Initial Public Offering

A company sells newly issued shares directly to a small group of institutional investors under an exemption from registration. Which statement is correct?

1. A.This is a secondary market transaction, because no public offering ever took place.Wrong. The absence of a public distribution does not change the fact that new shares were issued for cash.
2. B.This is a primary market transaction, and the buyers receive restricted securities.Correct. New shares and proceeds to the issuer make it primary, and unregistered shares carry resale limits.
3. C.This is a primary market transaction, and the shares may be freely resold at once.Wrong. Shares sold without registration cannot be resold freely, which is precisely what restricted means.
4. D.This is neither market, because exempt securities sit outside the market structure.Wrong. An exemption relieves registration, and the securities still trade within the ordinary market structure.

Why: The primary market is about newly issued securities and proceeds reaching the issuer, and that is exactly what a private placement accomplishes without a registered public offering. Because the shares were never registered they are restricted, so a buyer wishing to resell must find a registration or an exemption covering that resale. The issuer trades speed and reduced disclosure for a narrower group of buyers and typically a lower price. A later resale into the market would be a secondary transaction, subject to whatever conditions apply to restricted stock.

Halverson Foods completes its initial public offering and the shares begin trading on a national securities exchange. Under SEC Rule 174, for how long after the effective date must dealers, including dealers that took no part in the syndicate, deliver a final prospectus with their sales of Halverson stock?

1. A.40 days40 days applies to certain secondary transactions in the securities of an issuer that already reports, not to a listed IPO.
2. B.25 daysCorrect. An IPO listed on an exchange or quoted on Nasdaq carries a 25 day aftermarket prospectus delivery period.
3. C.90 days90 days is the period for an IPO whose shares will NOT be listed on an exchange or quoted on Nasdaq. Halverson is listed.
4. D.Only until the syndicate account is closed and the underwriters are releasedBreaking the syndicate ends the underwriters' price restrictions, not the statutory prospectus delivery period, which binds non participating dealers too.

Why: The aftermarket prospectus delivery period exists so that early secondary buyers get the same disclosure the original purchasers received. For an initial public offering of a security that is listed on a national securities exchange or quoted on Nasdaq, that period is 25 days from the effective date. An IPO by an issuer whose shares will not be listed or quoted carries a longer 90 day requirement, reflecting the thinner information available in that market.

A dealer executes a secondary market transaction in the shares of an issuer that completed its initial public offering a short time earlier. The dealer treats the transaction as an ordinary secondary market trade with no prospectus delivery obligation, reasoning that the primary offering has already been completed. A principal is asked whether this reasoning is correct. What should she explain?

1. A.The reasoning is correct, since prospectus delivery obligations apply only to the primary offering itself and end once it is completed.Wrong. Dealers can have a continuing delivery obligation extending beyond completion of the primary offering.
2. B.The reasoning is correct as long as the dealer executing the trade was not part of the original underwriting syndicate.Wrong. The continuing aftermarket obligation is not limited only to dealers outside the original syndicate.
3. C.The reasoning is incorrect; dealers can have a continuing prospectus delivery obligation for a period following completion of an initial public offering.Correct. A continuing aftermarket prospectus delivery obligation can apply following an IPO.
4. D.The reasoning is correct only if the transaction is below a size the dealer considers immaterial.Wrong. Transaction size relative to the dealer's own materiality judgment doesn't determine whether the aftermarket obligation applies.

Why: Dealers can have a continuing prospectus delivery obligation for transactions in a security for a period following completion of an initial public offering, even though the transaction itself occurs in the secondary market; treating the transaction as automatically free of any prospectus delivery obligation simply because the primary offering has closed is not correct.

A registered representative wants to personally purchase shares of a new equity initial public offering the firm is underwriting. What must the principal confirm under Rule 5130 before allowing this?

1. A.Confirm the representative has not previously purchased shares in another IPO this yearWrong. This invents a frequency-based limit that is not the basis for Rule 5130's restricted person analysis.
2. B.Nothing, since any firm employee may purchase shares of an offering the firm underwritesWrong. This is the exact trap the question describes; Rule 5130 specifically restricts this kind of insider access.
3. C.Confirm whether the restriction on new equity IPO purchases by associated persons under Rule 5130 applies before allowing the purchaseCorrect. Rule 5130 restricts new equity IPO purchases by industry insiders, including a firm's own associated persons, subject to specific exceptions.
4. D.Confirm the representative has sufficient account equity to cover the purchaseWrong. Account equity is a separate financial matter and does not address the Rule 5130 restricted person analysis.

Why: Rule 5130 generally restricts the purchase of new equity IPO shares by industry insiders, including a firm's own associated persons, subject to specified exceptions. The principal must confirm this restriction is properly evaluated before allowing the representative to purchase shares, not treat it as available to any employee who wants in.