Purchasing and Distribution Phases – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
🛒 Purchasing and Distribution Phases – Series 7 Exam
Understanding the purchasing and distribution phases of securities is essential for Series 7 candidates. These phases describe how new securities are brought to market, sold to investors, and regulated under U.S. securities law. Mastering these concepts is critical for passing questions related to primary and secondary market activities.
🏛️ What Are the Purchasing and Distribution Phases?
The purchasing phase refers to when securities are first created and sold to the public, typically through a public offering.
The distribution phase refers to how securities are sold, traded, and transferred after issuance, including secondary market activity.
📋 Key Components of the Purchasing Phase
| Activity | Description |
|---|---|
| Issuer | The company or entity creating and selling securities to raise capital. |
| Underwriter | The investment bank or group managing the issuance and sale of securities. |
| Registration Statement | Filed with the SEC, disclosing material information about the offering. |
| Preliminary Prospectus (Red Herring) | Issued to potential investors before SEC approval. |
| Cooling-Off Period | Minimum 20 days after filing where marketing occurs but sales are prohibited. |
| Effective Date | The date the SEC allows the securities to be sold. |
| Final Prospectus | Delivered to investors at or before confirmation of sale, containing finalized terms and disclosures. |
📈 Key Components of the Distribution Phase
| Activity | Description |
|---|---|
| Primary Market Sales | Sale of newly issued securities directly from the issuer to investors. |
| Secondary Market Trading | Sale of securities between investors, typically on exchanges or OTC markets. |
| Aftermarket Stabilization | Underwriters may stabilize the price temporarily to prevent market disruption. |
| Syndicate Penalty Bid | A reclaim of commissions from brokers who sell IPO shares quickly to discourage immediate flipping. |
| Quiet Period | A time after the offering when underwriters and issuers must limit promotional activities. |
🔎 Regulatory Rules You Must Know
- Securities Act of 1933: Regulates the purchasing phase (primary market). Focuses on full disclosure to protect investors.
- Securities Exchange Act of 1934: Regulates the distribution phase (secondary market). Focuses on fair and orderly markets.
- FINRA Rules on IPO Allocations: Firms must avoid “spinning” and allocate IPO shares fairly.
- Rule 144 and Rule 144A: Cover the resale of restricted and privately placed securities.
🧠 Common Series 7 Exam Focus Areas
- Distinguishing between the primary and secondary market
- Knowing the documents used in the issuance (registration statement, prospectus)
- Understanding underwriting arrangements (firm commitment, best efforts)
- Knowing restrictions on resale of new issues
- Recognizing the role of syndicates and selling groups
✅ Master the Flow from Issuance to Trading
Passing the Series 7 means more than memorizing definitions—you must understand how securities move from creation to public trading, and how each phase is regulated.
Access full coverage of Series 7 concepts, quizzes, and real-world examples at finra-exam-mastery.com