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 Securities Act sets the standard length of the cooling-off period at 20 calendar days.
- 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. In a firm commitment underwriting, the investment bank purchases the shares to be issued from the issuing company and then agrees to resell them to the public. By purchasing the shares, the underwriting investment bank makes a “firm commitment” to issuer. A 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 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 Trust Indenture Act of 1939. The Act applies to corporate bond offerings that are in excess $50 million issued in a single year, with an exemption for bonds that have a maturity of 270 days or less. Compan