ESBM securities test

The income levels for accredited investor status are (i)____200__________ and (ii)_______300__________.

$200K for single and $300K for couple

Rule 504 (reg d)

-$1M limit (in 12 mnth period) -no limit on investors -no investor qualifications

Section 3(b)2 of JOBS exemptions

-$50,000,000 (12 mnth period) -no limit on investors -only qualified buyers if not listed on an exchange

Section 4(a)5

-$5M limit -no limit on # of accredited invstrs -must be accredited invstrs

Reg A

-$5M limit (12 mnth period) -no limits or qualifications for investors -shorter, simpler registration process -can be resold -get to test the waters

Rule 505 (reg d)

-$5M limit (in 12 mnth period) -35 unaccredited investors, no limit on accredited -no investor qualifications for unaccredited -no advertising or solicitation

Briefly describe the types of exemptions from registration of securities covered under Rules 701 and 1001.

-701: covers compensation packages w/ securities for employees -1001: CA gives more general definition of accredited investor

Briefly describe what is meant by an intrastate offering. What are the major difficulties in assuring that an offer is intrastate?

-An intrastate offering is one where the issuer and investors are considered by federal securities law to be confined to one state. -SEC Rule 147 lays out guidelines under which the SEC will consider the offering to be intrastate.

Why does it matter if an investment is, or is not, viewed as being a security?

-Any investment considered to be a security under the 1933 Act comes under its provisions. -In particular, unless an exemption is secured, it must be registered with the SEC prior to being offered to the public.

What are the restrictions on general solicitation and advertising covered in Rule 504?

-Rule 504 is the most lenient and the only exemption in Reg D that allows for any conditions under which the solicitation can be to the general public. -The specific conditions under which general solicitation and advertising are allowed, in the current form of Reg D, relates to state registrations and information dissemination. -Issuers considering general solicitation in connection with a 504 offering would be well-advised to seek specific legal counsel on the current conditions required in a 504 offering.

How do Rules 504, 505, and 506 of Reg D differ from one another?

-Rule 506 has no limits on the amount raised, but has a limit of 35 investors that fall in categories that have to be counted and those 35 must be "sophisticated." -Rule 505 has a monetary limit of $5 million and a limit of 35 investors that fall into categories that must be counted. -Rule 504 has a $1 million limit but no limit on the number or sophistication of investors.

From the Headlines—Sustainable Northwest: Describe the organizational structure of Sustainable Northwest Wood and its relationship to the 501(c)3 firm Sustainable Northwest. Do you see any financing limitations under that structure that would not arise if both were for-profit operations?

-Sustainable Northwest Wood is the for-profit subsidiary of the 501(c)3 non-profit Sustainable Northwest. Wood tries to assist in achieving specific aspects of its non-profits larger mission, trying to restore native ecosystems. -could be conflict of interest btwn the two -if both were for-profit operations, they then could use the opportunity to try and sell securities. Possibly under Regulation D so that they would not have to register w/ SEC

Briefly discuss the (a) Investment Company Act of 1940 and (b) Investment Advisers Act of 1940.

-The Investment Company Act of 1940 provides a definition of an "investment company." -The Investment Advisers Act of 1940 focuses on people and organizations that seek to provide financial advice to investors and defines "investment adviser.

Describe the Jumpstart Our Business Startups Act of 2012.

-The JOBS Act of 2012 is a federal law passed to stimulate the initiation, growth and development of small business companies. -Title II of the Act eliminates restrictions on general solicitation and advertising for Regulation D 506 accredited investor offerings. This is a significant departure from prior restrictions.

Briefly define the (a) Securities Act of 1933 and (b) Securities Exchange Act of 1934.

-The Securities Act of 1933 is the main body of federal law governing the creation and sale of securities. -The Securities Exchange Act of 1934 deals with the mechanisms and standards for public security trading.

Briefly describe the importance of the 1953 SEC vs. Ralston Purina case in terms of securities registration requirements.

-The U.S. Supreme Court took an important step toward defining a private (nonpublic) offering in SEC v. Ralston Purina. -The case involved the sale of securities to employees. -The court found that because Ralston Purina's offering included employees who would not necessarily have access to the appropriate type of information, it did not fall within the private placement exemption of the 1933 Act.

What is a restricted security? Why does this designation matter? What types of buyers must the owner of restricted securities find?

-a security that cannot be resold by the investor -this is very important b/c it keeps the private placement

Briefly describe Rule 508 of Reg D.

-allows for insignificant deviations from the exemptions requirements w/o losing safe harbor altogether

Briefly describe the purpose of Rule 144 of Reg D.

-designed to make sure that privately placed securities are resold to the public only when adequate current info is publicly available, and to make sure market is not flooded w/ venture's unregistered securities

Briefly describe how the SEC's Reg D expanded the original Securities Act of 1933 definition of an "accredited investor."

-expanded to include 8 categories of accredited investors -where they specified income and wealth levels -gave conditions under which foreigners would be counted as accredited investors

Briefly describe what is meant by the statement "Registering securities with the Securities and Exchange Commission (SEC) is both costly and a time-consuming process."

-great deal of expertise involved in preparing the documents and filings associated with a public offering. -Most ventures do not have the resources to employ a staff specializing in this area. -venture will retain legal and investment banking experts to assist in the offering. The associated costs are substantial and require much of the information be provided by venture insiders (the time element) who typically have been working on the non-financial aspects of growing the venture.

Describe the meaning of a "security" in terms of the Securities Act of 1933.

-in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

What are the income and net worth requirements for being an accredited investor? What in the requirements for designation as an accredited investor relates to the level of sophistication? Do the criteria act as good proxies for sophistication?

-income ->$200K single or $300K couple or $1M net worth -executive officers, vice presidents, officer who performs policy making function

What is integration as it applies to securities offerings and why does it matter?

-integration has to do w/ the separation in time periods and the type of securities you're offering so you can't offer over the limit in the certain 12 month period

What are the four conditions of a Reg D offering that are covered under Rule 502?

-integration: offerings cannot exceed dollar limits, best way is to make sure surrounding 12 months is free of other Reg D offerings -information: formal disclosure must be given to investors, especially unaccredited ones -solicitation: general ads and solicitation are forbidden (minus some exceptions) -resale: can't do it b/c then would not be private

Provide a brief description of the use of Regulation A when issuing securities.

-limited registration that is faster and simpler than real one -the monetary limit is $5,000,000 -issuer is allowed to "test the waters" for the offering -the shares can be issued to the public and eventually trade freely.

Rule 506 (reg d)

-no $$ limit -35 unaccredited, no limit on accredited -unaccredited *must* have financial knowledge -no advertising or solicitation

Section 4(a)2

-no limit on offering amount -small # of investors -must be sophisticated investors -shows SEC doesn't care about small offerings

What types of information need to be disclosed to offerees under Reg D?

-offerings up to $2M audited BS and larger ones require more info & details

When in doubt regarding for-profit fundraising: a. consult your horoscope b. email Francisco c. seek a government bailout d. blame a government bailout e. consult the IRS f. consult an attorney who specializes in securities law

. consult an attorney who specializes in securities law

What types of biz need SEC registration (usually)?

1. debt free proprietorship: doesn't need SEC so low time & legal costs but unlimited liability 2. general proprietorship: No SEC if *active* partners 3. LLCs: passive partners w/ liability so *need* SEC

Types of crowdfunding

1. donations: funding for good causes->red cross 2. rewards/pre-sale: music, movies, electronics->kickstarter 3. debt-based crowdfunding (P2P): initially indvls but now large comps that provide funds at given rates->lending club 4. Reg D (equity): equity funding for startups satisfying Reg D (only accredited) 5. JOBS 2012 Act funding: debt, convertible & equity funding satisfying Titles 3 & 4 of Act. -Reg A+ now up to $50M -> "mini-IPO"

The number of days allowed for filing a form D after a Regulation D offering is: a. unlimited (pursuant to Rule 515) b. 35 days c. 15 days d. 7 business days

15 days

The Reg D Rule that permits some general solicitation is___

504

Three Rules (504, 505, and 506) under Regulation D relate to the (a) amount of offerings and (b) number of investors. Match Rules 504, 505, and/or 506 with each of the following:

A. $5 million offering limit (in a 12-month period) 505 B. $1 million offering limit (in a 12-month period) 504 C. No limit on the amount of offering (in a 12-month period) 506 D. No limit on the number of investors 504 E. No limit on number of accredited investors; limit of 35 unaccredited investors 505/6

The CareAssist Company, a web-based provider of information for the elderly, is planning to sell $4 million in securities. Management is trying to decide which, if any, securities laws must be complied with. For each of the following situations, describe the securities laws that might apply.

A. A private placement 504-506 B. An interstate public offering reg a? C. An intrastate public offering rule 147

Briefly explain whether each of the following individuals would qualify as an "accredited investor" under the SEC's Regulation D

A. Amy Smith is the chief executive officer (CEO) of the NetCare Company. YES B. Bruce Jones, who has a net worth of $750,000, is planning to purchase shares of stock to be issued by the NetCare Company. No b/c need $1M C. Jean Wu also is considering purchasing shares of stock that will be issued by the NetCare Company. Jean's annual income has been $250,000 in each of the past two years and she expects to have a comparable amount of income next year. YES D. James Shastri is a software programmer for the NetCare Company. NO E. Julie Kukoc recently inherited some financial assets and now has a net worth of $2 million with an annual income of $35,000. YES b/c worth $2M

What does the term accredited investor mean in terms of the Securities Act of 1933? Why does the designation matter?

Accredited investors under the 1933 Act are assumed to have sufficient financial expertise and wherewithal to make an intelligent and informed investment decision. -bank, insurance or investment company, small biz invstmnt company, retirement accounts -indvl. who has financial wealth over $1M or/and income is over $200K or as a couple $300K

What is meant by the term "blue sky" laws and how do these laws apply when issuing securities?

Blue Sky Laws are the STATE laws designed to protect individuals from investing in fraudulent securities offerings. They are the state equivalent of the federal securities laws.

Registration exemptions also protect the exempt party(ies) from fraud charges.

F

Regulation A may be considered for offerings over $5 million.

F

Rule 147 is the Regulation A exemption

F

Rule 505 permits at most 35 employees.

F

Rule 504 applies to offerings up to $10 million.

False

Franchise rights for what state were at issue in the Icedelights case: a. euphoria b. confusion c. exhilaration d. panic e. Florida

Florida

Section 4(2) (1933 Act) is the ____P__________________ ___P____________________ exemption.

Private placement exemption

The SEC Regulation permitting some "testing the waters" is__

Reg A.

What is the purpose of the SEC's Regulation D?

Reg D provides a set of safe harbor conditions under which an issuer can shield themselves from SEC action for failure to register securities.

SEC in this class stands for the ____

Security Exchange Commission

Identify some of the types of securities that are "exempt" from registration with the SEC.

Some of the exempt securities are: -government securities (federal and state) -securities issued by banks -certain securities issued by insurance companies -certain securities of not-for-profit issuers.

Accredited investors need not be counted for the numerical limits of Regulation D.

T

Rule 506 may be considered for offerings of less than or equal to $5 million.

T

Violating Regulation A is a securities law infraction

T

Identify and briefly describe two basic types of transactions that are exempt from registration with the SEC.

The most widely used exemption is the *private placement exemption*: transactions by an issuer not involving any public offerings. -The *accredited investor exemption* transaction exemption and lays much of the groundwork for the types of exemptions that involve a certain type of investor.

It is possible to use Rule 506 for a $100 million offering.

True

Which regulation allows you to "test the waters" a. Regulation A b. Regulation B c. Regulation C d. Regulation D e. Regulation U

a. Regulation A

According to the Viscotech case, a MIFT is a a. Medical Insurance Flexibility Test b. Medicare Insolvency Fraud Test c. Must I Finish the Test? d. Medical Investment Fund Trust e. Medical Insurance Formal Trust

d. Medical Investment Fund Trust

Accredited status for investors a. assures the investor that their principal is guaranteed (similar to FDIC) b. means they must be counted in the 35 investor limitations c. is available to those who invest over $1 million d. all of the above e. none of the above

e. none of the above

Section 4(2), as treated in this class, addresses: a. taxation on a "flow through" basis b. unlimited liability unless the firm is established as a limited partnership c. continuity of the entity after Chapter 11 bankruptcy d. centralized management and independent board members e. private placement f. none of the above

e. private placement

General advertising and solicitation are prohibited in: a. Rule 504 exemptions b. Rule 505 exemptions c. Rule 506 exemptions d. all of the above e. none of the above f. a and b but not c above g. a and c but not b above h. b and c but not a above

h. b and c but not a above

"Rescission" refers to___

if you don't comply w/ SEC you have to give back the $ to investors.

Without SEC reg a company can:

only sell in the same state and all investors & biz must be in the same state

Prospectus

packet of information given to investors before they decide to invest, basically what was given to SEC as well

The intrastate exemption applies to securities offered or issued in a single _____________________.

state

In SEC vs. Ralston-Purina a. the Supreme Court established Regulation D b. the SEC established the 1933 act c. the Supreme Court ruled in favor of Mr. Daug d. the Supreme Court clarified some registration exemptions e. the Supreme Court required Ralston-Purina to sell its stake in Keystone Ski Resort

the Supreme Court clarified some registration exemptions

Crowdfunding

using e-platforms to "disintermediate" commercial and investor banks as well as venture/private equity funds