After the stock market crash in 1929, the SEC was established to protect investors from fraudulent investments and to regulate the securities industry.

Correct Answers are:

1) I & III

2) High Net Worth: Accredited Investors (inverse: Low net worth: Non-Accredited Investors)

3) Venture Capitalist: Accel Partners (inverse: Angel Investor: Peter Thiel)

Assignment: Chapter 18 - Initial Public Offerings, Investment Banking, and Financial Restructuring Assignment: Chapter 18 - Initial Public Offerings, Investment Banking, and Financial Restructuring 1. Financing a start-up company Aa Aa 3 A company has to grow to a certain level before it can successfully raise capital by selling its stock to the public. At different stages, a company has different financing needs; it raises capital by reaching out to different kinds of investors. After the stock market crash in 1929, the Securities and Exchange Commission (SEC) was established to protect investors from fraudulent investments and to regulate the securities industry. Consider this case: Mark Zuckerberg started Facebook, a social networking website, in February 2004. He recruited his friends Dustin Moskowitz and Chris Hughes to grow the company. In the summer of 2004, their first investor, Peter Thiel-the cofounder of PayPal-invested $500,000 into Facebook for a 10.2% stake in the company. Based on your understanding of SEC regulations, which of the following statements are true? Check all that apply. The red herring prospectus can be distributed to potential investors, but the sale of the issuing company's stock cannot be finalized during the 20-day wait period. Private placements need to be registered with the SEC at least 20 days before they are issued. The SEC evaluates the information given in the prospectus and has the right to delay or stop a public offering if the information is misrepresented or if material facts are not included in the prospectus. As soon as a company decides to sell stock to prospective investors, it starts to advertise in order to increase the marketability of its new shares. Explanation: Close A The SEC requires that all newly issued securities be registered with the SEC at least 20 days before they are publicly sold. Companies can distribute the preliminary prospectus, or red herring prospectus, after the SEC declares the registration to be effective, but they cannot finalize any security sales until the 20-day waiting period has ended. In late 2004, Facebook was valued at $100 million and received funding of $12.7 million from Accel Partners. Facebook kept growing and received $25 million in funding from Greylock Partners and Meritech Capital. After several acquisition attempts and rounds of funding, Microsoft invested $240 million into Facebook for 1.6% of the company in October 2007. Based on your understanding of investors in different stages of a start-up's financial cycle, which of the following companies or individuals would be referred to as a venture capitalist? O Chris Hughes O Dustin Moskowitz O Mark Zuckerberg Accel Partners The company is required to submit the prospectus along with the registration statement. SEC lawyers and accountants analyze and evaluate these documents, and they can delay or stop the public offering if they find any information in the prospectus that is misleading or inadequate. Close A Explanation: Financing provided by wealthy individuals for business start-ups, usually in exchange for a certain rate of return or equity ownership, is referred to as angel investment, and the individuals who provide these funds are called angel investors. Most start-up companies receive their first round of external financing from angel investors, who bring experience, direction, and industry contacts along with funding. Private placements are not registered with the SEC, and the issuing companies sell their stock to a select group of investors. Companies can sell securities to select investors through private placements. However, there are regulations for private placements, because the SEC restricts the number and the type of investors involved in private placements. In the case of Facebook, Peter Thiel (the cofounder of PayPal) was one of the first investors in the company. He invested $500,000 for a 10.2% stake in the company. Thus, Peter Thiel was an angel investor. When a company decides to raise equity capital, the company needs to register with the SEC. The registration statement, Form S-1, provides financial, legal, and technical information about the company. Once the SEC declares that the registration is effective, the company can start advertising and promoting the sale of its equity. As start-up firms grow, their financing needs increase, and they seek out venture capital funds. A venture capital fund is a private limited partnership that brings in investments from institutional investors, such as pension funds, endowments, and corporations. Venture capital funds invest in companies that are showing operating success, growth, and the potential to grow further. The managers of venture capital funds are called venture capitalists (VCs). They bring industry experience to the board of directors and buy a certain stake in the company. In most public offerings, investors are classified based on their profiles. Individuals of high net worth, institutional investors, senior executives, and directors of companies are referred to as accredited investors Accel Partners, Greylock Partners, and Meritech Capital invested in Facebook after the company proved its potential to grow under the leadership of its founders and the guidance of angel investors. Thus, these companies provided venture capital, and their managers were venture capitalists. Close A Explanation: High-wealth investors, institutional investors, officers, and directors are categorized as accredited investors. Other investors are called nonaccredited investors. In private placements, companies sell their stock to accredited investors. Venture capital funds specialize in certain sectors. They provide funding and buy a stake in companies that meet their criteria. The companies that VC firms invest in are called portfolio companies. VCs dissolve their stake in the company by selling the company's stock