Chapter 4

If a broker-dealer purchases 100,000 shares of common stock from an individual investor, this is:

a nonissuer transaction

Which of the following securities are exempt from registration requirements under the Uniform Securities Act? 1. Issues of U.S.-based insurance companies authorized to conduct business in the state 2. NYSE-traded issues 3. Issues of nonprofit religious organizations 4. Commercial paper meeting certain requirements

a. Securities issued by an insurance company organized under the laws of any state and authorized to do business in that state are exempt from registration. NYSE-listed issues are federal covered, and nonprofit organizations and commercial paper with a maturity of 270 days or less are also exempt.

Under the National Securities Markets Improvement Act of 1996 (NSMIA) which of the following statements describe federal-covered securities? 1. A security registered under the Uniform Securities Act 2. Security registered under the Investment Company Act of 1940 3. A security of a company regulated by the U.S. Federal Reserve Board 4. A security issued by the U.S. government

2, 3, 4 A federal covered security has a federally imposed exemption from state registration, so selecting a choice that includes registering under the USA cannot be correct. The list includes most securities exempt from registration under the federal Securities Act of 1933 (those issued by the U.S. government and state and local governments, as well as bank securities regulated by the Federal Reserve Board). In addition, it includes a number of securities registered with the SEC, primarily those traded on the exchanges and Nasdaq, as well as investment companies registered under the Investment Company Act of 1940.

Keely Company, Inc., has outstanding equity securities registered with the SEC. The company issues a debt security directly to financial institutions. This sale is an example of: A) an exempt transaction. B) an exempt security. C) a nonissuer transaction. D) a nonexempt transaction.

A. Under the Uniform Securities Act, the sale of securities to financial institutions is an exempt transaction.

Under the terms of the Uniform Securities Act, an agent who sells shares of a Nasdaq Stock Market security to an insurance company has engaged in: A) an unlawful transaction. B) a sale exempt from the registration and advertising provisions of the Uniform Securities Act. C) an unsuitable transaction. D) an issuer transaction.

B. An agent who sells shares of any security to an insurance company is engaged in an exempt transaction that is not bound by the advertising and registration requirements of the USA. Any sale to certain institutional customers, such as banks and insurance companies, is an exempt transaction, regardless of where the security is traded. Neither exempt securities nor exempt transactions must adhere to the registration and advertising provisions of the USA. This is an exempt transaction due to the nature of the purchaser, not the type of security being sold.

Which of the following entities would not be considered issuers of exempt securities under the Uniform Securities Act? A) the State of Michigan B) City of Cancun, Mexico C) City of Calgary, Alberta D) U.S. Treasury

B. Foreign national governments, such as that of Mexico, with whom the United States has diplomatic relations, but not their political subdivisions, such as any city in Mexico, are considered issuers of exempt securities. The United States or any of its agencies, such as Fannie Mae, or any state, Canadian province, or political subdivision thereof, is considered an issuer of exempt securities.

One of the requirements of the Uniform Securities Act is that nonexempt securities must be registered prior to sale in the state unless the sale is made in an exempt transaction. Which of the following would most likely register by qualification? A) A rights offering by ABC Corporation whose common stock is listed on the NYSE B) First mortgage bonds issued by XYZ Computers, a company whose common stock was issued only in this state C) An equipment trust certificate for the Great American Railroad's newest locomotives D) Common stock issued by The First National Bank of Largeville

B. When a company's stock is issued only in one state, that is known as an intrastate offering. As such, the issue can not register with the SEC but registers with the state using qualification. Any subsequent capital issue from that company in this state would also use qualification. Bank stock and equipment trust certificates are exempt securities. Rights offered by a company whose stock is listed are considered federal covered securities.

Under the USA, which of the following types of transactions can be entered into legally with unregistered nonexempt securities? A) Solicited transactions with individual clients located within the state B) Private placement offered to more than 50 institutional purchasers in the state C) Rights offering to existing shareholders with underwriting compensation of $0.05 per share to the soliciting broker-dealers D) Public offering of stock in a new corporation

B. Private placement offered to more than 50 institutional purchasers in the state Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to noninstitutional buyers are limited to a maximum of 10 in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions.

When the Uniform Securities Act refers to unsolicited orders, which of the following is true? A) A client may not purchase, at her own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. B) Under certain conditions, an Administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. C) Unsolicited orders are defined as exempt transactions under the Uniform Securities Act. D) If the order ticket is appropriately marked, the Administrator may not challenge a broker-dealer's assertion that the order was unsolicited.

C. A client has the right to buy or sell whatever she may desire. The issue becomes who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The state securities Administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is nonexempt and unregistered in the state.

The RAN Corporation's common stock is listed on the New York Stock Exchange. To raise additional working capital, RAN's board of directors has authorized the sale of $75 million in subordinated debentures. Under the Uniform Securities Act, which of the following is not a true statement? A) The Administrator can bring an enforcement action against the issuer if it is deemed that the issue is fraudulent. B) The Administrator may require payment of a filing fee prior to sales taking place in the state. C) The Administrator can require that the issuer provide a notice filing in the state. D) The Administrator can require the RAN Corporation to register the debentures prior to an offering in the state.

D. Because the RAN Corporation's common stock is listed on the NYSE, it—and any security equal or senior to it—is a federal covered security. As such, the state has no registration authority over the security. However, notice filing and payment of fees may be required. The Administrator always has the power to enforce antifraud statutes.

Which of the following statements concerning transactions exempt from registration under the Uniform Securities Act is true? A) An unregistered nonexempt security may be lawfully sold in a nonexempt transaction. B) A security sold under an exempt transaction must be registered. C) The antifraud provisions of the Uniform Securities Act apply to exempt transactions. D) The Administrator may require that a security be registered and a prospectus be delivered in an exempt transaction.

The antifraud provisions of the USA apply to exempt transactions. The antifraud provisions of the act are always applicable, even if the securities or the transaction are exempt from the registration provisions of the act. Fraud is a crime, and no criminal acts are exempt from the law. If a security is nonexempt, it is required to be registered before sale. The term exempt transaction means that a determination of whether the security is registered or is exempt from registration is not necessary to do the transaction. Exempt transactions avoid the necessity of registration and prospectus delivery.