Series 7 practice questioneasyEquity Securities — Preemptive Rights
Preemptive rights allow existing shareholders to:
- AReceive dividends before preferred stockholders
- BSell their shares before the public in a secondary offering
- CPurchase newly issued shares before the general public to maintain their proportional ownership✓ Correct answer
- DVote on more issues than newly acquired shareholders
Explanation
Why C — Purchase newly issued shares before the general public to maintain their proportional ownership
Preemptive rights give existing shareholders the opportunity to purchase newly issued shares in proportion to their current holdings before the shares are offered to the public. This prevents dilution of ownership percentage. Not all corporations grant preemptive rights; they must be specified in the corporate charter.
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