Series 79: Underwriting and Financing

Series 79 Underwriting and Financing questions help you isolate one part of the FINRA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.

Topic snapshot

Sample questions

Question 1

You are on the syndicate desk for a marketed follow-on for Granite Solar, Inc. The base deal is 10.0 million shares with an initial price range of $20–$22. As of 3:00 p.m. ET on launch day, the book looks like this:

Exhibit: Order book summary (indications in millions of shares)

Which interpretation is best supported by the exhibit for a pricing/sizing recommendation?

• A. The book supports pricing at $22 because most demand is long-only
• B. Investor feedback supports raising the range above $22
• C. Demand is price-sensitive; clearing base size likely needs low-end pricing
• D. The deal can be upsized and priced at $22 based on the book

Best answer: C

Explanation: The book is undercovered at $22 and only barely covered at $21, with meaningfully stronger demand at $20.

The exhibit shows that demand drops sharply at the top of the range and is strongest at $20. At $22, total demand is well below the 10.0 million share base size, and several orders are explicitly capped at $20. That pattern supports recommending low-end pricing (and caution on any upsize) to clear the deal.

In a marketed follow-on, the order book is used to gauge price sensitivity and whether the transaction can clear at the proposed terms. Here, the base size is 10.0 million shares, but total demand is only 6.0 million at $22 (undercovered) and 10.5 million at $21 (barely covered), while demand rises to 18.0 million at $20. The presence of “limit $20” orders also indicates some demand will disappear if priced above $20. Together, these data support a recommendation to price toward the low end (and avoid assuming an upsize) because the book is not robust at the top of the range. The key takeaway is that the book supports a lower price to achieve execution certainty at the base size.

• The option claiming an upsize at $22 ignores that $22 demand (6.0) is below the 10.0 base.
• The option suggesting raising the range conflicts with weaker demand at higher prices.
• The option stating pricing at $22 is supported by long-only demand misreads the mix; long-only demand is only 2.0 at $22 and is strongest at $20.

Question 2

Which statement best describes the purpose and scope of Regulation A as a conditional small-issues exemption?

• A. It permits certain smaller offerings to be sold to the public with SEC-qualified offering materials, subject to offering size and investor protection conditions.
• B. It exempts all private placements from Securities Act registration if sales are made only to accredited investors.
• C. It allows an issuer to avoid SEC review by relying solely on state blue-sky registration for any size offering.
• D. It permits immediate unrestricted resales of securities sold in a Rule 144A offering to any retail investor.

Best answer: A

Explanation: Regulation A is a conditional exemption that allows public sales in a limited-size offering using SEC-qualified disclosure, rather than a full Securities Act registration.

Regulation A is designed to let smaller issuers raise capital from the general public without completing a full Securities Act registration, while still requiring SEC involvement through qualification of offering materials. It is “conditional” because eligibility, offering size limits, and disclosure/investor protection requirements must be met.

Regulation A is a conditional small-issues exemption under the Securities Act that provides an alternative path for smaller capital raises. Instead of registering the offering on a full registration statement, an eligible issuer offers securities to the public using offering materials that are filed with, and qualified by, the SEC. The exemption is conditional: the issuer must meet the rule’s eligibility criteria and comply with limits and requirements (for example, constraints on offering size and mandated disclosures and other investor protections) to rely on the exemption. The key idea is that Regulation A facilitates public distribution in a smaller offering with scaled regulatory requirements, not a complete absence of federal oversight.

Key takeaway: Regulation A sits between a full registered offering and a purely private placement.

• The accredited-investor-only concept describes Regulation D private placements, not Regulation A public offerings.
• Replacing federal review with only state blue-sky registration confuses Regulation A with intrastate and other state-centered approaches.
• Rule 144A focuses on resales to QIBs and does not create freely tradeable retail securities immediately after issuance.

Question 3

A U.S. issuer plans a small common stock offering to finance a new facility and wants to rely on a state intrastate exemption (no SEC registration). The issuer will market through a password-protected website but wants to reduce the risk that non-residents buy, or that investors quickly resell shares to non-residents. Management also wants a practical, documentable control that the transfer agent can enforce.

Which action is the best recommendation by the investment bank to support intrastate compliance?

• A. Use residency reps plus restrictive legends and stop-transfer instructions
• B. Allow immediate resales but add risk factor disclosure in the PPM
• C. Rely on verbal residency confirmations during online investor calls
• D. File a Form D and use standard Rule 144 restricted legends

Best answer: A

Explanation: Investor residency representations, intrastate resale legends, and transfer restrictions create documented, enforceable controls to support the exemption.

Intrastate offerings commonly rely on documented residency checks and resale-restriction practices to reduce the chance of out-of-state purchasers or downstream resales that could jeopardize the exemption. The strongest practice combines investor representations in the subscription documents with a restrictive legend and transfer agent stop-transfer instructions so the restriction is visible and operationally enforceable. This aligns legal compliance goals with practical execution controls.

To support an intrastate exemption, bankers typically help counsel implement controls that (1) document that purchasers are in-state at the time of sale and (2) discourage or prevent early transfers that could move the securities out of state. A practical, audit-friendly package is to obtain written investor representations (residency and intent) in the subscription agreement and place an intrastate resale-restriction legend on the security (or book-entry statement), paired with transfer agent stop-transfer instructions. Those measures create evidence of compliance and an operational mechanism to block noncompliant transfers, which is especially important when marketing occurs digitally and the issuer wants a control the transfer agent can enforce. Disclosure alone or informal checks may not adequately mitigate the compliance risk.

• Verbal confirmations are hard to evidence and do not create an enforceable transfer restriction.
• Form D and Rule 144 legends relate to Reg D/controlled security resale concepts, not intrastate compliance controls.
• Risk-factor disclosure may warn investors but does not prevent or restrict non-resident transfers.

Question 4

An issuer has an effective Form S-3 shelf registration statement on file with a base prospectus. The issuer now wants to launch an overnight marketed “takedown” offering of senior notes with deal-specific terms (size, price, maturity, use of proceeds). Sales wants to circulate only the base prospectus plus an unfiled investor term sheet.

Which action by the syndicate desk best aligns with proper registration statement and prospectus use concepts?

• A. Treat the unfiled investor term sheet as the final prospectus because it contains the key economic terms
• B. Rely on a preliminary prospectus supplement for post-pricing confirmations so long as no material changes occur
• C. Use a preliminary prospectus supplement for marketing, then file and deliver a final prospectus supplement with the priced terms
• D. Circulate only the base prospectus because it is already part of an effective registration statement

Best answer: C

Explanation: A shelf takedown uses the base prospectus plus a deal-specific prospectus supplement (preliminary for marketing, final after pricing) to provide complete disclosure of the offering terms.

In a shelf offering, the base prospectus provides general issuer and shelf information, but the specific takedown terms must be disclosed in a prospectus supplement. Using a preliminary supplement supports lawful marketing before pricing, and a final supplement must be filed and used after pricing to reflect the final terms investors are buying.

The core concept is matching the disclosure document to where the deal is in the offering process and ensuring the document set is complete. With an effective shelf registration statement, the issuer can offer securities “off the shelf” using the base prospectus, but each takedown typically requires a prospectus supplement that adds the transaction-specific terms (e.g., principal amount, price/yield, maturity, underwriting discounts, use of proceeds updates).

A durable execution standard is:

• Pre-pricing/marketing: use a preliminary prospectus supplement (often alongside the base prospectus) so investors see current, deal-specific disclosure.
• Post-pricing: file and use the final prospectus supplement reflecting the priced terms for confirmations and ongoing selling materials.

Using only the base prospectus or an unfiled term sheet risks incomplete or improper prospectus disclosure for the takedown.

• Using only the base prospectus omits the priced terms and other takedown-specific disclosures that belong in a supplement.
• An unfiled term sheet is not a substitute for the statutory prospectus package required for a registered takedown.
• Continuing to use a preliminary supplement after pricing undermines record integrity because investors need the final, priced disclosure document.

Question 5

A U.S. issuer wants to raise $15,000,000 in a Regulation D private placement with a $1,000,000 minimum subscription. The banker proposes promoting the offering through a publicly accessible webinar and LinkedIn posts that link to an online subscription portal.

Assuming the issuer is willing to accept only accredited investors if necessary, which choice best fits the issuer’s plan and the applicable investor requirements, and how many investors at the minimum subscription are needed to reach the target raise?

• A. Rule 506(c); verify accredited status; 15 investors needed
• B. Rule 506(c); self-certification allowed; 15 investors needed
• C. Rule 506(b); no verification required; 15 investors needed
• D. Rule 506(c); up to 35 non-accredited allowed; 15 investors needed

Best answer: A

Explanation: Public marketing is general solicitation, so Rule 506(c) fits and requires verification of accredited status; $15,000,000/$1,000,000 = 15.

Because the issuer plans a publicly accessible webinar and LinkedIn promotion, it is engaging in general solicitation. Rule 506(c) is designed for that approach but requires the issuer to take reasonable steps to verify that all purchasers are accredited investors. The minimum investor count is the target raise divided by the minimum subscription: 15 investors.

The key distinction is solicitation and verification. Rule 506(b) prohibits general solicitation; investors can generally self-certify accredited status (subject to the issuer’s reasonable belief), and up to 35 non-accredited (but sophisticated) investors may participate. Rule 506(c) permits general solicitation, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify accredited status (more than a simple check-the-box representation).

For the math, the minimum number of investors at the minimum subscription is:

\(\$15{,}000{,}000 / \$1{,}000{,}000 = 15\).

So the issuer’s marketing plan points to Rule 506(c) with accredited verification, and it needs 15 minimum-sized investors to hit the target.

• The option using Rule 506(b) conflicts with the publicly accessible webinar/LinkedIn promotion, which is general solicitation.
• The option allowing self-certification under Rule 506(c) misses that Rule 506(c) requires reasonable verification steps.
• The option allowing up to 35 non-accredited investors under Rule 506(c) confuses the 506(b) flexibility with 506(c), which is accredited-only.

Question 6

A U.S. issuer completes an IPO where the syndicate allocates 115% of the base deal size, creating a syndicate short position. The underwriting agreement includes a standard overallotment (greenshoe) option.

Which statement about the overallotment option and the syndicate short position is INCORRECT?

• A. Overallotting shares can create a syndicate short position that must be covered after pricing.
• B. If the stock trades below the offering price, the syndicate typically covers the short by exercising the greenshoe.
• C. If the stock trades above the offering price, exercising the greenshoe can be a way to cover the short without buying in the open market at higher prices.
• D. The greenshoe gives the underwriters the right to buy up to an additional amount of shares from the issuer at the offering price.

Best answer: B

Explanation: When the stock trades below the offering price, the syndicate generally buys shares in the open market to cover the short, using the greenshoe more often when the price is at or above the offering price.

Overallotment (greenshoe) provisions let underwriters sell more shares than the base deal, creating a syndicate short that must be covered. If the stock trades at or above the offering price, the syndicate can cover by exercising the greenshoe to buy shares from the issuer at the offering price. If the stock trades below the offering price, covering in the open market is typically preferred because it can support the price and may be cheaper than exercising the option.

An overallotment (greenshoe) option is an issuer-granted right that typically allows the underwriters, for a limited period after pricing, to purchase up to 15% additional shares at the IPO price. The option works in tandem with a syndicate short position created when the syndicate allocates more shares than the base offering.

Mechanics at a high level:

• Overallot (sell extra shares) 0 create a syndicate short.
• If the stock trades below the offering price, covering the short by open-market purchases is often preferred (potentially cheaper and can provide aftermarket support).
• If the stock trades at/above the offering price, covering by exercising the greenshoe avoids buying shares in the market at higher prices.

Key takeaway: the greenshoe is not typically the preferred tool for covering the short when the stock is trading below the offering price.

• The option describing a right to buy additional shares from the issuer at the offering price reflects the core purpose of the greenshoe.
• The statement that overallotments create a syndicate short is accurate; it is a deliberate part of IPO execution.
• The idea of exercising the greenshoe when the stock is above the offering price is consistent with avoiding higher-priced open-market covering purchases.

Question 7

A U.S. issuer priced its IPO on June 3, 2025. The lock-up agreements are 180 days, but they also include an early-release feature if the stock closes at least 33% above the IPO price for 10 consecutive trading days beginning 120 days after pricing. Management expects the stock may meet the trigger and wants no “surprise” selling pressure or avoidable communication issues.

Two post-offering workflows are proposed to manage lock-up expirations. Which workflow best fits the key differentiator in this IPO’s lock-up terms?

• A. Assume Rule 144 holding periods determine when IPO insiders may sell and focus tracking on Rule 144 dates instead of lock-up terms
• B. Rely on the end of the research quiet period as the practical end of post-IPO selling restrictions
• C. Calendar the 180th day only and treat any early release as a shareholder-by-shareholder waiver handled when requested
• D. Maintain a lock-up matrix that tracks calendar expirations and the price-based trigger, and pre-coordinate any lock-up release/related messaging with issuer counsel, IR, and compliance

Best answer: D

Explanation: Because the lock-up can end early based on market performance, the bank must actively monitor the trigger and coordinate any release and communications in advance.

Lock-ups are contractual and can include conditions that cause an earlier-than-expected release. When an IPO lock-up has a price-based early-release trigger, the underwriter should track both the date and the trigger conditions and coordinate any release decisions and related communications with the issuer, counsel, and compliance to reduce avoidable market disruption and messaging risk.

The key differentiator is that the lock-up may terminate earlier than 180 days if a specified market-price condition is met. Because that outcome depends on trading performance (and may occur without any specific shareholder request), the underwriter’s post-execution controls should include (1) a tracking tool that captures all lock-up terms by signer and (2) a monitoring and communication plan for potential early release and any waivers. Coordination typically involves the issuer’s counsel and investor relations plus the bank’s compliance (and, as applicable, the syndicate desk) to ensure the timing and content of external messaging are controlled and consistent, and that any release is implemented uniformly under the agreement’s terms. The research quiet period and Rule 144 are separate concepts and do not replace tracking the lock-up contract.

• Calendaring only day 180 can miss an earlier contractual release and lead to unmanaged selling pressure and reactive communications.
• The research quiet period governs research publication timing, not when insiders are contractually permitted to sell.
• Rule 144 may affect resales, but IPO lock-ups are separate agreements that can be more restrictive (or trigger earlier) than Rule 144.

Question 8

Which statement is most accurate about “bad actor” disqualification and eligibility for an offering exemption?

• A. Bad actor disqualification applies only when the issuer generally solicits investors under Rule 506(c).
• B. In a Regulation D Rule 506 offering, a disqualifying “bad actor” event involving any covered person (including the issuer’s directors/officers, 20% owners, and the placement agent/underwriter) can make the exemption unavailable unless an exception or SEC waiver applies.
• C. Only the issuer is a covered person; misconduct by the placement agent does not affect Rule 506 eligibility.
• D. If a covered person has a disqualifying event, the issuer may still use Rule 506 as long as it discloses the event to investors.

Best answer: B

Explanation: Rule 506 eligibility can be lost due to disqualifying events of covered persons, subject to limited exceptions such as reasonable care or an SEC waiver.

Rule 506 offerings have “bad actor” disqualification provisions that can block reliance on the exemption if certain enumerated misconduct events involve a covered person. Covered persons extend beyond the issuer to include key control persons and compensated solicitors (e.g., placement agents/underwriters). The exemption may still be available only if an applicable exception (such as reasonable care) or an SEC waiver applies.

The key concept is that some exemptions are conditional on the issuer and specified “covered persons” not having certain disqualifying events (commonly called “bad actor” events). For Regulation D Rule 506 offerings, covered persons include the issuer and key insiders (such as directors and certain executive officers), significant owners (often 20% beneficial owners), and any compensated solicitor (e.g., a placement agent or underwriter). If a covered person has a disqualifying event, the issuer may be unable to rely on Rule 506 unless an exception applies (for example, the issuer can show it exercised reasonable care and did not know, or could not have known, of the event) or the SEC grants a waiver. Mere investor disclosure generally does not “cure” a disqualification.

• The idea that disqualification applies only with general solicitation is incorrect; Rule 506(b) offerings can also be affected.
• Limiting covered persons to only the issuer is incorrect; compensated solicitors and certain control persons can trigger disqualification.
• Treating disclosure to investors as a blanket substitute for eligibility is incorrect; disqualification is typically a condition to using the exemption.

Question 9

A U.S. issuer is conducting a firm-commitment IPO with one lead-left bookrunner, two co-managers, several syndicate members, and a separate selling group. After the issuer and lead-left agree on the final offering price and share count at the pricing meeting, the syndicate desk needs to communicate terms and allocations so firms can begin confirming orders with investors.

What is the best next step in the sequence, and who is primarily responsible for it?

• A. Selling group members notify investors of guaranteed allocations before receiving instructions
• B. Lead-left/bookrunner sends the pricing/allocation (deal) wire to the syndicate and selling group
• C. Syndicate members file the final prospectus with the SEC before any allocations are set
• D. A co-manager independently sets allocations for all syndicate firms’ accounts

Best answer: B

Explanation: The bookrunner coordinates the order book and, immediately after pricing, communicates final terms and allocations to all participants via the deal/pricing wire.

In an IPO, the lead-left/bookrunner controls the book-building process and is the central point for final pricing and allocation decisions. Once price and size are set, the next execution step is distributing final deal terms and allocations to the syndicate and selling group so they can confirm orders consistently. Co-managers, syndicate members, and selling group firms follow the bookrunner’s allocation instructions rather than setting them unilaterally.

The core concept is that syndicate roles drive both responsibility and sequencing in underwriting execution. The lead-left/bookrunner runs the book, consolidates demand from all participants, coordinates final pricing with the issuer, and then communicates final economics and allocations to the rest of the distribution network. Co-managers and syndicate members help market the deal, take indications of interest/orders, and provide investor feedback, but they do not “run the book” or unilaterally set allocations across firms. Selling group members primarily solicit orders and deliver them into the syndicate process; they should not promise allocations until they receive official allocation instructions. After pricing, distributing the pricing/allocation (deal) wire is a key control point that aligns all firms on final terms and permitted communications.

• The option claiming a co-manager sets allocations for all firms misstates the role; co-managers support distribution but do not control the overall book and allocations.
• The option suggesting selling group members guarantee allocations is premature; selling group firms must follow the bookrunner’s allocation instructions.
• The option stating syndicate members file the final prospectus assigns the task to the wrong party and misorders execution; allocations are set/communicated through the bookrunner immediately after pricing.

Question 10

A venture-backed private company sold Series B preferred stock in a private placement relying on Regulation D (Rule 506(b)) to accredited investors. The stock is not an “exempt security,” and the certificates include a restrictive legend.

Six months later, one investor asks the firm’s investment bank to help sell the shares to retail customers in the public market.

What is the most likely outcome/consequence?

• A. The resale is automatically exempt because the original sale relied on Reg D
• B. The shares are freely tradable because the securities themselves are exempt from registration
• C. The only requirement is to amend the issuer’s Form D before the resale
• D. The resale would generally require registration or another resale exemption

Best answer: D

Explanation: Reg D is a transaction-level exemption, so the shares remain restricted and a public resale risks an unregistered distribution absent a separate exemption.

Regulation D exempts the offering transaction, not the security itself. As a result, purchasers receive “restricted securities,” and a later public-market sale must be registered or fit within a separate resale exemption (for example, Rule 144 or Rule 144A, as applicable). Attempting to place the shares broadly with retail investors would create Section 5 (unregistered distribution) risk.

The key distinction is whether the exemption attaches to the security or to the particular offering. A transaction-level exemption (like a Reg D private placement) means only that the issuer’s original sale can occur without Securities Act registration; it does not make the shares freely tradable. Those shares are typically “restricted securities,” and any later resale must either be registered or qualify for an independent resale exemption; otherwise, the seller (and potentially the broker-dealer) risks participating in an unregistered distribution under Section 5.

By contrast, security-level exemptions (for example, many municipal securities or U.S. government securities) are exempt securities; resales of those securities do not need Securities Act registration (though antifraud rules still apply).

• The idea that a Reg D sale makes later resales automatically exempt confuses a transaction exemption with an exempt security.
• Treating preferred stock as an exempt security is incorrect; most corporate equity is not exempt at the security level.
• Updating Form D relates to the issuer’s offering notice filing and does not, by itself, legalize a public resale.

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