REGS: Sec Act of 1933

Regulation Crowdfunding is intended as a means of raising capital: I for start-up companies II for established companies III with no registration with the SEC IV with a less-rigorous registration process with the SEC Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. "Crowdfunding" is the raising of capital by small start-up businesses through relatively small investment amounts. These are private placement securities that are exempt from registration with the SEC. The intent is to help early-stage companies raise investment capital with little regulatory burden, improving job formation and economic growth in the U.S. economy.

A start-up company looking to raise a small amount of "seed" capital would most likely use: Correct Answer A. Regulation Crowdfunding StatusB B. Regulation A StatusC C. Rule 147 Incorrect Answer D. Regulation D

The best answer is A. "Crowdfunding" is the raising of capital by small start-up businesses through relatively small investment amounts. These are private placement securities that are exempt from registration with the SEC. The intent is to help early-stage companies raise investment capital with little regulatory burden, improving job formation and economic growth in the U.S. economy. SEC Regulation Crowdfunding sets the ground rules for these offerings. Regulation A is an "EZ" registration method for offerings of up to $50 million. Rule 147 is an exemption for an intrastate offering. Regulation D is a private placement exemption, which can be used to raise any dollar amount.

The selling shareholders are required to offer their shares via a prospectus because: Correct Answer A. they are likely to be officers and large shareholders of the company who must sell their shares either under the provisions of Rule 144 or who must sell their shares in a managed offering so that the existing trading market for the stock is not distorted Incorrect Answer B. by using an underwriter, the selling shareholders can offer their shares to the public at a premium to the current market price of the stock and maximize their potential profit on the sale StatusC C. under the tax laws, gains on shares that are sold using underwriters are subject to long term capital gains treatment, whereas gains on shares that are sold in the secondary market are subject to short term capital gains treatment StatusD D. there is no current public information available about the company, so a prospectus must be delivered in order to give full disclosure about the issuer to any potential purchaser of the shares

The best answer is A. Generally, registered secondary distributions are used by officers of public held companies and larger shareholders, who when selling shares, are subject to the requirements of Rule 144 (public notice of sale and limits on the amount of shares that can be sold each quarter). If an officer or selling shareholder wishes to sell a large amount of shares (in excess of Rule 144 limits) of that company, it must register the sale with the SEC, use an underwriter to manage the sale of the shares, and sell with a prospectus. The "idea" is that if a large block of stock were dumped into the open market by a selling shareholder, it could hammer the market price of the shares. By using a manager, the stock will be sold in an orderly fashion into the market and the market price of the outstanding shares should not be adversely affected. Since the shares are being offered at the current market price of the stock, Choice B is false. The tax laws are the same for capital gains treatment of shares that are sold either using underwriters or that are sold on an exchange, making Choice C incorrect. This company is already publicly traded, therefore it is filing its financial information with the SEC, which makes the information available to the public, making Choice D incorrect.

The President of PDQ Corporation buys PDQ shares in the open market. After holding them for 3 months fully paid, the President wishes to sell the shares. The shares can be sold: Correct A. immediately StatusB B. after holding the securities for an additional 3 months StatusC C. after holding the securities for an additional 6 months StatusD D. after holding the securities for an additional 1 year

The best answer is A. "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. The 6-month holding period is required for restricted stock, but not for control stock.

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: Correct A. immediately StatusB B. after holding the securities for 90 days StatusC C. after holding the securities for 2 years StatusD D. after holding the securities for 3 years

The best answer is A. 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.

Crowdfunding offerings are typically: I made by start-up issuers II made by seasoned issuers III purchased by small investors IV purchased by large investors Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. Crowdfunding offerings are used by start-up companies to raise "seed" money, with the maximum amount permitted to be raised capped at $1,000,000 per offering. They are targeted at small investors. The investment minimum is only $2,000 and the investor is not required to meet any income or net worth tests. (Test Note: The investment minimum and maximum amount that can be raised are subject to an inflation adjustment every 5 years. In April 2017, they were adjusted to $2,200 and $1,070,000 respectively. For the exam, know the base amounts and the fact that they are indexed for inflation periodically.)

Which of the following securities is NOT exempt from the Securities Act of 1933? Correct A. Industrial Company issues StatusB B. Benevolent Association issues StatusC C. Small Business Investment Company issues StatusD D. Common Carrier issues

The best answer is A. Industrial companies are not exempt from the Securities Act of 1933. Common carriers, small business investment companies, and benevolent associations are all exempt.

Intrastate offerings are exempt from: I Federal registration II State registration III FINRA regulation Correct Answer A. I only StatusB B. II only Incorrect Answer C. I and III only StatusD D. I, II, III

The best answer is A. 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.

Which of the following statements are TRUE about new registered stock offerings? I Any purchaser who received a preliminary prospectus must also receive the final prospectus II Any purchaser who received a preliminary prospectus need not receive the final prospectus III Any purchaser will pay the Public Offering Price IV Any purchaser will pay the Public Offering Price plus a commission or mark-up Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. New stock issues are sold under a prospectus that states the Public Offering Price which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed. Whether or not the purchaser received a preliminary prospectus is a moot point - any purchaser must get the final prospectus at, or prior to, confirmation of sale.

Which of the following activities are allowed once a registration statement for a new issue is filed with the SEC? I Sending a customer a "red herring" preliminary prospectus II Accepting an indication of interest from the customer III Accepting a deposit from the customer IV Accepting a firm order from the customer Correct A. I and II StatusB B. III and IV StatusC C. II and III StatusD D. I, II, III, IV

The best answer is A. Once the registration statement is filed, the issue enters the 20-day cooling off period. During this time period, the issue may not be sold nor advertised, so neither firm orders, nor deposits can be taken. It is permitted to send a preliminary prospectus (red herring) to obtain indications of interest during the cooling off period, because legally, these are not offers to sell the security. Once the registration is effective, the final prospectus is used to offer and sell the issue.

Restricted stock is best described by which of the following? Correct A. A security which was never registered and can only be sold in the public markets when it is either registered, or sold under an exemption provision StatusB B. A security of an issuer which has been bought in the open market by an officer or director of that company StatusC C. A security purchased by a non-accredited investor in a Regulation D private placement StatusD D. A security which is purchased by an issuer that is not exempt from the provisions of the Securities Acts

The best answer is A. Restricted stock is stock which was never registered and cannot be sold in the public markets unless registration takes place or an exemption (such as Rule 144) is available. Note, however, the restricted securities may always be sold in a so-called "private transaction" - these are not considered to be public offers of that restricted security.

Rule 144 allows the sale, every 90 days, of: I 1% of the outstanding shares II 10% of the outstanding shares III the weekly average of the prior 4 weeks' trading volume IV the weekly average of the prior 8 weeks' trading volume Correct Answer A. I or III, whichever is greater Incorrect Answer B. I or IV, whichever is greater StatusC C. II or III, whichever is greater StatusD D. II or IV, whichever is greater

The best answer is A. Rule 144 allows the sale, every 90 days, of the greater of 1% of the outstanding shares of that company; or the weekly average of the prior 4 week's trading volume.

Restricted securities can be sold under Rule 144 if all of the following conditions are met EXCEPT: Correct Answer A. they are sold on a dealer basis StatusB B. they are sold on an agency basis StatusC C. solicitation of orders to buy is restricted to customers expressing interest within the past 10 days Incorrect Answer D. the issuer is reporting currently to the SEC

The best answer is A. Rule 144 requires that restricted securities be sold on an agency basis only. Your firm cannot act as a market maker in "144" shares. Solicitation of orders to buy "144" shares is prohibited (to stop you from soliciting potential customers to buy 144 shares, which would tend to push the price up). However you are allowed to recontact individuals expressing buying interest in "144" transactions within the past 10 days. Since 144 shares are being sold in the open market, the issuer must comply with SEC issuer reporting rules to maintain the public market in the securities.

Which of the following statements are TRUE regarding Rule 144A? I Rule 144A allows qualified institutional buyers to buy and trade between themselves large blocks of privately placed issues II Rule 144A limits the amount of restricted securities that can be sold in the public markets III Rule 144A permits issuers to sell tradeable private placement units to qualified institutional buyers IV Rule 144A permits issuers to sell tradeable private placement units to individual investors Correct A. I and III StatusB B. II and IV StatusC C. I, II, III StatusD D. I, II, III, IV

The best answer is A. 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.

Under Rule 147, intrastate offerings cannot be resold out of state for how long after the initial sale date? Correct Answer A. 6 months Incorrect Answer B. 12 months StatusC C. 18 months StatusD D. 24 months

The best answer is A. 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."

Which statement is TRUE regarding Commercial Paper? Correct A. Commercial Paper may be sold without a prospectus StatusB B. Commercial Paper must be sold with a prospectus StatusC C. Commercial Paper must be sold with an Official Statement StatusD D. Commercial Paper must be sold with an Offering Memorandum

The best answer is A. Since Commercial Paper is an exempt security under the Securities Act of 1933, it may be sold without a prospectus. The prospectus is the disclosure document for new issues that are not exempt from registration. The Official Statement is the disclosure document for municipal bonds (which are an exempt issue). An Offering Memorandum is the disclosure document for a private placement - which is a security sold in an exempt transaction.

The announcement appears in the Wall Street Journal. This offering is a(n): I registered distribution II unregistered distribution III primary distribution IV secondary distribution Correct Answer A. I and III StatusB B. I and IV Incorrect Answer C. II and III StatusD D. II and IV

The best answer is A. Since this is the first issue of these securities, this is a primary distribution. Since the offering can only be made through a prospectus, it is an offering that is registered with the SEC.

The maximum amount that can be invested by a client in a single issue under Regulation Crowdfunding is: Correct Answer A. $100,000 StatusB B. $500,000 Incorrect Answer C. $1,000,000 StatusD D. $5,000,000

The best answer is A. The maximum amount that can be invested in a single offering under Regulation Crowdfunding is $100,000. The maximum size of single offering under the rule is $1,000,000. (Test Note: The maximum investment amount and the maximum amount that can be raised are subject to an inflation adjustment every 5 years. In April 2017, the maximum investment amount was increased to $107,000 and the maximum amount that can be raised was adjusted to $1,070,000. For the exam, know the base amounts and the fact that they are indexed for inflation periodically.)

This offering is a(n): I registered distribution II unregistered distribution III primary distribution IV secondary distribution Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. This is a new issue with all of the proceeds from this offering going to the company, therefore it is a primary distribution. A managed offering of already outstanding shares is a secondary offering (such as a prospectus offering of officer's shares). Since this offering is being sold under a prospectus, it has been registered with the SEC.

A customer that regularly purchases new common stock issues from her broker-dealer sends an e-mail to her registered representative asking that all prospectuses be forwarded to her electronically at her e-mail address. Which statement is TRUE? Correct A. The registered representative can follow the customer's instructions by forwarding the request to the member firm's operations department StatusB B. The registered representative must inform the customer that all prospectuses must be sent in hard-copy form to the customer's physical mailing address StatusC C. The registered representative must advise the customer that the firm will charge an extra fee for this service StatusD D. The registered representative must forward the e-mail to the branch manager for handling

The best answer is A. Under the "access equals delivery" rule, prospectuses can be delivered electronically to customers as long as the member firm knows that the customer has internet access. Since this customer made the request by e-mail, we know that the customer has internet access and the firm can follow the customer's instructions.

Under the Securities Act of 1933, new issues are not marginable until how many days have elapsed from the effective date? Correct A. 30 days StatusB B. 45 days StatusC C. 60 days StatusD D. 90 days

The best answer is A. Under the Securities Act of 1933, new issues are not marginable until 30 days have elapsed from the issue (effective) date.

An "accredited investor questionnaire" is required when which type of offering is made to investors? StatusA A. Rule 147 Correct B. Regulation D StatusC C. Regulation A StatusD D. Rule 144

The best answer is B. Private placements under Regulation D 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. Rule 147 is the intrastate exemption; Rule 144 is an exemption from SEC registration for the resale of private placement stock owned by an investor where the company subsequently went public; and Regulation A is an exemption from registration for the sale of a small dollar amount ($50 million or less).

On November 23rd, an officer of MNO Corporation wishes to sell stock under Rule 144. MNO has 50,000,000 shares outstanding. The previous weeks' trading volumes are: Week Ending Volume Nov 21 Nov 14 Nov 7 Oct 31 Oct 24 500,000 shares 525,000 shares 485,000 shares 450,000 shares 400,000 shares If the Form 144 is filed today, the maximum sale is: StatusA A. 490,000 shares Correct B. 500,000 shares StatusC C. 506,250 shares StatusD D. 515,725 shares

The best answer is B. Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 50,000,000 shares = 500,000 shares. The last 4 weeks' trading volumes are: 500,000 shares 525,000 shares 485,000 shares 450,000 shares 1,960,000 shares / 4 weeks = 490,000 share average The greater amount is 1% of outstanding shares, or 500,000 shares.

Which of the following statements are TRUE regarding Rule 415? I This rule allows seasoned issuers to file a blanket registration which covers a 3 year period II This rule allows seasoned issuers to file a blanket registration which covers a 5 year period III The issuer must still go through a 20 day cooling off period during which the SEC may require more information to be submitted IV The issuer avoids the 20 day cooling off period and is allowed to issue the securities 2 business days after filing StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. SEC Rule 415, the "shelf registration rule" allows "seasoned issuers" to file a blanket registration statement with the SEC, covering a period of 3 years, for any securities that the issuer may wish to sell. It is only available to "seasoned" companies that already have completed a registered IPO, that have been registered for 1 year, and that have a minimum market capitalization of $75 million. If the seasoned issuer wishes to sell any securities during this 3 year period, it simply files a notification with the SEC that it is selling under that registration statement. This procedure avoids the "20 day cooling" off period, and allows seasoned issuers to enter the market quickly (such as when interest rates have dipped) to sell their securities.

Which of the following is defined as an "accredited investor" under Regulation D? StatusA A. Non-profit organization with assets in excess of $2,000,000 Correct B. Trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person StatusC C. Partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered StatusD D. An individual investor who buys $2,000,000 of the offering

The best answer is B. 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. 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.

Which of the following statements are TRUE regarding the preliminary prospectus? I The preliminary prospectus may be sent to a potential customer prior to that customer expressing an indication of interest II The preliminary prospectus may not be sent to a potential customer prior to that customer expressing an indication of interest III The preliminary prospectus constitutes an offer to sell the issue IV The preliminary prospectus does not constitute an offer to sell the issue StatusA A. I and III Correct Answer B. I and IV Incorrect Answer C. II and III StatusD D. II and IV

The best answer is B. 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. 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.

Which of the following is subject to the registration requirements of the Securities Act of 1933? StatusA A. Eurodollar Debt Correct B. American Depositary Receipts StatusC C. Municipal Debt StatusD D. Foreign Government Debt

The best answer is B. 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. Municipal debt, U.S. Government debt and Foreign Government debt are all exempt. Eurodollar bonds are sold outside the U.S. and thus do not fall under the Act.

An indication of interest for a new stock offering is normally taken: StatusA A. before the 20 day cooling off period Correct B. during the 20 day cooling off period StatusC C. after the 20 day cooling off period StatusD D. either before, during, or after the 20 day cooling off period

The best answer is B. An indication of interest is taken during the 20 day cooling off period before a new issue's registration becomes effective. The underwriters use the indications collected as one of the determinants for pricing the issue (this happens at the very end of the cooling off period).

Common carrier issues are: I exempt from the Securities Act of 1933 II subject to the Securities Act of 1933 III required to be sold with a prospectus IV not required to be sold with a prospectus StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. 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.

The most probable reason why these shares are being offered by prospectus is that: Incorrect Answer A. this is a new issue offering of a non-exempt security that must be registered with the SEC and sold to the public with a prospectus under the requirements of the Securities Act of 1933 Correct Answer B. the amount of stock held by the selling shareholders was restricted and was too large an amount to sell under the provisions of Rule 144 StatusC C. the issuer needs to raise substantial funds from its selling shareholders for some business purpose that is detailed in the prospectus StatusD D. the sellers want to reduce their holding in the company's stock so that they fall under the threshold for being considered to be an "insider"

The best answer is B. Generally, registered secondary distributions are used by officers of public held companies and larger shareholders, who when selling shares, are subject to the requirements of Rule 144 (public notice of sale and limits on the amount of shares that can be sold each quarter). If an officer or selling shareholder wishes to sell a large amount of shares (in excess of Rule 144 limits) of that company, it must register the sale with the SEC, use an underwriter to manage the sale of the shares, and sell with a prospectus. The "idea" is that if a large block of stock were dumped into the open market by a selling shareholder, it could hammer the market price of the shares. By using a manager, the stock will be sold in an orderly fashion into the market and the market price of the outstanding shares should not be adversely affected.

When the Securities and Exchange Commission sets the effective date for a new issue in registration, which of the following statements is (are) TRUE? I The SEC has certified that the offering documents give full and fair disclosure II The proper documents for registration have been filed with the SEC III The SEC has approved the offering for sale to the public IV The SEC has established the final offering price StatusA A. I only Correct B. II only StatusC C. I, II, IV StatusD D. I, II, III, IV

The best answer is B. 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 of any new issue in registration, does not "certify" the issue, nor do they establish the offering price. Think of the SEC as a big filing cabinet - once the proper documents relating to a new issue offering are filed, the issue may be offered and sold to the public.

To claim a private placement exemption: StatusA A. a registration statement must be filed with the SEC Correct B. a Form D must be filed with the SEC StatusC C. a Form 144 must be filed with the SEC StatusD D. no filing is required with the SEC

The best answer is B. 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 is being offered in compliance with the exemption.

An unregistered hedge fund creates a website and uses it to promote itself to investors. Potential investors are invited to enter a password-protected area where they can get details about the fund's investment strategy and performance. Which statement is TRUE? Incorrect Answer A. This is prohibited under SEC rules Correct Answer B. This is permitted under SEC rules as long as the potential viewer completes and signs an accredited investor questionnaire before being given the password to enter StatusC C. This is permitted under SEC rules as long as the potential viewer completes and signs an arbitration agreement before being given the password to enter StatusD D. This is permitted without restriction

The best answer is B. Private placements are typically only offered to "accredited investors." These are wealthy individuals and institutional investors. The SEC encourages the use of the internet and permits private placements under Regulation D to be offered via the web. However, the offerer must set up a password-protected website and can only allow access to accredited investors. To document that the purchasers are, indeed, accredited, an "accredited investor questionnaire" must be completed and signed by the potential purchaser. This is submitted to the offerer through the website, who then can give access to the potential investor.

A new issue offering to a maximum of 35 non-accredited investors that has not been registered with the SEC is: StatusA A. exempt under Regulation A Correct B. exempt under Regulation D StatusC C. exempt under Rule 144 StatusD D. not exempt and must be registered

The best answer is B. Regulation D allows a "private placement" exemption if an issue is sold to a maximum of 35 "non-accredited" investors. The issue can be sold to an unlimited number of "accredited" (wealthy and institutional) investors under this exemption and still be considered a private placement.

Under Regulation D regarding private placements, how many non-accredited investors are allowed to invest in the offering? StatusA A. 10 Correct B. 35 StatusC C. 50 StatusD D. An unlimited number

The best answer is B. 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.

Excluding the percentage of the outstanding shares test, the maximum permitted sale under Rule 144 is the weekly average of the last: StatusA A. 2 weeks' trading volume Correct B. 4 weeks' trading volume StatusC C. 8 weeks' trading volume StatusD D. 12 weeks' trading volume

The best answer is B. 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) to be sold every 90 days.

Rule 144 applies to: I purchases of control stock II purchases of restricted stock III sales of control stock IV sales of restricted stock StatusA A. I and II only Correct B. III and IV only StatusC C. I and III only StatusD D. II and IV only

The best answer is B. 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.

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? StatusA A. Yes, because any sale of shares by a director requires the filing of a Form 144 Correct Answer B. No, because the shares are being sold under a "de minimis" exemption StatusC C. Yes, because she has not held the shares for 6 months Incorrect Answer D. No, because the shares are not restricted

The best answer is B. 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.

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, which of the following statements are TRUE? I The spouse is considered to be an affiliated person subject to Rule 144 II A Form 144 must be filed if the shares are to be sold III Solely from the standpoint of percentage of shares outstanding, a maximum of 1% of the company's shares can be sold at this time IV Up to 6 sales per year are allowed StatusA A. I and IV only Correct B. I, II, III StatusC C. II, III, IV StatusD D. None of the above

The best answer is B. 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.

An investor that has been unaffiliated with the issuer for at least 3 months is permitted to sell restricted shares under Rule 144 without being subject to the volume restrictions, after having held the shares for: StatusA A. 3 months Correct B. 6 months StatusC C. 9 months StatusD D. 1 year

The best answer is B. Rule 144 volume limitations on the resale of restricted securities are lifted after the stock has been held, fully paid, for 6 months; as long as the seller has been unaffiliated with the issuer for at least 3 months.

Which of the following statements are TRUE about Rule 147? I The rule exempts intrastate issues from Federal registration II The rule exempts intrastate issues from State registration III Both the issuer and all purchasers must be state residents IV Resale is permitted to state residents only, for the 180 day period following the offering StatusA A. I and II only Correct B. I, III, IV StatusC C. II, III, IV StatusD D. I, II, III, IV

The best answer is B. Rule 147 exempts "intrastate" issues from registration with the SEC. However, the issue is still subject to state (blue-sky) registration. To obtain the 147 exemption, both the issuer and the purchaser must be state residents. Resale is restricted to state residents for 6 months following the offering; thereafter, the issue can be sold 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 Rule 147, intrastate offerings cannot be resold out of state for how long following completion of the initial offering? StatusA A. 3 months Correct Answer B. 6 months Incorrect Answer C. 12 months StatusD D. 24 months

The best answer is B. Rule 147 requires that resale of securities sold under the intrastate exemption be restricted to intrastate only for 6 months following completion of the initial offering. 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."

Which of the following is an exempt security under the Securities Act of 1933? Incorrect Answer A. Unit Investment Trust Correct Answer B. Small Business Investment Company StatusC C. Open-End Investment Company StatusD D. Closed-End Investment Company

The best answer is B. 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.

Under Rule 144, the Form 144 is filed: I by the seller of the restricted shares II by the buyer of the restricted shares III 10 business days prior of the placement of the order IV at, or prior to, the placement of the order StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. 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.

Which offering of securities under Regulation A is subject to purchase limitations? StatusA A. Tier 1 offerings Correct B. Tier 2 offerings StatusC C. Both Tier 1 and Tier 2 offerings StatusD D. Neither Tier 1 nor Tier 2 offerings

The best answer is B. There are no purchase limitations on Tier 1 (up to $20 million) Regulation A offerings. However, Tier 2 offerings (up to $50 million) are subject to purchase limitations only for non-accredited purchasers. (Regulation D -the private placement exemption - sets the requirements for "accredited" investors - these are wealthy individuals.) Non-accredited investors buying a Tier 2 Regulation A offering cannot invest an amount that is the greater of 10% of that person's annual income or net worth. Note that there is no similar limitation on Tier 1 purchases.

All of the following are required to sell "144" stock EXCEPT: StatusA A. seller's representation letter Correct B. buyer's representation letter StatusC C. issuer's representation letter StatusD D. broker's representation letter

The best answer is B. 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.

U.S. Government securities: StatusA A. trades settle "regular way" in 3 business days Correct B. are exempt securities under the Securities Act of 1933 StatusC C. are sold through prospectus offerings StatusD D. are implicitly backed by the U.S. Government

The best answer is B. Under the 1933 Act, U.S. Government securities are exempt and are not required to be registered with the SEC, nor are they required to be sold with a prospectus. Trades of U.S. Governments settle "regular way" in 1 business day. U.S. Government securities are guaranteed by the U.S. Government and have the government's direct backing.

All of the following statements are true about Regulation A offerings EXCEPT: StatusA A. the maximum offering amount permitted under the rule is $50,000,000 within a 12 month period StatusB B. an offering circular must be provided to all purchasers Correct C. sales are limited to purchasers who are "resident" in the state where the issuer resides StatusD D. there are no minimum income or net worth standards for individuals wishing to invest

The best answer is C. Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 "tiers" to the rule. Tier 1 gives an "E-Z" registration process to offerings of no more than $20 million in a 12 month period. Tier 2 requires more detailed information, including audited financial statements, and can be used for offerings of up to $50 million. While no prospectus is required, each buyer must be given disclosure in an Offering Circular. Anyone can purchase a Regulation A offering - it is not limited solely to accredited (wealthy) investors. Customers in any state can buy - this is not being sold under an "intrastate exemption" (Rule 147) that limits purchasers to residents of 1 state. Anyone can purchase a Regulation A offering, however the amount that can be purchased of a Tier 2 offering by a non-accredited investor (basically, a person who is not wealthy) is limited to the greater of 10% of that person's annual income or net worth.

Which SEC rule gives a simplified registration process to offerings of no more than $50 million within a 12 month time frame? StatusA A. Rule 144 StatusB B. Rule 144A Correct C. Regulation A StatusD D. Regulation D

The best answer is C. Regulation A is intended to make it easier for start-up companies to raise capital. It gives an "E-Z" registration method for offerings of up to $50 million within a 12 month period. The rule is split into Tier 1 and Tier 2. Tier 1 offerings, up to a maximum amount of $20 million, are given the easiest registration method and do not require audited financial statements. Tier 2 offerings allow a maximum of $50 million to be raised, but require audited financial statements. An abbreviated registration statement is filed with the SEC (Form S1-A) and the issue must go through a 20 day review period, similar to a regular registered offering. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

ABC corporation has 100,000,000 shares outstanding. An officer of ABC wishes to sell ABC stock on November 15th under Rule 144. The prior weeks' trading volumes are: Week Ending Volume Nov. 12th Nov. 5th Oct. 30th Oct. 23rd Oct. 16th 1,500,000 shares 1,200,000 shares 800,000 shares 600,000 shares 400,000 shares If the Form 144 had been filed the preceding week, the maximum permitted sale is: StatusA A. 500,000 shares Incorrect Answer B. 750,000 shares Correct Answer C. 1,000,000 shares StatusD D. 1,025,000 shares

The best answer is C. Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 100,000,000 shares = 1,000,000 shares. If the Form 144 was filed the preceding week, then the week ending November 12th would not yet have occurred. The 4 weeks' trading to be averaged are: Nov. 5th Oct. 30th Oct. 23rd Oct. 16th 1,200,000 shares 800,000 shares 600,000 shares 400,000 shares 3,000,000 shares / 4 weeks = 750,000 share average The greater amount is 1% of outstanding shares, or 1,000,000 shares.

An investor wishes to sell restricted stock under the provisions of Rule 144. The company has 1,800,000 shares outstanding. The Form 144 is filed on Monday, October 5th. The previous weeks' trading volumes are: Week Ending Volume September 6th 17,000 shares September 13th 19,000 shares September 20th 20,000 shares September 27th 18,000 shares October 4th 16,000 shares Assuming that all other requirements of the rule are met, the maximum sale amount is: StatusA A. 17,000 shares StatusB B. 18,000 shares Correct C. 18,250 shares StatusD D. 18,500 shares

The best answer is C. Rule 144 permits the sale of the greater of 1% of the shares outstanding or the weekly average of the preceding 4 weeks' trading volume. 1% of 1,800,000 shares = 18,000 shares. The weekly average of the preceding 4 weeks' trading volume is: Week Ending Volume September 13th 19,000 shares September 20th 20,000 shares September 27th 18,000 shares October 4th 16,000 shares 73,000 shares / 4 = 18,250 shares The greater amount, 18,250 shares, can be sold during the next 90 days.

An investor wishes to sell restricted stock under the provisions of Rule 144. The company has 25,000,000 shares outstanding. The Form 144 is filed on Monday, September 28th. The previous weeks' trading volumes are: Week Ending Volume August 30th September 6th September 13th September 20th September 27th 200,000 shares 280,000 shares 220,000 shares 250,000 shares 200,000 shares The maximum permitted sale amount is: StatusA A. 225,750 shares Incorrect Answer B. 237,500 shares Correct Answer C. 250,000 shares StatusD D. 280,000 shares

The best answer is C. Rule 144 permits the sale of the greater of 1% of the shares outstanding or the weekly average of the preceding 4 weeks' trading volume. 1% of 25,000,000 shares = 250,000 shares. The weekly average of the preceding 4 weeks' trading volume is: Week Ending Volume September 6th September 13th September 20th September 27th 280,000 shares 220,000 shares 250,000 shares 200,000 shares 950,000 shares / 4 weeks = 237,500 shares The greater amount is 1% of outstanding shares, or 250,000 shares.

A company has filed a registration statement with the SEC that uses a method that is only available to seasoned issuers. This registration statement is good for: Incorrect Answer A. 1 year StatusB B. 2 years Correct Answer C. 3 years StatusD D. 4 years

The best answer is C. SEC Rule 415, the "shelf registration rule" allows "seasoned issuers" to file a blanket registration statement with the SEC, covering a period of 3 years, for any securities that the issuer may wish to sell. It is only available to "seasoned" companies that already have completed a registered IPO, that have been registered for 1 year, and that have a minimum market captialization of $75 million. If the seasoned issuer wishes to sell any securities during this 3 year period, it simply files a notification with the SEC that it is selling under that registration statement. This procedure avoids the "20 day cooling" off period, and allows seasoned issuers to enter the market quickly (such as when interest rates have dipped) to sell their securities.

An officer of a company has acquired shares of that issuer in the open market. If the officer wishes to sell the shares, the officer must meet all of the following requirements EXCEPT: Incorrect Answer A. filing of the Form 144 with the SEC StatusB B. a maximum of 4 sales per year are permitted Correct Answer C. the stock must be held for 6 months, fully paid StatusD D. each sale is limited to the greater of 1% of the outstanding shares; or the weekly average of the prior 4 weeks' trading volume

The best answer is C. "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. The 6-month holding period is required for restricted stock, but not for control stock.

Which of the following securities are NOT required to be registered with the SEC? I American Depositary Receipts II Eurodollar Debt III Foreign Government Debt IV Municipal Debt StatusA A. I and II only StatusB B. III and IV only Correct Answer C. II, III, IV Incorrect Answer D. I, II, III, IV

The best answer is C. 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. Municipal debt, U.S. Government debt and Foreign Government debt are all exempt. Eurodollar bonds are sold outside the U.S. and thus do not fall under the Act.

Banker's Acceptances are: StatusA A. money market instruments subject to the Securities Act of 1933 StatusB B. capital market instruments subject to the Securities Act of 1933 Correct C. money market instruments exempt from the Securities Act of 1933 StatusD D. capital market instruments exempt from the Securities Act of 1933

The best answer is C. Bankers Acceptances are a money market instrument used to finance imports and exports. They are an exempt security under the Securities Act of 1933 and can be sold without a prospectus.

Under Rule 144, no filing is required if the sale amount every 90 days does not exceed: I 500 shares II 5,000 shares III $50,000 IV $500,000 StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV

The best answer is C. Form 144 does not have to be filed to sell restricted or control stock if 5,000 shares or less, worth $50,000 or less, is sold during each 90 day period.

When the Securities and Exchange Commission sets the effective date for a new issue in registration, this means that the: Incorrect Answer A. SEC has approved the offering for sale to the public StatusB B. SEC has certified that the offering documents give full and fair disclosure Correct Answer C. proper documents for registration have been filed with the SEC StatusD D. effective cost to potential purchasers has been established by the SEC

The best answer is C. 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 of any new issue in registration, does not "certify" the issue, nor do they establish the offering price. Think of the SEC as a big filing cabinet - once the proper documents relating to a new issue offering are filed, the issue may be offered and sold to the public.

Which of the following are non-exempt issues under the Securities Act of 1933? I Fixed annuity contracts II Variable annuity contracts III Listed option contracts IV Listed common stock StatusA A. I and II only StatusB B. III and IV only Correct C. II, III, IV StatusD D. I, II, III, IV

The best answer is C. 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.

Intrastate offerings are subject to: I SEC registration II State registration III FINRA regulation StatusA A. I only Incorrect Answer B. II only Correct Answer C. II and III StatusD D. I, II, III

The best answer is C. 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.

Which of the following are exempt issues under the Securities Act of 1933? I Real Estate Investment Trusts II Savings and Loan Issues III U.S. Government Bonds IV U.S. Government Bond Funds StatusA A. I and II only StatusB B. III and IV only Correct C. II and III only StatusD D. I, II, III

The best answer is C. Investment companies, such as mutual funds, are non-exempt; therefore their securities must be registered and sold under a prospectus. 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.

When a customer buys a new stock issue from a syndicate member, the customer pays: StatusA A. the public offering price as stated in the prospectus plus a commission Incorrect Answer B. the public offering price as stated in the prospectus plus a mark-up Correct Answer C. the public offering price as stated in the prospectus without any commission StatusD D. any price since this is a negotiated market offering

The best answer is C. New stock issues are sold under a prospectus that states the Public Offering Price which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.

Under SEC rules, the purchaser of a Regulation D private placement must complete and sign a(n): Incorrect Answer A. subscription agreement StatusB B. hypothecation agreement Correct Answer C. accredited investor questionnaire StatusD D. arbitration agreement

The best answer is C. 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.

All of the following are exempt issues under the Securities Act of 1933 EXCEPT: StatusA A. U.S. Government Bonds Incorrect Answer B. Savings and Loan Issues Correct Answer C. Real Estate Investment Trusts StatusD D. Municipal Revenue Bonds

The best answer is C. 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.

Restricted securities can be sold under Rule 144 if: I they are sold on a dealer basis II they are sold on an agency basis III solicitation of orders to buy is restricted to customers expressing interest within the past 10 days IV the issuer is reporting currently to the SEC StatusA A. I and III only StatusB B. II and III only Correct C. II, III, IV StatusD D. I, II, III, IV

The best answer is C. Rule 144 requires that restricted securities be sold on an agency basis only. Your firm cannot act as a market maker in "144" shares. Solicitation of orders to buy "144" shares is prohibited (to stop you from soliciting potential customers to buy 144 shares, which would tend to push up the stock price). However you are allowed to recontact individuals expressing buying interest in "144" transactions within the past 10 days. Since 144 shares are being sold in the open market, the issuer must comply with SEC issuer reporting rules to maintain the public market in the securities.

For an institutional investor to qualify as a "QIB" under Rule 144A, the institution must have at least: StatusA A. $1,000,000 of assets that it invests on a discretionary basis StatusB B. $10,000,000 of assets that it invests on a discretionary basis Correct C. $100,000,000 of assets that it invests on a discretionary basis StatusD D. $1,000,000,000 of assets that it invests on a discretionary basis

The best answer is C. 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 describes trading of Rule 144A issues? StatusA A. Rule 144A issues are NMS securities that are listed and trade on the NYSE, AMEX and NASDAQ StatusB B. Rule 144A issues are not listed and trade in the OTCBB or Pink Sheets Correct C. Rule 144A issues trade in the PORTAL market from QIB to QIB StatusD D. Rule 144A issues cannot be traded in the public markets

The best answer is C. 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 statements are TRUE regarding intrastate offerings under Rule 147? I Resale of the securities is permitted within that state immediately following the initial offering II Resale of the securities is permitted outside that state immediately following the initial offering III Resale of the securities is not permitted within that state for 6 months following the initial offering IV Resale of the securities is not permitted outside that state for 6 months following the initial offering StatusA A. I and II StatusB B. III and IV Correct C. I and IV StatusD D. II and III

The best answer is C. Securities that are sold under a Rule 147 exemption (intrastate exemption) cannot be resold outside that state for 6 months following the initial offering. There is no restriction on resales within that state. 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."

The Securities Act of 1933 is primarily concerned with registration of:: StatusA A. broker-dealers StatusB B. exempt issues Correct C. non-exempt issues StatusD D. self-regulatory organizations

The best answer is C. The Securities Act of 1933 requires that new issues that are not exempt from the Act be registered with the SEC. Thus, the 1933 Act is concerned with the primary (new issue) market. The Securities Exchange Act of 1934 consists of a variety of rules covering the trading (secondary) market. It requires the registration of broker-dealers and self-regulatory organizations (the exchanges).

The maximum amount that can be raised by an issuer under Regulation Crowdfunding is: StatusA A. $100,000 StatusB B. $500,000 Correct C. $1,000,000 StatusD D. $5,000,000

The best answer is C. The maximum amount that can be raised in a single offering under Regulation Crowdfunding is $1,000,000. (Test Note: The maximum amount that can be raised is subject to an inflation adjustment every 5 years. In April 2017, it was adjusted to $1,070,000. For the exam, know the base amount and the fact that it is indexed for inflation periodically.)

Which of the following are accredited investors? I Individual earning $200,000 per year II Couple earning $300,000 per year III Person with a net worth of $1,000,000 exclusive of residence IV Person buying $150,000 of the issue within 5 years StatusA A. I only StatusB B. III and IV only Correct C. I, II, III StatusD D. I, II, III, IV

The best answer is C. To be accredited, an individual must have an annual income of $200,000 per year; or a couple must have an annual income of $300,000 per year; or the purchaser must have a net worth of at least $1,000,000, exclusive of residence. One is not accredited because a large purchase of the private placement is made.

Under Regulation D, which of the following statements are TRUE? I A Prospectus must be delivered to all purchasers II An Offering Memorandum must be delivered to all purchasers III Full disclosure must be made to investors IV No disclosure is required to investors StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV

The best answer is C. 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."

Which statements are TRUE about the use of a "red herring" preliminary prospectus? I A preliminary prospectus may be sent to a prospective customer before the issue has entered into the 20 day cooling off period II A preliminary prospectus may be sent to a prospective customer once the issue has entered into the 20 day cooling off period III The use of the preliminary prospectus constitutes an offer to sell under the Securities Act of 1933 IV The use of the preliminary prospectus does not constitute an offer to sell under the Securities Act of 1933 StatusA A. I and III StatusB B. I and IV StatusC C. II and III Correct D. II and IV

The best answer is D. 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. Prior to the "20 day cooling off period," the filing had not been made, so nothing can be done that involves contacting the public about that issue. 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").

If the SEC sends a deficiency letter to the issuer regarding an issue in registration, which of the following statements are TRUE? I Disclosure in the registration documents is not complete II The issuer must file an amendment with the SEC to cure the deficiency III The 20-day cooling off period starts again once the amendment is filed IV The SEC can issue subsequent deficiency letters after amendments are reviewed StatusA A. I and III StatusB B. II and IV StatusC C. I, II, III Correct D. I, II, III, IV

The best answer is D. 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. Once the amendment is filed, the 20-day cooling off period starts counting again from the beginning. If the SEC finds that there is not adequate disclosure after the amendment is filed, it can issue subsequent deficiency letters. Thus, the registration for the issue may never "go effective."

A small investor with $2,000 of available funds wishes to make a crowdfunding investment. Which statement is TRUE about this? StatusA A. This client cannot make the investment because the dollar amount to be invested is too small Incorrect Answer B. The client cannot make the investment unless he or she is an accredited investor StatusC C. The client cannot make the investment because the offering is only available to institutional investors Correct Answer D. The client can make the investment without restriction

The best answer is D. Crowdfunding offerings are targeted at small investors. The investment minimum is only $2,000 and the investor is not required to meet any income or net worth tests. The intent is to make it easy for start-up company to raise "seed" capital in a private placement offering from a group of relatively small investors. (Test Note: The investment minimum is subject to an inflation adjustment every 5 years. In April 2017, it was adjusted to $2,200. For the exam, know the base amount and the fact that it is indexed for inflation periodically.)

Which of the following are prohibited during the 20 day cooling off period for a new issue in registration? I Sale of the issue II Advertisement of the issue III Recommending the purchase of the issue IV Soliciting orders to buy the issue StatusA A. I only StatusB B. II and IV only StatusC C. I and III only Correct D. I, II, III, IV

The best answer is D. During the 20-day cooling off period for a new issue in registration, the worry of the SEC is that the underwriters will "hype" the issue to increase investor interest and hence increase the final Public Offering Price. Thus, while the issue is in registration, the issue cannot be offered, sold, advertised, or recommended, and orders to buy the issue cannot be solicited. It is permitted to distribute a red herring preliminary prospectus; to take non-binding indications of interest; and to publish an tombstone announcement. Legally, these are not considered to be offers of the security.

Which of the following are exempt securities under Securities Act of 1933? I Corporate Bonds II Municipal Bonds III U.S. Government Bonds IV Small Business Investment Companies StatusA A. III only StatusB B. I and II StatusC C. II and III only Correct D. II, III, IV

The best answer is D. Government bonds, municipal bonds, and Small Business Investment Company issues are all exempt securities under the 1933 Act. Corporate bonds are non-exempt securities that must be registered with the SEC under the Securities Act of 1933.

Which of the following activities are allowed prior to the filing of a registration statement? I Solicitations of indications of interest II Solicitations of orders III Sending a preliminary prospectus IV Publishing a tombstone announcement StatusA A. I and II only StatusB B. II and III only StatusC C. I, II, III, IV Correct D. None of the above

The best answer is D. Prior to the filing of a registration statement for a new issue, nothing can be done. 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.

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? StatusA A. 1 StatusB B. 2 StatusC C. 3 Correct D. 4

The best answer is D. 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.

An unaffiliated investor wishes to sell a large amount of "144" shares. This person can do so, without being subject to the Rule 144 volume limitations, after holding the securities for: Incorrect Answer A. 3 years StatusB B. 2 years StatusC C. 1 year Correct Answer D. 6 months

The best answer is D. Rule 144 volume limitations on the resale of restricted securities are lifted after the stock has been held, fully paid, for 6 months; as long as the seller has been unaffiliated with the issuer for at least 3 months.

A registered representative has prepared a research report about a new issue that is "in registration." Which statement is TRUE? StatusA A. The research report may be sent to any customer expressing an "indication of interest" StatusB B. The research report may be sent to any customer if it is accompanied by a preliminary prospectus StatusC C. The research report may only be sent to customers who have bought new issues within the preceding 12 months Correct D. The research report may not be sent

The best answer is D. Since this issue is "in registration," it is in the 20-day cooling off period. The only permitted written communications during this period are the red herring preliminary prospectus, and a tombstone announcement (which, in reality, is not published until the effective date). This research report cannot be sent, since it would be considered to be a prohibited "offer to sell" the securities.

Which statements are TRUE regarding intrastate offerings? I Intrastate offerings are subject to Federal registration II Intrastate offerings are subject to State registration III Intrastate offerings are exempt from Federal registration IV Intrastate offerings are exempt from State registration StatusA A. I and II only StatusB B. III and IV only StatusC C. I and IV only Correct D. II and III only

The best answer is D. 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 are defined as "accredited investors" under Regulation D? I Non-profit organization with assets in excess of $2,000,000 II Trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person III Partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered IV A bank or savings and loan institution StatusA A. I and III StatusB B. I and IV Incorrect Answer C. II and III Correct Answer D. II and IV

The best answer is D. 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. 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!

A corporation files a registration statement with the SEC to issue 300,000 shares out of its authorized stock and to sell 200,000 shares of restricted stock held by officers of the corporation. Which statements are TRUE? I This is a primary distribution of 500,000 shares II This is a primary distribution of 300,000 shares III Proceeds from the sale of 500,000 shares will go to the company IV Proceeds from the sale of 300,000 shares will go to the company StatusA A. I and III StatusB B. I and IV StatusC C. II and III Correct D. II and IV

The best answer is D. This is a combined primary and secondary distribution. The primary distribution of 300,000 shares consists of the newly issued shares where the proceeds will go to the issuer. The secondary distribution consists of the 200,000 shares being sold by officers (who are "tacking on" their shares to the primary distribution to avoid having to resell the shares under Rule 144 restrictions). Only the proceeds from the primary distribution will go to the company. The proceeds from the secondary distribution go to the selling shareholders.

Deficiency letter

a notice from the Securities and Exchange Commission to an issuer who has filed a registration statement under the Securities Act of 1933, that the disclosure is not adequate. The registration statement must be amended, and the 20 day cooling off period starts recounting from the date of the amendment filing. (see Cooling off period)

Non-accredited investor

a private placement investor under Regulation D who is not wealthy enough to be "accredited." A maximum of 35 non-accredited investors are permitted in a private placement for the transaction to be exempt under the Securities Act of 1933.

QIB

acronym for a "Qualified Institutional Buyer" as defined under Rule 144A. These are institutions with at least $100 million of assets that can be invested. Such "QIBs" can buy unregistered private placement blocks and trade them with other "QIBs."

Regulation A

an "E-Z" registration process under the Securities Act of 1933 that permits a non-exempt issuer to issue up to $50,000,000 worth of securities each year. The intent is to make it simpler for start-up companies to raise capital.

Private placement

an exempt transaction under Regulation D that can be sold without a prospectus to an unlimited number of accredited (wealthy) investors, but only to a maximum of thirty-five (35) non-accredited investors. In reality, private placements are sold to a relatively small number of institutional investors. (see Accredited investor)

Intrastate offer

an offer of securities that is made only in one state (as opposed to an interstate offer made in more than 1 state) that is an exempt transaction under the Securities Act of 1933, since the Federal government does not have jurisdiction unless the transaction crosses state lines. However, the offering must still be registered in that state, under the state "Blue Sky" laws.

Rule 415

known as the "shelf registration rule," this is a streamlined registration process under the Securities Act of 1933 for large, established companies. Rather than having to file a registration statement and complete a 20 day cooling off period for each new securities offering, the issuer files a blanket registration statement with the SEC that goes on the SEC's "shelf" for 3 years. Once the "shelf" filing is made, by giving 2 days' notice to the SEC, the issuer can sell new securities in the market. This procedure is much faster and cheaper.

Common carrier issue

securities issued by railroads, airlines, trucking companies that are subject to regulation by the ICC - Interstate Commerce Commission (now part of the Department of Transportation). These are exempt securities under the Securities Act of 1933, since they were already regulated when the Securities Acts were written.

Restricted stock

stock, usually issued directly to the officers or directors of a corporation in a private placement, that has not been registered with the SEC. These shares are privately placed under Regulation D, and thus are exempt from registration. Resales of restricted securities in the public markets must comply with the provisions of SEC Rule 144 (see Rule 144).

Rule 145

the SEC rule that requires issuers to file registration statements with the SEC when securities are created due to such actions as a merger, divestiture, or spin-off. Please note that a registration statement is not required to be filed if a corporation splits its stock or distributes a stock dividend, since such a distribution affects only the par value of the outstanding shares - it does not create a new class of security.

Rule 147

the SEC rule that spells out the requirements for an issuer to obtain an exemption from registration for a new issue because the offering will be made only in 1 state (an intrastate exemption). 100% of the issue must be sold solely to state residents to obtain the exemption.

Registration statement

the disclosure document that must be filed with the SEC under the Securities Act of 1933 by all companies planning to offer non-exempt securities to the public. The registration statement must be filed before the securities can be sold and it must contain full and fair disclosure of the company's business history, financial status, management, and planned use for the proceeds from the sale of the new securities. Most of the registration statement is a copy of the Prospectus to be given to investors. (see Exempt security, Non-exempt security, Prospectus)

Securities Act of 1933

the federal regulation aimed at curbing manipulation and fraud in the new issue market. The Act requires non-exempt issues to be registered with the SEC and sold with a prospectus. (see Non-exempt security, Prospectus)

Effective date

the first date that a new issue can be sold to the public under the provisions of the Securities Act of 1933. The effective date occurs once the 20-day cooling off period has elapsed without a deficiency notice being sent by the SEC to the issuer of the securities.

Accredited investor

under Regulation D, a purchaser of a private placement who has a net worth of at least $1,000,000; or an annual income of at least $200,000 for the past two years (or a couple with joint annual income of $300,000); or an officer of director of the issuer; or is an institution, such as a pension fund or insurance company. (see Regulation D)