Regulation of New Issues – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
🆕 Regulation of New Issues – Series 7 Exam
Understanding the regulation of new issues is critical for anyone preparing for the Series 7 exam. New issues — such as initial public offerings (IPOs) and secondary offerings — are tightly regulated to ensure transparency, prevent fraud, and protect investors. This topic appears frequently on the exam and requires a strong grasp of specific rules and procedures.
This guide breaks down the essential concepts you need to master.
📜 Key Regulations Governing New Issues
1. Securities Act of 1933
- Primary law governing the issuance of new securities to the public
- Requires registration of securities unless exempt
- Aims to provide full disclosure to investors through a prospectus
- Prohibits fraud in the primary market
2. FINRA Rules on New Issues (Rule 5130)
- Restricts purchase of new issues by restricted persons (such as broker-dealers, their employees, and immediate family members)
- Ensures that new issues are fairly allocated to the public rather than insiders
3. Blue Sky Laws
- State-level registration requirements for new issues
- Issuers must comply with both federal and state regulations before offering securities to the public
📋 Important Concepts for the Series 7 Exam
| Topic | Key Points |
|---|---|
| Registration Statement | Filed with the SEC; includes detailed company and offering information |
| Cooling-Off Period | Minimum 20 days after SEC filing; no sales allowed, only indications of interest |
| Preliminary Prospectus (Red Herring) | Distributed during cooling-off period; incomplete information (no price yet) |
| Final Prospectus | Must be delivered at or before the sale of the security; includes final pricing |
| Tombstone Ads | Limited advertisements permitted during cooling-off; factual and non-promotional |
| Restricted Persons | Defined by FINRA Rule 5130; cannot purchase IPO shares |
| Stabilization | Underwriters may bid to support the price after the offering (must follow strict rules) |
🧠 Example Exam Question
Question:
During the cooling-off period for a new stock offering, which of the following is prohibited?
🅰️ Distributing a preliminary prospectus
🅱️ Holding a roadshow to market the offering
🅲️ Soliciting indications of interest
🅳️ Accepting payment for shares ✅
Correct Answer: 🅳️
During the cooling-off period, sales and payments are prohibited. Firms can only distribute red herrings and collect indications of interest.
⚠️ Common Pitfalls to Avoid
- Confusing the roles of preliminary and final prospectuses
- Forgetting the definition of restricted persons under Rule 5130
- Overlooking the purpose of the cooling-off period
- Misinterpreting stabilization bids as market manipulation (they are legal but highly regulated)
📥 Prepare for Full Exam Mastery
Understand the process. Memorize the key rules. Walk into the Series 7 exam ready to handle any question on new issues.
👉 Explore complete Series 7 exam prep at FINRA Exam Mastery