Question 1

Early stage financing is typically:

Accepted Answer

Early stage financing is often referred to as seed or start-up capital. It is used to support the initial growth of a business and is typically harder to obtain than expansion financing. While venture capitalists may get involved in early stage financing, it is not a requirement.

Question 2

Two major disadvantages of going public are the increased reporting requirements and potential loss of control.

Accepted Answer

Going public requires increased reporting requirements such as filing with the SEC and disclosing financial and business information to the public. Additionally, once a company goes public, it may experience a loss of control as shareholders have a say in company decisions and can potentially vote to replace the board of directors.

Question 3

The securities of certain smaller companies going public must also be qualified under international blue-sky laws.

Accepted Answer

Blue-sky laws are state securities laws in the United States designed to protect investors from fraud. International blue-sky laws do not exist; rather, each country has its own securities regulations.

Question 4

________ crowdfunding sites allow individuals to invest in private companies for a percentage share of the company.

Accepted Answer

Equity crowdfunding sites allow individuals to invest in private companies for a percentage share of the company. Lending crowdfunding sites allow individuals to lend money and receive interest on the loan, while reward-based crowdfunding sites allow individuals to support a project in exchange for non-monetary rewards. Market crowdfunding sites involve the pre-selling of a product before it is produced or manufactured.

Question 5

A publicly traded company needs to disclose to the public all material information regarding the company,its operations,and its management.

Accepted Answer

Under securities laws and regulations, publicly traded companies are required to disclose all material information concerning the company, its operations, financial condition, and management to the public in a timely and accurate manner. This allows shareholders and potential investors to make informed decisions about the company's prospects and risks. Failure to disclose material information can lead to legal repercussions and damage to the company's reputation.

Question 6

When private individual investors put money into a fund,which usually has a manager,then this becomes:

Accepted Answer

Angel funds are pools of money from private individual investors that are used to invest in early-stage companies.

Question 7

The underwriting syndicate is a group of firms involved in selling stock to the public.

Accepted Answer

The underwriting syndicate is a group of investment banks and brokerage firms that help to sell securities, such as stocks, to the public. It is also responsible for setting the price of the securities and for ensuring that the offering is fully subscribed.

Question 8

Which type of risk-capital market is available as a stage one funding source only for high-potential ventures

Accepted Answer

The answer of Which type of risk-capital market is available...

Question 9

Which of the following would not typically be part of a private venture capital fund

Accepted Answer

Private venture capital funds usually invest in privately held companies and are funded by high net worth individuals or institutions such as insurance companies, pension funds, and college endowment funds. It is unlikely for state governments to invest in private venture capital funds.

Question 10

With the enactment of the Sarbanes-Oxley Act in 2002,the expense and administrative responsibilities of being a public company,as well as the liability risks of officers and directors,are significantly greater.

Accepted Answer

The Sarbanes-Oxley Act increased the expense and administrative responsibilities, as well as the liability risks of officers and directors, for public companies.

Question 11

The deregulatory legislation that allows companies to be more active in their intent to raise money through crowdfunding was the:

Accepted Answer

The JOBS Act, passed in 2012, allows companies to use crowdfunding as a means to raise capital without going through traditional methods such as IPOs. This deregulatory legislation makes it easier for small businesses and startups to access funding and bypass some of the restrictions and regulations previously imposed by the Securities and Exchange Commission (SEC).

Question 12

In most of the significant public offerings,the company technically sells the shares to the underwriters,who then resell the shares to the public investors.

Accepted Answer

This is true. In an initial public offering (IPO), the company works with underwriters who buy the shares from the company and then resell them to public investors. This is known as an underwritten offering.

Question 13

Which of the following is not part of the private equity market

Accepted Answer

An underwriter is not part of the private equity market. Underwriters are typically involved in the initial public offering (IPO) process, where they help companies go public by selling shares to the public market. Private equity, on the other hand, involves investing in private companies or acquiring them outright. The other options - angel investors, SBICs, and crowdfunding - are all examples of players in the private equity market.

Question 14

The best source of funds for first-stage financing is the:

Accepted Answer

The informal risk capital market, often consisting of friends, family, and angel investors, is typically the best source of funds for first-stage financing due to its accessibility and willingness to invest in early-stage companies.

Question 15

Blue-sky laws may speed up the process and lessen costs to the company going public.

Accepted Answer

Blue-sky laws are state securities regulations designed to protect investors from fraud, and they can actually complicate and increase the costs for a company going public due to the need to comply with various state-level regulations in addition to federal laws.

Question 16

A prospectus is a letter from the SEC to a company indicating corrections that need to be made in their submitted material.

Accepted Answer

A prospectus is a formal legal document filed with the SEC by a company that is seeking to sell securities to the public. It includes information about the company, its business operations, financial condition, and risks associated with the investment. The SEC may issue comments or requests for correction during the review process, but a prospectus itself is not a correction letter from the SEC to the company.

Question 17

Venture capital firms prefer to invest in:

Accepted Answer

Venture capital firms typically seek out high-potential, growth-oriented startups with innovative business models, disruptive technologies, or unique value propositions. These ventures have the potential to generate high returns on investment, and the venture capitalist's goal is to identify and nurture these businesses to reach their full potential. Ventures during the early stages are also attractive to venture capital firms, as they can provide valuable input in the development of the business strategy, management team, and financial operations. Therefore, the best choice is A.

Question 18

Business angels usually find their deals through:

Accepted Answer

Referral sources are the best way for business angels to find potential deals. Referral sources could be other angel investors, attorneys, accountants, or other professionals in the industry who can provide recommendations based on their experience and network. Cold calling can be ineffective because many entrepreneurs receive numerous requests for funding and may not have the time or interest to listen to unsolicited pitches. Although venture capitalists may provide a source of deals for angels, the relationship between the two groups is often competitive rather than collaborative. The Internet can be a useful tool for research and networking, but it may not be the most reliable source of quality deals.

Question 19

The quiet period is a 90-day period in going public when company information that will help increase stock price should and can be released.

Accepted Answer

The quiet period is a 25-day period after a company goes public during which time they cannot release any information that could influence investors' decisions about buying or selling their stock. This is to ensure that all investors have access to the same information and to prevent companies from artificially driving up their stock price.

Question 20

The shorter the time before a company goes public,given that profits and sales growth occur,the less percentage of equity the entrepreneur will have to give up per dollar invested.

Accepted Answer

The shorter the time before a company goes public, the more developed and potentially profitable it is likely to be, which can lead to a higher valuation. This means the entrepreneur might have to give up less equity per dollar invested because the company is closer to its growth targets and has demonstrated its potential for success.

Quiz 12: Informal Risk Capital, Venture Capital, and Going Public