Practice: 2.1.1 Equity Securities

Section 2: Understanding Products and Their Risks. 12 question(s) in this unit's pool (2 above the exam). Free up to ten a day; the coach picks which ones based on what you have already answered and when each is next due.

Section 2: Understanding Products and Their RisksSIE outline 2.1.1

Today's practice

Pick an answer, say how sure you are, then reveal. Every wrong choice gets its own explanation. Questions you have already answered correctly and confidently stay out of the way until they are due for review again.

Question 1Exam level

A corporation's charter is silent on cumulative voting. How are its directors elected?

A. By straight (statutory) voting, one vote per share per open seat B. By cumulative voting automatically, since it favors minority holders C. By whichever method the shareholders vote to adopt at the annual meeting D. By cumulative voting, since state corporation law requires it unless the charter opts out

How sure are you?

Sure Fairly sure Guessing

Correct: A. State corporation law's own text opens with 'may,' not 'shall': cumulative voting only applies if the charter itself provides for it, so silence defaults to statutory, one vote per share per seat.

B. Cumulative voting is never automatic; it requires an express charter provision.

C. Shareholders cannot adopt cumulative voting by a floor vote alone; it must be written into the charter.

D. Reverses the statute; the default is statutory voting unless the charter opts in to cumulative voting, not the other way around.

Unit: SIE outline 2.1.1

Question 2Exam level

An American depositary receipt is issued against a foreign company's stock. Per the SEC's own investor bulletin, how many underlying shares does one ADR represent?

A. One or more shares, or a fraction of a share, depending on the ratio set for that ADR B. Always exactly one share. The ratio varies by ADR; it is not always one-to-one. C. Always a fixed 10 shares. No fixed 10-share ratio applies across ADRs generally. D. A dollar amount, not a share count. An ADR represents an underlying share count (or fraction), not a bare dollar amount.

How sure are you?

Sure Fairly sure Guessing

Correct: A. The SEC's own investor bulletin on international investing states each depositary receipt represents one or more shares of a foreign stock, or several, or a fraction, and the ratio drives the price.

B. The ratio varies by ADR; it is not always one-to-one.

C. No fixed 10-share ratio applies across ADRs generally.

D. An ADR represents an underlying share count (or fraction), not a bare dollar amount.

Unit: SIE outline 2.1.1

Question 3Exam level

A corporation's charter says nothing about pre-emptive rights. May an existing shareholder demand a pro rata right to buy into a new stock issue before it goes to the public?

A. No; pre-emptive rights exist only where expressly granted in the charter B. Yes; pre-emptive rights are presumed unless the charter denies them C. Yes; any shareholder may demand this right under federal securities law D. No; pre-emptive rights were abolished for all U.S. corporations

How sure are you?

Sure Fairly sure Guessing

Correct: A. State corporation law's own text states no shareholder has a pre-emptive right unless it is expressly granted in the charter; silence is a denial, not a gap.

B. Reverses the statute; silence is a denial, not a presumption in the shareholder's favor.

C. Pre-emptive rights are a state corporate-law matter tied to the charter, not a federal securities-law entitlement.

D. Pre-emptive rights are not abolished; they simply require an express charter grant to exist.

Unit: SIE outline 2.1.1

Question 4Exam level

A corporation holds 50,000 of its own previously issued shares as treasury stock. What is true of those shares at the corporation's next shareholder vote?

A. They neither vote nor count toward the quorum B. They vote normally, the same as any outstanding share C. They count toward the quorum but may not vote D. They vote only on matters the board designates

How sure are you?

Sure Fairly sure Guessing

Correct: A. State corporation law's own text says treasury shares shall neither be entitled to vote nor be counted for quorum purposes.

B. Treasury shares carry no vote at all, unlike ordinary outstanding shares.

C. The statute denies them both the vote and the quorum count, not one alone.

D. The statute grants the board no power to selectively enable a treasury share's vote.

Unit: SIE outline 2.1.1

Question 5Exam level

A board of directors wants to issue more shares than its charter currently authorizes. What must happen first?

A. The charter itself must be amended to raise the authorized-share ceiling B. The SEC must approve the increase C. The corporation must first buy back an equal number of treasury shares D. Nothing; the board may issue shares up to any number it chooses

How sure are you?

Sure Fairly sure Guessing

Correct: A. Directors may issue shares only up to the amount authorized in the certificate of incorporation; raising that ceiling means changing the charter.

B. The SEC approves nothing; it reviews registration statements, not a corporation's own share-authorization ceiling.

C. Buying back treasury shares changes the treasury count, not the authorized ceiling.

D. The board's own authority to issue shares is capped at the charter's authorized amount.

Unit: SIE outline 2.1.1

Question 6Exam level

An individual buys shares of a reporting company's stock in an unregistered, private transaction. Under Rule 144, how long must she hold them before reselling?

A. Six months B. Three months C. One year D. Two years

How sure are you?

Sure Fairly sure Guessing

Correct: A. Rule 144(d) sets a six-month holding period where the issuer is subject to Exchange Act reporting requirements.

B. Three months appears nowhere in Rule 144's holding-period text.

C. One year is the period for a non-reporting issuer's securities, not a reporting one.

D. Two years is not a period Rule 144 sets for either type of issuer.

Unit: SIE outline 2.1.1

Question 7Exam level

The same investor instead buys restricted shares of a company that does not file reports under the Exchange Act. How long must she hold them before reselling under Rule 144?

A. One year B. Six months C. Ninety days D. There is no holding period for a non-reporting issuer's shares

How sure are you?

Sure Fairly sure Guessing

Correct: A. Rule 144(d) sets a one-year holding period where the issuer is not a reporting company.

B. Six months is the shorter period that applies only to a reporting issuer's securities.

C. Ninety days appears nowhere in Rule 144's holding-period text.

D. A non-reporting issuer's restricted shares carry the longer period, not an absent one.

Unit: SIE outline 2.1.1

Question 8Exam level

An affiliate of an issuer wants to sell shares under Rule 144's volume limitation. Which amount may she sell in a three-month period?

A. The greater of 1% of the class outstanding, or the average weekly trading volume over the preceding four weeks B. Always exactly 1% of the class outstanding C. Always the average weekly trading volume over the preceding four weeks, whichever is lower D. A fixed 5% of the class outstanding

How sure are you?

Sure Fairly sure Guessing

Correct: A. Rule 144(e) sets the limit as the greatest of 1% of the class outstanding or the average weekly reported trading volume over the preceding four weeks.

B. The rule allows the greater of the two tests, not a flat 1% regardless of the other figure.

C. The rule uses the greater, not the lesser, of the two tests.

D. No flat 5% figure appears in Rule 144's volume limitation.

Unit: SIE outline 2.1.1

Question 9Exam level

A company officer who directly controls the issuer buys additional shares of her own company on the open market. What has she acquired, under Rule 144's own vocabulary?

A. Control stock B. Restricted stock C. Treasury stock D. Unregistered stock

How sure are you?

Sure Fairly sure Guessing

Correct: A. Rule 144 defines an affiliate as a person who controls, is controlled by, or is under common control with the issuer; ordinary shares bought openly by an affiliate are control stock.

B. 'Restricted' describes shares acquired in an unregistered private sale; these were bought openly on the market.

C. Treasury stock belongs to the corporation itself, not to an individual officer.

D. These shares were registered when originally issued; they are not unregistered.

Unit: SIE outline 2.1.1

Question 10Exam level

A company issues certificates letting the holder buy stock at $18 while the market price is $20, expiring in 30 days. What are these certificates?

A. Rights B. Warrants C. Convertible preferred stock D. American depositary receipts

How sure are you?

Sure Fairly sure Guessing

Correct: A. Rights are struck below the current market price and are short-lived, living for weeks, exactly the pattern here.

B. Warrants are struck above the current market price and run for years, the opposite of both signals in this stem.

C. Convertible preferred would convert an existing security rather than let the holder buy new shares at a set price.

D. A depositary receipt represents foreign shares and carries no exercise price at all.

Unit: SIE outline 2.1.1

Question 11Above the exam

A corporation's charter authorizes 5,000,000 shares, of which 5,000,000 are already issued and outstanding, and the charter is silent on pre-emptive rights. The board wants to issue 1,000,000 more shares to a new institutional investor. Can it do so immediately, and could an existing shareholder demand a pro rata right to buy into that new issuance first?

A. No, issuing beyond the 5,000,000 authorized ceiling requires a charter amendment first; and no shareholder may demand a pre-emptive right, since the charter never expressly grants one B. Yes, the board may issue freely up to any amount; and every shareholder may demand a pro rata right automatically C. No, because pre-emptive rights automatically block any new issuance once shares are fully authorized D. Yes, since the ceiling only limits authorized shares, not issued ones; and no pre-emptive right exists here

How sure are you?

Sure Fairly sure Guessing

Correct: A. All 5,000,000 authorized shares are already issued, so any new share requires a charter amendment to raise the ceiling; separately, silence on pre-emptive rights is a denial under the charter default rule, not a presumption in the shareholder's favor.

B. The board cannot issue past its own authorized ceiling, and pre-emptive rights are never automatic; they require an express charter grant.

C. Pre-emptive rights do not exist here at all (the charter is silent, which denies them), so they cannot be blocking anything.

D. The ceiling limits total shares that may be issued, and this corporation has already issued its full authorized amount, so the ceiling is the live constraint here.

Unit: SIE outline 2.1.1

Question 12Above the exam

An affiliate of a reporting company acquires restricted shares and holds them for exactly six months, satisfying Rule 144's holding period. The company has 20,000,000 shares outstanding, and the average weekly trading volume over the preceding four weeks was 150,000 shares. What is the maximum she may sell in the current three-month window?

A. 200,000 shares, the greater of 1% of the 20,000,000 shares outstanding (200,000) and the 150,000-share average weekly volume figure B. 150,000 shares, the average weekly volume figure alone. 150,000 is the smaller of the two figures; the rule uses the greater, not the lesser. C. 20,000,000 shares, since the holding period has been satisfied. Satisfying the holding period does not remove the separate volume limitation; the two rules apply together. D. 200,000 shares, but only after an additional six-month wait beyond the first. No second six-month wait applies once the holding period is met; the volume limit governs the amount, not a further waiting period.

How sure are you?

Sure Fairly sure Guessing

Correct: A. The holding period (six months, reporting issuer) is satisfied, clearing her to sell; the volume limit is then the greater of 1% of 20,000,000 (200,000) and the 150,000 four-week average, so 200,000 governs.

B. 150,000 is the smaller of the two figures; the rule uses the greater, not the lesser.

C. Satisfying the holding period does not remove the separate volume limitation; the two rules apply together.

D. No second six-month wait applies once the holding period is met; the volume limit governs the amount, not a further waiting period.

Unit: SIE outline 2.1.1

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