Unit 4

Preliminary Prospectus

(AKA Red Herring) Must be made available to any prospective purchaser who expresses interest in the security from the time the issue is filed with the SEC until it becomes publicly available for sale. Used to acquaint investors with essential facts concerning the new issue, and used to solicit indications of buyer interest. Expected number of shares to be sold and a bona fide estimate of price range per share must be included. Under no circumstances may a broker-dealer or agent accept money or orders prior to the effective date. All they can do is ask a client for an indication of interest as to whether they might be interested when the registration is declared effective - this is non binding on both parties. No person connected with the offering is allowed to make marks on a preliminary prospectus under any circumstances. They cannot write short summaries or reviews on it, and it must be given to customers without any alterations since information is subject to change.

Categories of accredited investors under Regulation D

- A bank, insurance company, or registered investment company - An employee benefit plan if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million - A charitable organization, corporation, or partnership with assets exceeding $5 million - Directors, executive officers, and general partners of the issuer -Any natural person whose individual net worth, or joint net worth with that person's spouse, excluding the net equity in his primary residence, exceeds $1M at the time of his purchase - Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year - Entities made up of accredited investors

Information required in State Registration Statement Applications

- Amount of securities to be issued - States in which the security is 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 (why are we raising this money?) The Administrator may, by rule or order, permit the omission of any information they consider unnecessary

6 items that are NOT a security under the Uniform Securities Act

- 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") - Interest in a retirement plan, such as an IRA or 401(k) plan - Collectibles - Commodities such as precious metals and grains, including futures and forward contracts - Condominiums used as a personal residence - Currency (Sale of these are not regulated by state securities law)

The Administrator may, by rule or order, deny or revoke the registration exemption of:

- Any security issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association (your basic nonprofit exemption); and - Any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan

Exempted Securities under the Securities Act of 1933 (federally exempted)

- Any security issued or guaranteed by the United States, any state, or any political subdivision of a state (all federal government issues and municipal securities are exempted securities). Note that Canadian securities are not included in this exemption (NASAA membership includes Canadian Administrators) - Any commercial paper that has a maturity at the time of issuance of no more than nine months (270 days), with the stipulation that the proceeds are to be used by the issuer to increase working capital and not for the purchase of fixed assets; there is no minimum denomination or rating requirement similar to that found the Uniform Securities Act - Any security issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, or charitable purposes, and not for pecuniary profit - Any interest in a railroad equipment trust - Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution

What can a red herring NOT be used for?

- As a confirmation of sale - In place of a registration statement - To declare the final public offering price - Public offering price and effective date should be missing from this prospectus

Exempt Transactions (that take place in a state)

- Isolated nonissuer transactions - Unsolicited brokerage transactions - Underwriter transactions - Bankruptcy, guardian, or conservator transactions - Institutional investor transactions - Limited offering transactions - Preorganization certificates - Transactions with existing security holders - Nonissuer transactions by pledgees

Methods of State Registration of Securities

- Notice Filing - Coordination - Qualification

Summary of the Registration Statement

- Purpose of issue - Public offering price (anticipated range, but not the actual 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 (ex. control persons), and underwriters of the issue - Copy of underwriting agreements - Copies of articles of incorporation

Categories of Federal Covered Securities

- 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 (formerly known as AMEX), the Nasdaq Stock Market,, and several other U.S. exchanges. In addition, any security equal in seniority (rights or warrants) or senior to these securities (bonds and preferred stock) is also considered federal covered - Securities offered pursuant to the provisions of Rule 506(b) or 506(c) of Regulation D under the Securities Act of 1933 (qualifying under the private placement transaction exemption) - most securities exempt from registration under the Securities Act of 1933. If the federal government says the security does not have to register, no state can overstep that. Municipal bonds are included in the list of securities exempt from registration under federal (and state) law. However, under the NSMIA, if the municipal issuer is located in the state in which the securities are being offered, that security is not considered a federal covered security.

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 Regulation D)

Exempt Securities

- U.S. and Canadian government and municipal securities - Foreign government 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

Three Phases of Underwriting

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

SEC Rule 506(b)

A company seeking to raise capital through a private placement under this rule can sell the offering to an unlimited number of accredited investors and up to 35 non-accredited investors. In addition, no advertising may be done on behalf of the offering.

Nonissuer transactions by pledgees (Exempt Transactions)

A nonissuer transaction executed by a bona fide pledgee (ex. the one who received the security as collateral for a loan), as long as it was not for the purpose of evading the act, is an exempt transaction. For example, you pledge stock as collateral for a loan and defaulted on your obligation. The lender will sell your stock to try to recoup his loss and, under the Uniform Securities Act, this is considered an exempt transaction.

SEC Rule 506

A private placement where there is no dollar limit on the amount sold. Consists of two sections, 506(b) and 506(c).

Federal Covered Securities

A security that was exempt from registration on the state level. State securities registration requirements were preempted with respect to federal covered securities. However, states may require Notice Filings, consisting of filing fees and copies of documents filed with the SEC, primarily in the case of registered investment companies (ex. mutual funds)

Transactions with existing security holders (Exempt Transactions)

A transaction made under an offer to existing security holders of the issuer (including persons who are holders of convertible securities, rights, or warrants) is exempt as long as no commission or other form of remuneration is paid directly or indirectly for soliciting that security holder

Issuer Transaction

A transaction where the proceeds of the sale go to the issuer. All newly-issued securities, such as an initial public offering (IPO), are issuer transactions. In other words, when a company raises money by selling (issuing) securities to investors, the proceeds from the sale go to the company itself

Nonissuer transaction

A transaction where the proceeds of the sales do not go, directly or indirectly, to the entity that originally offered the securities to the public. The most common example of this is everyday trading on exchanges such as the NYSE or Nasdaq stock market. In this transaction, the proceeds of the sale go to the investor who sold the shares. Referred to as secondary trading because the shares are not new.

Securities Act of 1933

Aka the Paper Act, the Truth in Securities Act, and the Prospectus Act. Regulates the issuing of corporate securities sold to the public. Unless the security or transaction is exempt, the act requires securities issuers to make full disclosure of all material information in their registration materials in order for investors to make fully informed investment decisions.

Primary Offering

An issuer transaction involving new securities. All of these are issuer transactions because the issuer (the company) receives proceeds from the investor investing in the company

Notice Filing (Methods of State Registration of Securities)

An opportunity for the states to collect revenue in the form of filing fees because the Administrator has limited powers to review any documentation filed with her department. The fees for this are generally lower than the fees for coordination or qualification. State Administrators may require the issuer of certain federal securities to file the following documents as a condition for sale of their securities in the state: -Documents filed along with their registration statements filed with the SEC - Documents filed as amendments to the initial federal registration statement - A report as to the value of such securities offered in the state - Consent to the service of process

Interest in a railroad equipment trust

Any interest in an equipment trust, lease, or other similar arrangement entered into, guaranteed by, or for the benefit of a regulated common carrier to finance the acquisition of rolling stock, including motive power

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. Does not include oral communication.

Issuer

Any person who issues (distributes) or proposes to issue a security. The most common are companies or governments (federal, state, and municipal governments and their agencies and subdivisions)

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 direct or indirect participation in that distribution.

Registration by Qualification (Methods of State Registration of Securities)

Any security can be registered this way. Requires a registrant to supply any information required by the state securities Administrator. Securities not eligible for registration by another method must be registered by qualification. In general, securities that will be sold only in one state (intrastate) will be registered this way. Issuers must submit: - A consent to service of process - Name, address, form of organization, description of property, and nature of business - Name and address of any person owning 10% or more of the outstanding shares of any class of equity security of the issuer - Estimated proceeds and the use to which the proceeds will be put - Type and amount of securities offered, offering price, and selling and underwriting costs - Copy of any prospectus, pamphlet, circular, or sales literature to be used in the offering - A specimen copy of the security's certificate The administrator may require additional information by rule or order. The Administrator may require that a prospectus be sent to purchasers before the sale and that newly established companies register their securities for the first time in a state by qualification.

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. This exemption from federal registration 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 a state. Available only if the entire issue is offered and sold exclusively to residents of a single state. If any sales take place to non-residents, the entire issue loses its exemption. The purpose of this exemption is to allow issuers to raise money on a local basis, provided the business is operating primarily within that state.

Accredited investor

Applies only to private placements. Just because one meets the financial requirements of an accredited investor doesn't mean that suitability standards are ignored

Escrow

As a condition of registration under coordination or qualification, the Administrator may require that a security be placed in escrow if the security is issued: - within the past three years; - to a promoter at a price substantially different than the offering price; or - to any person for a consideration other than cash May also require that the proceeds from the sale of the registered security in this state be impounded until the issuer receives a specified amount from the sale of the security either in this state or elsewhere. Lessens the likelihood that companies raise their targeted goal and run off with the money.

Effective Date of Registration by Coordination

Becomes effective at the same time the federal registration becomes effective, provided: - No stop orders have been issued by the Administrator and no proceedings are pending against the issuer; - The registration has been on file for at least the minimum number of days specified by the Administrator, an umber that currently ranges from 10-20 days, depending on the state; and - A statement of the maximum and minimum offering prices and underwriting discounts have been on file for two business days

Cooling-off period (phase of underwriting)

Begins before registration becomes effective. Minimum of 20 days, but normally takes longer for the SEC to clear registration statements, make additions and corrections. No one can solicit sales during this period, but indications of interest can be solicited with a red herring.

SEC Rule 501

Classifies an accredited investor for the purposes of Regulation D into several categories. Investors are considered to be accredited under the rule only if the issuer or any person acting on the issuer's behalf has reasonable grounds to believe, and does believe after reasonable inquiry, the the investors are included in one of the categories in the definition.

Certain money market instruments (Exempt Securities)

Commercial paper is the most common example

Filing Fee (State registration)

Determined by the Administrator and often based on a percentage of the total offering price. If registration is withdrawn or if the Administrator issues a stop order before the registration is effective, the Administrator may retain a portion of the fee and refund the remainder to the applicant

How to amend a registration statement after its effective date

Doing so will increase the securities specified to be offered and sold Two conditions: 1. The public offering price is not changed from the amount stated in the original registration statement 2. The underwriters' discounts and commissions are not changed from the respective amounts stated in the original registration statement

Effective Date of Registration by Qualification

Effective whenever the state Administrator so orders. Every registration statement is effective for one year from its effective date. Registration may continue in effect past the first anniversary if there are still some unsold shares remaining, as long as they are still being offered at the original public offering price by either the issuer or the underwriter (though this is rare that it is applies to anything other than a security registered by qualification).

When must a security be registered with the SEC?

If the security is not exempt (a non exempt security) or the transaction is not exempt (exempt transaction)

Limited offering transactions (Exempt 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: - The seller reasonably believes that all of the noninstitutional buyers are purchasing for investment purposes only - No comissions or other remuneration is paid for soliciting noninstitutional investors, and - No general solicitation or advertising is used

Isolated nonissuer transactions (Exempt Transactions)

Include secondary (non-issuer) transactions that occur infrequently (very few transactions per year; the exact number varies by state). However, these usually do not involve securities professionals. In the same manner that individuals placing a "for sale by owner" sign on their front lawns do not need a real estate license, one individual selling stock to another in a one-on-one transaction is engaging in a transaction exempt from the oversight of the Administrator, because the issuer is not receiving any of the proceeds, and the parties involved are not trading as part of a regular practice.

Depository Institutions (Exempt Securities)

Include securities that are issued, guaranteed by, or are a direct obligation of a depository institution. The Uniform Securities Act divides them into the following categories: 1. Any security issued by and representing an interest in or a debt of, or guaranteed by , any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state 2. Any security issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this state 3. Any security issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state Note: for 2 and 3, if the institution is not federally chartered, then it must be authorized to do business in the state (under the supervision of a regulator in that state)

How to register a security with the SEC

Issuer information must be disclosed in a registration statement and published in a prospectus. In addition, the act prohibits fraudulent activity in connection with the sale, underwriting, and distribution of securities. The act provides for both civil and criminal penalties for violations of its provisions.

State law under the Uniform Securities Act

It is unlawful for any person to offer or sell an unregistered security in a state unless: - It is registered under the Act - The security or transaction is exempted from registration under the Act - It is a federal covered security If the security or transaction is not exempt or is not a federal covered security as defined by the National Securities Markets Improvement Act, it must be registered in the state or it cannot be lawfully sold in the state.

SEC Antifraud Statement for Investment Advisers

It is unlawful for any person who receives, directly or indirectly, any consideration from another person for advising the other person as to the value of securities or their purchase or sale, whether through the issuance of analyses or reports or otherwise, 1. To employ any device, scheme, or artifice to defraud the other person 2. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the other person

SEC Antifraud Statement for Broker-Dealers

It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly 1. to employ any device, scheme, or artifice to defraud 2. to make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they are made, not misleading, or 3. to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person

Exempt Transaction

Justification must be established before each transaction. Exempt from the regulatory control of the state Administrator because of the manner in which a sale is made or because of the person to whom the sale is made. A transaction is an action and must be judged by the merits of each instance. Exemption must be established with each transaction and, provided it is in the public interest, the state Administrator can deny, suspend, or revoke any securities transaction exemption other than that of a federal covered security.

NSMIA of 1996

Law that effectively divided the responsibility for regulating investment advisers between the states and the SEC by creating the category of registration known as a federal covered adviser. Also created the term federal covered security.

Jumpstart Our Business Startups (JOBS) Act of 2012

Made several changes to Rule 506 of Regulation D. Also included a provision that an issuer is disqualified from using Rule 506 under their "bad actor" provisions. Simply, if the issuer or other relevant persons (ex. underwriters, directors, officers, or significant shareholders of the issuer) have been convicted of securities fraud or certain other securities violations, an offering under Rule 506 may not take place.

Security

Must constitute: - 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 USA applies only to those financial instruments that are securities; the purchase, sale, or issuance of anything that is not a security is not covered by the Uniform Securities Act

Nonexempt Issuer

Must generally register its securities in the states where they will be sold under one of the registration methods described in this unit

Nonexempt Security

Must register unless sold in exempt transactions.

Issuer files registration statement with the SEC (phase of underwriting)

No sales can be solicited and no prospectus can circulate during this time

Effective date (phase of underwriting)

Offering period may begin. Sales can now be solicited, but the firm must use a final prospectus.

Effective Date of Registration Statement

On the date the SEC has cleared the security for sale, securities may be sold to the public by broker-dealers and their agents. A copy of the final prospectus must be delivered to each purchaser, either before or with the confirmation of the trade. Additional sales literature may be used by the firm as long as it is preceded or accompanied by a prospectus. No other areas of special interest may be highlighted or have attention drawn to them by any other method. Money may be accepted by the broker-dealer from customers at this time.

Tombstone Advertisement

One that simply identifies the security, the price, and the underwriters. Not considered a prospectus nor an offering of the subject security.

SEC Rule 506(c)

Permits the offering to be advertised. Two primary requirements to do this: - All purchasers are accredited investors, or the issuer reasonably believes that they are accredited investors - The issuer takes reasonable steps to verify that all purchasers are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports, and the like.

Exempt Security

Retains its exemption when initially issued and in subsequent trading

Final Prospectus

Shorter document summarizing the information contained in the registration statement. Must contain all of the material facts, but in shorter term. The purpose is to provide the investor with adequate information to analyze the investment merits of the security. Must be given to an investor, even if he does not read it.

Special Subscription Form

The Administrator may also require, as a condition of registration, that the issue be sold only on a form specified by the Administrator and that a copy of the form or subscription contract be filed with the Administrator or preserved for up to three years

Ongoing Reports

The Administrator may require the person who filed the 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 require more often than quarterly.

SEC Antifraud Statement for securities

The antifraud provisions, apply regardless of whether the security is registered, exempted, or sold in violation of the registration requirements

Initial Public Offering (IPO)

The first time an issuer distributes securities to the public.

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.

Registration by Coordination (Methods of State Registration of Securities)

The most common form of registration for those securities that are not federal covered. This happens if a registration statement has been filed under the Securities Act of 1933 in connection with the same offering. Issuers must supply the following records: - Consent to service of process - Copies of the latest form of prospectus filed under the Securities Act of 1933, if the Administrator requires is - Copy of articles of incorporation and bylaws, a copy of the underwriting agreement, or a specimen copy of the certificate - If the Administrator requests, copies of any other information filed by the issuer under the Securities Act of 1933 - Each amendment to the federal prospectus promptly after it is filed with the SEC

Registrant

The person registering the securities

Regulation D

The private placement exempt transaction. Securities offered and sold in compliance with this are exempt from registration with the SEC and, as was listed earlier, are considered federal covered securities exempt from registration on the state level as well.

Institutional investor transactions (Exempt Transactions)

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

Public utility and common carrier securities (Exempt Securities)

These include any security issued or guaranteed by a public utility or public utility holding company, or an equipment trust certificate issued by a railroad or other common carrier regulated in respect to rates by federal or state authority; or regulated in respect to issuance or guarantee of the security by a governmental authority of the United States, any state, Canada, or any Canadian province

Federal covered securities (Exempt Securities)

These include any security of that issuer equal to or senior to it. This would include rights, warrants, preferred stock, and any debt security

Securities issued by nonprofit organizations (Exempt Securities)

These include securities issued by religious, educational, fraternal, charitable, social, athletic, reformatory, or trade associations. Nonprofit is the key word

Foreign government securities (Exempt Securities)

These include securities issued, insured, or guaranteed by a foreign government with which the United States maintains diplomatic relations. However, unlike U.S. or Canadian issues, political subdivisions are not included (unless guaranteed by the sovereign government)

Insurance company securities (Exempt Securities)

These include securities issued, insured, or guaranteed by an insurance company authorized to do business in the state. Insurance company securities refer to the stocks or bonds issued by insurance companies, not the variable life policies and variable annuities sold by the companies.

U.S. and Canadian government and municipal securities (Exempt Securities)

These include securities issued, insured, or guaranteed by the United States or Canada, by a state or province, or by their political subdivisions, (states or provinces, cities, counties, etc.)

Underwriter transactions (Exempt Transactions)

These include transactions between issuer and broker-dealers performing in the capacity of an underwriter (such as a firm commitment underwriting) as well as those between underwriters themselves (as when functioning as members of a selling syndicate)

Unsolicited brokerage transactions (Exempt Transactions)

These include transactions initiated by the client, not the agent. This is probably the most common of the exempt transactions. If a client calls a registered agent and requests that the agent buy or sell a security, the transaction is an unsolicited brokerage transaction exempt from state registration. But, the Administrator may by rule require that the customer acknowledge upon a specified form that the sale was unsolicited, and that a signed copy of the form be kept by the broker-dealer for a specified period.

Securities of employee benefit plans (Exempt Securities)

This includes any investment contract issued by an employee stock purchase, saving, pension, or profit-sharing plan

Registration Statement

This must be filed by the issuer with the SEC, disclosing material information about the issue. Must be signed by the principal executive officer (usually designated the CEO), the principal financial officer (usually designated the CFO), and a majority of the board of directors. All of the signers are subject to criminal and civil penalties for willful omissions and misstatements of material facts.

Preorganization certificates (Exempt Transactions)

Tool that postpones registration, does not excuse registration altogether. 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 - No payment is made by any subscriber

Bankruptcy, guardian, or conservator transactions (Exempt Transactions)

Transactions by an executor, administrator, sheriff, marshal, receiver, guardian, or trustee in bankruptcy are exempt transactions. Please note that a custodian under UGMA or UTMA is not included in this list and that the only trustee is one in bankruptcy

Form D

Under Rule 503 of Regulation D, an issuer that is issuing securities in reliance on Regulation D must file this electronically with the SEC no later than 15 days after the first sale of securities in the offering.

Stop Order

Used to deny effectiveness to, or suspend or revoke the effectiveness of, any registration statement. This applies only to securities, not professionals.