Unit 8: Regulation of Securities and their Issues

information required in the registration statement may be:

- purpose of isseu - public offering price - underwriter's commissions or discounts - promotion expenses - expected use of the net proceeds of the issue to the company - balance sheet - earnings statements for the last three years - names, addresses, and bios of officers, directors, stockholders owning more than 10% of the outstanding stock, and underwriters of the issue - copy of underwriting agreements - copies of articles of incorporation

During the cooling-off period, underwriters may not:

- take orders - distribute sales literature or advertising material however they may: - take indications of interest - distribute preliminary prospectuses; or - publish tombstone advertisements to provide information about the potential availability of the securities

SEC requires that

- the issuer file a registration statement with the SEC before securities are offered or sold in interstate commerce - a prospectus that meets the requirements of the act be provided to prospective buyers - penalties for violations of the act

Transactions with existing security holders

A transaction made under an offer to existing security holders of the issuer is exempt as long as no commission or other form of remuneration is paid directly or indirectly for soliciting that security holder

preorganization certificates

An offer or sale of a preorganization certificate or subscription is exempt if: - no commission or other remuneration is paid or given directly or indirectly for soliciting any subscriber, - the number of subscribers does not exceed 10, and - no payment is made by any subscriber.

an agent can sell a security that is not exempt from registration in the state if the purchaser of the security is a bank or other institutional buyer. Why is that so?

Because the sale of securities to certain financial institutions is an exempt transaction (as will be enumerated shortly), the sale can be made without registration. this means that the securities sold in exempt transactions do not have to be registered in the state. If that same nonexempt security was not sold in an exempt transaction, such as to an individual investor, it would have to be registered in the state

NASAA

North American Securities Administrators Association

federal covered security

a security that is exempt from registration on the state level.

a red herring a used to

acquaint investors with essential facts concerning the new issue. cannot be used: - as a confirmation of sale - in place of registration statement - to declare the final public offering price

issuer

any person who issues or proposes to issue any security. most issuers are businesses, and the term issuer would also apply to a government entity.

SEC Rule 501

classifies an accredited investor for the purposes of Regulation D into separate categories

the issuer must pay a

filing fee, as determined by the administrator, when filing the registration

It's important to note that registering a security with the SEC does not automatically make it federal covered

for example, over-the market traded securities. a security does not have to be covered with the SEC to be included in the definition of federal covered security

although investment company securities such as mutual funds are federal covered securities, the Uniform Securities Act allows states to

impose filing fees on them under a process called notice filing

broker-dealers (BDs)

in the business of buying and selling securities for their customers (investors) and for their own accounts

underwriter transactions

include transactions between an issuer and broker-dealers performing in the capacity of an underwriter as well as underwriters themselves

unsolicited brokerage transactions

include transactions initiated by the client, not the agent, the most common of the exempt transactions

If the investor who purchased those state X bonds decided to sell them, she would contact her agent at the brokerage firm where she has an account. The agent would then arrange for a sale to an interested buyer. In this case, because the proceeds of the bond sale would go to the investor, this is a nonissuer transaction.

or secondary transaction. (like when you sell your old car, it is a second-hand sale: the manufacturer received the money when the product was initially sold [primarily] and you receive the money now

Jumpstart Our Business Startups (JOBS) Act of 2012

permits the offering to be advertised

SEC Rule 506

private placement where there is no dollar limit on the amount sold

a nonissuer transaction is one in which the

proceeds of the sales do not go, directly or indirectly to the entity that originally offered the securities to the public. most common instance of this is everyday trading on exchanges such as the NYSE or the Nasdaq. this is secondary trading

exempt security

retains its exemption when initially issued and in subsequent trading.

nonexempt securities must register unless

sold in exempt transactions

the prospectus

summarizes the information contained in the registration statement

Uniform Securities Act (USA) of 1956

template of guide that each state uses in drafting its securities legislation. most states follow the USA very closely, and in many cases almost exactly

a bond issued by the city of columbus, OH is a federal covered security everywhere but in the state of Ohio. The effect of this is that no state regulator can enforce any of their rules against the bond. But, in the state of Ohio, even though the security is exempt under Ohio's securities law,

the Administrator could request that the issuer (the city) furnish certain details about the issue. This Columbus, OH bond is still exempt from registration under both state and federal law, but, in Ohio, is not known as a federal covered security

the administrator may also require that the issue be sold on only a form specific by

the administrator and that a copy of the form or subscription contact be file and preserved for up to 3 years.

agents, aka registered representatives (stockbrokers)

the individuals who represent broker-dealers in dealing with customers

additional primary offering (APO)

when a corporation wishes to raise additional equity capital, it can issue additional new shares

there are only two securities exemptions that the administrator may revoke,

while all exempt transactions, other than in certain federal covered securities, may be revoked

Can assets in an account or property held jointly with another person who is not the purchaser's spouse be included in determining whether the purchaser satisfies the net worth test in Rule 501?

yes, assets in an account or property held jointly with a person who is not the purchaser's spouse may be included in the calculation for the net worth test, but only to the extent of his or her percentage ownership of the account or property

for an instrument to be a security, it must consistute

- an investment of money - in a common enterprise - with the expectation of profits - to be derived primarily from the efforts of a person other than the investor

Three Phases of Underwriting

1. Issuer files registration statement with the SEC 2. Cooling-off period 3. Effective date - offering period may begin

state =

any of the 50 states; any territory or possession of the US (such as American Samoa, Guam, and the Virgin Islands); the District of Columbia; and Puerto Rico

underwriter

any person, usually a broker-dealer, who has purchased a security from an issuer with a view to the distribution of the security, or participates or has a direct or indirect participation in that distribution

most registration statements are filed by the issuer, but they may also be filed by

any selling stockholder, such as an insider making a large block sale, or by a broker-dealer

Which of the following are exempt transactions? 1. a nonissuer transaction with a bank in a Nasdaq Capital Market Security 2. An unsolicited request from an existing client to purchase a nonexempt security 3. the sale of an unregistered security in a private, nonpublicly advertised transaction to 10 noninstitutional purchases over a period not exceeding 12 months 4. the sale of unlisted securities by a trustee in bankruptcy a. 1 and 2 b. 1, 2, 3 c. 1, 2, 4 d. 1, 2, 3, 4

c -choice3 is not an exempt transaction because the private placement exemption is limited to 10 offerees, not 10 purchasers. All of the others are included in our list of exempt transactions

KC 8.1 Which of the following is included in the Uniform Security Act's definition of a security? a. an individual's vested interest in his 401k plan b. fixed, guaranteed annuity payments made for life or for a specified period c. commodity futures contracts d. a US treasury bond

d - a bond, regardless of the nature of the issuer, is considered a security. The physical commodity and futures contracts on commodities are included in the list of nonsecurity investments. Retirement plans and fixed annuities are not securities

issuer is any person who

issues (distributes) or proposes to issue a security most common issuers are companies or governments (federal, state, and municipal governments and their agencies and subdivisions)

statement from the USA:

it is unlawful for any person to offer or sell any security in this state unless 1. it is registered under this act or 2. the security or transaction is exempted under this act or 3. it is a federal covered security

the "residency" rule for issuers only requires one of the three 80% conditions or the fourth--a

majority of the employees are located in the state - the resale restriction is six months from the date of purchase by the investor - only 147a permits an issuer...

issuer transaction =

one in which the proceeds of the sale go to the issuer

the securities act of 1933 (aka the paper act, truth in securities act, and prospectus act)

regulated the issuing of corporate securities sold to the public

the rule 147 exemption is available only if the entire issue is offered and sold exclusively to

residents of a single state

isolated nonissuer transactions

secondary transactions that occur infrequently, usually not involving security professionals.

a security is exempt because of the nature of the issuer, not

the purchasers

although the exam will ask about state and federal law, if it doesn't specify, the "default" choice is always state law

true

after the issuer files a registration statement with the SEC, a

20-day cooling-off period begins before the registration becomes effective.

Under the Uniform Securities Act, which of the following persons is responsible for providing that a securities issue is exempt from registration? a. underwriter b. the person requesting the exemption c. state administrator d. there is no need to prove eligibility for an exemption

b - the burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. In the event the registration statement was filed by someone other than the issuer (such as selling stockholders or a broker-dealer), that person must prove the claim

Nonissuer transactions by pledgees

executed by a bona fide pledgee (the one who received the security as collateral for a loan)

exempt transaction

exempt from the regulatory control of the state administrator because of the manner in while a sale is made or because of the person to whom the sale is made

exempt security is a noun

exempt transaction is a verb

the person registering the securities is known as

the registrant

the USA restricts the number of offers that may be made

true

what is form D, and when does it have to be filed?

under rule 503 of regulation D, an issuer that is issuing securities in reliance on Regulation D must file Form D electronically with the SEC no later than 15 days after the first sale of securities in the offering

along with stating the expected number of shares to be sold, a

bona fide estimate of the price range per share is required to be included

fixed annuities, precious metals, grains, real estate, and currencies can be attractive investments,

but they are not securities. thus, their sales is not regulated by the state securities law.

the cooling-off period can last several months because of

the time it takes to make additions and corrections

rule 147 exemption criteria

- securities must be offered or sold exclusively to a persons who have their principal residence within the state where the issuer's principal place of business is located - for six months from the date of the sale by the issuer to that purchaser, resales of any part of the issue by that person will be made only to persons resident within the same state - the issuer must have a "reasonable belief" that the investor is a resident of the state - it is required that issuers obtain a written representation from each purchaser as to residency - issuer must place a prominent legend on the certificate disclosing to offerees and investors the limits on resales among other things -minimum of one of the following conditions: >at least 80% of the issuers gross revenue must be derived from operations within the state...

unlike the USA, there are only two exempt transactions that might be tested and they are

- transactions by any person other than an issuer, underwriter, or dealer (basically private transactions between individuals) - transactions by an issuer that do not involve a public offering (private placement under regulation D)

under the uniform securities act, it is unlawful for an person to offer or sell an unregistered security in a state unless

1. it is registered under the act 2. the security or transaction is exempted from registration under the act 3. it is a federal covered security

exempt securities under the USA include:

- US and canadian government and municipal securities - foreign government securities - depository institutions -insurance company securities - public utility and common carrier securities - securities issued by nonprofit organizations - securities of employee benefit plans - certain money market instruments

state administrators require every issuer to supply the following information on their applications

- amount of securities to be issued in the state - states in which the securities are to be offered, but not the amounts offered in those other states - any adverse order or judgement concerning the offering by regulatory authorities, court, or the SEC - anticipated effective date - anticipated use of the proceeds

registration statement

- issuer must file with the SEC disclosing material information about the issue - must be signed by principal executive officer - principal financial officer - and majority of the board of directors

major categories of federal covered securities (as defined in the NSMIA) which cannot be regulated by state securities Administrators include:

- securities issued by an open-end or closed-end investment company, unit investment trust, or face-amount certificate company that is registered under the Investment Company Act of 1940 - securities listed on the NYSE, the NYSE American LLC, the Nasdaq, and several other exchanges - securities offered pursuant to the provisions of Rule 506(b) or 506(c) of Regulation D under the Securities Act of 1933

state X issues bonds as a way of borrowing money so that the state government can function. The state is the issuer of those bonds. Typically, they will be purchased by a client of a broker-dealer whose account is handled by an agent of the firm.

This would be an issuer transaction because the proceeds of the sale of the bonds would go to State X, the issuer

common enterprise

an enterprise in which the fortunes of the investor are interwoven with those of the person offering the investment, a third party, or other investors

primary offering

an issuer transaction involving new securities if it is the first time an issuer distributes securities to the public, it is called an initial public offering (IPO)

Which of the following securities is not exempt from the registration and advertising requirements of the Uniform Securities Act? a. shares of commonwealth, edisin, a regulated public utility holding company b. securities issued by the nonprofit carnegee endowment for peace c. securities issued by a bank that is a member of the federal reserve system d. variable annuity contracts issued by metrodential insurance company licensed to do business in the state

d - variable annuities (whose performance depends on the securities in a segregated fund) are nonexempt, which means they are covered by the act and have to register. Shares in public utilities, charitable foundations, and banking institutions that are members of the federal reserve system are included in our list of exempt securities

KC 8.4 Which of the following describe indications of interest secured during the 20-day cooling-off period? 1. binding on the customer 2. nonbinding on the customer 3. binding on the broker-dealer 4. nonbinding on the broker-dealer a. 1 an 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

indications of interest are not binding on either party

institutional investor transactions

primarily transactions with financial institutions such as banks, insurance companies, and investment companies, no minimum order size used to define these trades

the USA applies to only those financial instruments that are

securities

the administrator may require the person who filed registration statement to file reports to keep the information contained in the registration statement current and to inform the administrator of the progress of the offering

these reports cannot be required more often than quarterly

annuities with fixed payouts are not securities, but variable annuities are because

they are dependent on the investment performance of securities within the annuity

bankrupty, guardian, or conservator transactions

transactions by an executor, administrator, sheriff, marshal, receiver, guardian, or trustee in bankruptcy are exempt transactions

the following six items are not securities under the USA:

- an insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed sum of money either in a lump sum or periodically - interest in a retirement plan such as an IRA or 401k - collectibles - commodities such as precious metals and grains, including futures and forward contracts - condominiums used as a personal residence - currency

prospectus

any notice, circular, letter, or communication, written or broadcast by radio or television, that offers any security for sale or confirms the sale of a security

the rule 147 exemption

any security issued under this rule qualifies as an exempt security under federal law but is not exempt under the uniform securities act and will probably have to register with the state exemption applies to any security offered and sold only to persons resident within a single state, where the issuer of such security is a person whose principal place of business is located within such state

Two items missing from the preliminary prospectus (red herring)

are the public offering price (expected range must be shown) and the effective date

for a security transaction to be lawful under the Uniform Securities Act (USA), the security itself must

be registered unless it or the transaction is exempt from registration requirements

justification as an exempt transaction must be established

before each transaction

a primary transaction is a. the first transaction between two parties in the over-the-count market b. a sale between investors of securities traded on the NYSE c. a new offering of an issuer sold to investors d. when the proceeds of the sale go to the selling party

c - a primary transaction is a new offering of securities by an issuer sold to investors. the key is that the proceeds of the sale go to the issuer. transactions between two investors in the over-the-counter market are called secondary transactions. a sale between investors of securities traded on the NYSE is another example of a secondary transaction. In both of those cases, the proceeds of the sale go to the selling party, but that party is not the issuer

four months ago, one of your clients purchased 100 shares of stock that was sold under rule 147 exemption. He has just called to inform you that he has sold those shares to his neighbor at a nice profit. Under the provisions of the rule 147 resale restrictions, a. the client had to wait at least 6 months from the date of the last sale by the issuer of any part of the issue b. the resale restrictions now pass to the buyer c. the resale restrictions only apply to residents of another state d. the resale must be made through the broker-dealer who made the original sale

c - although the rule has a 6-month resale restriction, that only applies to sales made to residents of other states. it is not a problem if you resell in a much shorter time to your neighbor.

charlotte is an agent of Gibraltar securities. her most active customer told charlotte that he is thinking about buying 10,000 shares of retailer's stock for which Gibraltar will be participating in the underwriting syndicate. The SEC release date for the stock is anticipated within 10 business days. What may Charlotte send to the client today? a. the preliminary prospectus and a reprint of a popular advertisement place by the issuing corporation b. the preliminary prospectus c. an order request d. the final prospectus

c - because a security is in registration until released by the SEC for public sale, only the unadulterated prospectus may be sent to parties indicating interest in purchasing the stock. Orders may not be accepted for a security while in registration. Because the final prospectus is indeed an offering document, it may not be presented until the SEC has released the security for public sale

which list of instruments below is not composed of securities? a. stock, treasury stock, rights, warrants, and transferable shares b. voting trust certificates and interests in oil and gas drilling programs c. commodity futures contracts and fixed payment life insurance contracts d. options on securities and interests in multilevel distributorship arragangements

c - commodity future contracts and fixed payment life insurance contracts are included in our list of six items that are not securities

KC 8.2 which of the following securities is not exempt from the registration and sales literature filing requirements of the Uniform Securities Act? a. shares of investment companies registered under the investment company act of 1940 b. shares sol don the nasdaq stock market c. aaa rates promissory notes of $100,000 that mature in 300 days d. bonds issued by saskatchewan, canada

c - in order to be exempt, promissory notes cannot have a maturity beyond 270 days. Registered investment companies are federal covered securities, as are share of companies listed on the Nasdaq Stock Market. Any security issued by a state or Canadian province is an exempt security

which of the following is defined as a security under the Uniform Securities Act? a. a guaranteed, lump-sum payment to a beneficiary under a modified endowment policy b. fixed, guaranteed payments made for life for a specified period under an annuity contract c. commodity futures contracts d. an investment contract

d - an investment contract is defined as a security under the Uniform Securities Act. In fact, the term is often used as a synonym for a security. a guaranteed, lump-sum payments to a beneficiary is an endowment policy excluded from the definition of a security. Fixed, guaranteed payments made for life or for a specified period are fixed annuity contracts not defined as securities. commodity futures contracts and the commodities themselves are not securities. it is much easier to remember what is a not a security than what is

KC 8.3 all of the following describe exempt transactions except a. ABC, a broker-dealer, purchases securities from XYZ corporation as part of an underwriting commitment b. first national bank sells its entire publicly traded bond portfolio to amalgamated national bank c. amalgamated national bank sells its publicly traded bond portfolio to ABC insurance company d. joan smith, an employee of A. national bank, buys securities recommended by her agent at ABC securities corporation, a registered broker-dealer

d - the purchase of securities from a broker-dealer by an employee of a bank is a nonexempt transaction--it is the sale of a security by a broker-dealer to a member of the public and is therefore not exempt. Transactions between broker-dealers and issuers as part of an underwriting commitment; transactions between banks; and transactions between banks and insurance companies are exempt because they are transactions between financial institutions. exempt transactions are most often identified by whom the transaction is with rather than what type of security is involved

both rule 147 and rule 147a require that the issuer meet residency requirements. Meeting which of the following is not one of those requirements? a. at least 80% of the issuer's assets are located in the state b. at least 80% of the issuer's gross revenue must be derived from operations within the state c. at least 80% of the proceeds of the offering must be used for business d. at least 80% of the issuer's employees must be located in the state

d - the requirement is that a majority of the issuer's employees are locate din the state, not at least 80%

as defined in the uniform securities act, each of the following would be considered an exempt transaction except a. a trustee of a corporation in bankruptcy liquidates securities to satisfy debt holders b. an offer of a securities investment is directed to 10 individuals in the state during a period of 12 consecutive months c. an agent solicits insurance companies to purchase shares of nonexempt securities d. preorganization certificates are subscribed to by nine investors in the state, earning the agent a modest commission

d- the nine investors are within the required ten, but in order for a preorganization certificate to be an exempt transaction, there can be no payment of funds or commissions. Transactions by fiduciaries, such as a trustee in bankruptcy (the only trustee who qualifies) and transactions with institutions, such as insurance companies, are exempt. the private placement exemption applies as long as there are no more than ten offers to individual (retail) purchasers within 12 consecutive months

a stop order is used to

deny effectiveness to, or suspend or revoke the effectiveness or, any registration statement. This applies only to securities, not professionals such as broker-dealers, agents, investment advisers, and investment adviser representatives

limited offering transactions

include any offering, called a private placement, directed at not more than 10 persons (called offerees) other than institutional investors during the previous 12 consecutive months, provided that - seller reasonably believes that all of the noninstitutional buyers are purchasing for investment purposes only - no commissions or other remuneration is paid for soliciting noninstitutional investors - no general solicitation or advertising is used

preliminary prospectus (red herring)

must be made available to any prospectus purchaser who expresses interest in the security from the time the issue if filed with the SEC until it becomes publicly available for sale, the effective date

securities have profit motive, for example,

renting out a vacation home that you use for personal vacation time sometimes.

principal place of business

the location from which the officers, partners, or managers of the issuer primarily direct, control, and coordinate the activities of the issuer.

administrator =

the office or agency that has the complete responsibility for administering the securities laws of the state. - has jurisdiction over almost all securities activity that emanates from his state as well as that received in his state. - jurisdiction over the registration of securities professionals and securities, power to make rules and issue orders - can deny, suspend, or revoke registrations

an exemption for a transaction must be established with each transaction

the state administrator can deny, suspend, or revoke any securities transaction exemption other than that of a federal covered security

under the Uniform Securities Act, with respect to certificates of interest; participation in oil, gas or mining titles or leases; or in payments out of production under such titles or leases,

there is not considered to be any issuer

The first time that ABC Shoe Co issued shares to the public, ABC Shoe engaged in an IPO or an initial primary offering because it received the proceeds from distributing its shares to the public. After ABC shoe went public, subsequent transactions between investors through agents of broker-dealers were nonissuer (secondary) transactions

true

a promissory note (commercial paper) that matures within nine months, is issued in denominations of at least $50,000, and receives one of the three highest ratings by a nationally recognized rating agency is exempt from registration requirements. Please note that this is the only cases where a security's rating is part of the registration or exemption under the Uniform Securities Act

true