SIE - Regulations Pt. 1

Under Rule 144, how much of the issuer's outstanding shares can be sold every 90 days?

1% of the outstanding shares or the average of the last 4 weeks' trading volume, whichever is greater Rule 144 allows the sale of 1% of the issuer's outstanding shares or the weekly average of the preceding 4 weeks' trading volume (whichever is higher) to be sold every 90 days.

The maximum maturity on a banker's acceptance is:

270 days, because a longer maturity would cause the issue to be non-exempt Banker's acceptances issued by banks are an exempt security under the Securities Act of 1933, as long as the maturity does not exceed 270 days.

Under Regulation D regarding private placements, how many non-accredited investors are allowed to invest in the offering?

35 Regulation D permits a private placement to be sold to a maximum of 35 non-accredited investors and an unlimited number of accredited (wealthy and institutional) investors.

A seller who has filed Form 144 can sell 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume whichever is greater. This amount can be sold how many times a year?

4 Rule 144 allows the sale of 1% of the issuer's outstanding shares or the weekly average of the preceding 4 weeks' trading volume (whichever is greater). This amount can be sold every 90 days (every 3 months), so a sale can occur 4 times per year.

Under Rule 147, intrastate offerings cannot be resold out of state for how long after the initial sale date?

6 months Rule 147 requires that resale of securities sold under the intrastate exemption be restricted to intrastate only for 6 months following first sale. Thereafter, they can be resold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."

Under SEC Rule 144, calculated amounts to be sold of restricted or control stock are permitted over the upcoming:

90 days Rule 144 under the Securities Act of 1933 most often applies to the public resale of restricted stock granted to officers and directors of privately held companies. These are typically start-up companies that don't have the funds to pay large salaries, so to attract quality people, they give these officers stock instead. Because the company is still private, these are restricted private placement shares that cannot be sold in the public market, unless the company goes public. Assuming that the company does go public later on, these officers can now "cash out" their holdings under Rule 144. By using the rule, the officers can sell metered amounts of the stock into the public market over each 90-day time window (and they can get very wealthy in the process!). The rule authorizes the registration of the stock with the SEC, so the buyer in the market gets clean registered shares.

Which of the following is NOT subject to the registration requirements of the Securities Act of 1933?

A American Depositary Receipts B American Depositary Shares C American Style Options Correct answer D Foreign Currency Contracts ADRs (American Depositary Receipts) are non-exempt securities and must be registered with the SEC under the Securities Act of 1933. ADRs are the way that most foreign corporate issues trade in the United States. The bank that structures the ADRs handles the registration. Another name for an ADR is an American Depositary Share. Listed option contracts are registered with the SEC, as are investment company issues. These securities are "continuously issued" and the prospectus delivery requirement is met by giving the customer an Options Disclosure Document (which used to be called the Options Clearing Prospectus); or a fund prospectus. Foreign currency contracts are not securities, and hence are not subject to the 1933 Act (though foreign currency option contracts traded on the Philadelphia Stock Exchange are subject to the Act).

Which of the following securities is NOT exempt from the Securities Act of 1933?

A Benevolent Association issues B Small Business Investment Company issues C Common Carrier issues Correct answer D Industrial Company issues Benevolent association, small business investment company, and common carrier issues are all exempt under the Securities Act of 1933. Industrial companies are not exempt - their securities must be registered and sold with a prospectus.

To sell restricted stock in compliance with the provisions of Rule 144, all of the following are required EXCEPT:

A Filing of a Form 144 B Issuer's representation that the corporation is current with all required SEC filings C Seller's representation that the securities have been held fully paid for 6 months Correct answer D Broker's representation that it solicited the transaction Filing of a Form 144 with the SEC is required at the time that the order to sell restricted stock is placed. On the Form 144, the seller computes the maximum sale amount during the next 90 days. The issuer's representation that the corporation is current with all required SEC filings must be obtained because it is prohibited to use Rule 144 to sell if this is not the case. The seller must represent that the securities have been held fully paid for 6 months, otherwise Rule 144 cannot be used. Finally, the broker must represent that it did NOT solicit the transaction and that it acted as agent in executing the transaction.

All of the following securities are exempt from registration under the Securities Act of 1933 EXCEPT:

A Insurance company issues B Bank issues C Savings and loan issues Correct answer D Junk bonds When the Securities Act of 1933 was written, issuers that were already regulated under other laws were generally exempted from the provisions of the Act. Insurance companies were already regulated under state insurance laws; banks and savings and loans were regulated by both state and federal banking laws. Junk bonds are high-yield corporate securities and as corporate issues, are subject to the Securities Act of 1933.

All of the following are required to sell "144" stock EXCEPT:

A Issuer's representation letter B Broker's representation letter C Seller's representation letter Correct answer D Buyer's representation letter To effect Rule 144 transactions, certain representations are required to ensure that the sale is not being made in contravention of the rule. The issuer must represent that the corporation is current with all required SEC filings because it is prohibited to use Rule 144 to sell if this is not the case. The seller must represent that the securities have been held fully paid for 6 months, otherwise Rule 144 cannot be used. Finally, the broker must represent that it did not solicit the transaction and that it acted as agent in executing the transaction. There is no representation required on the part of the buyer - when the restricted stock is sold through the rule, the buyer receives "clean" unrestricted shares from the transfer agent.

An investor owns 20% of the outstanding shares of ABC Corporation, a publicly traded company. The investor's spouse owns 5% of that company's stock. If the spouse wishes to sell her holding, all of the following statements are true EXCEPT:

A The spouse is considered to be an affiliated personsubject to Rule 144 B A Form 144must be filed if the shares are to be sold C Solely from the standpoint of percentage of shares outstanding, a maximum of 1% of the company's shares can be sold at this time Correct answer D Up to 6 sales per year are allowed Rule 144 is applicable to officers, directors, and "affiliated" persons - meaning someone whom they "control." A spouse is considered an affiliated person. To sell, a Form 144 must be filed. The rule allows the greater of 1% of the outstanding shares or the weekly trading average of the last 4 weeks to be sold under the filing. 4 filings are allowed per year.

All of the following are exempt issues under the Securities Act of 1933 EXCEPT:

A U.S. Government Bonds B Savings and Loan Issues Correct answer C Real Estate Investment Trusts D Municipal Revenue Bonds Real Estate Investment Trusts are regulated similarly to Investment Companies, and their securities are non-exempt and must be registered under the Securities Act of 1933. U.S. Government issues, savings and loan issues, and municipal issues are exempt.

All of the following are exempt securities under Securities Act of 1933 EXCEPT:

A U.S. Government Bonds Correct answer B U.S. Government Bond Trusts C Municipal Bonds D Small Business Investment Companies U.S. Government Bond Trusts are an investment company whose shares (actually, these are termed "units") must be registered with the SEC under the Securities Act of 1933. Government bonds, municipal bonds, and Small Business Investment Company issues are all exempt securities under the 1933 Act.

Under SEC Rule 145, all of the following corporate distributions by an issuer are exempt from the requirement to file a registration statement EXCEPT:

A stock dividend B fractional stock split . C whole stock split Correct answer D stock spin off Corporate distributions that result in an issuer distributing the exact same class of security to existing shareholders do not require a registration statement filing with the SEC. Thus, a corporation distributing a stock dividend or splitting its stock would not require a registration statement filing. However, if a corporation spins off a subsidiary to its shareholders, the shareholders are receiving stock in a different company, so a registration statement must be filed for those shares.

Under Regulation D, which statement is TRUE?

An Offering Circular is used to provide disclosure Under Regulation D, purchasers of private placements must be given full disclosure about the issue, even though no prospectus is required (the issue is exempt). Disclosure is accomplished by providing the purchaser with a copy of an "Offering Circular," which for smaller private placements is called the "Offering Memorandum." An Official Statement is a disclosure document used for municipal issues.

Who is defined as an accredited investor under Regulation D?

Chief Financial Officer of the issuer with an annual income of $175,000

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT:

Collateral Trust certificate Securities that are exempt from the registration provisions of the Securities Act of 1933 are principally governmental debt issues, including U.S. Government debt, U.S. Government agency debt, such as Ginnie Mae debt, and municipal debt such as general obligation bonds. Collateral trust certificates are issued by corporations, where the stock of a subsidiary is put up as collateral for the bond issue. This is a non-exempt security.

Which of the following activities is prohibited during the "cooling off" period?

Confirming an indication of interest During the cooling off period, an offer or sale of the issue is prohibited, as are recommendations of the issue or the advertising of the issue. Sending a preliminary prospectus (Red Herring) or accepting an indication of interest does not constitute an "offer" under the Securities Act of 1933 and thus is permitted. However, no confirmation of purchase can be made prior to the issue being priced and declared effective. Part of the IPO marketing process is to schedule road shows during the 20-day cooling off period, attended by invited large institutional investors, portfolio managers and research analysts. These are informational only - not promotional. The officers of the company make presentations and the attendees get to have their questions answered. This process helps build investor interest in the offering.

All of the following are non-exempt issues under the Securities Act of 1933 EXCEPT:

Correct answer A Fixed annuity contracts B Variable annuity contracts C Listed option contracts D Listed common stock Insurance company offerings are exempt from the 1933 Act with the exception of variable annuity and variable life contracts. Thus, a fixed annuity offered by an insurance company is exempt from the 1933 Act. Listed stocks, and stock options are non-exempt issues that must be registered with the SEC.

All of the following statements are true during the period that a non-exempt new issue is "in registration" EXCEPT:

Correct answer A the preliminary prospectus with the final public offering price is distributed B the offering participants perform due diligence on the offering C the SEC may issue a deficiency letter requesting additional information before allowing registration to become "effective" D no advertising or sale of the issue is permitted During the 20-day cooling off period, due diligence is performed by the parties involved in the offering. During this time, no advertising or sale of the issue is permitted because registration is not yet effective. If the SEC has problems with the filing, it will issue a deficiency letter requiring more information. A preliminary prospectus (red herring) may be distributed but it does not contain the final offering price because this is not known until the effective date.

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT:

Debentures Securities that are exempt from the registration provisions of the Securities Act of 1933 are principally governmental issues, including U.S. Government debt, U.S. Government agency debt and municipal debt. Debentures are a type of corporate bond, and hence, are not exempt.

Intrastate offerings are exempt from:

Federal registration Intrastate offerings are exempt from SEC registration, but are still subject to registration within the state where the offer is being made. In addition, the terms of the offering must be filed with FINRA and must comply with FINRA rules.

An officer of a company has acquired shares of that issuer in the open market. If the officer wishes to sell the shares:

Form 144must be filed with the SEC "Control stock," which is registered stock of a company bought in the open market by an officer or director of that company, is subject to all Rule 144 requirements when the officer or director wishes to sell, except for the 6 month holding period (there is no holding period on control stock). The 6 month holding period is required for restricted stock, but not for control stock.

A registered representative who handles the accounts of wealthy clients is told the following by one of her customers: "I made a "seed" money investment of $8,000,000 in a venture capital financing of a start-up tech company and received unregistered stock. Now I want to sell $4,000,000 of that company's shares." In order to handle the sale, the registered representative makes several disclosures to the client. Which of the following "due diligence" disclosures is INCORRECT?

If more than one filing is required due to the large size of the holding, the customer must wait 30 days to sell the next tranche. These are unregistered shares that are "restricted" as to resale. A public resale can be made under the provisions of Rule 144, and by selling via the rule, this will register the shares. In order to use the rule:The company must have gone public and must be current in its SEC filings.The customer must have held the stock fully paid, at risk for at least 6 months.The customer must intend to make a bona fide offer of the shares in the public trading markets.The customer must file a Form 144 with the SEC (notice of sale), that details the maximum permitted sale (the greater of 1% of the outstanding shares or the weekly average of the prior 4 weeks' trading volume). This amount can be sold every 3 months under Rule 144.Filing windows are every 90 days, not every month.

Which of the following is a "QIB" under Rule 144A?

Institution with at least $100 million of assets to invest Rule 144A allows issuers to sell minimum $500,000 units of private placements to so-called "QIBs" - Qualified Institutional Buyers; and these QIBs can trade the units with other QIBs. Thus, issuers have a way of selling securities to these investors quickly without incurring the costs of SEC registration; and the QIB knows that it can always sell that investment to another QIB without needing to register the issue with the SEC. A Qualified Institutional Buyer must be an institutional investor (not an individual) with at least $100 million of discretionary funds available for investment. Included are investment companies, insurance companies, banks, trust funds, employee benefit plans, and employee retirement funds.

Which statement is TRUE regarding intrastate offerings?

Intrastate offerings are subject to "Blue Sky" laws The federal government has no jurisdiction over intrastate offerings. The federal government only has jurisdiction over interstate offerings. Thus, intrastate offerings of securities are exempt from federal registration, but still are subject to registration within that state under the state's Blue Sky laws.

Which of the following best describes a tombstone announcement?

It is an announcement of a new issue offering that is being registered with the SEC The "tombstone" is an announcement of a new issue offering that is being registered with the SEC. It is not an advertisement because new issue advertising is prohibited. Rather, it is a non-promotional announcement of the offering - and the information in it is limited to the name of the issuer, the type of security, the size of the offering, the price of the issuer and the names of the underwriter(s). The disclosure document for a registered new issue offering is the prospectus.

Which statement is TRUE regarding intrastate offerings?

Many intrastate offerings are subject to provisions of the Uniform Securities Act The federal government has no jurisdiction over intrastate offerings. The federal government only has jurisdiction over interstate offerings. Thus, intrastate offerings of securities are exempt from federal registration, but still are subject to registration within that state under the state's "Blue Sky" laws. Blue Sky laws are based on the Uniform Securities Act (USA) of 1956, which is a model law that most state regulators use for the basis of local statutes.

What risk is the greatest concern in a Rule 144A transaction?

Marketability risk Rule 144A issues are private placement securities sold in minimum $500,000 blocks only to QIBs - Qualified Institutional Buyers (institutions with at least $100MM of assets available for investment). Whereas normal private placements cannot be traded, these can be traded from QIB to QIB. The market for this is PORTAL, but trading activity is thin in this market, especially as compared to the market for publicly traded securities.

Which statement is TRUE about credit on new issues?

New issues are not marginable until 30 days from the completion of the offering

A director of a publicly held company wants to sell 5,000 registered shares of that company's stock at $8 per share that she has held for 3 months. Does the Form 144 filing requirement apply to this sale?

No, because the shares are being sold under a "de minimis" exemption Rule 144 includes a "de minimis" exemption, permitting the sale every 3 months of 5,000 shares or less, worth $50,000 or less, without having to file a Form 144. The transfer agent is authorized by the SEC to transfer the shares without a copy of the Form 144. Because this sale is 5,000 shares @ $8 = $40,000, it can be done under this exemption. Rule 144 applies to the public resale of restricted (unregistered private placement) stock and to the sale of registered control shares. Control shares are registered shares owned by a key officer or director. These do not have to complete the 6 month holding period requirement because they are registered, but to sell them, the officer must file a Form 144 Notice of Sale and is subject to the rule's volume restrictions.

Under Regulation D, purchasers of private placement offerings must be given full disclosure through a(n):

Offering memorandum Under Regulation D, purchasers of private placements must be given full disclosure about the issue, even though no prospectus is required (the issue is exempt). Disclosure is accomplished by providing the purchaser with a copy of an "Offering Circular," which for smaller private placements is called the "Offering Memorandum." There is no registration statement for private placements because they are exempt - the exemption is claimed by filing a Form D with the SEC.

Who is an accredited investor under Regulation D?

Officer or director of the issuer Private placements under Regulation D can be sold to an unlimited number of accredited (generally wealthy) investors. The accredited investors are: Individual with $200,000 of annual income; Married Couple with $300,000 of annual income; Individual or Couple with a $1,000,000 net worth (excluding home); Institution with at least $5,000,000 available for investment; and Officers and directors of the issuer. Notice that there is no minimum net worth or income test for an officer or director of the issuer to be accredited when buying a private placement (and they should know what they are getting into, so that is why there is no $$$ test).

An offering made under Regulation D, where a company that is already public raises additional capital solely from accredited investors, is called a PIPE transaction. PIPE stands for:

Private investment in public equity A PIPE transaction (Private Investment in Public Equity) is a way for a company that is already public to raise additional capital quickly, without having to take the time and expense of registering securities with the SEC. Large institutional investors who are accredited agree to quickly make an investment and get discounted private placement stock of the company in return. The company agrees to file a shelf registration with the SEC for those shares, so the institutional investors can "cash out" anytime they want (and if they want) over the next 3 years (the life of the shelf registration). If the investor wishes to maintain its investment longer than 3 years (because the stock has been performing well), then the company will renew the shelf registration for another 3 years, and so on. The basic advantage for the company is that it gets a quick injection of money. The advantage for the accredited institutional investor is that it gets to invest at a discounted price and can "cash out" by selling those shares to the public at any time thereafter under the shelf registration.

What is found in the final prospectus for a registered offering that is not in the preliminary prospectus?

Public offering price The Public Offering Price (POP) for a registered offering is not set until the very end of the 20-day cooling off period. The preliminary prospectus (red herring) is distributed to interested buyers during the 20-day cooling off period to determine the level of investor interest. If there is high demand, the final POP will be set higher; if there is low demand, it will be lowered. Thus, the preliminary prospectus does not have the POP. Instead, it may have an estimated price range, or it may not even show a price. The names of the underwriters, the use of the proceeds of the offering and the company's audited financial statements are found in both the preliminary prospectus and the final prospectus.

Which of the following activities may a Registered Representative do prior to the filing of a registration statement for a new issue securities offering?

Read background material on the industry Prior to the filing of a registration statement for a new issue, nothing can be done with customers. Of course, Registered Representatives are allowed to educate themselves on the industry the issuer is involved in. Once the registration statement is filed, a preliminary prospectus can be sent; indications of interest can be accepted; and a "tombstone" announcement can be published. Once the registration is effective, orders can be accepted if customers receive the final prospectus, at or prior to, confirmation of sale.

"Qualified Institutional Buyers" are permitted to buy and trade large blocks of unregistered securities among themselves under:

Rule 144A Rule 144A should not be confused with SEC Rule 144. Rule 144A allows qualified institutional buyers ("QIBs") to buy and trade between themselves large blocks of privately placed issues. Thus, issuers can sell private placements to these QIBs, who can then trade the private placement issues among themselves. This market is not available to individuals. Do not confuse Rule 144A with Rule 144, which covers the sale of "restricted" and "control" stock in the open market.

Exempted issuers are defined under the:

Securities Act of 1933 The Securities Act of 1933 defines exempt issuers and exempt transactions. If an issuer is exempt or if a new non-exempt issue is sold in an exempt transaction, that new issue does not have to be registered under the Act. Otherwise, registration is required.

What type of securities offering is NOT exempted from registration with the SEC?

Shelf offering Shelf offerings under Rule 415 allow seasoned issuers to file a blanket registration statement that goes on the SEC's "shelf," good for 3 years. The issuer simply gives 2 day notice to the SEC and can sell. This is a simplified registration process. Regulation S states that if a U.S. company sets up a non-U.S. subsidiary, and offers securities only to non-U.S. residents, then it is exempted from having to register those securities with the SEC (because the offering is not being made in the U.S.). Rule 147 is an intrastate exemption. If an issue is only sold within 1 state, then federal law does not apply (the transaction must cross state lines for federal law to apply). Only that state's blue sky registration laws apply. Rule 147 says that if 100% of the issue is offered and sold to residents of a single state, then there is no federal registration with the SEC. Regulation D is the private placement exemption from registration. It basically states that private placements that are not offered to the general public are exempt from registration. Rule 506 (the major rule under Regulation D) states that if an offering is made to a maximum of 35 non-accredited investors and to an unlimited number of accredited (wealthy) investors, then it is exempt from SEC registration.

What type of registration allows the issuer to sell securities for the upcoming 3 years?

Shelf registration "Seasoned" issuers are permitted to use the shelf registration rule. A seasoned issuer is one that has already registered securities with the SEC and that has a minimum $75 million market capitalization. The issuer can file a blanket registration statement that goes on the SEC's "shelf" and then can sell anytime during the next 3 years. The issuer gives 2-day notice to the SEC in order to sell and does not need to use the full prospectus to sell. In contrast, for an IPO (an unseasoned issuer), a 20-day cooling off period must be completed and each purchaser must get a copy of the full prospectus "at or prior to confirmation of sale."

Which of the following is an exempt security under the Securities Act of 1933?

Small Business Investment Company Small business investment companies are an exempt security under the Securities Act of 1933. Other investment companies - whether they be open-end or closed-end management companies; or unit investment trusts; are non-exempt and must be registered with the SEC.

If the Securities and Exchange Commission sets the effective date for a new issue in registration, which statement is FALSE?

The SEC approves of the new issue If the SEC sets the "effective date" for an issue in registration, this means that all proper documents have been filed with the SEC. The SEC does not approve (nor does it disapprove) of any new issue in registration. Once the proper documents relating to a new issue offering are filed, the issue may be priced and offered to the public.

A customer who has his primary residence in Colorado, has a vacation home in Montana. An intrastate offering is being made in the state of Montana. Which statement is TRUE regarding the customer purchasing this securities offering?

The customer is prohibited from buying these securities To purchase an intrastate offering, the purchaser must be a primary resident of that state. Having a vacation home in another state does not constitute a "primary residence."

Which statement is TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering?

The indication is not binding on either party An indication of interest is taken during the 20 day cooling off period before a new issue's registration is effective. The issue may never "go effective" and the indication can be canceled by the underwriter. Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or change his indication. These indications are not binding on either party because the issue cannot be legally "offered or sold" until the effective date.

To offer a private placement, which statement is TRUE?

The offering is exempt, so no registration is required Private placements are exempt transactions under the Securities Act of 1933. No registration is required. The issuer must file a Form D with the SEC within 15 days of the offering to claim the exemption. The filing of Form D is not a registration. It simply notifies the SEC that the issue has been offered in compliance with the exemption.

A brokerage research department has been following the common stock of Acme Corporation and has prepared a favorable research report on the company. The brokerage firm is a member of a syndicate handling an issue of Acme common stock that is currently in registration. A registered representative wishes to send the research report to all of his customers. Which statement is TRUE?

The report cannot be sent until registration is effective When an issue is "in registration," meaning it is in the 20 day cooling off period, nothing can be sent to a customer that can be considered to be an "offer" of the securities. Under the Securities Act of 1933, no offer can be made unless a final prospectus accompanies the offer. Since no final prospectus is available, the research report cannot be sent to customers since it would constitute an "offer." Furthermore, because the member firm is in the syndicate underwriting the issue, the research report cannot be issued for 10 days following the effective date (this is for an add-on offering; if this were an IPO, a research report could not be issued for 40 days following the effective date).

Which statement is TRUE regarding restricted shares?

They are normally acquired through Regulation D private placement transactions Restricted shares are normally acquired through private placements under Regulation D and restricted from resale for 6 months. If there is a public market for the stock at a later date, to sell the restricted shares in the market, they must either be registered or sold under a Rule 144 exemption.

Which of the following is defined as an "accredited investor" under Regulation D?

Trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person There is no limit on the number of accredited investors that can purchase a private placement under Regulation D. Regarding institutional investors, any investment company, insurance company, bank, or savings and loan is accredited. The president of an Insurance Company is not accredited even though his or her employer is. A non-profit organization, trust, or institutional investor is accredited if it has at least $5,000,000 of assets and was NOT formed with the intent of buying the private placement. The idea here is that people could attempt to get around the 35 non-accredited investor limit by having these non-accredited investors contribute to a trust that would buy the issue. If the trust accumulated $5,000,000 for investment, it would be accredited. But the rule disallows this if the trust is formed for the purpose of buying the private placement! Regarding individual investors, either a minimum income ($200,000 for an individual or $300,000 for a married couple) or net worth test ($1,000,000 net worth) must be met to be accredited. There is no minimum purchase amount that makes an individual accredited.

Under SEC rules, the purchaser of a Regulation D private placement must complete and sign a(n):

accredited investor questionnaire Private placements are typically only offered to "accredited investors." These are wealthy individuals and institutional investors. To document that the purchasers are, indeed, accredited, an "accredited investor questionnaire" must be completed and signed by the potential purchaser. This is retained by the broker-dealer or issuer selling the securities and is proof that the purchasers were accredited.

U.S. Government agency securities:

are exempt securities under the Securities Act of 1933 Agency bond trade settlement depends of the type of agency security traded, is complicated, and is not tested. Trades of U.S. Government securities settle regular way the next business day, but this is often not the case for agency issues. Under the 1933 Act, agency securities are exempt and are not required to be registered with the SEC, nor are they required to be sold with a prospectus. Agencies, such as Fannie Mae are not guaranteed by the U.S. Government (with the sole exception of Ginnie Mae). Agency issues are not sold through competitive bid. They are sold though selling groups on a negotiated basis.

Under Rule 144, a customer wishing to sell must file the 144 "Notice of Sale" with the SEC:

at, or prior to, the placement of the sell order The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not approve of the sale. The Form must be filed by the seller at, or prior to, with the placement of the sell order.

The final prospectus for a new registered securities issue:

contains the Public Offering Price and must be given to the customer at, or prior to, confirmation of sale The final prospectus contains the Public Offering Price and the underwriter's spread on the front cover (this is not in the preliminary prospectus). Any purchaser of the new issue must be given the final prospectus, at, or prior to, confirmation of sale.

If the SEC sends a deficiency letter to the issuer regarding an issue in registration, then:

disclosure is not considered to be adequate An SEC "deficiency letter" indicates that there is not adequate disclosure in the registration documents to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow the registration to be effective.

Common carrier issues are:

exempt from the Securities Act of 1933 and not required to be sold with a prospectus Common carrier issues such as railway issues are exempt under the Securities Act of 1933 because they were regulated by the Interstate Commerce Commission (I.C.C.) before the Act was written; and Congress did not want to subject them to "double" regulation.

Under SEC rules, filing of the Form 144, required when selling restricted stock, is:

filed at, or prior to, the time that the sell order is placed Filing of the Form 144 to sell restricted stock is the responsibility of the seller. The form must be filed with the SEC at, or prior to, the time that the sell order is placed.

The President of PDQ Corporation donates restricted PDQ shares to the United Way after holding them for 3 years fully paid. United Way can sell the stock without restriction:

immediately As long as the 6-month holding period requirement has been met on the restricted shares (the officer held them 3 years) when they are donated, the charity can sell them immediately. There is no requirement that another 6-month holding period be met.

Electronic delivery of a prospectus is NOT permitted for:

investment company issues The "access equals delivery" rule that permits electronic delivery of a prospectus (instead of paper) to those customers that have internet access is permitted for all securities offerings with the exception of investment company issues. For example, the purchaser of a mutual fund must still get a paper prospectus.

Commercial Paper is a:

money market instrument exempt from the Securities Act of 1933 Commercial paper is a money market instrument issued by corporations. It is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed 270 days and can be sold without a prospectus.

Private placements offered under Regulation D are exempt from:

registration with the SEC Private placements offered under Regulation D are not registered with the SEC (a big savings on time and money). They can only be sold to a maximum of 35 non-accredited investors and an unlimited number of accredited (wealthy) investors. Nothing is exempt from anti-fraud rules. A fraudulent offering of Treasury securities (an exempt security) is still fraud under the 1934 Act (meaning go to jail). A fraudulent private placement offering (an exempt transaction) is still fraud under the 1934 Act (meaning go to jail). Finally, states have their own anti-fraud rules under the Uniform Securities Act, and they can pursue anyone who commits securities fraud in the state - it makes no difference if the security involved is exempt or non-exempt.

Rule 144 applies to:

sales of both control and restricted stock Rule 144 does not apply to stock purchases - it only applies to stock sales. It applies limits to sales of restricted (private placement) stock in the open market and sales of registered stock being sold by control persons.

Which statement is TRUE about the use of a "red herring" preliminary prospectus? The preliminary prospectus may only be sent to customers:

who have expressed an indication of interest or who are likely purchasers, during the cooling off period A "red herring" preliminary prospectus may be sent to any prospective purchaser of that new issue once the issue has entered into the "20 day cooling off" period that commences upon filing of the registration statement with the SEC. Nothing may be sent to the customer prior to the start of the "20 day cooling off" period. The use of the "preliminary prospectus" does not constitute an "offer" under the 1933 Act, and the red ink statement on the cover of the preliminary prospectus states this (hence the name "red herring"). The red herring is used to obtain non-binding indications of interest in the issue, and may be sent to anyone during the cooling off period, whether or not that person has previously expressed any interest in the issue.