Chapter 6 Practice Question Answers
1. Answer: B. In a best efforts commitment, payments for issued securities must be deposited into an escrow account of an independent bank until the offering concludes. This rule was put into place to ensure that purchasers get their money back if the offering is canceled. There are two types of best efforts commitments: all-or-none commitments and mini-max commitments.
2. Answer: C. 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.
3. Answer: D. The SEC does not endorse, guarantee, or approve anything relative to the registration statement. It simply wants to see that there is one and that it contains no misleading statements.
4. Answer: C. Investors who purchase a new issue in the secondary market within 25 days of the effective date of the issue must be provided with a copy of the final prospectus.
5. Answer: A. Regulation M, Rule 103 permits NASDAQ market makers that participated in a securities distribution to make bids on the security during the restricted period as long as the bid does not exceed the highest independent bid. This is called passive market making. Market makers must notify NASDAQ in advance of engaging in passive market making. On a single day of the restricted period, a passive market maker’s net purchases may not exceed the greater of 30% of the security’s average daily trading value or 200 shares of the security. A passive market maker must designate its bid as a passive market making bid.
Since Able’s report meets these qualifications, it is not considered an offer.
6. Answer: B. Stabilizing bids must be no higher than the lower of the public offering