Series 24 – General Securities Principal Exam Underwriting & Securities Offerings 1 — Questions and Answers
Question 1: In a firm commitment underwriting, the underwriter:
- Sells securities on a best-efforts basis as agent for the issuer
- Purchases the entire issue from the issuer and resells it to the public (Correct answer)
- Returns unsold securities to the issuer at the offering price
- Acts solely as a placement agent without taking inventory risk
Correct answer: Purchases the entire issue from the issuer and resells it to the public
In a firm commitment underwriting, the underwriter buys the entire issue from the issuer and assumes full financial risk for any unsold shares.
Question 2: A 'red herring' prospectus is best described as:
- A final prospectus that includes the public offering price and effective date
- A preliminary prospectus used to gauge investor interest before the effective date (Correct answer)
- A tombstone advertisement published in financial newspapers
- A document filed exclusively with state securities regulators
Correct answer: A preliminary prospectus used to gauge investor interest before the effective date
A red herring is a preliminary prospectus filed with the SEC during the cooling-off period that lacks the final offering price and effective date; it is used to solicit non-binding indications of interest.
Question 3: During the cooling-off period for an IPO, a registered representative may:
- Accept binding customer purchase orders and collect payment
- Send the final prospectus with the confirmed offering price
- Distribute the preliminary prospectus and record non-binding indications of interest (Correct answer)
- Publish the final offering price in tombstone advertisements
Correct answer: Distribute the preliminary prospectus and record non-binding indications of interest
During the cooling-off period, broker-dealers may distribute preliminary prospectuses and collect non-binding indications of interest, but may not accept binding orders or collect funds.
Question 4: FINRA Rule 5110 primarily governs:
- Suitability standards for retail customers purchasing new issues
- Underwriting compensation, terms, and arrangements in public offerings (Correct answer)
- Net capital requirements applicable to underwriting broker-dealers
- Anti-money laundering obligations during securities distributions
Correct answer: Underwriting compensation, terms, and arrangements in public offerings
FINRA Rule 5110 (the Corporate Financing Rule) regulates the fairness of underwriting compensation, terms, and arrangements to prevent excessive or unreasonable compensation in public offerings.
Question 5: Stabilizing bids during a new securities offering are:
- Prohibited under all circumstances by SEC regulations
- Permitted if disclosed and used to prevent the market price from falling below the offering price (Correct answer)
- Required for all IPOs involving more than one million shares
- Limited to purchases of no more than 10% of the total offering size
Correct answer: Permitted if disclosed and used to prevent the market price from falling below the offering price
Under Regulation M, stabilizing bids are permissible if properly disclosed; they allow the managing underwriter to support the price at or below the offering price to prevent excessive declines.
Question 6: The 'green shoe' (over-allotment) option in an underwriting agreement allows:
- The issuer to withdraw the offering if market conditions deteriorate before closing
- The underwriter to sell up to 15% more shares than originally planned when demand exceeds supply (Correct answer)
- Investors to return shares to the underwriter within 30 days if the price declines
- FINRA to review and approve additional underwriting compensation post-offering
Correct answer: The underwriter to sell up to 15% more shares than originally planned when demand exceeds supply
The green shoe option allows underwriters to sell up to 15% additional shares beyond the original offering size to cover over-allotments when investor demand is strong.
Question 7: In an 'all-or-none' underwriting arrangement:
- The underwriter must sell at least half the offering or return all proceeds to investors
- The offering is cancelled and all funds returned if the entire issue is not sold by the deadline (Correct answer)
- The underwriter is required to purchase all unsold shares at the closing date
- Only institutional investors are eligible to purchase shares in the offering
Correct answer: The offering is cancelled and all funds returned if the entire issue is not sold by the deadline
In an all-or-none underwriting, the entire offering must be sold by the specified deadline; if any shares remain unsold, the offering is cancelled and all investor funds held in escrow are returned.
Series 24 – General Securities Principal Exam Underwriting & Securities Offerings 1
In a firm commitment underwriting, the underwriter: