9.5 - What is a Security Under the Uniform Securities Act?

If a public customer plans to purchase stock in a company that has been listed on a stock exchange for the past year in a regular way secondary transaction, when must the customer receive the prospectus? A) There are no prospectus delivery requirements for this transaction. B) Before the order entry. C) Before the settlement date. D) No later than three days from the settlement date.

Answer: A Because this is a secondary market transaction in a listed stock, there is no requirement that a prospectus be delivered to the customer.

Under the Uniform Securities Act, a nonissuer transaction is: A) the purchase and sale of shares of common stock on the AMEX. B) a Regulation D private placement sale of limited partnership interests. C) an initial public offering of common or preferred stock. D) the issuance of mutual fund shares.

Answer: A In a nonissuer transaction, the proceeds do not flow to the issuer; rather, the proceeds are credited to selling shareholders. A secondary market trade, such as a transaction executed on the floor of an exchange, is a nonissuer transaction. An IPO, the purchase of mutual fund shares, and the purchase of limited partnership interests all benefit the issuer and are called issuer transactions.

Which of the following would be a nonissuer transaction? XYZ Corporation sells 100,000 shares of previously issued common stock out of its treasury. GEMCO Mutual Fund sells 100,000 shares of XYZ Corporation common stock out of its portfolio. Curt sells 1,000 shares of Giggle common stock to Chuck in an isolated transaction. Dave reinvests his dividend into additional shares of GEMCO Mutual Fund. A) II and III. B) I and II. C) I and IV. D) III and IV.

Answer: A In a nonissuer transaction, the proceeds of the sale go to someone other than the issuer. When a mutual fund liquidates a holding in its portfolio, the fund receives the proceeds, not the issuer. One individual selling his stock to another is the classic example of an isolated nonissuer transaction. A corporation selling stock out of its treasury receives the money from the sale, and dividend reinvestment purchases shares directly from the mutual fund.

Joan owns and operates a jewelry store, and she has contracted to purchase 5,000 Swiss watches, paying the watch manufacturer in Swiss francs 3 months from the date of contract. To protect (hedge) her currency risk, she purchases call options on Swiss francs. Which of the following statements best describes her transaction in the Swiss franc calls in light of the USA? A) She has engaged in a securities transaction because options on foreign currencies are considered to be securities under the USA. B) She has not engaged in a securities transaction because options on foreign currencies are not considered to be securities under the USA. C) She has not engaged in a securities transaction because she purchased the options to hedge a business risk. D) She has engaged in a prohibited transaction because American investors are generally prohibited from trading in foreign currencies under the USA.

Answer: A Options, regardless of the underlying asset, are considered securities under the USA. Therefore, Joan engaged in a securities transaction by purchasing call options on the Swiss franc. While there is no prohibition against American investors trading in foreign currency options or futures under the USA, acquiring the currency itself, rather than the option, would not have involved a securities transaction; currency is not a security.

An interest in which of the following is a security under the Uniform Securities Act? Merchandising marketing scheme. Multilevel distributorship arrangement. Oil and gas drilling program. Cattle feeding program. A) I, II, III and IV. B) I only. C) II and III. D) III only.

Answer: A The USA considers interests in merchandising marketing schemes, multilevel distributorship arrangements, oil and gas drilling programs, and farm animals, whether it is a feeding or a breeding program, to be investment contracts and, therefore, securities. The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are.

Under the USA, which of the following are securities? Commodity option contract. Treasury stock. Keogh plan. A) I, II and III. B) I and II. C) I and III. D) II and III.

Answer: B A commodity option contract and treasury stock are securities under the USA. A commodity option contract is a security, while a commodity futures contract is not. A Keogh plan is a vehicle for an investment, but it is not a security in and of itself.

A primary issue is: A) a secondary market transaction in a security recently offered to the public. B) a new offering of an issuer sold to investors. C) the first transaction between two parties in the over-the-counter market. D) a sale between investors of securities traded on the New York Stock Exchange.

Answer: B A primary issue is a new offering of securities by an issuer sold to investors. Transactions between two investors in the over-the-counter market refer to secondary transactions (the market between investors). A sale between investors of securities traded on the New York Stock Exchange is another example of a secondary transaction.

Which of the following are issuers of securities? ABC Manufacturing Corporation borrows in the capital markets by selling bonds every few months. Dot.Com, Inc., in an initial public offering, sells all its securities to the public within a few minutes after the shares go public. XYZ Corp., in an initial public offering, fails to sell any shares to the public because it is not an attractive investment. YYY Corp., with 1 million shares outstanding, sells additional shares to the public in a primary offering. A) I, II and IV. B) I, II, III and IV. C) I only. D) III and IV.

Answer: B ABC Manufacturing Corp. is an issuer raising debt capital whereas Dot.Com Inc is an issuer raising equity capital. YYY Corp. is an issuer raising equity capital by selling additional new shares in a public primary offering. XYZ Corp. is an issuer despite its failure to sell any shares. The USA defines an issuer as a person that issues or proposes to issue a security. It is not necessary that an issuer actually issue the shares it proposes to issue.

Which of the following would not be an issuer? A) a governmental agency borrowing money for short-term needs. B) a corporation selling certificates of interest in a mining lease. C) an investment company. D) a partnership selling partnership interests.

Answer: B Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note.

If a broker/dealer purchases 100,000 shares of common stock from an individual investor, this is a: A) private placement. B) nonissuer transaction. C) prohibited transaction. D) local transaction.

Answer: B In a nonissuer transaction, the proceeds of the trade do not benefit or go to the issuer.

Which of the following is an example of a nonissuer transaction? A) Preemptive rights offering. B) Secondary offering by an institutional seller. C) Private placement by an issuer. D) Primary issue of corporate stock.

Answer: B Investors or shareholders routinely receive the proceeds from a secondary transaction. About the only time a secondary offering is an issuer transaction is if the issuer were reselling treasury stock since the proceeds go to the issuer.

Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security for sale to the public. According to the USA, which of the following is NOT an issuer? The city of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds. AAA Partnership issues certificates of interest or participation in its oil, gas, and mining titles. The AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering. The United States government, which proposes to offer Treasury bonds. A) I, II and IV. B) II only. C) I only. D) I, II and III.

Answer: B Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security. However, with respect to certificates of interest or participation in oil, gas, or mining titles or leases, there is not considered to be any issuer even though those certificates are included in the definition of "security". Examples of issuers are a municipality such as the city of Chicago, which issues tax-exempt highway improvement bonds; the AAA Manufacturing Company, which proposes to offer shares to the public even though it has not completed the offering; and the United States government, when it proposes to offer Treasury bonds.

Which of the following is NOT an issuer under the USA? A) A new company that offers shares to the public in an IPO. B) A company whose shares trade on the New York Stock Exchange. C) A broker/dealer trading securities as an agent for the account of others. D) A corporation that proposes to issue securities but has not done so as of yet.

Answer: C A broker/dealer that trades securities as an agent for its clients is not acting in the capacity of an issuer. If the broker/dealer were offering its own shares to the public through underwriting, it would then be an issuer. A corporation that proposes to issue securities but has not as yet done so, is for purposes of the act, an issuer. A company offering its shares to the public in an IPO is an issuer. A company whose shares trade on the NYSE is an issuer whose shares are now trading in the secondary market.

Which of the following financial instruments are considered securities under the USA? Collateral trust certificates. Investment contracts, including interests in oil and gas drilling partnerships. Options listed on the Chicago Board of Options Exchange. Foreign currency options contracts traded on the Philadelphia Stock Exchange. A) II and III. B) II, III and IV. C) I, II, III and IV. D) I and II.

Answer: C Collateral trust certificates, investment contracts, options, and option contracts, regardless of the underlying asset, are identified as securities in the Uniform Securities Act and are subject to its provisions. Currencies are not securities, but options on currencies are.

Which of the following best describes a nonissuer transaction? A) One that involves investors in the primary market. B) One that is generally prohibited under the USA. C) One that occurs between investors in the secondary market. D) One that provides capital to a corporation that is offering stocks or bonds to the public

Answer: C In a nonissuer transaction, none of the proceeds go to the issuer, and the most common nonissuer transaction occurs between investors in the secondary market. An issuer transaction provides capital to issuers.

Which of the following are nonissuer transactions? An investment manager purchases 100,000 shares of XYZ on the NYSE. An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction. The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE. Dot.com purchases its own shares on the open market in order to place them in treasury. A) I only. B) I and II. C) III and IV. D) I, II, III and IV.

Answer: D A nonissuer transaction is a transaction in which the proceeds do not directly or indirectly go to the issuer as in a secondary transaction. When the investment manager purchases XYZ shares on the NYSE, the proceeds of the sale do not go to XYZ Corp., but to the investors who sold the stock. When an investment adviser sells YYY Corp. shares to an overseas private investment group, YYY Corp. does not benefit directly or indirectly because the proceeds go to the investment adviser, not to YYY Corp. When Dot.com purchases its own shares on the open market, the proceeds go to outside investors, not to Dot.com as the purchaser. However, if Dot.com resold its shares, the transaction would be an issuer transaction.

Which of the following would be considered a nonissuer transaction as defined in the Uniform Securities Act? Gates Williams, the largest shareholder in Maxihard Corporation, sells 100,000 shares in a registered secondary transaction. Buffy Warren, the largest shareholder in Barkshire Mathaway, purchases an additional 50,000 shares on the NYSE. In its capacity as a market maker, XYZ Securities sells 200 shares of Gemco common stock to the corporate treasurer of Gemco, buying for the company's investment account. Gemco, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to XYZ Securities, a registered market maker in Gemco stock. The stock was donated to Gemco by a former officer of the firm. A) I and II. B) II and III. C) III and IV. D) I, II and III.

Answer: D A nonissuer transaction is one in which the issuer does not receive the proceeds of the sale. When a stockholder sells his shares, he is the one who receives the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. When an issuer sells shares, whether in a primary or secondary transaction (as is the case with the donated shares), if it receives the proceeds, it is an issuer transaction.

Which of the following is NOT classed as a security under the Uniform Securities Act? A) Options on stocks. B) Options on commodities futures. C) Stocks. D) Commodities futures.

Answer: D Commodities such as gold, silver, wheat, and pork bellies are not securities. Options to purchase or sell commodity futures, options on stocks, and stocks are securities.

A securities transaction where there is no benefit to the issuer is called a(n): A) primary transaction. B) nonprofit transaction. C) issuer transaction. D) nonissuer transaction.

Answer: D In a nonissuer transaction, the proceeds do not benefit or go to the issuer directly. In a primary transaction, the proceeds of an underwriting go to the issuing corporation directly.