Tombstone Advertisement

A tombstone advertisement:

1. A.Replaces the prospectusThe stripped-down format looks like a substitute summary, but solve it backward: a document that replaced the prospectus would have to carry the full disclosure the prospectus carries, and a tombstone carries none of it. It points readers toward the prospectus rather than standing in for it.
2. B.Announces an offering but is not an offer to sellCorrect - it is informational only.
3. C.Guarantees allocationTempting because a tombstone names the underwriters, which reads like a claim on shares. Naming who is selling says nothing about who gets filled, and the ad makes no commitment of any kind to a reader.
4. D.Is the legal offer to sellThe closest miss: a tombstone does appear during the offering and does identify the security. What it lacks is the disclosure that turns a communication into a legal offer. Per the stem, it announces the offering without being an offer to sell.

Why: A tombstone announces a securities offering with limited information but is not itself an offer to sell.

Halverson Foods has filed its registration statement and its red herring is circulating. A prospective investor reads it and asks his representative how much Halverson will actually raise and at what price per share. Neither figure appears anywhere in the document. Why not?

1. A.The final public offering price, and therefore the proceeds to the issuer, are not fixed until shortly before the registration statement becomes effective.Correct. A red herring omits final price, spread, proceeds and effective date because those terms are still being negotiated.
2. B.The underwriters set the price only after observing the first day of secondary market trading.Wrong. The offering price is set before effectiveness. Secondary trading begins after the offering is priced and sold.
3. C.Price information appears only in the tombstone advertisement published during the cooling-off period.Wrong. A tombstone is a bare announcement of the issue and where to obtain a prospectus; it is not where pricing is established or disclosed.
4. D.The SEC prohibits disclosing an offering price to investors at any time before the securities begin trading in the secondary market.Wrong. The price is disclosed in the final prospectus, before any sale is confirmed. There is no such prohibition.

Why: A preliminary prospectus (red herring) contains substantially all of the disclosure an investor needs EXCEPT the economics that are still being negotiated: the final public offering price, the underwriting spread, and therefore the net proceeds to the issuer, along with the effective date. Those are set immediately before the registration statement goes effective, once the syndicate has gauged demand through indications of interest. The red herring carries a legend, printed in red, stating that the registration statement has been filed but is not yet effective and that the securities may not yet be sold.

Before filing, a sponsor publishes a brief notice stating that it proposes to offer interests in a new real estate program and giving no more than the basic particulars the rule permits. How is the notice treated?

1. A.An unlawful written offer, because the registration statement has not been filedWrong. This narrow category of notice is expressly not deemed an offer to sell.
2. B.A tombstone advertisement, which may only be published after effectivenessWrong. This is a different carve-out, and tombstones are not confined to the post-effective period.
3. C.A permitted notice of a proposed offering, not treated as an offer to sellCorrect. Its content stays inside the particulars the rule allows.
4. D.A preliminary prospectus, since it precedes the final offering termsWrong. A brief notice is nothing like the full disclosure document a preliminary prospectus is.

Why: A notice of a proposed registered offering that confines itself to the particulars the rule allows is not treated as an offer to sell, so publishing it does not amount to gun jumping. The permission is narrow: the notice announces that an offering is proposed and nothing about why anyone should want it. Adding a description of the program's strategy or expected returns would take the piece outside the rule and make it a written offer of an unregistered security. The point of the carve-out is to let an issuer say that a transaction is coming without letting it begin selling.

A member firm publishes an announcement of a forthcoming registered program offering that identifies the security, the issuer, the price and from whom a prospectus may be obtained, and states that it is not an offer to sell. What is this communication?

1. A.A preliminary prospectus, because it precedes the final offering termsWrong. A preliminary prospectus is a full disclosure document, not a short announcement.
2. B.An unlawful prospectus, since any written offer must be a statutory prospectusWrong. This category of announcement is expressly not deemed a prospectus.
3. C.A retail communication requiring filing before first use in every caseWrong. The question is the character of the announcement, and this category is carved out.
4. D.A tombstone advertisement, permitted because it stays within the allowed particularsCorrect. Its permissibility rests on the limited content, not on the disclaimer.

Why: This is a tombstone advertisement, a communication that is expressly not deemed a prospectus provided it confines itself to the limited identifying particulars the rule allows. Its function is to announce that an offering exists and to direct interested people to the prospectus, not to describe or promote the program. Adding promotional language about the sponsor's prior returns or the merits of the investment would take the piece outside the permitted content and make it an unlawful prospectus. Had the firm wanted to say more, the way to do it is through the prospectus itself.