Chapter 12 Practice Question Answers
- 1. Answer: B. During the cooling-off period, companies are restricted from advertising and selling their new offering of securities. Offers of securities are only allowed through a preliminary prospectus or a free-writing prospectus. Underwriters are allowed to collect indications of interest. Companies are allowed to publish tombstone ads that provide general information about a new offering.
- 2. Answer: D. Regulation D, Rule 506(c) has an unlimited dollar cap, and public advertising is allowed as long as all investors are accredited investors. Rule 147 and Regulation A are only for U.S. issuers, so they would not be appropriate for this Japanese company. Regulation S is only for offshore transactions.
- 3. Answer: B. Rule 144A allows issuers and non-issuers to sell restricted securities to qualified institutional buyers (QIBs) without restrictions.
- 4. Answer: B. The CEO of a corporation is an affiliate, also called a control person. If a person purchases shares from an affiliate, the shares are considered restricted, even if they were not restricted in the affiliate’s hands, and therefore, the shares are subject to holding limits. In this case, J.P. will need to hold on to the shares for at least six months because XYZ is a reporting company. These shares cease to be control securities when they leave the hands of the CEO, so they are not subject to volume limits.
- 5. Answer: B. Situations that do require registration under Rule 145 include mergers where stock is exchanged, reclassifications where one type of stock is converted to another (e.g., common to preferred), and transfers of assets where one corporation purchases a substantial portion of another. Situations that do not require registration under Rule 145 include acquisitions where shareholders are paid in cash and no shareholder vote is required, stock splits, reverse stock splits, and stock dividends.
- 6. Answer: A. For businesses that