Chapter 6.1

Question 1

Securities Act of 1933

Answer 1

Covers registration of new issues. Calls for full and fair disclosure.

Question 2

Securities act requires a prospectus which must include:

Answer 2

• date of prospectus
• statement that the SEC does not approve or disapprove of securities under any circumstances
• stabilization clause
• copies of underwriting contracts and opinions of counsel are not needed
• A prospectus cannot be marked upon in any way; but could include a letter stating “Here is the prospectus.”
• “Access equals delivery”. If the final prospectus can be viewed at EDGAR on the SEC website, access to the final prospectus equals delivery of the final prospectus. This rule applies only to the Final prospectus, no to the Preliminary Prospectus and not to Mutual funds.

Question 3

Prospectus sent electronically

Answer 3

If the prospectus is sent electronically, the B/D must have obtained an informed consent from the client to receive the information through email or verify receipt, generally, with a return verification email.

Question 4

Who can be liable for material misrepresentations contained in a registration statement or prospectus?

Answer 4

• Issuer
• Officer
• Director
• Principal Stockholders
• Investment Banker
• Accountants
• Attorneys

Question 5

Purposes of the 1933 Act:

Answer 5

• Require registration with SEC before public distribution
• Require prospectus
• Prohibit fraud in the sale of new issues
• Not to authorize the SEC to determine which securities may be publicly offered.

Question 6

What can the managing underwiter do during the distribution of a new issue?

Answer 6

May stabilize “at or below” the public offering price.

Question 7

When can a RR predict or guarantee a specific rise or fall in price of a security?

Answer 7

Never!

Question 8

While a firm is involved in the distribution of a new issue, an RR may distribute what?

Answer 8

They can distribute the preliminary prospectus but would not be allowed to distribute research reports or articles about the new issue. If an order is taken on an issue, the purchaser would have to receive a final prospectus, not a preliminary prospectus,

Question 9

How long must syndicate members wait before extending margin to customers on the new issue?

Answer 9

30 days

Question 10

Prospectus delivery requirements for B/D’s that participated in the distribution of a new issue and then becoming market makers in the issue

Answer 10

Continue to apply to B/D’s for 90 days from the closing date of the syndicate

Question 11

Fixed Annuities

Answer 11

Are not considered Securities

Question 12

Restricted Person

Answer 12

• Member firms or other B/D’s
• B/D personnel
• Any officer, director, general partner, associated person or employee of a member or any other B/D and their immediate family members
• Any agent of a member or any other B/D and their immediate families or is supported by an immediate family member
• Finders and Fiduciaries(attorneys, accountants, and financial consultants) and their immediate families
• Portfolio Mangers and their immediate families

Question 13

Immediate Family Member

Answer 13

Parents, Mother-in-law, father-in-law, spouse, brother or sister, sister-in-law, daughter-in-law, children and any other individual to whom the person provides material support.

**Does not include Aunts, Uncles, Cousins and Grandparents.

Question 14

When may a member or a person associated with a member not sell or purchase a new issue of common stock

Answer 14

To any account in which a “restricted person” has beneficial interest if the interest exceeds 10% of the value of the account.

Question 15

A member may not hold new issues if.

Answer 15

Acquired by the member as an underwriter, selling syndicate member or selling group member.

Question 16

Preconditions for Sale

Answer 16

A member firm may not sell a new issue of common stock to any account unless within the last 12 months it has in good faith obtained verification that the account is eligible to purchase the new issue.

Question 17

Standby Purchasers

Answer 17

Standby purchasers(person who would normally be restricted) would be allowed to purchase or sell shares of the new issue provided that:

• The stand-by agreement is disclosed in the prospectus
• The stand-by agreement is a written agreement
• The managing underwriter represents in writing that it was unable to find any other purchasers for the securities
• Securities sold pursuant to the stand-by agreement are subject to a 3-month “locked-up” period(cannot be sold for 3 months after purchase).

Question 18

When a new issue is under-subscribed

Answer 18

Underwriters may place a portion of a public offering in its own investment account when it is unable to sell those shares to the public.

Question 19

Who typically gets the proceeds if a company offers authorized shares of common stock to the public?

Answer 19

The company(issuer) will receive the proceeds

Question 20

Rule 144 transaction

Answer 20

Investors will pay or receive the proceeds of the transaction, not the issuer.

Question 21

Regulation S-X

Answer 21

Sets forth the form, content, and requirements for financial statements filed with or as part of Registration statements filed with the SEC on new issues and mutual funds.

Question 22

Regulation S-K

Answer 22

Regulates the requirements of the content of non-financial portions of registration statements filed with the SEC.

Question 23

Holding period for customers purchasing IPOs

Answer 23

Do not have to hold them long-term prior to sale

Question 24

Securities Exempt from the 1933 Act registration requirements include:

Answer 24

• U.S. Government Securities
• Municipal Securities
• Intrastate offerings - offerings within one state only
• Regulation A offering:
  - Is a limited offering where securities offered cannot exceed $50,000,000 in any consecutive 12-month period. Also known as a short form registration.
  - A full registration statement does NOT need to be filed with SEC but an offering statement is filed.
  - A prospectus is not required.
  - Reg A shares can be purchased by institutions and individuals.
  - The shares are not restricted. There is no holding period required. The shares are free to be sold once they are registered and issued.
• Small business investment companies
• Reg D offerings(private placements)
• Building and loan associations
• Benevolent associates
• Banks and Savings and Loans
• Commercial paper if its term is 270 days or less
• Bankers acceptances if its term is 180 days or less

**Variable Annuities are not exempt from registration

Question 25

Shelf Registration

Answer 25

Using a single registration statement, a corporation can register all securities it intends to issue in the upcoming three-year period, then issue them from the “shelf” without filing again with the SEC.

Question 26

Notice of Proposed Registered Offering

Answer 26

An issuer or a selling security holder that publishes a notice of a proposed offering to be registered under the ACT will not be deemed to offer its securities for sale if:

• The notice includes a legend or statement to the effect that it does not constitute an offer of any securities for sale and
• The notice includes no more than the following information:
  
  • The name of the issuer
  • The title, amount and basic terms of the securities offered
  • The amount of the offering to be made by selling security holders
  • The anticipated timing of the offering
  • Brief statement of the manner and the purpose of the offering, without naming underwriters
  • Whether the issuer is directing its offering to only a particular class of purchasers
  • Any statements or legends required by law