Chapter 1

Underwriting Securities

A good place to start is at the beginning. Prior to corporations “going public,” they must register and have a way of distributing their securities. The Series 7 exam tests your ability to understand the registration process, the entities involved in bringing new issues to market, and types of offerings. In addition, you’re expected to know which securities are exempt from Securities and Exchange Commission (SEC) registration.

The Problems You’ll Work On

As you work through this chapter, be sure you can recognize, understand, and, in some cases, calculate the following:

• The process involved with bringing new issues to market
• Who gets what (distribution of profits)
• The different types of offerings
• Exempt securities and transactions

What to Watch Out For

Read the questions and answer choices carefully and make sure that you

• Watch out for words that can change the answer you’re looking for, such as EXCEPT, NOT, ALWAYS, and so on.
• Recognize that there’s a difference between exempt securities and exempt transactions.
• If you’re not certain of the correct answer, try to eliminate any answers that you can. Doing so may make the difference between passing and failing.

1–22 Bringing New Issues to Market

1. For an entity to become a corporation, they must file a __________ with their home state of business.

(A) registration statement

(B) statement of additional information (SAI)

(C) corporate charter

(D) prospectus

2. GNU Corporation is planning to issue new shares to the public. GNU has not yet filed a registration statement with the SEC. An underwriter for GNU may do which of the following?

(A) Accept money from investors for payment of the new issue of GNU.

(B) Send a red herring to investors.

(C) Accept indications of interest.

(D) None of the above.

3. Which of the following information must be included in the registration statement to the SEC when registering new securities?

1. The issuer’s name and description of its business
2. What the proceeds of sale will be used for
3. Financial statements
4. The company’s capitalization

(A) I and III

(B) I, II, and III

(C) I, III, and IV

(D) I, II, III, and IV

4. What is the underwriting arrangement that allows an issuer whose stock is already trading publicly to time the sales of an additional issue?

(A) Shelf registration

(B) A standby underwriting

(C) A negotiated offering

(D) An Eastern account underwriting

5. SEC Rule 415 outlines rules for

(A) primary offerings

(B) shelf offerings

(C) secondary offerings

(D) IPOs

6. The cooling-off period for a new issue lasts approximately how many days?

(A) 20

(B) 30

(C) 40

(D) 60

7. All of the following terms apply to a new issue of securities EXCEPT

(A) stabilization

(B) due diligence

(C) matching orders

(D) cooling-off period

8. Under the Securities Act of 1933, the SEC has the authority to

1. approve new issues of common stock
2. issue stop orders
3. review registration statements

(A) I and II

(B) II and III

(C) I and III

(D) all of the above

9. Which of the following MAY NOT occur during the cooling-off period?

(A) Having a due diligence meeting

(B) Obtaining indications of interest

(C) The publishing of a tombstone ad

(D) Soliciting sales of the new security

10. If AylDec Corporation wishes to have a public offering of common stock, they must

1. issue a prospectus
2. publish a tombstone advertisement
3. register the securities with the SEC

(A) I and II

(B) II and III

(C) I and III

(D) I, II, and III

11. A tombstone ad would include all of the following names EXCEPT

(A) selling group members

(B) syndicate members

(C) the syndicate manager

(D) the issuer

12. All of the following would be included on a tombstone ad EXCEPT

(A) the name of the issuer

(B) the names of the selling groups

(C) the names of the syndicate members

(D) the name of the syndicate manager

13. Zamzow, Inc., has filed a registration statement and is currently in the cooling-off period. Zowie Broker-Dealer is the lead underwriter for Zamzow and is in the process of taking indications of interest. Which TWO of the following are TRUE regarding indications of interest?

1. They are binding on Zowie.
2. They are binding on customers.
3. They are not binding on Zowie.
4. They are not binding on customers.

(A) I and II

(B) III and IV

(C) I and IV

(D) II and III

14. Which of the following are types of state securities registration?

1. Filing
2. Communication
3. Qualification
4. Coordination

(A) I, III, and IV

(B) II, III, and IV

(C) I, II, and III

(D) I, II, III, and IV

15. This type of state securities registration is used for established companies that have previously sold securities in the state.

(A) Notification

(B) Coordination

(C) Indemnification

(D) Qualification

16. This type of state securities registration is used for securities that are exempt from SEC registration but must register with the state.

(A) Notification

(B) Coordination

(C) Indemnification

(D) Qualification

17. All of the following may be determined by the managing underwriter EXCEPT

(A) the takedown

(B) the public offering price

(C) the effective date

(D) the allocation of orders

18. The SEC has ruled that an offering has become effective. This means that

(A) the SEC has approved the issue

(B) the SEC has cleared the issue

(C) the SEC has verified the accuracy of the information provided on the registration statement

(D) all of the above

19. Which of the following securities acts covers the registration and disclosure requirements of new issues?

(A) Securities Act of 1933

(B) Securities Exchange Act of 1934

(C) Trust Indenture Act of 1939

(D) All of the above

20. Which of the following are covered under the Securities and Exchange Act of 1934?

1. Margin accounts
2. Trust indentures
3. Proxies
4. Short sales

(A) I, II, and III

(B) II and IV

(C) III and IV

(D) I, III, and IV

21. The Trust Indenture Act of 1939 prohibits corporate bond issues valued greater than _________ from being offered to investors without an indenture.

(A) $5 million

(B) $10 million

(C) $50 million

(D) $75 million

22. The main function of an investment banker is to

(A) advise an issuer on how to raise capital

(B) raise capital for issuers by selling securities

(C) help issuers comply with the laws of the Securities Act of 1933

(D) all of the above

23–47 Agreement Among Underwriters

23. Which of the following documents details the liabilities and responsibilities of each firm involved in the distribution of new securities?

(A) The registration statement

(B) The letter of intent

(C) The syndicate agreement

(D) The code of procedure

24. Which of the following documents would contain the allocation of orders?

(A) Official statement

(B) Trust...