Chapter 6 Practice Question Answers
- 1. Answer: B. Registration statements become effective after a cooling-off period during which time the SEC makes sure that the registration statement is complete. The cooling-off period is a minimum of 20 days long.
- 2. Answer: C. Stabilizing bids must be no higher than the lower of the public offering price or the highest independent bid. Since the price has been dropping from its inception, the stabilizing bid cannot exceed the highest independent bid.
- 3. Answer: A. This question explores the different types of underwriting. The key concept is that the underwriters act as principals, not as agents, in a firm commitment underwriting.
- 4. Answer: B. A tombstone advertisement is generally placed in a newspaper with respect to an upcoming IPO. Correctly written, it is not deemed to be an offer to sell or a solicitation of an offer to buy a security. It is primarily used to refer prospective buyers to the underwriter of the IPO to obtain additional information.
- 5. Answer: C. An issuer may file a shelf registration when the market conditions are not favorable for an initial public offering to occur. Using a shelf registration, an issuer may carry out all the necessary registration procedures ahead of time and put them on a “shelf” until the market conditions become more favorable. An issuer must bring the shares to market within three years of the initial effective date of the shelf registration.
- 6. Answer: D. Preferred stock is not considered a debt security under the Act. The Trust Indenture Act of 1939 applies to corporate bond offerings that are in excess of $5 million and mature in more than 270 days. Companies that issue bonds that are in excess of $5 million and mature in more than 270 days must sell these bonds under an indenture or contract. The indenture is with an outside trustee who represents the bondholder’s interests. The company must appoint this outside trustee. If the company g