Question 1

Which of the following is not an essential part of a prospectus?

Accepted Answer

Details of future equity issues are not considered an essential part of a prospectus. A prospectus typically includes information about the company's financial situation, risks, management, and use of proceeds from the sale, but not necessarily specific plans for future equity issues.

Question 2

The acronym IPO stands for:

Accepted Answer

IPO stands for Initial Public Offering, which refers to the first time a company's stock is offered to the public for purchase. It allows a privately held company to become a public company, raising capital by selling shares to investors.

Question 3

Which of the following is not a reason for a firm to go public?

Accepted Answer

Going public actually increases reporting regulations for a company, making it a less attractive option if a company wishes to decrease regulations. The other options are all valid reasons for a firm to go public.

Question 4

Which of the following is not one of the bases of the three major categories of exempt purchasers?

Accepted Answer

The three major categories of exempt purchasers typically include considerations based on the sophistication level of the purchaser, the low-risk nature of the instrument, and the dollar value of the potential issue. The existence of an alternative source of money is not a standard basis for categorizing exempt purchasers.

Question 5

What is venture capital?

Accepted Answer

Venture capital refers to money raised from private investors in the exempt market. It is typically invested in young, high-growth companies that have the potential to generate significant returns for investors.

Question 6

Use the following statements to answer this question:
I.Risk of information asymmetry is high in an IPO because the company's public disclosure, as a public firm, is minimal.
II.An IPO prospectus eradicates the issue of information asymmetry completely.

Accepted Answer

Statement I is correct as an IPO often involves a company going public for the first time, therefore, information available to the public is limited. Statement II is incorrect as an IPO prospectus provides extensive information that helps reduce but does not completely eradicate information asymmetry.

Question 7

Generally, underwriters provide which of the following services to the issuing firm?

Accepted Answer

Underwriters provide all of the above services to the issuing firm. Strategic business advice may include market timing and structuring of the issue. Pricing the issue involves deciding the price at which the securities will be offered to the public. Determination of the spread refers to the difference between the price paid by the issuing firm to the underwriters and the price at which the securities are offered to the public.

Question 8

The term "red herring" refers to the:

Accepted Answer

A red herring is a preliminary prospectus, which is a document filed with the Securities and Exchange Commission (SEC) before an IPO to disclose key information about the company's business and operations, as well as the risks involved in investing. The document is called a red herring because it typically includes a disclaimer that the information contained therein is not yet complete and may be subject to change.

Question 9

Which of the following is not true about a prospectus?

Accepted Answer

Typically, the CEO, not the CFO, signs the prospectus on behalf of the board of directors.

Question 10

If you are handed a formal summary of a security that describes the costs, investment objectives, and risks involved, what are you reading?

Accepted Answer

A prospectus is a formal summary of a security that describes the costs, investment objectives, and risks involved. The annual report provides a comprehensive overview of a company's financial performance and operations over a fiscal year. The auditor report provides an independent assessment of a company's financial statements. The proxy statement provides information about voting procedures and proposals for a company's annual shareholder meeting.

Question 11

If you are reading an IPO prospectus, in which form must it be?

Accepted Answer

An IPO prospectus must be in long-form due to the greater risk involved in the offering. The long-form prospectus provides detailed information about the company and its financials, which is necessary to help investors make an informed decision about whether to invest in the company. A short-form prospectus may be used for a secondary offering or a prospectus supplement, but not for an IPO. A prospectus is required for an IPO.

Question 12

A prospectus is mandatory for all securities issuances except:

Accepted Answer

A prospectus is generally required for securities issuances to inform investors about the risks, objectives, and terms of the investment. However, exceptions are made for small amounts, where the administrative burden of producing a prospectus might outweigh the benefits for both the issuer and the potential investors.

Question 13

Use the following statements to answer this question:
I.One of the most frequently cited reasons of why a firm goes public is because investors want to cash out.
II.Obtaining cheaper sources of financing over the long term is a potential reason for an IPO.

Accepted Answer

Both statements are correct. Going public allows initial investors to cash out their investments, and it also provides companies with access to capital markets for cheaper long-term financing compared to other forms of raising capital.

Question 14

The Ontario Securities Commission has regulated which of the following?

Accepted Answer

The Ontario Securities Commission has regulated all of the following- distribution of shares, control blocks, and restricted shares.

Question 15

What is the exempt market?

Accepted Answer

The exempt market refers to the segment of the capital markets where securities can be sold without the need to file a prospectus with regulatory authorities, typically involving private placements to specific types of investors. This market is unregulated in the sense that the securities offered are not registered with securities regulators and it primarily raises capital from private investors.

Question 16

Which of the following is/are the major areas in which the OSC is involved?

Accepted Answer

The OSC (Ontario Securities Commission) is involved in all of the above areas, including primary and secondary market offerings, activities of investment professionals, and takeover bids. The OSC is responsible for regulating and enforcing securities laws in Ontario, Canada, and is committed to protecting investors and maintaining fair and efficient capital markets.

Question 17

Use the following statements to answer this question:
I.Improvements in securities laws have helped in curbing fraudulent activities.
II.Asymmetry of information is the major source of frauds in financial markets.

Accepted Answer

Both statements are correct. Improvements in securities laws have indeed helped in reducing fraudulent activities by making markets more transparent and regulated. Asymmetry of information, where one party has more or better information than the other, is a significant source of fraud in financial markets, as it can lead to exploitation and unfair practices.

Question 18

Put the following IPO process stages into chronological order:
I.Initial filing
II.Preliminary prospectus
III.Pricing and distribution
IV.Investment bank discussion

Accepted Answer

The answer of Put the following IPO process stages into...

Question 19

Which of the following is part of a prospectus?

Accepted Answer

A prospectus typically includes a description of the proposed business activity, potential market, and risk factors. It also includes financial information, management biographies, and other relevant details about the company or investment opportunity being presented.

Question 20

What are the main differences between a prospectus and an offering memorandum?

Accepted Answer

Offering memorandums are typically shorter and less expensive to prepare than prospectuses. This is because offering memorandums are used for private placements and do not require the same level of detail or regulatory approval as prospectuses, which are used for public offerings.

Quiz 17: Investment Banking and Securities Law