Question 1

________ are the major investors in private placements.

Accepted Answer

Life insurance companies are major investors in private placements due to their long-term investment horizon and need for stable returns.

Question 2

The gross spread earned by the underwriter depends on numerous factors.

Accepted Answer

The gross spread earned by the underwriter depends on the offering size, issuer creditworthiness, market conditions, and other factors, therefore the statement is true.

Question 3

In April 1990, the SEC Rule 144A became effective and ________.

Accepted Answer

SEC Rule 144A eliminated the two-year holding period by permitting large institutions to trade securities acquired in a private placement among themselves without having to register these securities with the SEC. This allowed for a more liquid market for these securities and increased access to capital for issuers.

Question 4

In 1982, the SEC adopted Regulation D,which ________.

Accepted Answer

Regulation D provides guidelines for determining if a securities offering is exempt from registration requirements under the Securities Act of 1933.

Question 5

The Securities Act of 1933 does not provide specific guidelines to identify what is a ________.

Accepted Answer

The Securities Act of 1933 provides specific guidelines to identify what is a public offering. However, it does not provide specific guidelines to identify what is a private offering.

Question 6

Because of the low risks associated with the underwriting of securities, an underwriting syndicate and a selling group are rarely formed.

Accepted Answer

This statement is false. Underwriting syndicates and selling groups are commonly formed, especially for larger securities offerings, to help spread the risk among multiple financial institutions and to help distribute the securities to a wider range of potential investors.

Question 7

Congress specifies the conditions that must be satisfied to qualify for a private placement.

Accepted Answer

Congress does not typically specify the conditions that must be satisfied to qualify for a private placement. Private placements are generally subject to Securities and Exchange Commission (SEC) rules and regulations.

Question 8

A private placement is the distribution of shares to a limited number of institutional investors rather than through a public offering.

Accepted Answer

A private placement is a type of securities offering in which shares are sold to a small group of institutional investors, rather than through a public offering. This small group of investors is typically composed of wealthy individuals, mutual funds, pension funds, or other large financial institutions, and the shares are not sold to the general public. Private placements are often used by companies to raise capital without the cost and regulatory requirements of a public offering.

Question 9

An offering of a new security cannot be made by means of an auction process.

Accepted Answer

An offering of a new security can indeed be made through an auction process. This method is used to determine the price of the new security based on demand, allowing investors to bid on the securities before they are issued.

Question 10

Depending on the type of underwriting agreement, the underwriting function may expose the investment banking firm to the risk of selling the securities to the public at a price greater than the price paid to the issuer.

Accepted Answer

In underwriting, the risk is typically that the securities might be sold to the public at a price lower than the price paid to the issuer, not greater.

Question 11

A corporation can offer existing shareholders new shares in a preemptive rights offering, and using a standby underwriting arrangement, the corporation can have an investment banking firm agree to distribute any shares not subscribed to.

Accepted Answer

This statement correctly describes the process of a preemptive rights offering and standby underwriting arrangement.

Question 12

Which of the below statements is FALSE?

Accepted Answer

The statement "For the shares sold via a preemptive rights offering, the underwriting services of an investment banker are needed" is false. Preemptive rights offerings do not require the services of an investment banker as the offering is made directly to existing shareholders.

Question 13

In addition to underwriting securities for distribution to the public, securities may be placed with a limited number of institutional investors such as ________.

Accepted Answer

Securities may be placed with a limited number of institutional investors such as insurance companies, investment companies, and pension funds. Therefore, the best choice is D, which includes all three options.

Question 14

In regards to Rule 144a, which of the below statements is FALSE?

Accepted Answer

Rule 144A improved the liquidity of securities acquired by Qualified Institutional Buyers (QIBs), not all institutional investors, in a private placement.

Question 15

Rule 415 is popularly referred to as the closet registration rule because the securities can be viewed as sitting in the "closet," and can be taken out of the closet and sold to the public without obtaining additional SEC approval.

Accepted Answer

The answer of Rule 415 is popularly referred to as...

Question 16

A rights offering ensures that current shareholders may maintain their proportionate equity interest in the corporation.

Accepted Answer

A rights offering allows current shareholders to purchase additional shares at a discounted price, which helps them maintain their proportional ownership in the corporation.

Question 17

Rule 415 permits certain issuers to file a single registration document indicating that they intend to sell a certain amount of a certain class of securities at one or more times within the next two years.

Accepted Answer

Rule 415 does indeed permit certain issuers to file a single registration document indicating their intention to sell a certain amount of a certain class of securities over the next two years. This type of registration is known as a "shelf registration."

Question 18

Investment banking firms assist in the private placement of securities by ________.

Accepted Answer

Investment banking firms assist in the private placement of securities by working with the issuer and potential investors on the design and pricing of the security. They use their expertise to advise on market conditions, pricing, and other factors that could affect the success of the offering. In addition, they help the issuer identify potential investors and market the security to them. This comprehensive approach is what sets investment banking firms apart from other financial intermediaries.

Question 19

Investment bankers will typically work with issuers in the design of a security for a private placement and line up the potential investors.

Accepted Answer

This is true. Investment bankers play a key role in helping issuers design securities for private placements and identify potential investors who may be interested in investing in the securities.

Question 20

The time interval between the initial filing of the registration statement and the time the registration statement becomes effective is referred to as the waiting period.

Accepted Answer

The waiting period refers to the time interval between the initial filing of the registration statement and the time the registration statement becomes effective.

Quiz 13: Primary Markets and the Underwriting of Securities