A wealthy customer has been asked by his neighbor to invest in the private placement of a "start-up" technology company as a venture capital investor. This is the first time that the customer has considered such an investment. The customer contacts his registered representative and asks: "Aside from the investment risk associated with a "start-up" company, what are the other issues that I should consider before making such an investment." The registered representative should inform the customer that:

II because the securities are not registered with the SEC, they can only be resold in the public markets if the company effects a registered primary distribution and is current in its SEC filings

III public resale of these securities can only occur if the customer holds the securities for 6 months "at risk" and then sells the securities in measured quantities

IV these securities can only be resold by the customer to underwriters that will buy the securities into their inventory and then register them with the SEC

Answer:

II because the securities are not registered with the SEC, they can only be resold in the public markets if the company effects a registered primary distribution and is current in its SEC filings

III public resale of these securities can only occur if the customer holds the securities for 6 months "at risk" and then sells the securities in measured quantities

Explanation:

Option I is wrong because this type of operations is completely legal, and they are called private placements.

Option IV is also wrong because the underwriters do not register the stocks with the SEC, the company must be public in order for it to be registered and their stocks publicly traded.

Option II is correct because you can privately resell the stocks, but the market is very limited.

Option III is correct because if the company does turn public, then the investor must hold the stocks for 6 months "at risk" (no puts purchased) before being able to sell them on public markets.