Question 1

A business angel's investment time horizon is usually:

Accepted Answer

Business angels typically have a longer investment time horizon than venture capitalists or private equity firms. They are willing to invest in early stage companies that may take several years to reach profitability or exit through an IPO or acquisition. A typical investment time horizon for a business angel is 7-10 years.

Question 2

With the enactment of the Sarbanes-Oxley Act in 2002,the expense and administrative responsibilities of being a public company,as well as the liability risks of officers and directors,are significantly greater.

Accepted Answer

The Sarbanes-Oxley Act increased the compliance costs and liability risks associated with being a public company for officers and directors.

Question 3

Early stage financing is typically:

Accepted Answer

Early stage financing is typically called seed or start-up capital. It is used to support the initial growth of a new company and is often difficult to obtain as there is high risk involved. Expansion financing, on the other hand, is used to fund the growth and expansion of a more established company and may be easier to obtain as there is often a track record of success. Venture capitalists may be involved in both early stage and expansion financing, but their involvement is not a defining characteristic of either type of financing.

Question 4

The informal risk-capital market is made up of:

Accepted Answer

The informal risk-capital market is primarily made up of angel investors who provide funding to startups and small businesses in exchange for equity or ownership in the company. Stockbrokers and commercial banks typically do not provide this type of funding, while venture capitalists operate in a more formalized and institutionalized market.

Question 5

Venture capital firms prefer to invest in:

Accepted Answer

Venture capital firms typically seek out high-potential, growth-oriented startups with innovative business models, disruptive technologies, or unique value propositions. These ventures have the potential to generate high returns on investment, and the venture capitalist's goal is to identify and nurture these businesses to reach their full potential. Ventures during the early stages are also attractive to venture capital firms, as they can provide valuable input in the development of the business strategy, management team, and financial operations. Therefore, the best choice is A.

Question 6

Blue-sky laws may speed up the process and lessen costs to the company going public.

Accepted Answer

Blue-sky laws are state securities regulations designed to protect investors from fraud, and they can actually complicate and increase the costs for a company going public due to the need to comply with various state-level regulations in addition to federal laws.

Question 7

After the completion of the preliminary preparation,the first public offering normally requires three to six months to prepare,print,and file the registration statement with the SEC.

Accepted Answer

The answer of After the completion of the preliminary preparation,the...

Question 8

Business angels usually find their deals through:

Accepted Answer

Referral sources, such as lawyers, accountants, and other business professionals, are a common way for business angels to find potential investment opportunities. These referral sources often have access to entrepreneurs and startups seeking funding and can make introductions to business angels who may be interested in investing. While the internet can be a useful tool for research, cold calling is generally not an effective method for business angels to find deals. Venture capitalists may also be a source of potential investment opportunities, but they are not typically relied upon by business angels to find deals.

Question 9

Which type of risk-capital market is available as a funding source only for high-potential ventures?

Accepted Answer

The answer of Which type of risk-capital market is available...

Question 10

The prospectus portion of the registration statement is almost always written in a concise form,since it is the selling document of the company.

Accepted Answer

The answer of The prospectus portion of the registration statement...

Question 11

For a company to go public,larger underwriting firms have more stringent criteria,such as sales as high as $50 million to $100 million,and a 40 to 70 percent annual growth rate.

Accepted Answer

The answer of For a company to go public,larger underwriting...

Question 12

The best source of funds for first-stage financing is the:

Accepted Answer

The informal risk capital market, often consisting of friends, family, and angel investors, is typically the best source of funds for first-stage financing due to its accessibility and willingness to invest in early-stage companies.

Question 13

Business angels typically invest what amount in the businesses they finance?

Accepted Answer

Business angels typically invest between $100,000 and $500,000 in the companies they finance.

Question 14

If there is a significant disparity between the offering price of the shares and the price paid for shares by officers,directors,or founding stockholders,a dilution section is necessary in the prospectus.

Accepted Answer

If there is a significant disparity between the offering price and the price paid by officers, directors or founding stockholders, it may create a perception of dilution among potential investors. To address this, a dilution section should be included in the prospectus to provide clarity and transparency on the issue.

Question 15

Two major disadvantages of going public are the increased reporting requirements and potential loss of control.

Accepted Answer

Going public requires companies to adhere to strict reporting requirements, which can be time-consuming and expensive. Moreover, public companies may have to give up some control over their operations and decision-making processes to satisfy the interests of shareholders.

Question 16

In most of the significant public offerings,the company technically sells the shares to the underwriters,who then resell the shares to the public investors.

Accepted Answer

This is correct, in the majority of cases, the underwriters purchase the shares from the company and then resell them to the public. This structure helps to mitigate the risk for the company going public and allows the underwriters to earn a profit from the difference between the purchase price and the public offering price.

Question 17

The quiet period is a 90-day period in going public when company information that will help increase stock price should and can be released.

Accepted Answer

The quiet period is actually a time after a company files registration for an IPO with the SEC, during which time the company and its insiders are restricted from promoting the company or its stock. During this time, no material information about the company can be released.

Question 18

The underwriter is of critical importance in establishing the initial price for the stock of the company.

Accepted Answer

The underwriter plays a key role in determining the initial public offering (IPO) price for a company's stock. They evaluate the company's financials, market conditions, and investor demand to set the IPO price, which can have a significant impact on the success of the offering.

Question 19

Making long-term decisions can be difficult in publicly traded companies where sales and profit evaluations indicate the capability of management via stock values.

Accepted Answer

Publicly traded companies are always under pressure to generate profits and increase stock values, which can make it difficult for management to make long-term decisions that may not yield immediate financial benefits.

Question 20

The shorter the time before a company goes public,given that profits and sales growth occur,the less percentage of equity the entrepreneur will have to give up per dollar invested.

Accepted Answer

The shorter the time before a company goes public, the more developed and potentially profitable it is likely to be, which can lead to a higher valuation. This means the entrepreneur might have to give up less equity per dollar invested because the company is closer to its growth targets and has demonstrated its potential for success.

Quiz 12: Informal Risk Capital, venture Capital, and Going Public