Unit 4

The six items that are not a security

1. 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 (this is basically any product from a life insurance company that does not use the word "variable") 2. Interest in a retirement plan, such as an IRA or 401(k) plan 3. Collectibles 4. Commodities such as precious metals and grains, including futures and forward contracts 5. Condominiums used as a personal residence 6. Currency

For an instrument to be a security it must constitute

(1) an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) to be derived primarily from the efforts of a person other than the investor.

As referred to in the NSMIA, the term "covered security" would apply to

Any security equal or senior to one listed on the NYSE is a covered security. The hierarchy goes from common stock, (the most junior) to preferred stock and then to any debt security. Equal to the common stock would be rights and warrants. Municipal bonds are a covered security except in their state of issuance. OTC Link and OTC Bulletin Board securities are not considered federal covered securities. U4LO3

XYZ Corporation has been in business for over 20 years. They need additional capital for expansion, and determine that a public offering in their home state and neighboring states is appropriate. Which method of securities registration would most likely be used to register this initial public offering?

Because this offering is being made in more than one state, SEC registration is necessary. The state registration method would be coordination, which is the simultaneous registration of a security with both the SEC and the states.

When a security is being registered under coordination, all of the following are required EXCEPT A) prompt filing with the Administrator of any amendments filed with the SEC B) a description of the proposed use of the proceeds of the underwriting C) filing with the Administrator of a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC D) payment of the appropriate fee

C. The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least 2 full business days before the effective date, not with the initial filing. U4LO3

Which of the following securities is NOT exempt from the registration provisions of the Securities Act of 1933? A) A high-quality corporate promissory note maturing in 180 days B) An equity security issued in only one state solely to residents of that state C) A U.S. government bond D) A new stock being offered in three states

Government securities, money market instruments (the promissory note is another way of saying commercial paper), and intrastate offerings are exempt from the registration provisions of the 1933 Act. A stock being offered in three states would have to register with the SEC and possibly with those states. U4LO3

Exempt Transaction - Rule 501: Accredited Investor

Institutional investors Employee benefit plans over $5M Insider of the issuer Individual with own or joint net worth greater than $1M (Excluding equity in residence) or earnings over $200K for past two years/joint $300K and expected this year

The U.S. Supreme Court case resulting in the decision than an investment contract is a security is the

It was the Howey case in 1946 where the decision ruled that an investment contract meeting the 4 prongs: (1) an investment of money, (2) into a common enterprise, (3) with the expectation of profit, and (4) due to the managerial efforts of others, is a security. U4LO1

Exempt Transactions - Pre-organization certificates

Maximum of 10 subscribers and no funds paid in

Under the USA, which of the following types of transactions can be entered into legally with unregistered, nonexempt securities? A) Private placement offered to more than 50 institutional purchasers in the state B) Solicited transactions with individual clients located within the state C) Rights offering to existing shareholders with underwriting compensation of $.05 per share to the soliciting broker-dealers D) Public offering of stock in a new corporation

Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to non institutional buyers are limited to a maximum of 10 in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions. U4LO3

Registration is effective when ordered by the Admin in the case of registration by:

Registration by qualification is the only registration method where the Administrator sets the effective date. The effective date under registration by coordination is set by the SEC, and notice filing is merely the filing of certain documents by certain federal covered securities.

The two securities exemptions that the Administrator may revoke

Religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory Employee stock purchase plan, savings, pension, profit,-sharing or similar benefit plan

During the cooling off period, underwriters may not:

Take orders; or Distribute sales literature or advertising material However they may: Take indications of interest Distribute preliminary prospectuses; or Publish tombstone advertisements to provide info about the potential availability of the securities

Registration statement may be filed by

The issuer A broker dealer, or An interested party, usually a selling stockholder

Exempt Transactions Under the Securities Act of 1933

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 Reg D)

Securities Exempt from state registration

US and Canadian government and municipal securities Foreign gov't securities Depository Institutions Insurance company Securities Public utility and Common carrier securities Federal covered securities Securities issued by nonprofit organizations Securities of employee benefit plans Certain money market instruments

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 percentage of ownership of the account or property.

An issuer

any person who issues (distributes) or proposes to issue a security

When using the process of registration by coordination under the Uniform Securities Act, issuers shall simultaneously submit to the state, the documents filed with the SEC under A) the National Securities Markets Improvement Act (NSMIA) B) the Investment Company Act of 1940 C) the Securities Act of 1933 D) the Securities Exchange Act of 1934

C. Under the Uniform Securities Act, an issuer registering its securities with the Securities and Exchange Commission (SEC) in accordance with the procedures found in the Securities Act of 1933 shall use the documents it submits to the SEC in its concurrent registration with states in which it plans to offer its securities. U4LO3

Which of the following securities is NOT exempt from the registration and sales literature filing requirements of the USA? A. Shares of investment companies registered under the investment company act of 1940 B. Shares sold on the Nasdaq stock market C. AAA rated promissory notes of $100K that mature in 300 days D. Bonds issued by Saskatchewan, Canada

C. To be exempt, promissory notes cannot have a maturity beyond 270 days. Registered investment companies (think mutual funds), are federal covered securities as are shares of companies listed on the Nasdaq Stock Market. Any security issued by a state or Canadian province (and their subdivisions) is an exempt security.

If securities of an issuer registered with the state are outstanding, how long after the effective date of registration must an issuer wait before the registration may be withdrawn?

Registration statements are usually effective for a period of 1 year from the effective date and may not be withdrawn during this period if any of the securities of the issuer of the same class are still outstanding. U4LO3

Exempt Transactions - Private Placements

Restricted to 10 offers in any 12 consecutive months other than institutional clients No immediate resale except for institutions No compensation paid on sales to non-institutional (retail) buyers

The term used to describe a customer initiated order that includes all of the details except time and price is

Unsolicited When the order to buy or sell is initiated by the customer, it is considered to be an unsolicited order. Discretionary orders leave the decision as to what security, how much, and buy or sell up to the designated agent. Limit orders carry a specified price and time. U4LO3

Which of the following are exempt transactions as defined in the Uniform Securities Act? I. An agent sells a security issued by a foreign government with which the United States has diplomatic relations to an individual client II. An agent fills a buy order based upon an unsolicited request from an existing client to purchase a nonexempt security III. The sale of an unregistered nonexempt security in a private, nonpublicly advertised transaction to 14 noninstitutional investors over a period not exceeding 12 months IV. The sale of unlisted securities by a trustee in bankruptcy A) III and IV B) I and III C) I and II D) II and IV

Unsolicited customer orders, regardless of the type of security involved, are always exempt transactions as are sales by fiduciaries. The private placement exemption is limited to 10 noninstitutional offerees, so 14 purchasers would certainly be over the limit. While a security issued by a foreign government with which we have diplomatic relations is an exempt security, a solicited sale by an agent to an individual client is not an exempt transaction. U4LO3