RED - 17.4 & 20.4
The sale of nonexempt securities may take place without an SEC registration if done in a manner that qualifies for a transactional exemption. An example of this would a sale complying with A) Rule 498. B) Rule 156. C) Rule 135A. D) Rule 506(b).
D. If the transaction is exempt, a security that would otherwise have to be registered is exempt from registration. Rule 506(b) is part of the private placement exemption under Regulation D of the Securities Act of 1933. Rule 498 deals with a summary prospectus for a mutual fund and Rules 156 and 135A deal with advertising.
When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period? A) None B) One year C) Three months D) Six months
a. Because the securities were received in a public offering, they are registered securities (not restricted), and therefore, there is no holding period. However, the sale is subject to Rule 144 volume limits. Control stock that is received in something other than a public offering is restricted and would have a six-month holding period in addition to volume limitations.
An issuer may direct sales of a new issue to all of the following except A) officers of the managing underwriter. B) officers of its largest customer. C) officers of the issuer. D) officers of its largest supplier.
a. Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted.
An affiliate or insider holding unregistered shares can sell under Rule 144 A) 4 times a year. B) 1 time a year. C) 12 times a year. D) 2 times a year.
a. Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days, which would allow for as many as four filings per year.
Under Rule 506(c) of Regulation D, advertising is permitted when A) the issue is limited to accredited investors. B) the advertisements have been approved by a principal. C) the advertisements have been filed with FINRA. D) there are no more than 35 nonaccredited investors.
a. Rule 506 of Regulation D of the Securities Act of 1933 has two parts. Rule 506(b) prohibits any advertising of the private placement, while Rule 506(c) permits it. The primary condition to be met is that the issue is offered solely to accredited investors. It is Rule 506(b) that has a limit of 35 nonaccredited investors, but that has nothing to do with the advertising restriction. Regulation D applies to issuers, not broker-dealers, so there is no principal to go to for approval. In the same vein, because issuers are not FINRA members, filing with FINRA is irrelevant.
A stock or bond power represents which of the following? A) Limited power of assignment and substitution B) Appreciation potential in a stock with a high EPS C) Power to accept dividends and interest D) Limited power of attorney to vote a stock if no contest exists
a. Stock powers are substitute forms for signatures on the back of actual certificates. A person can sign this separate document to satisfy transfer rules.
One of the terms used in the discussion of SEC Rule 144 is affiliate. Which of the following would be defined as an affiliate? A) The CEO's mother-in-law, whose only source of income is her Social Security and a small pension B) The brother-in-law of the spouse of the issuer's CEO, who lives in the same home as the CEO C) The sister of the CEO living in a neighboring town D) The CEO's contract bridge partner
b. For purposes of Rule 144, an affiliate is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer. In addition, any relative or spouse of such person, or any relative of such spouse, any one of whom has the same home as such person is considered an affiliate of the issuer. For test purposes, unless stated otherwise, spouses always live in the same home.
Which of the following securities is not exempt from the registration provisions of the Securities Act of 1933? A) An equity security issued in only one state, solely to residents of that state B) A new stock being offered in three states C) A high-quality corporate promissory note maturing in 180 days D) A U.S. government bond
b. Government securities, money market instruments, and intrastate offerings are exempt from the registration provisions of the Securities Act of 1933. A stock being offered in three states would have to register with the SEC and with those states.
An affiliate of an issuer that holds control stock for five months sells 1,000 shares for a $10,000 profit. How will this transaction be treated? A) Any profits can be kept by the seller, subject to tax. B) These short-swing profits must be escrowed by the issuer until the holding period is satisfied. C) These short-swing profits must be disgorged from the holder of the stock to the issuing corporation. D) The sale will be voided by the issuer and the stock returned to the original owner.
c. If control stock is sold before a six-month holding period, any profits are defined as short-swing profits, and the company receives the profits. The term disgorged refers to the profits being removed from the affiliate and given to the issuer.
One of your customers is a married couple with a joint account. Spouse 1 owns 9% of the common shares of XYZ. Spouse 2 owns 2% of the common shares of XYZ and wishes to sell some of the XYZ shares. Which of the following statements is correct? Spouse 2 is considered an affiliate. Soouse 2 is not considered an affiliate. Spouse 2 must file a Form 144 to sell. Spouse 2 does not have to file a Form 144 to sell.
d. If spouses (either individually or jointly) own a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. Among those requirements is the filing of Form 144. For exam purposes, spouses are assumed to live in the same home unless the question states otherwise.
Identify the accredited investors from the list below. I. An individual with a net worth of $800,000 and an annual salary of $150,000 II. A married couple with a net worth of $2 million consisting of net equity in their primary residence of $500,000 and pension plans and other assets worth $1.5 million III. An insurance company IV. A corporation with a net worth of $3 million A) III and IV B) I and IV C) I and II D) II and III
d. Institutional investors such as insurance companies are regarded as accredited investors, regardless of size. An individual with a net worth of $800,000 and a salary of $150,000 does not meet either of the two qualification criteria for individuals. The married couple with a net worth of $2 million, which, after excluding the net equity in the primary residence is still in excess of $1 million, is accredited. In order for a corporation to meet the definition, it must have a net worth of at least $5 million.
One of your clients saw an advertisement for a new offering. The fine print stated that this was available solely to accredited investors. You would explain that this is a private placement being offered under the exemption provided in SEC Rule A) 147. B) 144. C) 506(b). D) 506(c).
d. Regulation D of the Securities Act of 1933 deals with private placements. There are two options. Rule 506 (c) permits advertising, but only if 100% of the investors are accredited investors. Rule 506(b) does not permit advertising, but it does allow up to 35 nonaccredited investors. Rule 144 covers the sale of restricted or control stock, and Rule 147 is the intrastate exemption. Neither of them makes any mention of accredited investors. LO 20.e
A resident of a state who acquires stock pursuant to Rule 147 (intrastate offerings) is prohibited from selling the stock to a nonresident of that state for how many months? A) 3 B) 18 C) 12 D) 6
d. Rule 147 stock cannot be sold to a nonresident of the state for a period of six months after the purchase date.
If securities are not in good deliverable form, but are accepted by the broker-dealer representing the buyer, which of the following statements is true? A) The receiving broker-dealer must go through the process of rejection. B) The receiving broker-dealer must notify the transfer agent within two business days. C) The receiving broker-dealer must notify the transfer agent within three business days. D) The receiving broker-dealer must go through the process of reclamation.
d. The receiving broker-dealer would go through the process of reclamation. Once accepted, if securities are determined to be incorrect as delivered, reclamation is the correction process used. The receiving broker-dealer notifies the delivering broker-dealer (rather than the transfer agent). Rejection is the same process when the irregularity is noticed at the time of delivery (the delivery is not accepted in the first place). LO 17.d
Using a Rule 415 shelf registration, an issuer registered 40 million shares of common stock with the SEC. The registration is effective A) a maximum of two years, unless investors are given preemptive rights. B) for one year, after which the registration statement must be renewed with payment of the appropriate fees. C) until the final shares are sold
d. There is no need to file a new registration with the Securities and Exchange Commission if the issuer meets the two- or three-year requirement, whichever applies. Beyond these times, a new registration statement would be necessary. LO 20.f
There are several conditions found in the Securities Act of 1933 permitting the offering of control stock to the public without filing a Form 144. Included in that list are the dollar amount is $1 million or less. 100,000 shares or fewer are sold. 5,000 shares or fewer are sold. the dollar amount is $50,000 or less. A) II and IV B) I and II C) I and III D) III and IV
d. Under Rule 144, when shares are sold by an affiliate (control), Form 144 need not be filed if 5,000 or fewer shares are sold or the dollar amount is $50,000 or less. Meeting either of these conditions is considered the de minimis exception. This de minimis rule applies to sales in any 90-day period.
Lettered stock
sometimes called legend stock, has that name because there is a legend on the stock certificate indicating that sales of the shares is restricted. Invariably, this is stock acquired in a private placement that cannot be sold unless meeting the requirements of Regulation D or Rule 144 of the Securities Act of 1933. Once met, the legend is removed. Common and preferred stock can be the subject of a private placement.
