Offerings Practice Questions for the SIE

Answer: A corporation sells a new issue of bonds to investors through its underwriters

The primary market is where an issuer sells securities to investors and the issuer receives the proceeds — this is the territory of the Securities Act of 1933, which requires registration and prospectus delivery for new issues. A corporation selling a new bond issue through underwriters is therefore a primary-market transaction. The other three choices are all secondary-market activity (governed by the Securities Exchange Act of 1934): selling listed shares on the NYSE is the ordinary secondary market; exchange-listed stock trading over the counter is called the third market; and institutions trading directly with each other over an ECN, with no broker-dealer in the middle, is the fourth market. The quickest test is to follow the money — if the issuer gets the check, it is a primary-market transaction.

The Trap: primary vs. secondary market — who receives the proceeds

• Two pension funds trade a large block of stock directly with each other over an ECN: Fourth-market trap: direct institution-to-institution trading with no broker-dealer intermediary is the fourth market — a secondary-market venue students misfile because it looks unusual.
• An investor sells 200 shares of an exchange-listed stock on the NYSE: Secondary-market trap: investor-to-investor trading on an exchange is the secondary market; the issuer receives nothing. Targets the core primary-vs-secondary confusion (who gets the money).
• An institution buys exchange-listed stock in the over-the-counter market: Third-market trap: listed securities trading OTC (off-exchange) is the third market — still secondary-market, investor-to-investor activity.

Verified against: who-gets-the-proceeds anchor)

Answer: It omits the final public offering price and the effective date

A preliminary prospectus, or red herring, may be distributed during the cooling-off period under the Securities Act of 1933 to gauge investor interest, but it is deliberately incomplete: the final public offering price and the effective date are omitted because they are not yet set. It cannot be used to accept orders or money — only non-binding indications of interest may be taken before the registration becomes effective. Delivering it implies no SEC approval; the SEC reviews disclosure but does not approve or endorse any security. Finally, a representative must not mark up or highlight any prospectus, since altering a disclosure document turns it into an unapproved sales communication.

The Trap: red herring contents — no final price, no effective date

• Its delivery indicates that the SEC has approved the offering: The SEC never approves, endorses, or passes on the merits of any offering. It reviews registration statements for full and fair disclosure only, and delivering a prospectus implies no SEC approval.
• It may be used to accept a binding order from the customer: A red herring may be sent to customers during the cooling-off period, but it can never be used to take orders. No sales, binding orders, or payments are permitted before the effective date — only non-binding indications of interest may be accepted.
• The representative may highlight the sections most favorable to the offering before sending it: A prospectus must never be altered, annotated, or highlighted. Marking it up converts a regulated disclosure document into an improper, unapproved sales piece.

Verified against: red herring misconception pair)

Answer: A shelf registration

This describes a shelf registration under SEC Rule 415: a seasoned issuer files one registration statement and can then sell the securities in portions over time — generally up to three years — reaching the market quickly whenever conditions are attractive, without filing a new registration for each sale. A standby commitment is different: it is an underwriter's promise to buy whatever shares existing shareholders do not subscribe for in a rights offering. Regulation A is an exemption from full registration (using an offering circular, subject to dollar caps), and a Regulation D private placement avoids registration altogether and results in restricted securities — neither involves a registration statement kept 'on the shelf' for future takedowns.

The Trap: shelf registration identity — confusing Rule 415 with exemptions or standby underwriting

• A standby commitment: Underwriting-term confusion: 'standby' sounds like securities waiting on standby, but a standby commitment is an underwriter's agreement to purchase shares left unsold in a rights offering.
• A private placement under Regulation D: Exempt-transaction confusion: a Reg D placement avoids registration entirely and produces restricted stock; the scenario describes a registered public offering sold over time.
• A Regulation A offering: Streamlined-offering confusion: Regulation A is an exemption from full registration using an offering circular, with dollar caps — not a registration that stays effective for future sales.

Verified against: SEC Rule 415 (shelf registration)

Answer: A general obligation bond issued by a city

Municipal securities are exempt securities under the Securities Act of 1933 — like U.S. government and agency securities, bank securities, commercial paper with maturities of 270 days or less, nonprofit/religious issues, and insurance policies and fixed annuities, they need not be registered at all. A variable annuity is the exception among insurance products: because its value rides on a securities separate account, it is itself a security and must be registered. Stock sold under Rule 506(b) relies on an exempt transaction — the exemption covers that particular sale, not the security, which emerges as restricted stock. A 20-year corporate bond gets no exemption; only short-term corporate paper (270 days or less) qualifies. One principle applies across the board: an exemption excuses only registration — the antifraud provisions of the federal securities laws apply to every offering, exempt or not.

The Trap: exempt security vs. exempt transaction

• A corporate bond maturing in 20 years: Commercial-paper overreach trap: the short-term corporate debt exemption applies to paper with maturities of 270 days or less; long-term corporate bonds must be registered.
• A variable annuity issued by an insurance company: Fixed-vs-variable trap: insurance policies and FIXED annuities are exempt, but a variable annuity is a security whose value depends on a separate account and must be registered.
• Common stock sold to investors in a Rule 506(b) private placement: Exempt-security-vs-exempt-transaction trap: Reg D exempts the TRANSACTION, not the security — the stock itself is not an exempt security and comes out of the placement restricted.

Verified against: exempt security vs. exempt transaction pair)

Answer: The proceeds go to the venture capital firm, and the number of shares outstanding does not change

When existing shareholders — such as founders or venture capital investors — sell their shares to the public in a registered distribution, it is a secondary offering: the selling shareholders receive the proceeds, no new shares are created, and current holders are not diluted. Contrast this with a follow-on (subsequent) offering, in which the issuer sells additional newly issued shares — the issuer gets the money and existing owners are diluted. And do not confuse a secondary OFFERING with the secondary MARKET: the offering is a registered distribution under the Securities Act of 1933, complete with a prospectus, even though the issuer collects nothing. The reliable discriminator is always the same question: who gets the check?

The Trap: secondary offering vs. follow-on offering vs. secondary market

• This is a secondary-market transaction, so no prospectus is required: Secondary-offering vs. secondary-market conflation: a secondary offering is a registered distribution conducted through the primary-market process with a prospectus — not ordinary exchange trading.
• This is a follow-on offering that increases XYZ's total shares outstanding: Follow-on conflation: a follow-on (subsequent) offering means the ISSUER sells newly created shares, which is dilutive; here only existing shares change hands, so nothing new is issued.
• XYZ receives the offering proceeds because the shares are sold through a registered offering: Who-gets-the-check trap: in a secondary offering the selling shareholders — not the issuer — receive the proceeds; registration does not change where the money goes.

Verified against: Securities Act of 1933 secondary offering framework (registered distribution by selling shareholders)

Answer: Record a customer's non-binding indication of interest

During the cooling-off period under the Securities Act of 1933, a representative MAY distribute the preliminary prospectus (red herring), record non-binding indications of interest, and rely on permitted announcements such as tombstone ads under SEC Rule 134. What is prohibited: making sales, taking orders (even 'contingent' ones), accepting money, or sending research and other promotional material about the issue — restrictions often described as the quiet period. An indication of interest binds no one; the customer can walk away and the firm is not obligated to allocate shares. Orders and payment can be accepted only after the SEC declares the registration effective and the final prospectus, including the public offering price, is available.

The Trap: cooling-off period — indications of interest allowed; orders, money, and research prohibited

• Send customers the firm's research report recommending the new issue: Quiet-period trap: circulating research or promotional material touting the issue during registration is prohibited — only the preliminary prospectus and permitted announcements may be used.
• Accept a check from a customer so the customer can lock in shares at the offering price: No-money trap: no funds may be accepted before the effective date — a heavily tested cooling-off prohibition.
• Take a firm order contingent on the final offering price: No-orders trap: no sales or binding orders may be taken before effectiveness, no matter how the order is worded or conditioned.

Verified against: quiet-period concept)

Answer: Has cleared the registration for sale but does not approve, endorse, or pass on the merits or accuracy of the offering

Under the Securities Act of 1933, the SEC's role is disclosure, not merit review. When a registration becomes effective, it means the issuer's disclosure obligations have been satisfied and sales may begin — nothing more. Every prospectus must carry a disclaimer stating that the SEC has neither approved nor disapproved the securities and does not pass on the accuracy or adequacy of the document; telling a customer otherwise is a violation. The SEC also does not guarantee the prospectus is truthful — liability for misstatements rests with the issuer and the underwriters. And FINRA, a self-regulatory organization for broker-dealers, plays no role in 'approving' an issuer's securities.

The Trap: SEC effectiveness vs. SEC approval/endorsement

• Has approved the issue after determining it is suitable for public investment: Merit-approval trap: the single most-used distractor in this area — the SEC does not judge investment quality or suitability; it requires full and fair disclosure.
• Has verified the prospectus and guarantees that its contents are accurate: Guarantee trap: the SEC does not certify or guarantee accuracy; responsibility for the truthfulness of the registration statement stays with the issuer and underwriters.
• Has delegated the approval of new issues to FINRA: Regulator-confusion trap: FINRA is an SRO for broker-dealers; it does not approve issuers' securities offerings, and no one 'approves' new issues on the merits.

Verified against: no-approval disclaimer)

Answer: A firm commitment underwriting, in which the bank acts as principal

In a firm commitment underwriting, the underwriter buys the whole issue from the issuer and resells it to the public, acting as a principal. The issuer is assured of receiving its money, and the risk of unsold shares falls entirely on the underwriter — exactly the arrangement described. In a best efforts underwriting the underwriter is merely an agent: it sells what it can, returns the rest, and the issuer keeps the risk. All-or-none is a contingent form of best efforts in which the entire offering is cancelled (and escrowed investor funds returned) unless every share is sold; a mini-max deal works similarly around a minimum threshold. A standby commitment is specific to rights offerings — the underwriter agrees in advance to purchase whatever shares existing shareholders do not take.

The Trap: firm commitment (principal, underwriter risk) vs. best efforts (agent, issuer risk)

• A standby commitment, because the bank stands ready to hold unsold shares: Standby confusion: a standby commitment backstops a RIGHTS offering — the underwriter buys only the shares existing shareholders fail to subscribe for.
• A best efforts underwriting, because the bank will make every effort to sell the shares: Agent-vs-principal trap: in a best efforts deal the underwriter acts only as AGENT and returns unsold shares to the issuer — the issuer, not the underwriter, bears the risk.
• An all-or-none underwriting, because the bank has taken the entire issue: AON confusion: all-or-none is a contingent best-efforts variant — if the whole issue is not sold to investors, the offering is cancelled and escrowed funds are returned; the underwriter never owns the shares.

Verified against: firm commitment vs. best efforts pair)

Answer: Helps sell shares to investors but makes no purchase commitment and bears no liability for unsold shares

The dividing line between the underwriting syndicate and the selling group is financial commitment. Syndicate members (led by the managing underwriter) sign the agreement among underwriters, commit capital to purchase the issue, and share liability for unsold shares. Selling group members are brought in purely to widen distribution: they sell shares for a selling concession, but they make no purchase commitment and bear no liability if shares go unsold. So a firm that wants to participate in a hot deal without capital risk joins the selling group; a firm willing to put its capital on the line joins the syndicate and earns a larger share of the underwriting spread in exchange for that risk.

The Trap: syndicate (liability) vs. selling group (no liability)

• Is liable for its pro rata portion of any shares the offering fails to sell: Liability-flip trap: pro rata liability for unsold shares belongs to SYNDICATE members under the agreement among underwriters, not to the selling group.
• Assumes the same liability as the managing underwriter once it accepts shares to sell: Everyone-shares-liability trap: accepting shares to market creates no underwriting liability — the financial commitment line runs between syndicate and selling group, not by deal participation.
• Must purchase its full allotment from the issuer as principal before reselling it: Role-confusion trap: buying from the issuer as principal describes syndicate members in a firm commitment; selling group firms only sell, they do not buy the issue.

Verified against: FINRA underwriting practice standards distinguishing syndicate members from selling group members (agreement among underwriters vs. selling group agreement)

Answer: Advertising is permitted under Rule 506(c), but every purchaser must be an accredited investor whose status the issuer takes reasonable steps to verify

Regulation D offers two paths under Rule 506. Rule 506(b) is the traditional private route: unlimited dollars, unlimited accredited investors, and up to 35 non-accredited-but-sophisticated purchasers — but no general solicitation or advertising. Rule 506(c), mandated by the 2012 JOBS Act and effective in 2013, flips the trade-off: the issuer may advertise publicly, but then every purchaser must be accredited and the issuer must take reasonable steps to verify that status — for example, by reviewing documents such as W-2s, tax returns, or bank and brokerage statements. A useful hook: 506(b) is for 'buddies' — people the issuer already knows, no advertising, 35 non-accredited allowed; 506(c) is for the 'crowd' — advertise widely, accredited-only, verified. Blanket statements that private placements can never be advertised reflect the pre-2013 rules and are out of date.

The Trap: 506(b) vs. 506(c) — which permits general solicitation, and at what cost

• Advertising is permitted under Rule 506(b), provided no more than 35 non-accredited investors purchase: Rule-mixing trap: 506(b) is the rule that PROHIBITS general solicitation; the 35 non-accredited-but-sophisticated allowance belongs to 506(b) only because it stays private.
• Private placements may not be advertised to the public under any circumstances: Stale-rule trap: this was true before the JOBS Act changes; since 2013, Rule 506(c) has expressly permitted general solicitation subject to accredited-only, verified purchasers.
• Advertising is permitted under Rule 506(c), and up to 35 sophisticated non-accredited investors may also purchase: Feature-swap trap: imports 506(b)'s 35 non-accredited allowance into 506(c); once an issuer generally solicits under (c), non-accredited purchasers are not permitted at all.

Verified against: 506(b) vs. 506(c) misconception pair)