Study Question

July Study Question of the Month

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Question

A publicly traded company solicits private investors through a PIPE transaction. After the shares are sold, the company does not register them with the SEC. Which of the following negative consequences is it most likely to face?

Disciplinary action by the SEC
Disciplinary action by FINRA
Damages paid to the holders of the privately placed shares
Conversion of the privately placed shares to regular shares at a conversion ratio unfavorable to the company

Answer: C. Because a PIPE transaction is a private placement, the SEC does not require the company to register the shares. It is standard for the company to register the shares anyway, to remove their status as restricted securities. The company typically will have agreed to pay damages to the holders of the privately placed shares if this is not done within a reasonable time, usually 1% to 1.5% per month.

June Study Question of the Month

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Question

There are basically four things you can do with a short-term capital loss. Which of the following is the order in which you would typically do them?

Offset a short-term capital gain, offset a long-term capital gain, deduct up to $3,000 from income, carry over for a future year
Offset a long-term capital gain, offset a short-term capital gain, deduct up to $3,000 from income, carry over for a future year
Deduct up to $3,000 from income, offset a short-term capital gain, offset a long-term capital gain, carry over for a future year
Deduct up to $3,000 from income, carry over for a future year, offset a long-term capital gain, offset a short-term capital gain

Answer: A. Capital losses can be used to offset capital gains on a tax return. The taxpayer must first offset short-term gains with short-term losses and long-term gains with long-term losses. If there are any long-term or short-term gains remaining, these can be offset with any remaining losses. If there are any losses remaining after all gains have been offset, up to $3,000 of the losses can be deducted from a person’s taxable income each year. If there are still losses remaining after that, they can be carried over to the following year.

May Study Question of the Month

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Question

Through a private placement, Teddy purchases a 20% equity stake in Big Stick Industrial Adhesives. Are his shares considered control securities? Are they considered restricted securities?

A. Restricted only

B. Control only

C. Both control and restricted

D. Neither control nor restricted

Answer: C. A restricted security is one that cannot normally be sold by its current owner, for a certain period of time after it is acquired. A security may be restricted for a couple reasons, all having to do with how the security was acquired. The most common reason is that securities acquired through private placements are restricted.

A control security is simply one owned by an affiliate of the issuer (also called an insider). Insiders include officers, directors, and shareholders who own more than 10% of the company.

April Study Question of the Month

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Question

When inherited, the basis of a depreciated asset is?

A. Stepped up

B. Stepped down

C. Carried over

D. Carried under

Answer: B. Typically, when an asset is inherited, the value of the asset has increased since it was purchased and the heir gets to “step up” (raise) the basis of the inherited property to the fair market value at the date of death. So, for example, if Grandpa bought shares of XYZ for $1,000 in the previous century, and the shares are worth $1 million on the date of Grandpa’s death, the basis for tax purposes is stepped up to $1 million to the lucky recipient. This means that capital gain escapes any federal taxation.

The basis “step-up” rule can become a “step-down” rule as well. So if an asset’s value has declined and someone inherits the asset, for the sake of taxes, the basis of the asset is stepped down (lowered) to the fair market value on the date of the owner’s death. This loss of basis can be avoided by the owner selling any depreciated property before death, so he or she can reap the tax losses.

March Study Question of the Month

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Question

With mutual fund A shares, the price an investor pays is referred to as:

A. NAV

B. POP

C. ROA

D. LOI

Answer: B. Mutual fund A shares typically charge a front-end sales charge, also called a load, which is a percentage of the investment in the mutual fund. The front-end sales charge or load is included in the price per share an investor pays. The current share price of a mutual fund is referred to as the net asset value, or NAV. The share price including any sales charge is referred to as the public offering price, or POP. For example, a fund with a NAV of $15 and a 5% front-end load has a POP of $15.79. That is calculated by dividing the $15 NAV by .95 (1 minus the 5% load). ROA refers to rights of accumulation and LOI refers to letter of intent. Both ROA and LOI are ways investors can get a volume discount on the price of load mutual fund shares.

February Study Question of the Month

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Question

Spock is an adviser who takes great pride in his use of logic when making investment recommendations. Which of the following investment vehicles would he be least likely to recommend for a client’s IRA?

A. Corporate bonds

B. Growth stocks

C. Municipal bonds

D. REITs

Answer: C. Having municipals in an IRA is allowed, but it would not be the most logical investment choice. That is because the tax advantage associated with municipal bonds is wasted in a tax-deferred account like an IRA.

January Study Question of the Month

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Question

Relevant to the Series 7.

Cassie gives her nephew Frank 10 shares of Hathshire Berkaway as a college graduation present. Cassie purchased the shares five years ago at $1,000, and their fair market value is $1,500 at the time of the gift. Frank holds the shares for one year, then sells them at $2,000. What is Frank’s cost basis and holding period?

A. $10,000; one year

B. $10,000; six years

C. $15,000; one year

D. $15,000; six years

Answer: B. When someone gives securities as a gift to another individual, the recipient’s cost basis is the lower of (1) the giver’s cost basis or (2) the fair market value at the time of the gift. So Frank’s cost basis is Cassie’s purchase price of $10,000 ($1,000 x 10 shares). The giver’s holding period will correspond to cost basis. So Frank’s holding period starts from the date of Cassie’s purchase, six years before Frank sells the shares.

December Study Question of the Month

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Question

Relevant to the SIE.

Henry buys shares of ABC in an initial public offering. Two months later he sells the shares to James. Two months later James sells the shares to Carrie. Which of the following is true?

A. Henry’s sale to James is a primary market transaction, while James’s sale to Carrie is a secondary market transaction

B. Both Henry’s sale to James and James’s sale to Carrie are primary market transactions

C. Henry’s sale to James is a primary market transaction, while James’s sale to Carrie is a follow-on offering

D. Both Henry’s sale to James and James’s sale to Carrie are secondary market transactions

Answer: D. When an investor buys shares in an IPO from the issuer, the purchase is a primary market transaction. After that, whenever sales of the security are traded from investor to investor, and not from the issuer to an investor, the sales take place in the secondary market. Thus, while Henry’s initial purchase is a primary market transaction, his sale to James and then James’ sale to Carrie are both secondary market transactions.

November Study Question of the Month

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Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.

Question

Relevant to the Series 50, Series 51, Series 52, and Series 53.

A municipal finance professional decides to donate his time to a municipal official’s campaign. He donates his time outside of work hours. Which of the following is true?

A. This would not be considered a contribution under G-37, and would not need to be disclosed and would not trigger the ban

B. This is considered a contribution that will need to be reported and may trigger the ban

C. This will need to be disclosed by the dealer, but it would not trigger the ban

D. This is considered a contribution that may trigger the ban, but will not need to be reported

Answer: A. An employee of a dealer generally can donate his or her time to a municipal official’s campaign without it being considered a contribution to the official, as long as the employee is volunteering his or her time during non-work hours, or is using previously accrued vacation time or the dealer is not otherwise paying the employee’s salary (e.g., an unpaid leave of absence). Because the volunteering takes place outside of work hours, it would not be considered a contribution and will not trigger the ban or need to be disclosed.

October Study Question of the Month

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Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.

Question

Relevant to the Series 7, Series 62, Series 65, Series 79, Series 82, and Series 99.

What is the holding period for restricted securities issued by a company that files reports with the SEC?

A. Six months

B. Nine months

C. Twelve months

D. Securities issued by a company that files with the SEC are never restricted

Answer: A. Rule 144 requires purchasers of restricted securities to hold them for a certain amount of time before they sell them. If the issuer is a company that files reports with the SEC, the holding period is six months. If the issuer is a non-reporting company, the holding period is 12 months.