Series 79 – Investment Banking Representative Exam Capital Markets & Underwriting 1 — Questions and Answers
Question 1: In an IPO, what is the role of the 'bookrunner'?
- The attorney who drafts the registration statement
- The lead underwriter responsible for building the order book and allocating shares (Correct answer)
- The SEC examiner reviewing the prospectus
- The exchange specialist who sets the opening price
Correct answer: The lead underwriter responsible for building the order book and allocating shares
The bookrunner is the lead investment bank that manages the IPO process, conducts the roadshow, builds the investor order book, and determines final pricing and share allocation.
Question 2: What is the primary purpose of the SEC's 'quiet period' (or 'lock-up' on communications) surrounding an IPO?
- To prevent insider trading by company executives after the IPO
- To restrict promotional communications that could constitute an illegal offer of securities before the registration is effective (Correct answer)
- To allow the underwriter to stabilize the stock price
- To give competing underwriters time to submit bids
Correct answer: To restrict promotional communications that could constitute an illegal offer of securities before the registration is effective
The quiet period prevents issuers and underwriters from making promotional statements that could be deemed an illegal offer or sale of securities before the SEC declares the registration statement effective.
Question 3: In a 'firm commitment' underwriting, the underwriter:
- Agrees to sell as many shares as possible but returns unsold shares to the issuer
- Purchases all the offered securities from the issuer and bears the risk of reselling them (Correct answer)
- Acts only as a placement agent and earns a commission on shares sold
- Provides a bridge loan to the issuer until the offering closes
Correct answer: Purchases all the offered securities from the issuer and bears the risk of reselling them
In a firm commitment underwriting, the investment bank buys the entire offering from the issuer at a discount and assumes the full risk of selling the securities to the public.
Question 4: What is a 'greenshoe option' (overallotment option) in an IPO?
- An option granted to management to buy shares at the IPO price
- An option allowing underwriters to sell up to 15% more shares than originally planned to support the stock price (Correct answer)
- A put option allowing investors to return shares within 30 days
- A price reset mechanism if the stock falls below the IPO price
Correct answer: An option allowing underwriters to sell up to 15% more shares than originally planned to support the stock price
The greenshoe option gives underwriters the right to sell up to 15% additional shares; if the stock rises they exercise it, and if it falls they buy shares in the open market to provide price support.
Question 5: Under SEC Regulation S-K, a company's IPO prospectus must include:
- Only audited financial statements for the prior fiscal year
- Audited financial statements for the prior two to three years plus interim unaudited financials (Correct answer)
- Pro forma financials only
- Five years of tax returns
Correct answer: Audited financial statements for the prior two to three years plus interim unaudited financials
Regulation S-K requires IPO prospectuses to include audited financial statements for the most recent two or three fiscal years plus unaudited interim period financials.
Question 6: A 'secondary offering' differs from a primary offering in that:
- It can only occur within 12 months of the IPO
- Existing shareholders sell their shares, and the company receives no proceeds (Correct answer)
- It requires a new S-1 registration statement
- It is limited to institutional investors
Correct answer: Existing shareholders sell their shares, and the company receives no proceeds
In a secondary offering, existing shareholders (insiders, PE sponsors, etc.) sell their own shares to the public, meaning the company itself receives no new capital from the offering.
Series 79 – Investment Banking Representative Exam Capital Markets & Underwriting 1
In an IPO, what is the role of the 'bookrunner'?