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141 Terms
the purpose of issuing long-term securities is to
raise funds to work for the benefit of the issuer
What are the 2 cases in which the issuer receives proceeds?
Primary offering and when treasury stock is resold. (Because those shares were previously owned, they cannot be called a primary offering)
The preliminary studies, investigations, research, meetings, and compilation of information about a corporation and a proposed new issue that go on during an underwriting are known collectively as
due diligence.
As part of the due diligence process, investment bankers must
examine the use of the proceeds,
perform financial analysis and feasibility studies,
determine the company's stability, and
determine whether the risk is reasonable.
This study focuses on the projected revenues and costs associated with the project and on an analysis of competing facilities.
Feasibility study
a group of underwriters formed to purchase (underwrite) a new issue of municipal securities from the issuer and offer it for resale to the general public.
syndicate
a common calculation used for comparing bids and awarding the bond issue
It combines the amount of proceeds the issuer receives with the total coupon interest it pays
NIC (net interest cost)
provides the same type of cost comparison adjusted for the time value of money.
TIC (true interest cost)
What type of underwriting is this?
the most commonly used type of underwriting contract.
the underwriters, which are investment banks, commit to buy the securities from the issuer and resell them to the public. The underwriters assume the financial risk of incurring losses in the event they are unable to distribute all the shares to the public.
Because he purchases and resells the shares, he is acting in a principal (dealer) capacity
can be either a negotiated underwriting contract or a competitive bid arrangement.
Firm Commitment
______ take on financial liability and act in a principal capacity
syndicates
______ have no financial liability and act as agents because they have no commitment to buy securities from the issuer
Selling group members
Describe Standby (firm commitment)
When a company's current stockholders do not exercise their preemptive rights in an additional offering, a corporation has an underwriter standing by to purchase whatever shares remain unsold as a result of rights expiring.
Note that one significant difference between corporate and municipal underwritings is
the need for a legal opinion
syndicate latters are not legally binding until
the syndicate’s submission of the bid
Type of syndicate account in which each underwriter is responsible for only its own underwriting allocation
western account (divided account)
Type of syndicate account in which each underwriter is allocated a portion of the issue. After the issue has been substantially distributed, each underwriter is allocated additional bonds representing its proportionate share of any unsold bonds. Thus, an underwriter's financial liability might not end when it has distributed its initial allocation
eastern account (undivided account)
The process of establishing the reoffering yield (or price) for each maturity
writing the scale
(A scale is the list of the bond issue's different maturities)
writing the scale involves
determining what prices (yields) are necessary to be able to sell the various serial maturities and then backing off a little to arrive at a bid
What is the typical amount of a good faith deposit?
1-2% of the total par value of the offering
settlement of syndicate accounts is
30 calendar days after the issuer deliveres secuirities to the syndicate
The price at which the syndicate bonds are sold to the public is known as
the reoffering price (or reoffering yield)
The syndicate's compensation for underwriting the new issue is the
difference between the price the syndicate pays the issuer and the reoffering price
The term production refers to
the total dollar sales earned from a municipal issue. The production less the amount bid for the issue results in the spread.
The portion of the spread that remains after subtracting the management fee is called
the total takedown. (Members buy the bonds from the syndicate manager at the takedown.)
Selling group members buy bonds from syndicate members at
the concession
The concession is
The discount the selling group receives from the syndicate member
Reallowance
the discount (generally half the consession amt) that interested firms buy bonds from the syndicate
under what circumstances can a syndicate member can receive the full spread when a bond is sold?
the syndicate member receives the full spread if the member is also the syndicate manager
the order period is
the time set by the manager during which the syndicate solicits customers for the issue and all orders are allocated without regard to the sequence in which they were received
runs for an hour od the day following the award of the bid
A presale order is
entered before the date that the syndicate wins the bid, which means that a customer is willing to place an order without knowing the final price or whether the syndicate will even win the bid
has priority over other orders
individual syndicate members are not credited with any takedown on presale orders. The takedown is split among all syndicate members according to participation.
A group net order is
placed after the bid is awarded
The takedown on a group net order is deposited into the syndicate account, and upon completion of the underwriting, it is split among all syndicate members according to participation.
2nd in priority
PGDM stands for
Presale, Group, Designated, and Member.
Designated order
These orders are usually from institutions that wish to allocate the takedown to certain syndicate members.
3rd in priority
Member order
A member firm enters such an order for its own inventory or related accounts, such as for a dealer-sponsored unit investment trust (UIT)
On a negotiated underwriting, the investment banker who negotiates with the issuer is known as
the syndicate (or underwriting) manager
All the following are true statements except
A)
before the filing of the registration statement, there is a preeffective period for the SEC to examine the registration statement to ensure all requirements have been fully satisfied.
B)
the preliminary prospectus may be used to gather indications of interest.
C)
the front of every prospectus must contain the SEC disclaimer.
D)
the Securities Act of 1933 required nonexempt issuers of new securities to file registration statements with the SEC.
A)
before the filing of the registration statement, there is a preeffective period for the SEC to examine the registration statement to ensure all requirements have been fully satisfied.
Explanation
The waiting period begins after the registration statement has been filed, not before. The SEC disclaimer is printed on the front of the prospectus, and indications of interest may be gathered through a preliminary prospectus. Unless the issue qualifies for an exemption, it must register with the SEC.
Who does Regulation A apply to?
small- and medium-sized companies
(Tier 1. Securities offerings up to $20 million in a 12-month period are allowed. Of the $20 million, no more than $6 million can be sold on behalf of existing selling shareholders. The offering is subject to a coordinated review by individual states and the SEC and does not require audited financial statements. Tier 2. Securities offerings up to $75 million in a 12-month period are allowed. Of the $75 million, no more than $22.5 million can be sold on behalf of existing selling shareholders. These offerings are subject only to SEC review and not to review at the state level. Tier 2 offerings are still subject to rigorous disclosure requirements to the SEC, including audited financial statements as well as annual, semiannual, and current reports.)
private placement stock is called
lettered, legend, unregistered, restricted
XYZ, Inc., will be using Regulation A to offer $8 million of its common stock in its home state and in three other states. For the offering to be cleared for sale by the SEC, XYZ must file
an offering circular.
Explanation
In a Regulation A offering, the issuer files an abbreviated notice of sale, or offering circular, with the regional office of the SEC instead of with the SEC in Washington, D.C. It is this offering circular that is distributed to investors rather than a prospectus.
LO 1.c
Sales made under the provisions of Rule 506(b) of Regulation D must be reported on
Form D
Explanation
Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering.
Which of the following best describes how a syndicate determines the amount to bid for a new municipal issue?
A)
The average reoffering price minus the spread
B)
The gross spread minus the takedown
C)
The average reoffering price plus the takedown
D)
The average sales price divided by the interest cost
A)
The average reoffering price minus the spread
Explanation
A spread is analogous to the gross profit margin in other businesses. A syndicate's bid is based on the average reoffering price (the price the public will pay) less the syndicate's spread (the amount the syndicate will charge for bringing the issue to market).
One of your customers is a married couple with a joint account. Spouse 1 owns 9% of the common shares of XYZ. Spouse 2 owns 2% of the common shares of XYZ and wishes to sell some of the XYZ shares. Which of the following statements is correct?
Spouse 2 is considered an affiliate.
Soouse 2 is not considered an affiliate.
Spouse 2 must file a Form 144 to sell.
Spouse 2 does not have to file a Form 144 to sell.
I and III
If spouses (either individually or jointly) own a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. Among those requirements is the filing of Form 144. For exam purposes, spouses are assumed to live in the same home unless the question states otherwise.
An underwriting bid for a municipal general obligation issue would include which of the following?
The dollar amount
The coupon rate
The yield to maturity
The underwriting spread
I and II
Explanation
The only information the underwriter must furnish to the issuer is the dollar amount of the bid (the amount the issuer will receive) and the coupon rate (the amount of interest the issuer will pay). From the bids received, the issuer will award the offering to the municipal dealer with the lowest net interest cost.
A member of a $5 million Eastern account that has a $500,000 participation fails to sell $200,000 of bonds. At the close of the offering, if $1 million worth of bonds remains unsold, the member must take down
$100,000.
Explanation
In an undivided (Eastern) syndicate, each member is responsible for its portion of the offering regardless of how many bonds it has already placed. If the member was liable for 10% of the issue's original dollar value, it is committed to take down 10% of any bonds remaining unsold (10% of $1 million equals $100,000).
Under Rule 506(c) of Regulation D, advertising is permitted when
the issue is limited to accredited investors.
Explanation
Rule 506 of Regulation D of the Securities Act of 1933 has two parts. Rule 506(b) prohibits any advertising of the private placement, while Rule 506(c) permits it. The primary condition to be met is that the issue is offered solely to accredited investors. It is Rule 506(b) that has a limit of 35 nonaccredited investors, but that has nothing to do with the advertising restriction. Regulation D applies to issuers, not broker-dealers, so there is no principal to go to for approval. In the same vein, because issuers are not FINRA members, filing with FINRA is irrelevant.
LO 1.c
J.B. Collingsworth is the CEO and largest single shareholder in Collingsworth Industries, Inc. (CII). Three months ago, J.B. purchased 2,000 shares of CII in the secondary market at $6 per share. Yesterday, J.B. sold those shares for $8 per share. Under federal law,
A)
the $4,000 profit on the sale must be returned to CII.
B)
the shares must be registered before they can be resold.
C)
J.B. would likely be charged with insider trading.
D)
the sale could not have taken place without filing a Form 144.
A)
the $4,000 profit on the sale must be returned to CII.
Explanation
J.B. has violated the short swing profit rule of the SEC. That rule states that any affiliate of a public company realizing a profit on a sale of that company's stock within a six-month period of the purchase must return that profit to the company. There is nothing illegal about this, but J.B. doesn't get to keep the profit. The sale is well under the Form 144 de minimis limit of 5,000 shares or $50,000 in market value. Because the shares were purchased in the secondary market, they are already registered. Nothing in the question implies that J.B. was acting on inside information.
A municipal issuer publishes an official notice of sale to indicate that the offering will be made
on a competitive basis.
All of the following about a good faith deposit on a municipal bond underwriting are correct except
A)
it is applied against winning bidder's payment for the issue.
B)
it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the bonds.
C)
it is lost if the syndicate fails to carry out the provisions of the underwriting agreement.
D)
it is returned to the unsuccessful bidders.
B)
it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the bonds.
Explanation
In a municipal bond underwriting, the good faith deposit is submitted by a potential syndicate as earnest money. If the syndicate is not awarded the issue, the check is returned. If the syndicate is awarded the issue, the money is applied against the payment. However, if the syndicate fails to carry out the provisions of the underwriting, the money is retained by the issuer. If you have ever bought or sold a house, this is comparable to the earnest money deposit turned in by the buyer with the offer
When a broker-dealer assists a corporation going public, it is acting as
an underwriter or investment banker.
ABC Corporation is planning an offering of $10 million of common stock. When would it be prohibited for the company to place a tombstone ad?
Before the registration statement is filed with the SEC
An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are true?
He must file Form 144 to sell the shares.
He does not have to file Form 144 to sell the shares.
He is considered an affiliated person.
He is not considered an affiliated person.
II and IV
Explanation
Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because neither of the investors own at least 10% of the stock, they are not control persons under Rule 144 and do not have to comply with the rule. Certain family members, such as a spouse or other immediate family member residing in the same home, are required to combine holdings. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons.
LO 1.d
Who signs the agreement among underwriters for a municipal bond issue?
All members of the underwriting syndicate. It is not signed by the issuer, bond counsel, or trustee.
One of your clients saw an advertisement for a new offering. The fine print stated that this was available solely to accredited investors. You would explain that this is a private placement being offered under the exemption provided in SEC Rule
506(c).
Explanation
Regulation D of the Securities Act of 1933 deals with private placements. There are two options. Rule 506 (c) permits advertising, but only if 100% of the investors are accredited investors. Rule 506(b) does not permit advertising, but it does allow up to 35 nonaccredited investors. Rule 144 covers the sale of restricted or control stock, and Rule 147 is the intrastate exemption. Neither of them makes any mention of accredited investors.
A prospectus must be delivered to customers who purchase which of the following new issues?
U.S. government bonds
Corporate bonds
Fixed annuities
Variable annuities
II and IV
New issues of municipal bonds are exempt from all of the following except
A)
U.S. state registration requirements.
B)
Securities and Futures Authority (SFA) requirements.
C)
Securities Exchange Act of 1934 antifraud provisions.
D)
Securities Act of 1933 registration requirements.
C)
Securities Exchange Act of 1934 antifraud provisions.
Explanation
Municipal securities are exempt from federal and state registration. However, no security is exempt from the antifraud provisions of federal securities law, including the Securities Exchange Act of 1934. The SFA is a UK regulator and has no application in the United States.
Which of the following statements regarding the differences between Rule 506(b) and Rule 506(c) of Regulation D of the Securities Act of 1933 are true?
Rule 506(c) offerings can be advertised, while Rule 506(b) offerings cannot.
Rule 506(c) offerings are limited to 35 nonaccredited investors, while Rule 506(b) offerings do not have a limit.
The bad actor provisions only apply to Rule 506(c) offerings.
Rule 506(c) offerings are limited exclusively to accredited investors, while nonaccredited investors can participate in Rule 506(b) offerings.
I and IV
Explanation
As long as the offering is limited exclusively to accredited investors, Rule 506(c) offerings may be publicly advertised. Rule 506(b) offerings can never be advertised. The limit of 35 nonaccredited investors applies to Rule 506(b). There is no limit on the number of accredited investors for either rule. Both rules are subject to the bad actor provisions.
LO 1.c
An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 20 million shares outstanding, and, on average, 140,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next 90 days is
150,000.
Explanation
An affiliate who has held restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares (200,000) is greater than the last four weeks average trading volume (140,000), so the investor's entire position can be sold.
A legal contract known as an indenture between a bond issuer and a trustee appointed to represent the bondholders is required for
corporate bond issues of $50 million or more sold interstate.
Explanation
The Trust Indenture Act of 1939 requires corporate bond issues of $50 million or more sold interstate to be issued under a trust indenture, which is a legal contract between the bond issuer and a trustee representing bondholders.
All of the following about a good faith deposit on a municipal bond underwriting are correct except
A)
it is lost if the syndicate fails to carry out the provisions of the underwriting agreement.
B)
it is applied against winning bidder's payment for the issue.
C)
it is returned to the unsuccessful bidders.
D)
it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the bonds.
D)
it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the bonds.
Explanation
In a municipal bond underwriting, the good faith deposit is submitted by a potential syndicate as earnest money. If the syndicate is not awarded the issue, the check is returned. If the syndicate is awarded the issue, the money is applied against the payment. However, if the syndicate fails to carry out the provisions of the underwriting, the money is retained by the issuer. If you have ever bought or sold a house, this is comparable to the earnest money deposit turned in by the buyer with the offer.
The syndicate letter is
the document that sets forth the priority of sale of securities
Identify the accredited investors from the list below.
An individual with a net worth of $800,000 and an annual salary of $150,000
A married couple with a net worth of $2 million consisting of net equity in their primary residence of $500,000 and pension plans and other assets worth $1.5 million
An insurance company
A corporation with a net worth of $3 million
II and III
Explanation
Institutional investors such as insurance companies are regarded as accredited investors, regardless of size. An individual with a net worth of $800,000 and a salary of $150,000 does not meet either of the two qualification criteria for individuals. The married couple with a net worth of $2 million, which, after excluding the net equity in the primary residence is still in excess of $1 million, is accredited. In order for a corporation to meet the definition, it must have a net worth of at least $5 million.
LO 1.c
Which of the following statements regarding the sale of restricted stock under Regulation D by a nonreporting company with the seller relying on Rule 144 is true?
A)
Affiliates are never subject to holding periods or volume restrictions.
B)
Affiliates are not subject to volume restrictions on stock held for more than six months.
C)
Form 144 must be filed with the SEC within 10 days of the date of sale.
D)
Nonaffiliates are not subject to volume restrictions on stock held for more than 6 months.
D)
Nonaffiliates are not subject to volume restrictions on stock held for more than 6 months.
A provision permitting the syndicate members participating in a firm commitment offering to engage in short selling on an IPO is
the green shoe option.
Explanation
A green shoe clause, negotiated with and agreed to by the issuer, allows the syndicate to sell up to 15% more shares than initially registered within 30 days of the IPO beginning to trade. Because the underwriters do not own those additional shares, they are, in reality, selling them short. However, because the issuer has agreed to issue the additional shares, the syndicate does not have the risk normally associated with selling short.
In the case of a stock offering, when demand is considerably lower than supply for a new issue (the opposite of the conditions using the green shoe option), the price in the aftermarket is likely to fall. Under these circumstances, the underwriter can stabilize the security by bidding for shares in the open market. These bids may be placed at or just below the public offering price. The managing underwriter can enter or appoint a syndicate member to enter stabilizing bids for the security until the end of the offering period. In a firm commitment underwriting, the underwriter assumes substantial financial risk for the underwriting. To limit its risks, a market-out clause in the underwriting agreement specifies conditions under which the commitment is cancelable. An example of such an event would be the sudden death of the company president.
An issuer may direct sales of a new issue to all of the following except
A)
officers of its largest customer.
B)
officers of the managing underwriter.
C)
officers of the issuer.
D)
officers of its largest supplier
B)
officers of the managing underwriter.
Explanation
Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted.
Bond trust indentures are required for
corporate debt securities.
An affiliate or insider holding unregistered shares can sell under Rule 144
4 times a year.
Explanation
Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days, which would allow for as many as four filings per year.
A registered representative opens a new account for an investment club. His spouse is a member of the club and owns 15% of the club's assets. The registered representative wants to sell shares of a common stock IPO to the investment club. This is allowed
under no circumstances.
Explanation
Rules prohibit member firms from selling common stock IPOs to restricted persons. Under the rules, the account would not be restricted if the assets owned by the spouse made up less than 10% of the club's assets. Because the registered representative's spouse is a member of the investment club and owns more than 10% of the club's assets, the registered representative cannot sell shares of the IPO to the club.
Which of the following statements regarding a Rule 144 sale of restricted stock are true?
Stock sold through a 144 sale is considered registered stock after the sale.
After holding the stock for six months, nonaffiliates may sell unrestricted.
After holding the stock for six months, there are no volume restrictions for affiliates.
Form 144 must be filed with the SEC at least 10 business days before a 144 sale made by an affiliate.
I and II
Explanation
Stock sold through a 144 sale is considered registered stock after the sale. When required to be filed by affiliates or insiders, Form 144 must be filed with the SEC on or before the date of sale. After holding the stock fully paid for six months, nonaffiliates may sell unrestricted, but affiliates are subject to the volume restrictions of Rule 144.
Both of the securities acts of 1933 and 1934 address fraud in the securities industry. Regarding the antifraud provisions outlined in these acts, which of the following statements is true?
A)
No securities, issuers, or transactions are exempt from the antifraud provisions of these acts.
B)
Exempt transactions, like those offered under Regulation A+, are exempt from the provisions.
C)
Exempt securities, like those issued by municipalities, are exempt from the provisions.
D)
Exempt issuers like the federal government are exempt from the provisions.
A)
No securities, issuers, or transactions are exempt from the antifraud provisions of these acts.
Explanation
No securities, issuers, or transactions are exempt from the antifraud provisions of either the Act of 1933 or the Act of 1934.
LO 1.b
One of your customers was the founder of a start-up that became a tech unicorn: a new venture that reached a market capitalization of at least $1 billion. Although much of the equity was given to venture capital and private equity funds, your client still owns enough of the company to be considered a control person. The customer wishes to purchase a luxury condominium downtown and would like to sell some of the stock to pay for it. The current market price of the stock is $50 per share, and there are 35 million shares outstanding. The average daily trading volume over the past four weeks has been 300,000 shares. Under Rule 144, the maximum number of shares your customer could sell over a 90-day period is
1.5 million.
Explanation
Sales by a control person come under Rule 144. The limit is as follows: the greater of 1% of the outstanding shares or the average weekly trading in the stock over the preceding four weeks. And 1% of the outstanding number of shares is 350,000. The average weekly trading is 1.5 million shares. Did you notice the 300,000 was the daily average, not the weekly? The greater of the two is clearly the 1.5 million shares, and at the current market price of $50 per share, that will buy a lot of luxury.
LO 1.d
To be designated as an accredited investor under Regulation D, a married couple investing in a joint account must have income in the past two years of at least
$300,000.
(200,000 for individuals)
Raul Garcia is the chief operating officer (COO) of RMB, a NYSE-listed corporation. Garcia has an account at your firm and five months ago purchased 1,000 shares of RMB Class B common stock at $50 per share in a trade effected on the NYSE Trading Floor. When the RMB shares rose to $125 per share, Garcia exited the position. Which of the following statements likely represents the view of the SEC?
Garcia violated the short-swing profits rule.
Explanation
Section 16 of the Securities Exchange Act of 1934 contains the short-swing profits rule. This rule states that any insider of a publicly traded corporation (the COO would certainly be included in the definition of insider or affiliate) is prohibited from profiting from any purchase or sale (or sale and purchase) of the company's equity securities within a period of less than six months. This rule authorizes the corporation to recover from a statutory insider any so-called short swing profits. The profit must be disgorged or given back. There is nothing illegal here, so there are no fines or penalties. However, we investors might consider returning a $75,000 profit to be a penalty. This stock was purchased in the secondary market, so the Rule 144 holding period does not apply. Rule 144 permits affiliates (like Garcia) to sell up to 1% of the outstanding shares over a 90-day period. RMB Class B stock is traded on the NYSE, and 1,000 shares is certainly much less than 1% of the shares outstanding. Note that companies may offer different classes of common stock, each with its own benefits or drawbacks. For example, a Class B stock may have more voting rights per share. The specifics can vary widely by company. In this question it doesn't matter since we're looking only toward a possible violation of the short swing rule.
When the SEC rules that an offering has become effective, the SEC has
cleared the offering for sale
An intrastate offering is exempt from
federal registration
Offering stock to the public through an initial public offering (IPO) is the most familiar way of taking a company public. A reverse merger is another way that has advantages in some cases. All the following are advantages of going public by means of a reverse merger except
A)
capital can be raised more quickly than with a regular IPO.
B)
the private company’s stock will become more liquid.
C)
the process can take weeks rather than the months often required for an IPO.
D)
market conditions are less of a worry than with an IPO.
A)
capital can be raised more quickly than with a regular IPO.
Explanation
A reverse merger is not used to raise capital but is instead commonly used to go public. Once the process (which is shorter and simpler than an IPO) is complete, the new company's stock may likely see greater liquidity as a publicly traded security. Market conditions that can delay or cancel an IPO are voided. See Content Updates for more information about reverse mergers.
All of the following are exempt securities except
A)
bankers' acceptances.
B)
municipal bond mutual funds.
C)
commercial paper.
D)
T-bills.
B)
municipal bond mutual funds.
Explanation
While municipal bonds are an exempt security, bond mutual funds are not; they are investment company securities, which must be registered with the SEC prior to public sale.
A member of the board of directors of the Able Baker Charlie Company (ABCC) used her director's fees to purchase 200 shares of ABCC on the Nasdaq Stock Market at $20 per share. If she wished to sell these shares, compliance with Rule 144 would entail
A)
meeting a size limit, but not a time limit.
B)
meeting a time limit, but not a size limit.
C)
meeting both a size limit and a time limit.
D)
meeting neither a size limit nor a time limit.
D)
meeting neither a size limit nor a time limit.
Explanation
A member of the board of directors (BOD) of a publicly traded corporation is considered a control person. BOD members come under the provisions of Rule 144 when they wish to sell their stock in the company. In this question, there are two factors to consider. The first is that the stock is not restricted. How do we know that? Because it was purchased on the Nasdaq Stock Market in a secondary transaction. Therefore, there is no time limitation before she can sell. The second is that the sale meets the de minimis level (no more than 5,000 shares and less than $50,000). That means there is no need to file a Form 144 with its size limitations (the greater of 1% of the total outstanding shares of the same class at the time of sale, or the average weekly trading volume in the stock over the past four weeks on all exchanges or as reported through Nasdaq.)
Be careful to answer the question being asked, because there is another issue for this director to consider. Section 16(b) of the Securities Exchange Act of 1934 prohibits control persons from taking short-swing profits, defined as those realized within a period of less than six months.
Under which of the following terms does the underwriter act in a dealer capacity?
A)
Syndicate
B)
Firm commitment
C)
Best efforts
D)
Selling group
B)
Firm commitment
Which of the following exemption provisions of the Act of 1933 may not be used for an initial offering of securities?
A)
Rule 147
B)
Rule 144
C)
Regulation D
D)
Regulation A
Explanation
Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.
LO 1.d
B)
Rule 144
Explanation
Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.
LO 1.d
TCB Corporation wants to offer $75 million worth of common stock solely to residents of its home state. The issue will not be registered at the federal level. What type of registration will TCB use to register with the state?
Qualification
Explanation
If the registration is just with one state, the registration will be done through qualification. Qualification means that the state will collect all the information and decide whether or not to clear the offering for sale in the state.
Treasury stock =
issued shares - outstanding shares
ABC Company has authorized 3 million shares of common stock. It issued 70% of those shares one year ago. It then purchased 600,000 shares for its treasury. How many shares of ABC stock are outstanding?
A) 600,000
B) 1,500,000
C) 2,100,000
D) 3,000,000
B
issued stock – treasury stock = outstanding stock
Thus, 3,000,000 × 70% = 2,100,000 – 600,000 = 1,500,000.
ABC Company has 1,500,000 shares of common stock outstanding
a forward stock split _____ the number of shares and _____ the price without affecting the total market value of shares outstanding.
increases; reduces
a reverse stock split _____ the number of shares and _____ the price without affecting the total market value of shares outstanding.
decreases; increases
allows a stockholder to cast one vote per share owned for each item on a ballot, such as candidates for the BOD. A board candidate needs a simple majority to be elected.
Statutory voting
Example 1: Mr. X Owns 100 Shares
Statutory Voting | |
BOD Seat 1 | 100 |
BOD Seat 2 | 100 |
BOD Seat 3 | 100 |
allows stockholders to allocate their total votes in any manner they choose.
cumulative voting
Example 2: Mr. X Owns 100 Shares
Cumulative Voting | Cumulative Voting | |||
BOD Seat 1 | 175 | BOD Seat 1 | 300 | |
BOD Seat 2 | 50 | OR | BOD Seat 2 | 0 |
BOD Seat 3 | 75 | BOD Seat 3 | 0 | |
dual-class or multiclass share structures of common stock that provide the owners with a larger proportion of voting rights
supervoting stock
Preferred stock is always issued with
a fixed rate of return (fixed dividend)
allows stockholders to purchase common stock below the current market price
A rights offering
value of a right formula
market price − subscription price / number of rights to purchase one share + 1
ex rights formula
market price − subscription price /
number of rights to purchase one share
a certificate granting its owner the right to purchase securities from the issuer at a specified price
A warrant
Rank the following securities from the same issuer from most suitable to least suitable for a client whose primary objective is income with relative safety.
Cumulative preferred stock
Convertible preferred stock
Common stock
Warrant
I, II, III, IV
Answer: A For a client seeking income with some safety, preferred stock—especially one that is cumulative—would be the most suitable of the choices given. Convertible preferred stock generally pays a lower dividend rate than other preferred stocks. This is because of the attractiveness of the convertibility. Although there are some categories of common stock (e.g., utility stocks that pay liberal dividends), unless specifically mentioned you can assume that preferred stock dividends are higher than those for common stock of the same issuer. Warrants (and rights) never provide any income.
A type of alternative trading system (ATS) that focuses on transparency, actively participates in quote streams and is required to register with the SEC and FINRA as a broker-dealer is
an ECN
Explanation
Electronic communication networks (ECNs) are a type of alternative trading system (ATS) that trade listed stocks and other exchange-traded products. Unlike dark pools, which are another type of ATS, ECNs display order in the consolidated quote stream. Both dark pools and ECNs are required to register as broker-dealers. Trading in the fourth market (institution to institution) is done largely through ECNs.
Portfolio income includes
dividends, interest, and net capital gains derived from the sale of securities
(No matter what the source of the income, it is taxed in the year in which it is earned.)
long-term for capital gains and losses is
one day plus 12 months
Florence purchased 100 shares of YXC common stock for $22 per share on February 12, 2022. She received a 10% stock dividend on May 18, 2023. She sold all her YXC at $25 per share in June of the same year. What are the tax consequences of her trades?
$550 long-term gain
Explanation
We compare the cost with the proceeds. Florence paid $2,200 for 100 shares. She received an additional 10 shares from the stock dividend. Then she sold all 110 shares for $25 per share—$2,750. The difference between the cost and the proceeds is $550. The holding period was from February 2022 to June 2023—more than 12 months. That makes the gain long-term.
All of the following statements regarding over-the-counter (OTC) markets are true except
A)
a bid is the highest price a dealer will pay when buying.
B)
securities traded OTC include American depositary receipts (ADRs) and municipal bonds.
C)
the OTC market is an auction market.
D)
an offer is the lowest price a dealer will accept when selling.
C)
the OTC market is an auction market.
Explanation
The OTC market is a negotiated market in which market makers post their quotes to facilitate negotiating price. A bid is the highest price a buyer is willing to pay, and an offer is the lowest price a seller is willing to accept. Among the securities traded OTC are both ADRs and municipal securities.
Which feature of preferred stock allows the holder to reduce the risk of inflation?
Convertible
Explanation
Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.
One of your clients is a U.S. based taxpayer. The investor owns shares in an ADR and the bank sent a statement showing $500 in dividends paid during the taxable year. The client noticed that only $425 was credited to the account. How would you explain the discrepancy?
The difference represents foreign withholding tax.
Explanation
Any tax taken on dividends received from ADRs is taken in the country of origin. This is a foreign withholding tax for U.S. investors. The foreign withholding tax may later be taken as a credit against any U.S. income taxes owed by the U.S. investor.