Unit 7

Question 1

What is the primary market?

Answer 1

Where corporations sell stocks and bonds to the public to raise money

The primary market is where securities are first sold.

Question 2

What is the purpose of every sale in the primary market?

Answer 2

For the issuer to raise capital.

Question 3

What does the Securities Act of 1933 require?

Answer 3

Full and fair disclosure of new issues

It requires that a new issue, unless exempt, be registered with the SEC before sale.

Question 4

What must all investors in a corporate issue receive?

Answer 4

A prospectus.

Question 5

What is an official statement in municipal issues?

Answer 5

Similar to a prospectus, containing material information for investors.

Question 6

What is the role of underwriters in the primary market?

Answer 6

They work with issuers to bring securities to the market and sell to the public.

Question 7

What are the three types of investors in the primary market?

Answer 7

• Institutional investors
• Retail investors
• Accredited investors

Question 8

Who qualifies as an institutional investor?

Answer 8

Persons that pool money to purchase securities, such as banks and mutual funds.

Question 9

What defines a retail investor?

Answer 9

Typically a person investing their own assets.

Question 10

What is an accredited investor?

Answer 10

A subset of investors meeting specific financial criteria, including certain retail investors.

Question 11

What is an Initial Public Offering (IPO)?

Answer 11

When an issuer sells a specific type of security for the first time.

Question 12

What is an Additional Public Offering (APO)?

Answer 12

When an issuer sells more shares of a security already sold to the public.

Question 13

What are the two types of underwriting agreements?

Answer 13

• Best efforts agreements
• Firm commitment agreements

Question 14

What is a best efforts underwriting?

Answer 14

The underwriter sells the issuer’s securities to the public as an agent.

Question 15

What are the two types of best efforts underwriting contingencies?

Answer 15

• All or none (AON)
• Mini-max

Question 16

What is firm commitment underwriting?

Answer 16

Underwriters purchase securities from the issuer and resell them to investors.

Question 17

What is a syndicate in underwriting?

Answer 17

A temporary group of broker-dealers that shares the risk and profits from an offering.

Question 18

What is a cooling-off period?

Answer 18

A minimum of 20 days after filing a registration statement, during which certain activities are restricted.

Question 19

What activities can take place during the cooling-off period?

Answer 19

• Publication of tombstone advertisements
• Delivery of preliminary prospectus
• Gathering indications of interest

Question 20

What is the effective date in the context of a public offering?

Answer 20

When the SEC releases the offer for sale to the public.

Question 21

What is a shelf offering?

Answer 21

Allows an issuer to register new securities and sell them later.

Question 22

What is a PIPE offering?

Answer 22

Private investment in public equity, where additional shares are offered to institutions or accredited investors.

Question 23

What are the two tiers of Regulation A?

Answer 23

• Tier 1: Up to $20 million
• Tier 2: Up to $75 million

Question 24

What is Rule 147?

Answer 24

Exempts offerings that take place entirely in one state from registration.

Question 25

What must a company meet to qualify under Rule 147?

Answer 25

* At least 80% of its income in the state * At least 80% of assets in the state * At least 80% of offering proceeds used in the state

Question 26

What is Rule 147?

Answer 26

An exemption from registration for offerings that take place entirely in one state when the issuer's principal office is in the state and all purchasers are residents of the state. ## Footnote The issuer must meet one of four criteria related to income, assets, proceeds, or employee location.

Question 27

What are the four criteria that must be met under Rule 147?

Answer 27

At least one of the following: * 80% of income in the state * 80% of assets in the state * 80% of offering proceeds used in the state * Majority of employees work in the state ## Footnote Only one criterion needs to be met, not more than one.

Question 28

What is the resale restriction for securities sold under Rule 147?

Answer 28

Securities may not be resold to nonresidents of the state for six months after the initial purchase. ## Footnote This rule helps maintain the intrastate nature of the offering.

Question 29

What is a private placement?

Answer 29

A method for issuers to sell a new issue under Regulation D by filing a Form D with the SEC. ## Footnote There are restrictions on who may invest and how the offer is marketed.

Question 30

What does Form D contain?

Answer 30

Much of the same information as a prospectus. ## Footnote It is filed with the SEC for private placements.

Question 31

What is the term for a security that has restrictions on sale for a period of six months?

Answer 31

Lettered stock or legend stock. ## Footnote These terms also include restricted stock or unregistered.

Question 32

What are the two types of private placements?

Answer 32

Rule 506(b) and Rule 506(c). ## Footnote Each type has different requirements regarding investor accreditation and solicitation.

Question 33

What is a key point about Rule 506(b) offerings?

Answer 33

No general solicitation is allowed. ## Footnote This means no advertising to a broad audience.

Question 34

How many nonaccredited investors can participate in Rule 506(b) offerings?

Answer 34

Up to 35 nonaccredited investors. ## Footnote The offering can be sold to an unlimited number of accredited investors.

Question 35

What is a key point about Rule 506(c) offerings?

Answer 35

Advertising is allowed. ## Footnote All investors must be accredited and the issuer must verify their accreditation.

Question 36

What is the disclosure document for securities sold in exempt transactions called?

Answer 36

Offering circular or notice of sale. ## Footnote It contains similar information to a prospectus but is not called one.

Question 37

What type of offering does the example of Modulux, Inc. represent?

Answer 37

Secondary offering. ## Footnote This is due to the founder seeking to divest his interest for charitable purposes.

Question 38

What type of underwriting commitment involves the underwriter purchasing all unsold shares?

Answer 38

Firm commitment. ## Footnote This type of commitment ensures the issuer receives the funds they expect.

Question 39

Which of the following is not a listed criterion under Rule 147: * 80% of income in the state * 80% of assets in the state * 80% of proceeds used in the state * 80% of the issuer’s proceeds will be used within the state of California?

Answer 39

80% of the issuer’s proceeds will be used within the state of California. ## Footnote This is a misinterpretation of the criteria required under Rule 147.