Practice Scenarios and Knowledge Assessment
The central principle: Demonstrate understanding through the questions you ask, the explanations you give, and the commitments you avoid making without support.
| How | to | Use | the | Exercises |
|---|---|---|---|---|
| For | each | scenario: | ||
| Read the facts; | Identify the company’s | business objective; Separate | established information from | assumptions; |
| Write the questions you | would ask; Give a | short, plain-English response; Identify | the appropriate next step; | |
| Compare your | work with | the answer | guide. | |
| A facilitator | can assign | three roles: | ||
| Prospect: Presents the | company’s situation and | concerns; SDR: Conducts | discovery and explains | the evaluation |
| process; Observer: | Records strengths, | unsupported statements, | and missing | questions. |
| Rotate the | roles so | every participant | practices responding. |
Scenario One: Secured Notes and Existing Collateral
Situation
A manufacturer wants $8 million to expand production. Its CFO says: “We own valuable equipment and patents. We want to borrow against them without issuing shares.” The latest financial statements show an existing secured loan.
Your assignment
Identify: Why secured notes may warrant evaluation; What information is missing; Who should participate in the next discussion.
Answer guide
A secured-note structure may align with the company’s desire to borrow while preserving current equity ownership percentages. However, asset ownership alone does not establish available collateral or repayment capacity.
Ask:
- Which entity owns the equipment and patents?
- What assets secure the existing loan?
- What restrictions or consent requirements apply?
- What cash flows would support interest and principal payments?
- How was the collateral valued?
- What financing alternatives are being considered? A lien is a legal claim against property that may secure an obligation.
Creditor priority determines the relative position of creditors in recovering payment from assets or proceeds. Model response: “A secured-note structure may be worth evaluating. We first need to understand repayment capacity, the existing lender’s rights, and which assets could support the proposed financing. Your CFO and counsel should participate in that review.” Appropriate handoff: “Company seeks approximately $8 million for production expansion and prefers to preserve current equity percentages. Existing secured financing requires review. No conclusion reached about collateral availability or note terms.”
Scenario Two: Royalty-Linked Financing
Situation
A software company receives licensing revenue and wants $5 million for product development. Management says: “Could investors receive a percentage of licensing revenue instead of shares?”
Your assignment
Explain the potential benefit and identify the payment terms that need clarification.
Answer guide
A royalty-linked instrument may allow investors to participate in a defined revenue stream without receiving shares, depending on its complete terms.
A royalty is a payment tied to the use, sale, or commercialization of specified rights or products. Ask:
- Which contracts or products generate the relevant revenue?
- Which entity receives that revenue?
- Is the payment based on billed revenue or cash collected?
- What deductions are permitted?
- What percentage would apply?
- Is there a payment cap or termination date?
- How would investors verify the calculation?
- What happens if contracts change or revenue declines? Model response: “A royalty-linked structure could connect investor payments to a defined licensing revenue stream. The evaluation would need to establish the revenue definition, percentage, duration, reporting process, and effect on the company’s cash flow.” Hypothetical calculation: Assume the terms provide investors with 4% of eligible licensing revenue, with no deductions for this exercise.
If annual eligible revenue is $3 million: $3,000,000 × 4% = $120,000 That is the aggregate payment for the period under these assumptions. It is not automatically an individual investor’s payment or investment return.
Scenario Three: Preferred Shares and Investor Expectations
Situation
A company wants $10 million in equity financing. The CEO says: “We can offer preferred shares with an 8% dividend. That means investors are guaranteed 8%, correct?”
Your assignment
Correct the statement and identify the terms requiring review.
| Answer | guide |
|---|---|
| A stated dividend rate does not, | by itself, guarantee payment. |
| Preferred shares are equity securities with | specified rights that may give holders preferences over common |
shareholders. Ask:
- Is the dividend cumulative or noncumulative?
- What conditions govern declaration and payment?
- What funds would support payments?
- Are there conversion rights?
- Is there a redemption provision?
- What liquidation preference applies?
- What voting rights are included? A cumulative dividend generally accrues under the governing terms when unpaid. That does not ensure the company will ultimately have sufficient funds to pay it.
A liquidation preference describes specified payment priority in a liquidation or other event covered by the documents. It does not establish that sufficient assets will be available.
Model response: “The 8% figure describes a proposed dividend term. Whether and when payment is required depends on the documents and applicable conditions. We should describe those terms accurately and avoid presenting the dividend as guaranteed.”
Scenario Four: Financing an IP Subsidiary
Situation
A listed parent company owns patents used by several operating divisions. Management proposes moving the patents into a subsidiary and selling 20% of that subsidiary.
The CEO says:
“This raises capital without affecting our existing shareholders.”
Your assignment
Explain the potential benefit and the economic effect requiring clarification.
Answer guide
The structure may raise capital without issuing additional parent-company shares. However, selling subsidiary equity changes the parent’s ownership of the subsidiary and can affect the economics available to parent shareholders.
Ask:
- Does the subsidiary already exist?
- Which rights would it own?
- Can the parent transfer those rights?
- Do lenders or counterparties need to consent?
- How would operating divisions retain access to the IP?
- What tax and accounting effects need review?
- What rights would subsidiary investors receive? Intercompany agreements are agreements between related entities, such as a parent and its subsidiary.
Model response: “This may preserve the parent’s common-share count while bringing capital into the subsidiary. It would also share ownership and economics at the subsidiary level. The team needs to evaluate the IP transfer, operating licenses, investor rights, and accounting and tax consequences.”
| Ownership | exercise |
|---|---|
| Assume the parent initially owns 100% | of the subsidiary. New investors receive 20% of the subsidiary after the |
| issuance, with no other ownership | changes. |
| The parent then owns | 80%. |
Its public share count may remain unchanged, but its percentage ownership of the subsidiary has decreased.
Scenario Five: Parent Shares and Exchange Trading
Situation
A NASDAQ-listed company considers offering tokenized parent-company shares. Its CFO asks: “Because our existing shares trade on NASDAQ, can every buyer immediately sell these new shares there?”
Your assignment
Identify what must be confirmed before answering.
Answer guide
Existing listing status does not, by itself, establish immediate trading readiness for every newly issued security or holder.
The team needs to confirm: The precise share class and rights; Applicable listing and issuance requirements; Whether shareholder or other approvals are required; Transfer-agent and ownership-record arrangements; Brokerage, settlement, and deposit acceptance; Holder-specific restrictions or affiliate considerations; How the tokenized representation connects to the listed shares.
An affiliate, in securities-law contexts, generally involves a control relationship; the applicable analysis requires legal review.
Model response: “We need to verify the exact security and trading arrangements. Listing status alone does not establish immediate brokerage acceptance or sale availability for every purchaser. Counsel, the transfer agent, and the relevant market-service providers should confirm the process.”
Scenario Six: Valuation, GAAP, and Market Capitalization
Situation
A company reports a $25 million independent patent valuation. Its public common shares trade at $2, and it has 15 million common shares outstanding.
The CEO says: “Our market cap is $30 million. Adding the patent valuation makes it $55 million, right?”
Your assignment
Calculate the current market capitalization and explain why the proposed addition is incorrect.
| Answer | guide |
|---|---|
| Current common-equity market capitalization | is: |
| $2 | × 15,000,000 shares = $30,000,000 |
| The patent appraisal cannot simply be | added to that figure. |
| GAAP, or | Generally Accepted Accounting Principles, governs accounting recognition and presentation. An |
| economic appraisal does not automatically establish | an amount eligible for recognition on the balance sheet. |
The public market may already reflect expectations about the patents in the share price. Adding the appraisal could also double-count value.
Model response: “The current market capitalization is $30 million using those figures. The $25 million appraisal measures something different. It may inform financing or business analysis, but it does not automatically increase recorded assets or add $25 million to market capitalization.” Refer accounting questions to the accounting team and auditor, as appropriate.
Scenario Seven: Filing Versus Qualification
Situation
A prospect says: “We filed the Regulation A offering statement yesterday. Can we start taking investment money?”
Your assignment
Explain the distinction and identify the proper escalation.
| Answer | guide |
|---|---|
| Filing means submitting the offering | statement. |
| Qualification is the | SEC action permitting Regulation A sales, subject to applicable requirements. Filing alone |
| does not permit those | sales. |
| Testing-the-waters activity is a separate process | with its own requirements. It does not authorize accepting |
| purchase money or binding commitments before | qualification. [R01] |
| Model response: | “Filing and qualification are different stages. We need counsel and the responsible transaction |
| team to confirm the offering’s status | and the permitted activities. Investor funds and commitments must be |
| handled through the authorized | process.” |
Do not describe qualification as an SEC endorsement of the investment.
Scenario Eight: Trading Access and Liquidity
Situation
A prospect asks: “If the tokens are admitted to a trading venue, can we advertise that investors can cash out anytime?”
Your assignment
Explain the difference between venue access and an actual exit.
| Answer | guide |
|---|---|
| Liquidity means the practical ability to | sell within a reasonable time at an acceptable price. |
| Venue admission does not guarantee buyers, | price, trading volume, or immediate execution. |
Ask:
- What trading services are actually available?
- Which investors can participate?
- What restrictions apply?
- What are the operating hours and order procedures?
- Is there a documented redemption arrangement? A redemption is a repayment or repurchase under the security’s terms. It differs from a sale to another investor.
Model response: “We can describe the available trading arrangement accurately. We should not promise that investors can cash out at any time. An actual sale depends on available buyers, prices, and applicable conditions.”
Scenario Nine: Provider Responsibilities
Situation
A prospect sees one platform brand and asks: “Does your company issue the securities, hold the money, maintain ownership records, and operate the trading market?”
Your assignment
Explain how to answer without collapsing separate roles.
| Answer | guide |
|---|---|
| Identify the legal entity responsible for | each function. |
| Function | Entity or arrangement to identify |
| Issue | the | security | Issuer |
|---|---|---|---|
| Provide transaction services | Engaged broker-dealer, within | its scope | |
| Handle subscription funds | Designated bank or | escrow arrangement | |
| Function Entity | or arrangement | to identify | |
| Maintain holder records | Issuer’s designated recordkeeping | arrangement | |
| Safeguard assets or | credentials Specified custody | arrangement | |
| Provide trading | services Relevant | venue operator |
| Supply | software | Technology | provider |
|---|---|---|---|
| Model response: “The platform may coordinate | those services, but separate entities can | perform them. We will | |
| identify the provider responsible for | each function and the agreements | governing its role.” |
Do not state that a particular provider is engaged until that arrangement is confirmed.
Scenario Ten: Nonpublic Information
Situation
During a discovery call, a public-company executive starts describing an unannounced acquisition and financing plan.
Your assignment
State what you would say and do next.
| Answer | guide |
|---|---|
| Material nonpublic information, or | MNPI, is information not publicly available that could be important to an |
| investment | decision. |
| Model response: | “Before we go further into nonpublic transaction details, let’s confirm the appropriate |
| confidentiality and information-handling arrangements with the | designated legal contacts.” |
| If information has already been | received: |
| Restrict further sharing; | Notify the designated legal or compliance contact promptly; Preserve the communication |
| through the approved process; | Follow instructions governing access, use, and trading. |
Do not place sensitive details into a broadly accessible CRM field or independently decide to disclose them publicly.
Capstone Role-Play: From Discovery to Handoff
Company profile
A listed technology company:
- Wants approximately $12 million for commercialization. Owns patents but has not established licensing revenue; Has an existing secured lender; Wants to limit parent common-share dilution; Is interested in a public investor audience; Has engaged outside securities counsel; Has not selected an issuer or instrument.
| SDR | task |
|---|---|
| Conduct a ten-minute discovery | conversation. |
| Your questions should | address: |
The use of proceeds; Gross versus net funding needs; Timing and alternatives; Asset ownership and lender restrictions; Expected cash flows; The meaning of “limit dilution.”; Adviser involvement; Organizational readiness; Distribution expectations; The appropriate next meeting.
Model handoff: “Management is evaluating approximately $12 million for commercialization. Whether this refers to gross or net proceeds remains unresolved. The company prefers to limit parent common-share dilution but has not selected an instrument. Patents are parent-owned, licensing revenue is not established, and existing lender rights require review. Counsel is engaged. Recommend a meeting with the CFO, counsel, and transaction specialists to assess issuer choice, financing alternatives, repayment capacity, and execution requirements.” A strong handoff identifies the decision questions without presenting an unresolved structure as approved.
Written Knowledge Assessment
Answer each question in one to three sentences unless a calculation is requested.
- What is Regulation A Tier 2, and what is its general offering limit?
- Does tokenization change a note into equity?
- What creates the security interest supporting a secured note?
- Why does collateral not guarantee full repayment?
- What must a royalty-linked instrument define?
- How do preferred shares differ from common shares?
- Does issuing subsidiary shares necessarily increase parent share count?
- Why might subsidiary equity still affect parent shareholders economically?
- What is the difference between economic valuation and GAAP recognition?
- What is market capitalization?
- Does transferability guarantee liquidity?
- What is the difference between filing and qualification?
- Why should an SDR distinguish a platform brand from provider legal entities?
- Who should resolve questions about legal eligibility and accounting treatment?
- What should a specialist handoff contain? Calculation exercises: 16. Gross and net proceeds:An offering raises $9 million and incurs $600,000 in expenses. What are net proceeds?
17. Revenue-linked payment:An instrument pays 3% of $4 million in eligible collected revenue, with no deductions. What is the aggregate payment?
18. Parent equity dilution:A company has 20 million shares outstanding and issues 5 million new shares. A holder owns 1 million shares and buys none of the new issuance. What is the holder’s percentage before and after?
19. Market capitalization:A company has 25 million common shares outstanding at $1.60 per share. What is its common-equity market capitalization?
20. Discovery judgment:A company owns patents, needs immediate cash, has incomplete financial records, and expects guaranteed funding. What should the SDR clarify before advancing the opportunity?
Assessment Answer Guide
| Question | Expected | answer |
|---|---|---|
| 1 | An exemption for eligible public securities offerings, generally permitting up to $75 | |
| million in a 12-month period, subject | to applicable conditions and limits. | |
| 2 | No. The instrument’s legal and economic terms determine whether it is debt, equity, | |
| or another | security. | |
| 3 | The legally established collateral arrangement, including applicable attachment, | |
| perfection, and priority | requirements. | |
| 4 | Recovery depends on asset value, creditor rights, enforcement, expenses, and other |
circumstances. 5 The payment source, calculation, percentage, duration, deductions, reporting, and other governing terms.
6 Preferred shares have specified preferences or other negotiated rights; the documents establish their scope.
7 No. Subsidiary issuance can leave parent share count unchanged. 8 It can reduce the parent’s ownership percentage and participation in subsidiary economics.
9 Valuation estimates economic value; GAAP determines whether and how amounts are recognized and presented.
10 Generally, common-share market price multiplied by outstanding common shares. 11 No. Permitted transfers do not ensure an available buyer or acceptable price.
12 Filing submits documents; qualification permits Regulation A sales subject to applicable requirements.
13 Different entities may perform different services and assume different obligations. 14 Securities counsel for legal eligibility; the accounting team and auditor, as appropriate, for accounting treatment.
15 Objective, issuer and instrument status, participants, evidence, constraints, open questions, and an agreed next step.
16 $8.4 million: $9 million − $600,000. 17 $120,000: $4 million × 3%.
18 Before: 5%. After: 4%. One million divided by 20 million, then by 25 million. 19 $40 million: 25 million × $1.60.
20 Clarify deadline, financial readiness, alternatives, asset restrictions, repayment or investment economics, and the expectation of guaranteed funding. The opportunity may need preparation or another financing route.
For Question 18, the percentage ownership falls by one percentage point, representing a 20% relative reduction from the holder’s original percentage.
The Tier 2 limit and offering requirements should always be checked against current guidance before use in an actual transaction. [R01]
Facilitator Scoring Guide
The following is a suggested internal training standard, not a regulatory qualification or professional license.
| Written | assessment |
|---|---|
| Award up to five points per | question: |
| 5: | Accurate and complete; 3-4: Substantially accurate with a minor omission; 1-2: Partial understanding or a |
| material gap; 0: | Incorrect or unanswered. |
| Maximum score: 100 | points. |
Role-play assessment
Skill Weight
Discovers the objective and constraints 25 Explains structures and tradeoffs accurately 25 Recognizes uncertainty and routes questions appropriately 20
Communicates clearly and listens 15
Produces a useful handoff 15
Total 100
A suggested readiness threshold is 80 points on each assessment, followed by correction and re-demonstration of any material misunderstanding.
Claims of guaranteed returns, automatic accounting recognition, SEC endorsement, or guaranteed liquidity require targeted retraining even if the overall score is high.
Coaching and Continued Readiness
Use assessment results to identify specific skills for improvement.
Gap observed Coaching exercise
Starts with technology instead of the objective
Practice a discovery opening without blockchain terminology
Confuses the five structures Explain issuer, investor rights, and obligations for each Overstates liquidity Practice distinguishing transfer permission, venue access, and actual sales Confuses valuation and accounting Explain appraisal, balance-sheet recognition, and market capitalization separately Recommends a structure too early Write the missing questions before proposing a specialist meeting Gives an incomplete handoff Rewrite notes using facts, management statements, and unresolved issues Misses provider boundaries Map each function to the responsible legal entity Reassess when relevant services, provider arrangements, approved materials, or requirements change.
Completion of this chapter assesses understanding of the manual. Authorization to perform a particular activity still depends on the person’s role and the responsible organization’s requirements.