Function guide
Series 79 Function 2: underwriting, types of offerings and registration — the rules the exam tests
Function 2 of the Series 79 (Investment Banking Representative Qualification Exam) is the underwriting function: 20 of the 75 scored items, 27% of the outline, on how a deal is registered, syndicated, priced, stabilized, filed away and, when nobody registers anything, exempted. Most of its items ask which rule applies at which moment of the deal.
Series 79 outline
Function 2
Underwriting/New Financing Transactions, Types of Offerings and Registration of Securities
20
of 75 scored items
27%
of the outline
12
practice items here
Scope
What Function 2 covers (20 items, 27%)
20
scored items
of 75 on the exam
27%
of the outline
6
sub-sections
2.1 to 2.6
The FINRA content outline (© 2025) splits the function into six parts that follow a deal from the first filing to the archive box. This guide takes them in the same order.
- 2.1 Public Offerings
- 2.2 Activities of the Underwriting Syndicate
- 2.3 Execution and Distribution
- 2.4 Post-execution Activities for Financing Deals
- 2.5 Securities Exempt from the Registration Requirements of the Securities Act of 1933
- 2.6 Transactions Exempt from the Registration Requirements of the Securities Act of 1933
The rule index is lopsided: 2.1 lists several dozen Securities Act and Exchange Act provisions, 2.4 names four. The valuation arithmetic lives in Function 1; the study guide shows how the functions fit together, and the exam page covers format and scoring.
2.1 · the deal clock
The registered offering, step by step
Section 5 of the Securities Act splits a registered offering into periods, and most 2.1 items really ask one thing: which period is the stem in? Find the date before you read the options.
Pre-filing
No offers
Offering now is gun-jumping. Ordinary business information may continue (Rules 168, 169); Rule 163A covers issuer talk more than 30 days before filing.
Filed
Oral offers
Written offers only through the preliminary prospectus (no final price), a Rule 134 notice or a free writing prospectus.
Waiting period
Road show, the book
Indications of interest are collected, never accepted. IPO of a non-reporting issuer: preliminary prospectus to the buyer 48 hours before confirmation (Rule 15c2-8).
Effective
Sales confirmed
Under Rule 430A, price information follows in a 424(b) prospectus within two business days of pricing.
Closing
Cash for shares
The syndicate pays the offering price less the spread. The greenshoe stays open for 30 days.
Aftermarket
Delivery owed
Access equals delivery (Rule 172). Dealers’ Rule 174 period: 0, 25, 40 or 90 days.
Before effectiveness, two kinds of option are always wrong: one that treats an indication of interest as an order, and one that confirms a sale. The exam likes to dress both as customer service. Polite or not, it is still a sale.
2.1 · who may say what
Communications, research and liability
Safe-harbor items turn on two facts: who is talking (issuer, underwriter, a dealer outside the deal) and what kind of issuer it is (reporting, non-reporting, well-known seasoned). Pin those down and the rule picks itself.
- Rule 137: a non-participating dealer may publish research.
- Rule 138: a participating dealer may cover a different class, such as equity research during a debt deal.
- Rule 139: a participating dealer may keep regular-course research on S-3 or F-3 eligible issuers.
Rule 415 lets an issuer register now and sell later; a primary S-3 shelf lasts three years. A well-known seasoned issuer ($700 million of non-affiliate common float, or $1 billion of non-convertible securities other than common equity issued in registered primary offerings over three years) gets an automatic shelf, effective on filing. The May 2026 SEC proposal to rework that category is, as of October 2026, still a proposal.
FINRA Rule 5110 wants most public offerings filed with FINRA within three business days of the SEC filing. Rule 5121 handles conflicts, such as a member owning 10% or more of the issuer’s common equity or receiving at least 5% of net proceeds: prominent disclosure plus a qualified independent underwriter, unless an exception applies.
Section 12(a)(1) gives buyers rescission for sales that broke Section 5. Section 12(a)(2) covers misleading prospectuses and oral statements, with a reasonable-care defence, and Section 17(a) is the antifraud rule that reaches every offer and sale, registered or not.
- Rule 163A
- Any issuer, more than 30 days before filing, no mention of the offering. Not for underwriters.
- Rule 163
- A well-known seasoned issuer may offer at any time.
- Rule 168
- Reporting issuers: factual business and forward-looking information.
- Rule 169
- Non-reporting issuers: factual business information only, aimed at customers, not investors.
- Rule 134
- The tombstone-style notice: a short, fixed list of what it may say, and nothing else.
- FWP
- Free writing prospectus (Rules 164, 433): legended, usually filed.
2.2 · syndicate
Underwriting syndicates and commitment types
Illustrative notice
12,000,000 Shares
- Common Stock
- $20.00 per share
- Joint book-running managers
- Co-managers
Rule 134: the ad that runs once the hard part is over
Three documents run a syndicate. The underwriting agreement binds issuer and underwriters; the agreement among underwriters gives the manager the book and stabilization; the selected dealer agreement brings in a selling group that takes no underwriting risk. FINRA Rule 5160 wants price and concessions stated in selling agreements.
| Commitment | Who carries the risk | If undersold | Exam hook |
|---|---|---|---|
| Firm commitment | Underwriters buy the whole issue | Syndicate keeps the shares | Spread pays for the risk |
| Best efforts | Issuer; firm is agent | Shares not issued | No duty to buy |
| All-or-none | Issuer | All money refunded | Escrow (15c2-4); refund (10b-9) |
| Min-max | Issuer | Refund below the minimum | Same 15c2-4 / 10b-9 pair |
| Standby | Standby underwriter | Buys unsubscribed shares | Rights offerings |
Competitive versus negotiated is how the underwriter is chosen, not who carries the risk.
Lock-ups keep the issuer and insiders from selling into the aftermarket. Regulation M Rules 101 (distribution participants) and 102 (issuer, selling holders) bar bids and purchases in the restricted period: one business day before pricing for securities with $100,000 average daily volume and a $25 million float, five otherwise. Actively traded securities ($1 million volume, $150 million float) are excepted under 101, not 102. Rule 105: a short sale in the five business days before pricing generally bars buying in the deal.
2.3 · execution
Pricing, distribution and stabilization
The internal sales memo teaches the firm’s sales force the deal; the road show does the same for investors, with management talking. Selling to investors needs the Series 7 (or 82 for private placements), and the 79 vs 7 comparison sorts out who does which step.
The book of indications of interest drives sizing, pricing and timing. Allocation comes next, and FINRA Rule 5130 bars restricted persons (broker-dealer staff, finders, portfolio managers and their immediate families) from buying equity IPOs. An account counts as de minimis when restricted persons own no more than 10% of it.
In the spread, the underwriting fee pays for risk and absorbs deal expenses; the selling concession, the largest slice, goes to whoever sold, and reallowances come out of it. Pot orders are credited jump ball or fixed; designations let an institution name who gets credit.
- Offering price
- $20.00
- Gross spread
- $1.40 a share
- Split (assumed)
- 20 / 20 / 60
- Management and underwriting fees = 0.20 × 1.40 = $0.28 each
- Selling concession = 0.60 × 1.40 = $0.84
- Issuer proceeds = 10,000,000 × 18.60 = $186,000,000
AnswerThe issuer nets $186.0 million.
Managers over-allot, leaving the syndicate short. Stock above the offering price: cover with the greenshoe. Below: buy in the market, which supports the price. A naked short beyond the shoe is covered only in the market. Regulation M Rule 104 caps stabilizing bids at the offering price, with prior notice and records under Rule 17a-2; penalty bids are allowed.
Gross spread
Management fee + underwriting fee + selling concession
Issuer proceeds
Shares × (offering price − gross spread)
Greenshoe
≤ 15% × base shares
for 30 days
2.4 · post-execution
After the deal closes
- Correspondence with syndicate and issuer
- Marketing and road show materials
- Book-building records
- Prospectuses and underwriting documents
Part 2.4 is the deal file. The closing dinner gets the photographs; the deal file gets the exam questions.
Its four rules: FINRA Rule 4511 (books and records), Exchange Act Rules 17a-3 and 17a-4 (which records, kept how long) and FINRA Rule 11880 (syndicate settlement). The manager charges expenses against the underwriting fee, credits pot and designations, and settles with each member. Rule 174 delivery and the research quiet period from the deal timeline keep running after closing.
2.5–2.6 · exemptions
Exempt securities and exempt transactions
The sorting is itself testable. Regulation A and intrastate offerings (Rules 147, 147A) sit in 2.5, exempt securities; Section 4(a)(2), Regulation D, Rules 144 and 144A and Regulation S sit in 2.6, exempt transactions. Antifraud applies to all of them.
| Exemption | Part | Size limit | Who may buy | General solicitation | Resale |
|---|---|---|---|---|---|
| Section 4(a)(2) | 2.6 | None | Sophisticated, with access to information | No | Restricted |
| Rule 506(b) | 2.6 | None | Accredited, plus up to 35 sophisticated non-accredited | No | Restricted |
| Rule 506(c) | 2.6 | None | Accredited only, verified | Yes | Restricted |
| Rule 504 | 2.6 | $10 million / 12 months | Anyone; not reporting companies, investment companies or blank checks | Generally no | Generally restricted |
| Reg A Tier 1 | 2.5 | $20 million / 12 months | Anyone; state review | Yes | Not restricted |
| Reg A Tier 2 | 2.5 | $75 million / 12 months | Anyone; non-accredited capped at 10% of income or net worth | Yes | Not restricted |
| Rules 147, 147A | 2.5 | None federally | In-state residents | 147A may reach other states | In-state for 6 months |
| Rule 144A | 2.6 | None | Qualified institutional buyers | Yes, if sales go only to QIBs | Among QIBs |
| Regulation S | 2.6 | None | Offshore, no US selling efforts | Not in the US | None, 40 days or up to 1 year |
Rule texts on eCFR: 504, 506, Regulation A, 144A.
Rule 506, Tier 2 and exchange-listed securities are covered securities under Section 18: states may ask for a notice filing and a fee, not registration. Form D is due within 15 calendar days of the first Regulation D sale.
Part 2.6 also covers the paperwork: engagement letter, placement agent agreement, teaser, confidentiality agreement, private placement memorandum and term sheet, plus investor eligibility checks. FINRA Rule 5122 adds duties when a member places its own securities.
2.6 · resales
Resales: Rule 144 and Rule 144A
Rule 144 decides when someone selling unregistered stock is not an underwriter. Restricted securities came from the issuer privately; control securities are any shares an affiliate holds.
- Restricted securities wait 6 months if the issuer has reported for at least 90 days and is current, 1 year otherwise. Holding periods tack, so a gift recipient takes over the donor’s clock.
- Affiliates may sell, every three months, the greater of 1% of the shares outstanding or the average weekly trading volume of the past four weeks.
- An affiliate files Form 144 when sales in three months exceed 5,000 shares or $50,000.
Rule 144A lets private securities be resold to qualified institutional buyers, generally holding $100 million in securities ($10 million for a dealer), but not if fungible with a listed class. It usually pairs with Regulation S for the non-US tranche.
6 mo
hold, reporting issuer
reporting 90+ days
1 yr
hold, non-reporting issuer
Traps
Common Function 2 traps
The exam rarely asks what a rule says. It asks which rule the stem is standing in.
Each of these is an easy wrong option because it was once right, or nearly.
| The claim | The rule as of October 2026 |
|---|---|
| Rule 504 caps at $1 or $5 million; Rule 505 exists | $10 million since 2021; 505 repealed in 2017 |
| Reg A Tier 2 caps at $50 million | $75 million |
| Greenshoe of 10% for 45 days | Up to 15% for 30 days |
| WKSI status is gone | Still law; the change is a proposal |
| Rules 5131 and 163B are core outline rules | Law, but not in the 2025 rule index |
| The Series 79 covers road show selling | That needs the Series 7 or 82 too |
One more: Regulation A and intrastate offerings sit under exempt securities (2.5), even though they behave like transaction exemptions.
Drill
Practice: Function 2 questions
Twelve Function 2 items, one at a time. The memo under the card explains every option. It predicts no score; it shows which period or exemption you keep filing in the wrong drawer.
Function 2 drill 12 items
Item 1 of 12
F2 · Underwriting
An underwriter presents a term sheet for a new bond issuance with a gross spread of 600 basis points. The manager's fee is 120 basis points, and the selling concession is 300 basis points. The term sheet lists a total takedown of 450 basis points. How should a syndicate member evaluate this listed total takedown figure?
Pick A–D (or press 1–4). The reasoning lands here, with a note on every option — including the ones that were only trying to look helpful.
| Function | Outline | Answered | Right | Flagged |
|---|---|---|---|---|
| F2 Underwriting | 27% | 0/12 | 0 | 0 |
For all three functions, the Series 79 practice test has 60 items and an F2 tab; the front page has a four-item taster.
Questions people ask
FAQ
What are the three types of underwriting?
Usually firm commitment (underwriters buy and carry the risk), best efforts (the firm sells as agent) and the contingent forms, all-or-none and min-max, with money in escrow until the condition is met. The outline also names standby commitments.
What is on Function 2 of the Series 79?
Twenty of the 75 scored items (27%): public offerings, the syndicate, execution and distribution, post-execution records, exempt securities and exempt transactions.
What is Regulation D of the Securities Act of 1933?
SEC rules for selling without registration: Rule 504 up to $10 million in 12 months; Rule 506(b) unlimited, no general solicitation; Rule 506(c) general solicitation with verified accredited buyers only. Form D within 15 calendar days of the first sale.
What are the requirements for registration under the Securities Act of 1933?
Section 5 bars offers before a registration statement is filed and sales before it is effective, unless an exemption applies. Sections 7 and 10 set the disclosure, with financial statements under Regulation S-X.
Does the Series 79 cover selling the deal to investors?
No. Selling also needs the Series 7, or the 82 for private placements; see the 79 vs 7 page.
Drill the parts that cost points
The Series 79 practice app has more items like the ones on this page, sorted by outline function and explained option by option.