Chapter 4 Practice Question Answers
1. Answer: D. A best-efforts underwriting is a commitment to sell all the shares or cancel the offering (all or none) or to sell some minimum amount (mini-max) or cancel. Best effort is not a guarantee to sell but a money-back guarantee if they don’t.
2. Answer: A. Registered secondary offerings are sales of already issued stock where one or more major stockholders sell all or part of their positions through an underwriter. The insider selling the securities would therefore receive the proceeds directly, less underwriting fees.
3. Answer: B. Shelf offerings allow issuers to sell their offerings at any time over a three-year period. WKSIs may file an automatic shelf offering, which does not require SEC review.
4. Answer: D. Red herring is another term for the preliminary prospectus.
5. Answer: C. The managing underwriter’s fee, the underwriting fee, and the selling concession are the components of the spread in the underwriting of a securities issue. The coupon has to do with interest payments on a bond.
6. Answer: D. An S corporation is a so-called “pass-through” entity that allows shareholders to avoid double taxation on their gains by reporting profits and losses on their individual tax returns. However, to be recognized by the IRS as an S corporation, the entity can have no more than 100 shareholders and none of the shareholders may be partnerships, C corporations, or non-resident aliens—this last category thereby excludes the Swiss investors. The size of the investment is irrelevant.
7. Answer: B. A Form S-3 is the most simplified registration form and therefore most desirable to issuers. To file an S-3, issuers must have already issued SEC-registered securities, and must have filed all their SEC-required filings in a timely manner. Issuers that may use Form S-3 are well-known seasoned issuers (as defined in Rule 405) and seasoned issuers. Domestic issuers that are issuing securities for the firs