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93 Cards in this Set

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All of the following are required to be included in a preliminary prospectus according to the Securities Act of 1933 EXCEPT:
a. A written statement in red on the left border of a preliminary prospectus ("red herring") that states that the prospectus may be subject to changes
b. The purpose for which the funds are being raised
c. The final offering price
d. The financial status and history of the company
C
All of the items listed are required in a preliminary prospectus (red herring) except the final offering price. Many preliminary prospectuses do include a proposed offering price range, but it is not required. (9-12)
PRELIMINARY PROSPECTUS (S7) : This document is distributed before a security is offered to the public so that those selling the securities can obtain indications of interest. These indications help gauge demand for the new issue, which has implications for how the offering is priced. It is also called a Red Herring.
Which of the following persons may purchase a new issue from a member firm according to the New Issue Rule?
a. The brother-in-law of a person associated with a member firm
b. The uncle of a person associated with a member firm
c. A buy-side trader employed by a mutual fund
d. The owner of a member firm
B
Restricted persons are not permitted to purchase shares of an equity IPO under FINRA's New Issue Rule. Immediate family members of a person associated with a member firm, portfolio managers and owners of a broker-dealer would be considered restricted persons. Aunts, uncles, and cousins are not defined under the rule as immediate family members and are therefore not considered restricted persons. A buy-side trader would have the ability to make trading decisions and would be defined as a portfolio manager, who are individuals considered restricted persons under the rule. (9-4, 9-5, 9-6)
In a Rule 144A transaction, each of the following is true EXCEPT:
a. The seller, or any person acting on its behalf, such as a broker-dealer, must reasonably believe that the purchaser is a qualified institutional buyer (QIB)
b. The buyer must be able to establish its credentials as a QIB, through relevant documentation
c. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers)
d. If the seller has no reason to question the accuracy of documentation provided by the purchaser, it has no duty to inquire further about the purchaser's status as a QIB
C
The SEC has provided several examples of documents that can be relied upon by the seller when establishing its belief that a purchaser is a Qualified Institutional Buyer. Audited financial statements and a certification from the issuer are common methods of demonstrating that the purchaser is a QIB. (9-21)
Federal and state registration requirements apply to all of the following EXCEPT:
a. Publicly traded limited partnerships
b. Preferred stock
c. Municipal securities
d. Open-end investment companies
C
Municipal and U.S. government securities are exempt from the registration requirements of the Securities Act of 1933 and from state registration requirements. (9-19)
Blue Sky laws apply to which of the following?
I. Registered representatives
II. Securities
III. Tombstone ads
IV. REITs
a. I and II only
b. II and III only
c. I, II, and III only
d. I, II, III, and IV
D
Blue Sky laws are state securities laws. These laws apply to the registration of sales personnel (registered representatives ), the registration and sale of securities, and proper advertisement of securities. REITs (Real Estate Investment Trusts) are considered securities and are therefore regulated by state laws. (9-15)
BLUE SKY LAWS (S7) : State securities regulations. Also refers to the model law on which many states base their regulations--The Uniform Securities Act.
All of the following are types of municipal underwritings EXCEPT:
a. Negotiated
b. Competitive
c. All-or-none
d. Fill-or-kill
D
Fill-or-kill is a type of order placed to buy or sell a security in the secondary market; it is not a type of underwriting. (9-1)
A charity has received restricted stock from the director of a corporation. The director owned the stock for two years before giving it to the charity. According to SEC Rule 144, the charity can sell the stock:
a. Freely
b. Freely under Rule 144
c. After six months
d. After six months and then under Rule 144
B
The charity can sell the stock freely (immediately) since the required six-month holding period for restricted stock has already been met by the director. However, the stock is still restricted (unregistered) and must be sold under Rule 144. (9-20)
Rule 145 applies to which of the following situations?
a. A stock split
b. A stock dividend
c. An adjustment in par value
d. A merger
D
Rule 145 applies to mergers, consolidations, reclassification of securities, or transfer of corporate assets. Stock splits, dividends and the resulting changes in par value are specifically exempted from filing under Rule 145. (9-22)
The underwriting spread in a new corporate stock issue depends upon:
a. The dollar amount of the issue
b. The business and financial history of the corporation
c. The type of corporation and the kind of industry it is in
d. All of the above
D
The underwriting spread (the underwriter's compensation) depends upon all of the items listed since they help to determine the amount of risk that the underwriters take. (9-3)
An individual wishes to sell restricted securities according to the Rule 144 exemption. There are 6,000,000 shares outstanding. The trading volume for the last 5 weeks prior to the sale are:
April 1..........45,000
April 8..........62,000
April 15........70,000
April 22........75,000
April 29........72,000
If the customer were to sell the securities as of May 6th, how many shares can he sell?
a. 60,000
b. 63,000
c. 69,750
d. 72,000
C
The average weekly volume for the last four weeks prior to the sale equals 69,750 shares (add the weekly volume for the four weeks from 4/8 to 4/29 and divide by 4). One percent of the shares outstanding is 60,000. The individual can sell the greater of these two amounts which is 69,750 shares. (9-20)
The investment banking department of a broker-dealer generally does all of the following EXCEPT:
a. Underwrites new issues
b. Provides financing for industrial corporations
c. Distributes large blocks of already outstanding securities
d. Makes a secondary market for new issues
D
An investment banker generally does all of the items mentioned except make a secondary market for new issues. (9-1)
Which of the following is/are true regarding the sale of restricted securities under SEC Rule 144?
I. The securities must be fully paid.
II. The sale can be made on an agency or principal basis.
III. A Form 144 notice of sale must be filed with the SEC not later than 30 days after the sale.
IV. The securities must be owned for six months.
a. I only
b. I and II only
c. I, II, and III only
d. I, II, and IV only
D
The securities must be fully paid, owned for six months and can be sold on an agency or principal basis. A 144 notice of intent to sell, which is good for 90 days, must be filed with the SEC on the date of the sale. (9-20)
All of the following are true regarding a private placement EXCEPT:
a. There is a limit to the number of nonaccredited investors that may purchase the securities
b. The securities are exempt from registration
c. Solicitation of investors may not be permitted
d. It is usually a very liquid investment
D
Private placements are exempt from registration requirements under the Securities Act of 1933. Generally, the number of nonaccredited investors permitted to purchase the securities is limited to 35. General solicitation (i.e., cold calling) of investors is normally not allowed. A disadvantage of buying securities issued in a private placement is that it is usually an illiquid investment. (9-20)
NONACCREDITED (S7) : An investor not considered accredited for a Reg. D offering. See also: Accredited Investor.
REGULATION D OFFERING (S7) : A type of exempt offering that is sold directly to accredited investors and maximum of thirty-five nonaccredited investors. Also called Private Placement, Restricted Stock, Lettered Stock, Legend Stock.
A type of offering in which whatever is not sold is retained by the issuing corporation is:
a. A firm commitment
b. A best efforts
c. An all or none
d. A standby underwriting
B
A type of offering in which whatever is not sold is returned to the issuing corporation is a best-efforts underwriting. (9-2)
A type of offering in which the issuing corporation is assured of receiving the full amount of the offering, and whatever is not sold is retained by the underwriter, is:
a. A firm commitment
b. A best efforts
c. An all or none
d. A standby underwriting
A
A type of offering in which the issuing corporation is assured of receiving the full amount of the offering and whatever is not sold is retained by the underwriter is a firm commitment. (9-1)
FIRM COMMITMENT (S7) : A type of underwriting where the underwriters agree to purchase the entire issue from the issuer. If they do not sell the entire issue, they cannot return the unsold portion to the issuer.
A type of offering in which the offering is cancelled if the entire amount of the shares is not sold is:
a. A firm commitment
b. A best efforts
c. An all or none
d. A standby underwriting
C
A type of offering in which the offering is cancelled if the entire amount of shares is not sold is an all-or-none offering. (9-2)
The public offering price of a new issue of a corporation is determined by which of the following?
I. The dividends paid by the corporation
II. The past earnings record of the corporation
III. A comparison with other corporations in the same industry
IV. Market conditions at the time the new issue is expected to be sold
a. I and II only
b. I and III only
c. I, II, and III only
d. I, II, III, and IV
D
The public offering price of a new issue of a corporation is determined by all of the factors listed. (9-3)
For a new issue to be sold in its home state and neighboring states:
I. The issuer must file a Rule 147 form.
II. Registered representatives selling the stock must be registered in whatever states they plan to make sales in.
III. FINRA must approve the sale in all the states.
IV. The Blue Sky laws (state securities laws) of all the states in which the securities will be sold must be observed.
a. I and III
b. I and IV
c. II and III
d. II and IV
D
For the issue to be sold in its home state and neighboring states, individuals selling the new issue must be registered to sell the securities in those states. The Blue Sky laws (state securities laws) of those states in which the securities will be sold must also be observed. (9-15)
BLUE SKY LAWS (S7) : State securities regulations. Also refers to the model law on which many states base their regulations--The Uniform Securities Act.
The antifraud provisions of the Securities Act of 1933 apply to:
I. Brokers
II. Broker's brokers
III. Dealers
IV. Issuers
a. I and II only
b. I and III only
c. II, III, and IV only
d. I, II, III, and IV
D
The antifraud provisions of the Securities Act of 1933 apply to all of the choices listed. (9-19)
Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation.
Which of the following is true regarding this offering?
a. It is an initial public offering.
b. A registration statement is not required.
c. It is a combined offering.
d. It is a private placement.
C
Of the 500,000 shares being offered, 250,000 shares are being issued for the first time from authorized but unissued shares. This is considered a primary distribution. The 250,000 shares being offered by the selling stockholders have already been issued by the corporation. This would make them a secondary distribution. The offering is therefore a combined primary and secondary distribution. A registration statement is required because the securities are being offered to the public. (9-1)
Which of the following would be considered nonexempt securities according to the Securities Act of 1933?
a. U.S. government and municipal securities
b. Securities of a publicly held finance company
c. Securities of a small business investment company
d. Securities of a nonprofit organization
B
Nonexempt securities are securities that are subject to the registration requirements of the Securities Act of 1933. Securities of a publicly held finance company are the only nonexempt securities. All of the other securities listed would be exempt from the registration requirements of the Securities Act of 1933. (9-19)
A corporation is planning to issue new stock to the public but has not as yet filed a registration statement with the SEC. As a registered representative of the firm that is expected to do the underwriting, you cannot:
I. Obtain indications of interest from prospective purchasers
II. Receive monies from customers who intend to purchase the issue
III. Guarantee a customer that he will be able to purchase 1,000 shares of the issue
a. I only
b. I and II only
c. II and III only
d. I, II, and III
D
A registered representative cannot do any of the choices listed. The corporation has not filed a registration statement with the SEC. If a registration statement had been filed, the registered representative could obtain indications of interest to purchase the new issue. He could not accept money nor guarantee a customer that he would receive a particular amount of the issue. (9-16)
REGISTRATION STATEMENT (S7) : A disclosure document filed with the SEC under the Securities Act of 1933 to register an offering under the Act. A company must disclose pertinent information relating to its operations, securities, management, and purpose of the public offering.
In order to have an issuer of securities exempt from the provisions of the Securities Act of 1933 under Regulation D, which of the following is true?
I. Purchasers must sign an investment letter.
II. The size of the offering must be limited.
III. The number of accredited buyers is unlimited.
IV. The number of nonaccredited buyers is limited.
a. I only
b. I and II only
c. I, II, and III only
d. I, III, and IV only
D
According to the Regulation D, certain conditions must be met for the securities to be exempt from the provisions of the Securities Act of 1933. The offering must be restricted to persons who are knowledgeable and experienced in business and financial matters and who are able to afford the economic risks involved. The issuer must provide the buyer with detailed financial information, the number of nonaccredited purchasers must be limited to 35, and the offering must be made in direct negotiations between the issuer and the buyer or his purchaser representative. Also, the buyer must sign an investment letter stating that the purchase was made for investment and not for short-term trading purposes. The size of the offering is not limited. (9-20)
All of the following are correct concerning the underwriting of a new issue EXCEPT:
a. Some underwriting agreements include a clause that relieves the underwriter of his obligation if certain circumstances are not met
b. The preliminary prospectus (red herring) will contain all the relevant information including the final price of the issue in order to obtain indications of interest
c. The underwriting syndicate may engage in stabilization
d. Members of the underwriting syndicate whose customers sell securities back to the manager of the syndicate during the underwriting period may be penalized
B
All of the items listed are correct concerning the underwriting of a new issue except that the preliminary prospectus (red herring) will contain all the relevant information including the price of the issue. The preliminary prospectus does not include the final price. (9-12)
If a new issue is to be offered in three neighboring states:
I. The issue only has to be registered in the corporation's home state
II. The issue can only be sold by registered reps who are licensed to sell securities in the states where they conduct sales
III. The underwriter must publish a tombstone ad in all the states
IV. The issuer must satisfy the Blue Sky Laws (state securities laws) of the three states in which the issue will be sold
a. I and II
b. II and III
c. II and IV
d. III and IV
C
If a new issue is to be offered in neighboring states, the issue can only be sold by account executives who are licensed to sell securities in those states. The new issue must satisfy the Blue Sky Laws (state securities laws) of the three neighboring states in which the issue will be sold. The underwriter does not have to publish a tombstone ad in all the states. The issue must be registered in all the states, not only its home state. (9-15)
TOMBSTONE AD (S7) : An advertisement of a new issue of securities. It is placed by the underwriters and gets its name from the fact that it is bordered in black.
In a rights offering, an underwriter offers to purchase any of the shares the issuing corporation may not be able to sell. This is known as a(n):
a. Firm commitment underwriting
b. Best efforts underwriting
c. Standby underwriting
d. All or none underwriting
C
A type of underwriting in which the underwriter agrees to buy all the shares not subscribed for in a rights offering is a standby underwriting. The issuing corporation realizes that many small stockholders will not participate in the rights offering. This may amount to hundreds of thousands of shares in a corporation with a large capitalization. The corporation will not receive the money for the shares that are not subscribed for. The underwriter that is "standing by" to buy all the unsubscribed shares will either buy them at a discount or receive a fee. This type of an arrangement assures the issuing corporation it will receive the money it requires for expansion or for a new plant and equipment. (9-2)
STANDBY UNDERWRITING (S7) : An arrangement in which a securities firm is used to underwrite any unsubscribed shares of a rights offering. See also: Right.
Mr. Brown is a 15% owner of SamCo, a company whose stock is listed on the New York Stock Exchange. His wife also owns 4% of SamCo. If Mrs. Brown wishes to sell some of her SamCo shares, she:
a. Must do so according to Rule 144
b. May only do so with the permission of her husband
c. May do so provided that her husband also sells shares
d. May sell the shares without restriction
A
Rule 144 specifies procedures for the sale of restricted stock and control stock. Restricted stock is stock that is not registered and acquired through a private placement. Control stock is stock acquired by affiliated persons. This includes officers, directors, owners of more than 10% of the stock of a corporation, and their immediate families. Since Mr. Brown owns 15% of SamCo, Mrs. Brown is selling her shares as an affiliated person. (9-20, 11-5)
RULE 144 (S7) : A regulation that provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock. The number of shares that may be sold is limited.
RESTRICTED STOCK (S7) : Stock that was not registered under the Securities Act of 1933. Stock purchased through a company's stock option plan or a private placement will be unregistered. The purchaser will sign a letter agreeing that the purchase is for investment and not a short-swing profit. The holding period for restricted stock is six months. The sale of restricted stock is covered by Rule 144. See also: Rule 144; Letter Stock; Short-Swing Profit.
REGULATION D OFFERING (S7) : A type of exempt offering that is sold directly to accredited investors and maximum of thirty-five nonaccredited investors. Also called Private Placement, Restricted Stock, Lettered Stock, Legend Stock.
A syndicate is formed on an Eastern Account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is:
a. Not liable to sell any of the unsold bonds
b. Liable to sell 10% of the unsold bonds
c. Liable to sell $1,000,000 of the unsold bonds
d. Liable to sell all of the unsold bonds
B
In an Eastern or undivided account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is responsible for 10% of the unsold bonds. (9-4)
UNDIVIDED ACCOUNT (S7) : A form of a new issue syndicate where a member will be liable for a percentage of the issue and any unsold balance equal to its participation regardless of the amount the member has sold. Also known as an Eastern Account.
In an Eastern municipal syndicate account, the remaining liability of an account member is computed:
a. From the number of the bonds he has sold
b. From the number of bonds that are unsold in the account
c. By dividing the number of bonds in a single maturity year by the total number of account members
d. By the syndicate manager who randomly selects a member to sell the remainder of the bonds
B
An Eastern account is undivided as to liability. As long as any bonds in the account are still unsold, each member of the account is liable for his proportionate share of the unsold amount. If the member has a 10% participation in a $10,000,000 issue, originally his liability is for $1,000,000 of those bonds. If there is a balance of bonds unsold by other members, he will still have a liability of 10%, whether he sold all or none of his bonds. (9-4)
Rule 415 allows Shelf Registration. This permits one registration statement to cover all securities to be issued during the next:
a. Six months
b. One year
c. Three years
d. Five years
C
Shelf registration allows the issuer to file a registration statement with the SEC and then, over a 3-year period, sell the securities when the issuer deems the time is appropriate. (9-21)
SHELF REGISTRATION (S7) : A type of new issue registration that allows the issuer some flexibility as to the timing of the issue (up to three years from filing).
REGISTRATION STATEMENT (S7) : A disclosure document filed with the SEC under the Securities Act of 1933 to register an offering under the Act. A company must disclose pertinent information relating to its operations, securities, management, and purpose of the public offering.
A registered representative has sent a preliminary prospectus to various clients who have indicated an interest in a new issue his firm is underwriting. The registered representative is notified that he has been allocated 500 shares of the new issue. The registered representative should:
a. Allocate the 500 shares to his most active client
b. Allocate 100 shares each to his best clients
c. Contact all clients who have received a prospectus asking them if they have made a decision to purchase the new issue that is now available
d. Keep the 500 shares for himself
C
The only action the registered representative could take would be to contact all clients who have received a prospectus asking them if they have made a decision to purchase the new issue that is now available. (9-12)
A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares.
What amount will the issuer receive?
a. $11.95 per share for a total of $59,750,000
b. $12.20 per share for a total of $61,000,000
c. $12.35 per share for a total of $61,750,000
d. $13.00 per share for a total of $65,000,000
B
In a new stock offering, the underwriting syndicate assumes risk and is therefore entitled to make a profit on the shares sold. Members of the selling group do not assume risk and therefore make a profit on only the shares they sell. The profit on shares sold is the $0.40 which the selling group receives. The members of the underwriting syndicate receive $0.65 for shares they sell. This is composed of the $0.40concession plus $0.25 ($0.65 - $0.40) for their underwriting risk. The total spread is $0.80 ($0.15 manager fee plus $0.25 to the syndicate for risk plus $0.40 profit for sale of shares). The issuer will receive $12.20 per share ($13.00 offering price minus $0.80 underwriting spread) for a total of $61,000,000 ($12.20 x 5,000,000 shares). (9-3)
A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares.
When the issue is completely sold, the managing underwriter's fee will total:
a. $150,000
b. $600,000
c. $750,000
d. $2,600,000
C
The syndicate manager receives $0.15 for every share. The manager will receive, in total, $750,000 (5,000,000 shares x $0.15 per share). (9-3)
A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares.
Assuming that all of the shares are sold, what amount will the syndicate members receive for their risk on shares sold by the selling group?
a. $0.25 per share for a total of $250,000
b. $0.25 per share for a total of $1,000,000
c. $0.40 per share for a total of $400,000
d. $0.65 per share for a total of $650,000
A
The members of the syndicate receive $0.25 per share for their risk. Since the selling group was allocated 1,000,000 shares, the syndicate will receive $0.25 per share on 1,000,000 shares for a total of $250,000. (9-3)
The volume of trading in ABC Company is as follows:

Last week 15,000 shares traded
Two weeks ago 17,200 shares traded
Three weeks ago 19,600 shares traded
Four weeks ago 18,100 shares traded
Five weeks ago 17,100 shares traded

A customer owns 200,000 shares of restricted stock of ABC Company. ABC Company has 1,840,000 shares outstanding. If the customer wanted to sell his shares today, what is the maximum number of shares he could sell according to Rule 144?
a. 17,475
b. 18,000
c. 18,400
d. 20,000
C
The customer could sell 18,400 shares. Under Rule 144, a customer who owns restricted stock is able to sell 1% of the outstanding shares or the average weekly volume for the last four weeks prior to the sale, whichever is greater over the next 90 days. One percent of the outstanding shares is 18,400, which is greater than the average weekly volume of the last four weeks, which is 17,475.
Last week 15,000 shares traded
Two weeks ago 17,200 shares traded
Three weeks ago 19,600 shares traded
Four weeks ago 18,100 shares traded
69,900 total number of shares traded
69,900 divided by 4 equals 17,475 average weekly volume for the last 4 weeks prior to the sale. (9-20)
The conditions of an Eastern account provide that syndicate members:
a. Have no liability if they have sold their allotted commitment
b. Have a liability in proportion to their participation even if they have sold their allotted commitment
c. Have the same percentage liability as all other members of the syndicate
d. Belong to the New York Stock Exchange
B
The conditions of an Eastern account provide that syndicate members have a liability in proportion to their participation even if they have sold their allotted commitment. (9-4)
A corporation that is planning an offering of common stock has not filed a registration statement. Which of the following actions on the part of a registered representative would be a violation of the Securities Act of 1933?
a. Informing a customer that he may receive as many shares as he desires
b. Accepting orders for the shares to be offered
c. Attempting to obtain indications of interest for the shares to be offered
d. All of the above
D
All of the actions listed would be in violation of the Securities Act of 1933, if a registration statement has not been filed with the SEC. A registered representative cannot inform a customer that the customer can receive as many shares as desired. Nor can the registered representative solicit buy orders or solicit indications of interest from the customer. A registration statement has to be filed before indications of interest may be accepted, and only indications of interest would be acceptable at this time, not orders. (9-16)
The term all-or-none, in trading municipal bonds applies to:
a. Agency transactions
b. Premium bonds
c. Discount bonds
d. Sellers' offering terms
D
Offerings are sometimes made on an all-or-none basis (an AON offering), which is when the offerer agrees to sell the bonds only if all that he has available will be bought. (9-2)
A direct participation program is sold as a private placement. Which of the following would be required of an individual to be classified as an accredited investor?
I. $200,000 net worth
II. $1,000,000 net worth
III. $200,000 annual income
IV. $300,000 annual income
a. I or III
b. I or IV
c. II or III
d. II or IV
C
To qualify as an accredited investor, an individual must have $1,000,000 net worth or $200,000 annual income with the anticipation that income will continue at that level. (9-20)
ACCREDITED INVESTOR (S7) : To qualify as an accredited investor for a Regulation D Private Placement, an investor must be either: (a) an affiliate of the issuer, (b) a financial institution, or (c) an individual with $1 million net worth, or $200,000 annual income.
A corporation intends to sell 1,000,000 shares of stock through an underwriter. The prospectus states that 500,000 shares are being sold by the corporation from authorized but unissued stock. Also, 500,000 shares are being sold by officers and directors of the corporation. Which of the following are true?
I. This is a primary distribution for 1,000,000 shares.
II. This is a combined primary and secondary distribution of 1,000,000 shares.
III. All of the proceeds of the offering will go to the corporation.
IV. The proceeds of the offering will be divided between the corporation and selling officers and directors.
a. I and III
b. I and IV
c. II and III
d. II and IV
D
The corporation is selling 500,000 shares from authorized but unissued stock which would be a primary distribution. The officers and directors are selling 500,000 shares that were previously issued to them and are already outstanding. This would be a secondary distribution. The proceeds of the offering will therefore be divided among the corporation and the selling stockholders. (9-1)
ABC Corporation has filed a registration statement with the SEC. A registered representative would be prohibited from doing all of the following EXCEPT:
a. Sending a research report about ABC to prospective clients
b. Sending a preliminary prospectus to clients to obtain indications of interest
c. Accepting orders from clients
d. Accepting money from clients to buy the securities
B
During the registration period, a registered representative cannot send research reports to clients or accept orders and payments for new issues from clients. The registered representative can send a preliminary prospectus and receive indications of interest from his clients. (9-13)
Which of the following choices is an example of a stabilizing bid by the syndicate manager of a new issue?
Public Offering Price..........Bid
a. $15............................$15
b. $21............................$21.13
c. $25............................$25.25
d. $35............................$35.25
A
The syndicate manager would place a stabilizing bid at or below the public offering price ($15) of the new issue. The syndicate bid could be at $15. Stabilization prevents the market price from declining below the offering price, thereby aiding the marketing of the entire issue and providing the issuing corporation with the money it requires. The other choices listed show bid prices that are greater than the public offering price, which is not allowed when stabilizing an issue. (9-7)
STABILIZATION (S7) : The ability of an underwriter of a new issue to act in the secondary market to maintain the price of a security at the highest independent bid price
To sell a security in a given state, a registered representative:
a. Must be registered in that state
b. Must be registered in that state only if he is a resident of that state
c. Need not be registered in that state if his brokerage firm is registered in that state
d. Does not have to be registered in that state if he is registered with FINRA
A
Any broker-dealer or registered representative selling securities in a particular state must be registered in that state. Being registered with FINRA does not necessarily register an individual in a given state. Many states have additional registration requirements besides joining FINRA. (9-15)
There are 2,600,000 shares of XYZ Corporation outstanding. XYZ Corporation is listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities of XYZ Corporation which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks was:
1 week ago 25,000 shares
2 weeks ago 26,000 shares
3 weeks ago 27,000 shares
4 weeks ago 28,000 shares
5 weeks ago 27,000 shares
6 weeks ago 27,000 shares
How many shares of XYZ Corporation is Mr. Smith able to sell according to Rule 144?
a. 26,000 shares
b. 26,500 shares
c. 27,250 shares
d. 30,000 shares
B
Mr. Smith would be able to sell 26,500 shares. Under Rule 144, the amount that may be sold during any 90-day period is 1% of the outstanding shares or the average weekly volume of trading for the four weeks prior to the sale, whichever is greater. One percent of the outstanding shares is 26,000. The average weekly volume from the prior four weeks was 26,500 shares. (9-20)
There are 2,600,000 shares of XYZ Corporation outstanding. XYZ Corporation is listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities of XYZ Corporation which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks was:
1 week ago 25,000 shares
2 weeks ago 26,000 shares
3 weeks ago 27,000 shares
4 weeks ago 28,000 shares
5 weeks ago 27,000 shares
6 weeks ago 27,000 shares
According to Rule 144, Mr. Smith would have to file a notice of intent to sell with the SEC which is valid for:
a. 1 day
b. 90 days
c. 6 months
d. Whatever amount of time is necessary to complete the offering
B
The notice of offering is valid for 90 days. (9-20)
All of the following take place during the cooling-off period EXCEPT:
a. The due diligence meeting
b. The issuance of a red herring
c. Stabilizing the issue
d. Blue-Skying the issue
C
When a new stock issue is to be sold, a registration statement must be filed with the SEC. After the filing, there is a period of time for the SEC to review the information to ensure full disclosure. During the cooling-off period, a preliminary prospectus (red herring) is prepared to be used to get indications of interest from the public. The issue must be registered in each state in which it will be sold according to state (Blue Sky) laws. Prior to the completion of the final prospectus, a due diligence meeting is held. This is where all concerned parties (issuer and underwriter) meet to insure that everything has been done properly. Stabilization of the issue will take place after the new security is selling in the market. (9-13, 9-7, 9-16)
COOLING-OFF PERIOD (S7) : The period in a new stock issue beginning with the filing date of the registration statement and ending on the effective date. According to federal regulations, it must be a minimum of twenty days. During the cooling-off period, the issuing corporation and underwriters will prepare and distribute a preliminary prospectus, blue-sky the issue, hold a due diligence meeting, and prepare the final prospectus.
In an underwriting of a new issue by a syndicate, which of the following statements is true?
a. The underwriting spread is larger than the selling concession.
b. The selling concession is larger than the underwriting spread.
c. The reallowance is larger than the underwriting spread.
d. The reallowance is larger than the selling concession.
A
In the underwriting of a new issue, the underwriting spread is larger than the selling concession. The underwriting spread is larger because members of the underwriting syndicate assume the risks of underwriting. The selling concession given to the selling group is less because the selling group acts in a "best efforts" capacity and does not assume the risks involved in a firm commitment underwriting. A reallowance is compensation given to broker-dealers who are nonmembers of the syndicate or selling group who would like to participate in the underwriting. The reallowance given is less than the amount members of the syndicate or selling group receive. (9-3, 9-4)
REALLOWANCE (S7) : The amount received by a broker-dealer that is not a member of the syndicate or selling group.
A Regulation A exemption would be allowed of an issuer:
a. Offering 500,000 shares or less
b. Offering securities with a value not exceeding $10,000,000
c. Offering securities with a value not exceeding $5,000,000
d. Offering securities only to residents of a specific state
A
A Regulation A offering is exempt from the registration and prospectus requirements under the Securities Act of 1933. The offering is limited to the issuance of $5,000,000 worth of securities during a 12-month period. (9-19)
REGULATION A OFFERING (S7) : A type of new issue offering that is partially exempt from the filing provisions of the Securities Act of 1933. The exemption is given if the issue is no more than $5,000,000.
The part of a brokerage firm that would advise a corporation regarding the structure and timing of a future issue of stock and assist in the underwriting of the securities is called the:
a. Purchase and sales department
b. Reorganization department
c. Investment banking department
d. Sales and trading department
C
The investment banking department would assist issuers who need to sell new securities to the public. The sales and trading department is involved in the secondary market trading of securities. The purchase and sales department and reorganization department are part of a firm's back office involved in processing the trades that occur and maintaining books and records pertaining to customer accounts. (9-1, 11-18)
Use the following information to answer this question.
XYZ Corporation is selling 100,000 shares of common stock through an underwriter, at $15 per share. The underwriting spread is $1.00 and the selling concession is 30 cents. Selling group members have been allocated 50,000 shares.
XYZ Corporation will receive:
a. $13.40 per share
b. $14.00 per share
c. $14.40 per share
d. $15.00 per share
B
XYZ Corporation will receive the offering price ($15) minus the underwriting spread ($1.00), which equals $14. (9-3)
SPREAD (S7) :
(1) The difference between the bid and offer price of a security.
(2) The difference between the public offering price of a new issue and the proceeds received by the issuer; the underwriting spread.
(3) The purchase and sale of puts or calls on the same underlying security with different expirations and/or strike prices.
Use the following information to answer this question.
XYZ Corporation is selling 100,000 shares of common stock through an underwriter, at $15 per share. The underwriting spread is $1.00 and the selling concession is 30 cents. Selling group members have been allocated 50,000 shares.
If the selling group members sell their entire allocation, their compensation will be:
a. $15,000
b. $40,000
c. $50,000
d. $160,000
A
Selling group members are broker-dealers who participate in the sale of the issue on a best-efforts basis (they assume no risk). They receive a selling concession (compensation) that is less than that received by syndicate members, who do assume risk. The selling concession is $.30. This is part of the $1.00 underwriting spread. If the selling group sells its entire allocation, they will receive $15,000 (50,000 shares times $0.30 per share). (9-3)
CONCESSION (S7) : Part of the underwriting spread that the selling group receives from the syndicate for helping to sell a new issue. Also, part of a mutual fund's sales charge paid to a member broker.
Your client is President of XYZ Corporation and is selling XYZ shares pursuant to Rule 144. According to Rule 144, a filing must be made with the SEC:
a. 15 days before the sale
b. At the time of the sale
c. 30 days after the sale
d. 90 days after the sale
B
The filing must be made at the time of the sale and is effective for 90 days. (9-20)
An insider owning 500,000 shares of unregistered ABC stock has filed a form 144 Notice of Offering. The weekly volume of trading for ABC on all exchanges was:
June 30 61,000
June 23 62,000
June 16 64,000
June 9 65,000
June 2 40,000
ABC has 6,500,000 shares of stock outstanding. On July 3rd, the insider would like to sell a portion of his unregistered stock. What is the maximum amount of stock he could sell under Rule 144?
a. 57,750 shares
b. 58,400 shares
c. 63,000 shares
d. 65,000 shares
D
On July 3rd, the insider wants to sell unregistered ABC stock under Rule 144. The trading volume for the previous four weeks was:
June 30 61,000
June 23 62,000
June 16 64,000
June 9 65,000
Total four-week volume 252,000
The average volume is 63,000 shares (252,000 divided by four weeks equals 63,000). Rule 144 states the insider can sell an amount equal to the average weekly volume of the previous four weeks or 1% of the outstanding shares, whichever is greater. One percent of the 6,500,000 outstanding shares equals 65,000. Therefore, the investor can sell 65,000 shares of the security. (9-20)
An underwriting syndicate that offered a new issue at $21 could NOT stabilize the offering at:
I. 20.88
II. 21
III. 21.50
IV. 21.75
a. I only
b. I or II only
c. III or IV only
d. I, II, III, or IV
C
An underwriter can stabilize a new issue at or below the offering price. The underwriter could stabilize at 21 or 20.88, but could not stabilize at 21.50 or 21.75. (9-7)
Which TWO of the following would NOT be permitted to purchase shares of an IPO of KMF?
I. An attorney involved in the new issue of KMF
II. A portfolio manager of an investment company buying for his personal account
III. An investment company registered under the Act of 1940 which has some restricted persons as shareholders
IV. The general account of an insurance company
a. I and II
b. I and IV
c. II and III
d. III and IV
A
Restricted persons include finders and fiduciaries (such as attorneys and accountants) involved in the new issue and portfolio managers who buy and sell securities on behalf of institutional investors. The New Issue Rule also provides a number of general exemptions.
The exemptions allow a new issue defined under the rule to be sold to the following accounts.
• Investment companies registered under the Investment Company Act of 1940
• The general or separate account of an insurance company
• A common trust fund
• An account in which the beneficial interest of all restricted persons does not exceed 10% of the account. (This is a de minimis exemption that allows an account owned in part by restricted persons to purchase a new issue if all restricted persons combined own 10% or less of the account.)
• Publicly traded entities other than a broker-dealer or its affiliates that engage in the public offering of new issues
• Foreign investment companies
• ERISA accounts, state and local benefit plans, and other tax-exempt plans under IRS Code 501(c)(3) (9-5)
A new municipal bond issue has a total par value of $80,000,000. A member of the underwriting syndicate has sold its entire commitment of $10,000,000. If the syndicate is organized as an eastern account and there is an unsold balance of $2,000,000, what is the member's remaining liability?
a. 0
b. $250,000
c. $1,250,000
d. $2,000,000
B
In an eastern account, a syndicate member retains liability for unsold bonds. Regardless of the amount of bonds sold, the member is still liable for an amount of bonds equal to its percentage participation. The member's participation is 12.5% ($10,000,000 of the $80,000,000 total) and is therefore liable for $250,000 (12.5% x $2,000,000) of the unsold bonds. In a western account, a member is responsible for selling its participation. If this had been a western account, the member's responsibility would have ended once his $10,000,000 commitment was sold. (9-4)
DIVIDED ACCOUNT (S7) : A form of a new issue syndicate where a member is only liable for the percentage of the issue equal to its participation. The member's liability ceases after selling the participation amount. Also known as a Western Account.
Which of the following is a violation of federal laws with regard to tender offers?
a. The tender of stock from a cash account
b. The tender of stock from a long margin account
c. The tender of a minor's stock from a custodian account
d. The tender of stock in a short margin account which has been borrowed by a customer
D
It is a violation of federal law for anyone to tender the stock that a customer borrowed in a short margin account. The stock has been temporarily borrowed and does not belong to the customer and cannot be tendered. (9-7)
TENDER (S7) : (1) The act of surrendering securities in response to an offer to buy them at a set price as in a sinking fund call or tender offer. See also: Tender Offer.
(2) The process of submiting a bid to buy a security, as in a U.S. Treasury bill auction.
All of the following are true of Blue Sky laws EXCEPT:
a. Broker-dealers are required to register in each state in which they do business
b. Salesmen are required to be registered in each state in which they do business
c. Blue Sky laws are state securities laws
d. Blue Sky laws are part of the Securities Act of 1933
D
All of the choices listed regarding Blue Sky laws are true except Blue Sky laws are part of the Securities Act of 1933. Blue Sky laws are state securities laws which are not part of the Securities Act of 1933. Blue Sky laws regulate the issuance and trading of securities within the states (intrastate). The Securities Act of 1933 is a federal act which regulates new securities issues that will be sold interstate. (9-15)
Which of the following short positions violates SEC rules?
a. A customer short stock that he borrowed from the brokerage firm
b. A customer short and long the same stock at the same time
c. A customer borrowing stock in order to profit from a tender offer
d. A customer short stock while owning bonds convertible into the stock
C
A tender offer occurs when an entity offers to buy a corporation's shares at a premium to the current market price. It is normally for the purpose of acquiring control of the company. According to SEC rules, a customer may not tender short (borrowed) shares. (9-7)
Under the provisions of the Securities Act of 1933, which of the following are exempt securities?
I. Securities issued by state chartered banks
II. Municipal bonds
III. Federal government securities
IV. Securities issued by small business investment companies
a. II and III only
b. II, III, and IV only
c. I, II, and III only
d. I, II, III, and IV
D
The Securities Act of 1933 exempts government securities (both direct and agency), municipal securities, nonprofit organizations, and state chartered banks. Small business investment companies are formed under the Small Business Administration, which is a government agency. (9-19)
Which of the following would be associated with different types of underwritings?
I. Best-efforts
II. All-or-none
III. Firm-commitment
IV. Standby
a. I only
b. I and II only
c. I, III, and IV only
d. I, II, III, and IV
D
All of the answers listed would be associated with different types of underwritings. A best-efforts, all-or-none, and firm-commitment would be associated with a stock offering to the general public. A standby underwriting would be associated with a stock offering to existing shareholders where rights to subscribe to the offering are being issued. (9-1)
STANDBY UNDERWRITING (S7) : An arrangement in which a securities firm is used to underwrite any unsubscribed shares of a rights offering. See also: Right.
On an IPO (initial public offering), indications of interest are:
I. Binding on the broker-dealer
II. Not binding on the broker-dealer
III. Binding on the customer
IV. Not binding on the customer
a. I and III
b. I and IV
c. II and III
d. II and IV
D
Broker-dealers are not obligated to fill (allocate securities) indications of interest since there may not be enough securities to fill all indications of interest. The customer is also not bound by the indication of interest. (9-13
INDICATION OF INTEREST (S7) : A nonbinding indication of a client received before the effective date, for the possible purchase of a new issue.
A broker-dealer is a member of a syndicate which is underwriting a $5,000,000 municipal bond issue on an Eastern account basis. The dealer's participation is 10%. The dealer sells the $500,000 commitment but $1,200,000 worth of bonds remain unsold. The dealer will be responsible for additional bonds worth:
a. 0
b. $120,000
c. $500,000
d. $1,200,000
B
In an Eastern (undivided) account, although the dealer sells its entire commitment, it is still liable for the unsold amount to the extent of its original percentage commitment. The total issue is $5 million and the dealer's commitment is $500,000 (10% of the total). The dealer is therefore responsible for 10% of the $1,200,000 of unsold bonds or $120,000 (10% of $1,200,000 = $120,000). In a Western or divided account, the dealer is only responsible for the amount committed for and has no responsibility for the unsold portion. (9-4)
All of the following are TRUE in the sale of restricted securities EXCEPT:
a. Current financial information must be made available to prospective purchasers
b. The sale must conform to the provisions of SEC Rule 144
c. A brokerage firm can act as an agent or principal in the transaction
d. The sale must be at the bid price as determined by the current quote of the outstanding securities
D
All of the statements regarding restricted securities are true except the sale must be at the bid price as determined by the current quote of the outstanding securities. The sale can be made at whatever price is agreed upon between the buyer and seller. (9-20)
A Regulation D offering may be sold to a maximum of:
a. 15 nonaccredited investors
b. 15 accredited investors
c. 35 nonaccredited investors
d. 35 accredited investors
C
A Reg D offering may be sold to a maximum of 35 nonaccredited investors. There is no limit to the number of accredited investors. An individual will be considered an accredited investor if he has a net worth of $1,000,000 or has had $200,000 of income for the previous two years with an anticipation of continued earnings at the same or a greater level. (9-20)
All of the following statements are TRUE concerning preconditions for sale requirements under the New Issue Rule, EXCEPT:
a. The verification may be made through electronic communication
b. The verification may be made through oral communication
c. The verification must be conducted prior to the sale of new issues
d. After the initial verification an annual negative consent letter will be permitted
B
Prior to selling a new issue to an account, a firm must meet certain preconditions for sale. A firm must obtain representation from an account holder or any authorized party of an account, stating that the account is eligible to purchase new issues in accordance with the New Issue Rule before distributing a new issue to that account. The representation from the account holder may be in the form of an affirmative statement, which positively declares that the account is eligible. A firm may use electronic communications to verify account eligibility for new issues, but may not rely on oral statements. A member firm that sells new issues must reverify eligibility every 12 months and must retain copies of all information and records used in verification for a minimum of at least three years. (9-5)
Why is the maturity of commercial paper 270 days or less?
a. Because it coincides with the historical 9-month business cycle
b. It is an attractive alternative to 6-month Treasury bills
c. Because short-term corporate debt of 270 days or less is exempt from registration
d. All of the above
C
Commercial paper has a maximum maturity of 270 days so that it will be exempt from the registration requirements of the Securities Act of 1933. (9-19, 7-21)
COMMERCIAL PAPER (S7) : Debt instruments issued by well established companies to meet short-term financing needs. Commercial paper is unsecured debt and has a maximum maturity of 270 days.
Volume and holding period restrictions do not apply to the resale of private placements (Reg D offerings) when:
a. Purchasers' representatives assist investors
b. Both parties are accredited investors
c. The transaction is initiated by a registered principal
d. The purchaser is a qualified institutional investor
D
Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer without the volume and holding period restrictions of Rule 144. (9-21)
REGULATION D OFFERING (S7) : A type of exempt offering that is sold directly to accredited investors and maximum of thirty-five nonaccredited investors. Also called Private Placement, Restricted Stock, Lettered Stock, Legend Stock
RULE 144 (S7) : A regulation that provides for the sale of restricted stock and control stock. Filing with the SEC is required prior to selling restricted and control stock. The number of shares that may be sold is limited.
Which of the following new issues may be purchased by an employee of a broker-dealer under the New Issue Rule?
I. Convertible debt
II. Investment-grade debt
III. Exchange-traded funds
IV. Preferred stock
a. I and II only
b. III and IV only
c. I, II, and III only
d. I, II, III, and IV
D
An employee of a broker-dealer is considered a restricted person and may not purchase any new issues under FINRA rules. All of the choices listed in this question are not considered new issues under this rule. Exemptions from the definition include: all debt offerings, investment company offerings such as mutual funds and exchange-traded funds, and preferred stock. New issues under the rule are defined as initial public offerings (IPOs) of equity securities sold under a registration statement. (9-4)
REGISTRATION STATEMENT (S7) : A disclosure document filed with the SEC under the Securities Act of 1933 to register an offering under the Act. A company must disclose pertinent information relating to its operations, securities, management, and purpose of the public offering.
What is the maximum allowable percentage that can be sold above the original size of the offering through a green shoe option?
a. 10%
b. 15%
c. 20%
d. 25%
B
The overallotment provision of an underwriting agreement may contain a green shoe clause, which allows the syndicate to increase the number of shares sold by 15% over the original number of shares in the offering. (9-7)
GREEN SHOE (S7) : A disclosed provision (first used in the public offering of the Green Shoe Manufacturing Company) that underwriters may purchase additional shares from an issuer to meet the demands of an oversubscribed offering (also now as Overallotment Provision).
Fred's Auto Centers is looking to raise $10 million to expand its business. The company has entered into an agreement to raise the capital through Winco Securities, a local investment banking firm. Winco Securities has made no guarantee that it will be able to raise the full amount of the offering. Which of the following statements regarding this scenario is/are true?
I. This is an example of a firm commitment underwriting.
II. This is a best-efforts underwriting.
III. Winco is acting as an agent for Fred's Auto Centers.
IV. Winco is acting as principal in this underwriting.
a. II only
b. I and III only
c. I and IV only
d. II and III only
D
The underwriting is being done best-efforts, since no guarantee to raise the $10 million has been made by Winco Securities. Winco is acting as an agent in the transaction because any unsold shares will be retained by Fred's Auto Centers. Winco will be compensated only for the shares it sells and assumes no liability in the deal. (9-2)
Super Entertainment Inc., a publicly traded firm on the NYSE, spins off its domestic syndication division creating 1,000,000 new shares. To receive the new shares, investors must exchange 25% of their old shares. Investors who receive shares of the new company would:
a. Be required to receive a prospectus under the Securities Act of 1933
b. Not receive a prospectus because the shares were sold via a private placement
c. Receive a prospectus only if they received 500 shares or more
d. Not receive a prospectus because this is a Rule 144A offering
A
This scenario is an example of an offering regulated by Rule 145. Rule 145 defines certain types of reclassifications of securities as sales subject to the registration and prospectus requirements of the Securities Act of 1933. Shares acquired through mergers, consolidations, and spinoffs involving exchanges of stock are all covered under the rule. The amount of shares is irrelevant. (9-22)
A clause in an underwriting agreement that allows an underwriting syndicate to purchase more shares from the issuer for sale to the public is a(n):
a. Best-efforts clause
b. Green shoe clause
c. Distribution clause
d. All-or-none clause
B
A clause in an underwriting agreement that allows the syndicate to sell more of an issue than was originally available, and acquire those shares from the issuer, is known as a green shoe clause . This clause is found in the offering's overallotment provision. (9-7)
GREEN SHOE (S7) : A disclosed provision (first used in the public offering of the Green Shoe Manufacturing Company) that underwriters may purchase additional shares from an issuer to meet the demands of an oversubscribed offering (also now as Overallotment Provision).
An insider of XYZ Corp. buys company stock in the open market at $63/share. Ten months later, the insider wishes to sell the stock at the current market price of $68/share. Which two of the following statements are TRUE regarding this transaction?
I. The sale is subject to the six-month holding period under Rule 144.
II. This sale is not subject to the six-month holding period under Rule 144.
III. The sale is subject to the volume limitations under Rule 144.
IV. The sale is not subject to the volume limitations under Rule 144.
a. I and III
b. I and IV
c. II and III
d. II and IV
C
Rule 144 requires that restricted (unregistered) stock be held for six months before it can be resold. Control stock (registered stock purchased by insiders) is not subject to a holding period requirement under Rule 144. Both restricted and control stock are subject to the volume limitations under the Rule. (9-21)
RESTRICTED STOCK (S7) : Stock that was not registered under the Securities Act of 1933. Stock purchased through a company's stock option plan or a private placement will be unregistered. The purchaser will sign a letter agreeing that the purchase is for investment and not a short-swing profit. The holding period for restricted stock is six months. The sale of restricted stock is covered by Rule 144. See also: Rule 144; Letter Stock; Short-Swing Profit.
All of the following offerings are exempt from federal registration EXCEPT:
a. Private placements conducted under Regulation D
b. Intrastate offerings conducted under Rule 147
c. Public offerings of limited partnerships
d. Treasury bills sold through the Federal Reserve Banks
C
Public offerings of corporate securities and limited partnership interests are subject to federal registration. However, private placements (Regulation D offerings), intrastate (Rule 147) offerings, U.S. government securities and municipal securities, while exempt from federal registration requirements, are still subject to the antifraud provisions. (9-19)
REGULATION D OFFERING (S7) : A type of exempt offering that is sold directly to accredited investors and maximum of thirty-five nonaccredited investors. Also called Private Placement, Restricted Stock, Lettered Stock, Legend Stock
XYZ Corporation has 4,000,000 shares of common stock authorized and 2,500,000 shares issued of which 100,000 are treasury stock. The corporation is issuing an additional 1,000,000 shares through a standby underwriting. If only 600,000 shares are subscribed to in the corporation's offering, the number of outstanding shares will:
a. Remain the same since the entire issue was not fully subscribed
b. Increase by 600,000 to 3,000,000 shares
c. Increase by 600,000 to 3,100,000 shares
d. Increase by 1,000,000 to 3,400,000 shares
D
Since 100,000 shares of the 2,500,000 shares issued is treasury stock (repurchased by corporation), there are 2,400,000 shares outstanding prior to the new issue. On a standby underwriting, the underwriting syndicate agrees to purchase any shares which the corporation does not sell. Since the corporation only sold 600,000 shares, the underwriters would purchase the remaining 400,000 shares. After the new issue, there would be 3,400,000 shares outstanding (2,400,000 + 1,000,000). (9-2, 4-6)
STANDBY UNDERWRITING (S7) : An arrangement in which a securities firm is used to underwrite any unsubscribed shares of a rights offering. See also: Right.
A registered representative receives an order from the President of XYZ Corporation to sell unregistered XYZ shares. The client purchased the shares in a private placement 90 days ago. This order:
a. Will require the filing of Form 144 with the SEC
b. May be executed without any restrictions
c. Must be approved by a principal prior to execution
d. Is a violation of Rule 144 if executed
D
According to Rule 144, an affiliated person (e.g., the president of a company) must hold unregistered (restricted) stock for at least six months before it may be sold. Since the President of XYZ Corporation only owned the stock for 90 days, the order to sell would violate Rule 144 if executed. (9-20)
Which of the following makes a financial commitment in the distribution of a new issue of securities?
a. The selling group
b. The underwriting syndicate
c. A customer who provides an indication of interest
d. The exchange on which the security will be listed
B
The underwriting syndicate makes a commitment to the issuer to purchase the entire offering. If the syndicate cannot resell the offering at the public offering price, it may suffer a loss. While the selling group also participates in the sale of the new issue, it does not run the risk of losses if the securities do not sell. Regarding choice (C), a customer who provides an indication of interest has no obligation of any kind. (9-1)
SELLING GROUP (S7) A group of securities firms, acting as agents and receiving a concession, that helps to distribute a new issue. Not members of the syndicate.
Which TWO of the following persons would be permitted to purchase an equity IPO?
I. An employee of a FINRA member whose sister is a director of the issuer
II. A portfolio manager of a mutual fund purchasing for his personal account
III. Employees of the issuer if the issuer is a FINRA member
IV. An attorney hired by the issuer to assist in the IPO
a. I and II
b. I and III
c. II and III
d. II and IV
B
Issuer-directed securities provide an exemption for certain individuals under the New Issue Rule. Under this provision issuers may direct securities to the parent company of an issuer, the subsidary of an issuer, and employees and directors of an issuer. The issuer-directed provision also permits immediate family members to participate in the offering, provided they are employees or directors of the issuer. Registered representatives are also allowed to purchase shares of an equity IPO if the issuer is that person's employing broker-dealer or is the parent or subsidary of the broker-dealer.
An attorney hired to assist in the IPO has a restricted status because he is not employed by the broker-dealer. A portfolio manager of a fund may not purchase for his personal account. A purchase could be made on behalf of the fund. (9-7)
Keystone Chocolate Co. plans to sell shares of a new issue only in the state of Pennsylvania. In order to qualify for a registration exemption under Rule 147, what percentage of the corporation's assets must be located in Pennsylvania, and what percentage of its revenues must be derived from Pennsylvania sources, at the time of the offering?
a. 70%
b. 80%
c. 90%
d. 100%
B
Keystone is eligible to offer shares in Pennsylvania (PA) under the intrastate exemption (Rule 147) if 80% of its assets are located in PA, 80% of its revenues are derived from PA sources, and 80% of the proceeds from the sale are used in PA. In addition, to qualify for the exemption, 100% of the purchasers of the offering must be residents of PA. (9-19)
RULE 147 (S7) : An exemption from the registration requirements of the Securities Act of 1933 for intrastate offerings if certain requirements are met. One such requirement is that 100% of the purchasers must be from within one state.
An investor asks a registered representative to underline the most important facts found in a preliminary prospectus. The registered representative:
a. May not do this since it violates federal securities laws
b. May do this with approval by a principal at the firm
c. May do this with approval by FINRA
d. May do this without restrictions or approvals
A
Once a prospectus is filed with the SEC, it may not be altered in any way. (9-15)
PROSPECTUS (S7) : The official selling circular that must be given to new purchasers of new securities registered with the Securities and Exchange Commission. It summarizes the longer Registration Statement filed with the Commission. It discloses such material information as the issuer's property and business, the nature of the security offered, the use of proceeds, the issuer's competition and prospects, management's experience, history, and remuneration, and certified financial statements. A preliminary version of the prospectus, used by brokers to obtain indications of interest from investors, is called a Red Herring
An individual owns restricted stock. He would not have to file a Form 144 for a sale of less than:
I. 5,000 shares
II. 10,000 shares
III. $50,000
IV. $100,000
a. I and III
b. I and IV
c. II and III
d. II and IV
A
An individual is allowed to sell affiliated (restricted) stock without filing under Rule 144 or reporting the sale if the sale is for less than 5,000 shares and $50,000. (9-20)
Which of the following are TRUE about a divided account?
I. It is called a Western Account.
II. It is called an Eastern Account.
III. Each member is responsible for the unsold bonds based on the member's original participation.
IV. Each member is only liable for its own participation in the syndicate.
a. I and III
b. I and IV
c. II and III
d. II and IV
B
In a divided account or Western account, the member is responsible for its own participation in the syndicate. If any bonds remain unsold, it is the responsibility of that member. In an undivided or Eastern account, any unsold bonds are the responsibility of the entire syndicate. Each member would then be liable for the same proportion as his original participation. (9-4)
DIVIDED ACCOUNT (S7) : A form of a new issue syndicate where a member is only liable for the percentage of the issue equal to its participation. The member's liability ceases after selling the participation amount. Also known as a Western Account.
Who has the responsibility to investigate the accuracy of the information in a prospectus for a DPP?
a. SEC
b. FINRA
c. IRS
d. Managing Underwriter
D
The SEC only reviews the information in a prospectus. It never attests to its accuracy. The managing underwriter is responsible to investigate the accuracy of the information. (9-12)
A customer wishes to sell restricted stock under Rule 144 and files Form 144. The filing is good for:
a. 90 days
b. 120 days
c. 180 days
d. One year
A
The filing under Rule 144 covers a 90-day period. (9-20)
Leslie Moore has an account with Zucker Securities in New York City. She decides to move to Montana to raise cattle. She still intends to maintain an account with Zucker, which is registered only in New York. Which of the following statements is correct?
a. This is permitted provided Ms. Moore maintains a P.O. Box in New York.
b. This is permitted since the account was opened in New York prior to the client's move to Montana.
c. This is only permitted if Zucker registers as an investment adviser in Montana.
d. This is prohibited.
D
A broker-dealer must be registered in each state in which it conducts business. In addition, the securities and the registered representative must be registered in all states in which the issue is sold. Registration as an investment adviser is not the same as registration as a broker-dealer. (9-15)
Which of the following transactions would not violate FINRA's New Issue Rule regarding the sale of an equity IPO to a restricted person?
a. A registered representative involved in the distribution sells shares to her brother who she does not support.
b. The wife of a registered representative purchases shares from a broker-dealer that does not employ her spouse.
c. A registered representative sells shares to an uncle that she supports.
d. The mother of a registered representative purchases shares from a broker-dealer that does not employ her child.
D
The prohibition of IPO purchases by a restricted person include the following people.
• FINRA member firms and any associated person (i.e. an employee) of the member firm
• An immediate family member of an employee of a member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm.
The aforementioned immediate family members would only be considered a restricted person if any one of the following three conditions apply:
• The employee gives/receives material support to/from the immediate family member. Material support is defined as providing more than 25% of the person's income or living in the same household as the person associated with the member firm.
• The family member is employed by the member firm that is selling the new issue.
• The family member has the ability to control the allocation of the new issue.
Since the mother is not supported by her child and is purchasing the shares from a broker-dealer, which does not employ her child, she is not restricted on this purchase. (9-4)
Which one of the following persons is permitted to purchase an equity IPO in her personal account?
a. The cousin of a registered representative
b. The mother-in-law of a registered representative
c. A portfolio manager of a mutual fund
d. A person employed by an insurance company who buys and sells securities
A
The prohibition against IPO purchases by restricted persons includes:
• Member firms and any associated person (i.e., an employee) of the member firm
• An immediate family member of an employee of a member firm if the equity IPO is purchased from the employee's firm or there is material support between the immediate family member and the employee of the member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm.
• Portfolio managers, which include persons who can buy or sell securities on behalf of institutional investors (e.g., banks, investment companies, investment advisers, insurance companies, savings and loan institutions), as well as anyone whom they materially support. These are people who are in a position to direct future business to the firm, which is the reason for their restricted status and they may not purchase equity IPOs in their personal accounts.
Since, under the rule, a registered representative's cousin is not considered an immediate family member, she is permitted to purchase an equity IPO. (9-5)
Which of the following statements is TRUE concerning Rule 144A transactions?
a. The securities may be offered only to accredited investors.
b. The securities may be offered only to qualified institutional buyers.
c. An investor buying these securities must hold them for a period of six months.
d. Only domestic issuers may offer securities under this type of offering.
B
Rule 144A provides an exemption for the purchase of restricted securities by qualified institutions. Qualified institutional buyers (QIBs) are defined as financial institutions that have at least $100 million invested in securities of issuers not affiliated with the entity. These institutions may buy and sell directly with one another without meeting the requirement of Rule 144. The securities offered under Rule 144A may be debt or equity, may be offered by either a domestic or foreign issuer, and may be resold immediately to another QIB. There is no six-month holding period, as with restricted stock. A private placement under Regulation D may be offered to an unlimited number of accredited investors. An accredited investor is defined as a person with either a net worth of $1,000,000 or annual income of $200,000. (9-21)
Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company?
I. There is a limit on the amount of registered stock the director may purchase.
II. There is no limit on the amount of registered stock the director may purchase.
III. There is a limit on the amount of unregistered stock the director may sell.
IV. There is no limit on the amount of unregistered stock the director may sell.
a. I and III
b. I and IV
c. II and III
d. II and IV
C
Restricted stock is stock that is not registered and is typically acquired by an individual through a private placement. With regard to restricted stock, the purchaser must hold the stock for six months before she may dispose of it. Control stock is registered stock that is acquired by an affiliate (control) person, such as an officer or director, in the secondary market. A control person who acquires stock through an open-market purchase may sell the stock anytime. There is no limit placed on the number of registered shares an insider may purchase. According to Rule 144, there is a restriction on the sale of both restricted and control stock. (9-20)
There is no limit on the amount of registered stock the director may purchase.
There is a limit on the amount of unregistered stock the director may sell.
A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase:
a. Stock from a different broker-dealer
b. Stock from the RR's broker-dealer
c. Only a limited quantity of stock from any broker-dealer
d. The stock only in the secondary market
A
A restricted person is not permitted to purchase any shares of a new issue unless an exemption applies. There is no exemption for restricted persons to purchase limited quantities of an IPO. An immediate family member of an employee (an RR) of a member firm is a restricted person. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. An exception exists if a nonsupported immediate family member buys the IPO from a different broker-dealer. (9-4)
When raising capital, which TWO of the following securities are required to be registered with the SEC under the Securities Act of 1933?
I. Common stock in a software company that will be listed on Nasdaq
II. Debentures issued by a finance company sold only to qualified institutional buyers
III. An American Depositary Receipt issued by a Canadian company
IV. A revenue bond issued to finance a stadium
a. I and III
b. I and IV
c. II and III
d. II and IV
A
There is no specific exemption under the registration provisions of the Securities Act of 1933 for ADRs or shares of a software company that will be listed on Nasdaq. Both securities, if sold to the public in the U.S., would require SEC registration. A security sold only to qualified institutional buyers (QIBs) would be exempt and may be resold under a 144A exemption. Also exempt are municipal securities, which include both revenue and general obligation bonds. (9-19, 9-21)
))Morris Investments is working a leveraged buyout deal to purchase Simon Entertainment Group. The fundamental financing for the deal will consist mostly of:
a. Debt issued using the assets of Simon Entertainment Group as collateral
b. Debt issued using the assets of Morris Investments as collateral
c. Equity issued by Simon Entertainment Group
d. Equity issued by Morris Investments
A
A leveraged buyout (LBO) is the acquisition of a company primarily using debt to finance the purchase. The assets of the acquired company are generally used as collateral for the borrowed funds. This type of acquisition allows the acquiring company, which is referred to as a private equity (PE) firm, to make the purchase without using much of its own equity. In many circumstances, since a large amount of borrowed funds are used to make the purchase, they are usually noninvestment grade. (9-7)