchange.

Your answer, only if notice is given in the prospectus., was correct!. Stabilizing transactions are permitted if the SEC is notified in the registration statement and the investing public is notified in the prospectus. Reference: 7.3.5.3 in the License Exam Manual.

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

Your answer, the public offering price., 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. Reference: 7.2.2.2 in the License Exam Manual.

A customer requests information on a new mutual fund and asks her registered representative to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted: A) under no circumstances. B) if approved by a principal. C) without restriction. D) if accompanied by an unmarked prospectus.

Your answer, under no circumstances., was correct!. The prospectus is a legal document and may not be altered. Reference: 7.2.2.6 in the License Exam Manual.