Regulations: Securities Act of 1933

The maximum amount that can be raised by an issuer under Regulation Crowdfunding is:

$1,000,000. 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.)

Excluding the trading volume test, how much of the issuer's outstanding shares can be sold every 90 days under Rule 144?

1% 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 higher) to be sold every 90 days.

The maximum maturity on commercial paper is:

270 days, because a longer maturity would cause the issue to be non-exempt Commercial paper issued by corporations is an exempt security under the Securities Act of 1933, as long as its maturity does not exceed 270 days. If commercial paper were issued with a longer maturity, it would have to be registered and sold with a prospectus (a time consuming and expensive process, so this does not happen).

Under Regulation D regarding private placements, how many non-accredited investors are allowed to invest in the offering?

35 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.

Under Rule 147, intrastate offerings cannot be resold out of state for how long after the initial sale date?

6 months 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."

A high-ranking officer of ABC Corporation owns 10,000 shares of ABC Corporation control stock that she wishes to sell under the provisions of Rule 144. The company has 300,000 shares outstanding. The average weekly trading volume over the preceding 4 weeks was 9,000 shares. The maximum permitted sale under Rule 144 is:

9,000 shares 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 300,000 shares = 3,000 shares. The average trading volume over the preceding 4 weeks of 9,000 shares is greater, so this is the maximum permitted 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. This amount can be sold every:

90 days 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.

Which of the following are exempt issues under the Securities Act of 1933? I Government Bonds II Municipal Bonds III State Chartered Bank Issues IV Small Business Investment Companies

All of them All of the issuers listed are exempt from the provisions of the Securities Act of 1933 - government bonds, municipal bonds, state chartered bank issues (regulated by the banking laws) and small business investment companies (regulated by other Federal legislation that created the SBA - Small Business Administration).

Intrastate offerings are exempt from: I Federal registration II State registration III FINRA regulation

Federal registration only 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

I Any purchaser who received a preliminary prospectus must also receive the final prospectus III Any purchaser will pay the Public Offering Price 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 permitted after the registration statement is filed? I Solicitation of indications of interest for the issue in registration II Solicitation of orders for the issue in registration III Sending a preliminary prospectus to a customer about the issue in registration IV Publishing a tombstone announcement for the issue in registration

I, III, IV Once the registration statement is filed, a preliminary prospectus can be sent; indications of interest can be taken; and a "tombstone" announcement can be published. Legally, all of these are not considered to be "offers" of the security (offering the securities to the public is prohibited until the registration is effective). Once the registration is effective, orders can be accepted for the new issue if customers receive the final prospectus at, or prior to, confirmation of sale.

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

II 5,000 shares III $50,000 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.

Under Regulation D, which of the following statements are TRUE? I A Prospectusmust be delivered to all purchasers II An Offering Memorandummust be delivered to all purchasers III Full disclosure must be made to investors IV No disclosure is required to investors

II An Offering Memorandummust be delivered to all purchasers III Full disclosure must be made to investors 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 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

NONE OF THESE 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.

Under Regulation D, purchasers of private placement offerings must be given full disclosure through a(n):

Offering memorandum 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." There is no registration statement for private placements because they are exempt - the exemption is claimed by filing a Form D with the SEC.

All of the following are exempt securities under Securities Act of 1933 EXCEPT: U.S. Government Bonds U.S. Government Bond Trusts Municipal Bonds Small Business Investment Companies

U.S. Government Bond Trusts U.S. Government Bond Trusts are an investment company whose shares (actually, these are termed "units") must be registered with the SEC under the Securities Act of 1933. Government bonds, municipal bonds, and Small Business Investment Company issues are all exempt securities under the 1933 Act.

Spin off:

a corporation, that has a subsidiary that it feels will perform better as an independent company, may "spin-off" that business by giving its existing shareholders the subsidiary as a new independent company in a separate stock offering. For example, in 2006, American Express "spun-off" its brokerage operation (Ameriprise Financial Services) to its shareholders as a separate operating company.

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.

Variable annuity:

a unit trust form of an investment company where an insurance company sells an annuity in which the amount of the periodic payments to the investor (called the annuitant) will vary with the value of the mutual funds held in the underlying portfolio. The underlying portfolio is termed the "separate account," since these investments are segregated from the insurance company's general investment account. These are redeemable securities that do not trade. Variable annuities are a non-exempt security under the Securities Act of 1933 and must be sold with a prospectus

Credit can be extended on new issues:

after 30 days have elapsed from the completion of the offering New issues are not eligible for margin until 30 days have elapsed from the completion of the offering.

An unaffiliated investor is permitted to sell "144" shares without being subject to the volume limitations:

after holding the securities for 6 months 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.

Offering Memorandum:

also called a Private Placement memorandum, the disclosure document used in connection with a Regulation D private placement offering. Because this transaction is exempt, no prospectus is required under the Securities Act of 1933

Rule 144:

an SEC rule that permits the holders of private placement "restricted" shares to resell these securities in the public markets without filing a registration statement, if the issuer has "gone public." Rule 144 requires public notice of the sale; places limitations on the timing of the sales; and limits the amount that can be sold. Holders of "control" stock (shares purchased by officers of the issuer in the open market) also come under most of the Rule 144 limitations

Under Rule 144, a customer wishing to sell must file the 144 "Notice of Sale" with the SEC:

at, or prior to, the placement of the sell order 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.

Money market instrument:

debt obligations that mature in less than one year, such as certificates of deposit, commercial paper, or banker's acceptances. These will turn into "money" within the year, hence the name.

If the SEC sends a deficiency letter to the issuer regarding an issue in registration,: it disapproves of registering the issue disclosure is not considered to be adequate the underwriters have failed to establish the Public Offering Price due diligence has not been performed by the underwriters

disclosure is not considered to be adequate 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.

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:

immediately 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.

All of the following are accredited investors under the provisions of Regulation D EXCEPT a(n): married couple with a $1.2 million net worth exclusive of residence individual with $220,000 of annual income officer or director of the issuer individual that invests $50,000, which is approximately 20% of that person's liquid net worth

individual that invests $50,000, which is approximately 20% of that person's liquid net worth Accredited investors in a private placement under Regulation D include an individual with an annual income of at least $200,000 per year ($300,000 for a couple); or any person with at least a $1,000,000 net worth exclusive of residence. In addition, institutional investors and officers and directors of the issuer are accredited investors. There is no accredited investor definition based on the size of a person's investment.

Electronic delivery of a prospectus is NOT permitted for: common stock issues preferred stock issues corporate debt issues investment company issues

investment company issues The "access equals delivery" rule that permits electronic delivery of a prospectus (instead of paper) to those customers that have internet access is permitted for all securities offerings with the exception of investment company issues. For example, the purchaser of a mutual fund must still get a paper prospectus.

Rule 144A:

not to be confused with Rule 144, this rule permits large private placement offerings to be made to Qualified Institutional Buyers (QIBs) who may trade these securities among themselves without having to register the securities.

Restricted shares subject to sale under Rule 144 are most commonly acquired through:

private placements Restricted shares are normally acquired through private placements. If there is a public market for the stock at a later date, to sell the restricted shares in the market, they must either be registered or sold under a Rule 144 exemption.

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.

Exempt security:

securities, including governmental issues such as U.S. Government securities, Agency securities, municipal bonds; money market instruments such as commercial paper and banker's acceptances; and issuers that are regulated under other laws such as banks, insurance companies and common carriers; that are exempt from the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 (except for the anti-fraud provisions).

Restricted stock (shares)

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

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.

Offering circular:

the disclosure document used in connection with a Regulation A offering. Regulation A gives an "E-Z" registration process to new issue offerings of up to $50 million. Rather than a detailed prospectus, the issuer can use a simpler disclosure document called an Offering Circular.

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

Due diligence:

under the Securities Act of 1933, any omissions or misstatements of material fact in a registration statement or prospectus are fraud for all persons who have signed the registration statement. Thus, these persons must perform "due diligence" to insure that there is full disclosure to investors. The signers include the officers of the issuer; the accountants and lawyers involved in preparing the documents; and the underwriter.

Commercial paper:

unsecured short-term money market debt issued by a corporation with a maximum maturity of 270 days. Commercial paper is issued at a discount and matures at face value.

The maximum amount that can be invested by a client in a single issue under Regulation Crowdfunding is:

$100,000

Income bond (a.k.a. Adjustment Bonds):

(a.k.a. Adjustment Bonds) a debt security that pays interest only if the company earns the interest or to the extent that the company earns the interest. Thus, the corporation must earn "income" in order for the payment to be made. This type of bond is usually issued by a corporation trying to reorganize its capitalization in order to avoid bankruptcy. With the bondholders' approval, the corporation would exchange its regular bonds for income (adjustment bonds). Income bonds trade flat (without accrued interest).

Which of the following is an exempt issue? Fixed annuity contract Variable annuity contract Government bond mutual fund Municipal bond unit investment trust

Fixed annuity contract Fixed annuity contracts are considered to be an insurance product, since the insurance company bears the investment risk, and are exempt from SEC registration. On the other hand, variable annuity contracts, where the investor bears the investment risk, are a non-exempt security under the 1933 Act and must be registered. Investment company issues such as mutual funds and unit trusts are also non-exempt and must be registered with the SEC. It makes no difference that the investment company is investing in exempt securities such a U.S. Governments or municipals.

A Regulation A exemption from full SEC registration is available for new issue offerings that do not exceed: I $20,000,000 within a 12 month period for Tier 1 offerings II $20,000,000 within a 12 month period for Tier 2 offerings (A+ offerings) III $50,000,000 within a 12 month period for Tier 1 offerings IV $50,000,000 within a 12 month period for Tier 2 offerings (A+ offerings)

I $20,000,000 within a 12 month period for Tier 1 offerings IV $50,000,000 within a 12 month period for Tier 2 offerings (A+ offerings) Regulation A is intended to make it easier for start-up companies to raise capital. It gives an exemption from full registration 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. Tier 2 issues are also called Regulation A+ issues and can be exchange listed. Form 1-A is filed with the SEC to claim the exemption. It gives disclosure about the issue and a "20 day review period" must be completed before the issue can be sold. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

If the Securities and Exchange Commission sets the effective date for a new issue in registration, which of the following statements are TRUE? I All proper documents have been filed with the SEC II Additional documents must be filed with the SEC III The SEC approves of the new issue IV The issue may be offered to the public

I All proper documents have been filed with the SEC IV The issue may be offered to the public 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 (nor does it disapprove) of any new issue in registration. Once the proper documents relating to a new issue offering are filed, the issue may be offered to the public.

Banker's Acceptances are: I Money Market Instruments II Capital Market Instruments III Exempt Securities IV Non-Exempt Securities

I Money Market Instruments III Exempt Securities 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.

Which of the following statements are TRUEregarding 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

I Rule 144A allows qualified institutional buyers to buy and trade between themselves large blocks of privately placed issues III Rule 144A permits issuers to sell tradeable private placement units to qualified institutional buyers 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.

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

I Sending a customer a "red herring" preliminary prospectus II Accepting an indication of interest from the customer .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.

Which of the following actions on the part of a corporation would NOT require registration statement filing with the SEC under Rule 145? I Stock dividend distribution II Stock split III Merger with another publicly held company IV Spin off of a subsidiary as a publicly held company

I Stock dividend distribution II Stock split Corporate distributions that result in an issuer distributing the exact same class of security to existing shareholders do not require a registration statement filing with the SEC. Thus, a corporation distributing a stock dividend or splitting its stock would not require a registration statement filing. However, if a corporation spins off a subsidiary to its shareholders, the shareholders are receiving stock in a different company, so a registration statement must be filed for those shares. If a corporation merges with another publicly held company, a new corporation is being created, and a registration statement must be filed as well.

The Chief Executive Officer of PDQ Company is married and has a husband who owns 5% of the common equity of PDQ. Which of the following statements are TRUE regarding the husband and his PDQ stock holdings? I The husband is considered to be an "affiliate" under Rule 144 II The husband is not considered to be an "affiliate" under Rule 144 III To sell PDQ securities, the husband must file a Form 144 IV To sell PDQ securities, the husband is not required to file a Form 144

I The husband is considered to be an "affiliate" under Rule 144 III To sell PDQ securities, the husband must file a Form 144 The provisions of Rule 144 apply to not only insiders but also "affiliates" who are individuals "related" to someone who is an insider. The husband of the Chief Executive Officer of PDQ Corporation is an "affiliate," and sales of PDQ stock by the husband are subject to Rule 144.

Under Regulation Crowdfunding: I The maximum investment amount is $100,000 II The maximum investment amount is $500,000 III The maximum offering amount is $1,000,000 IV The maximum offering amount is $5,000,000

I The maximum investment amount is $100,000 III The maximum offering amount is $1,000,000 The maximum amount that can be invested in a single offering under Regulation Crowdfunding is $100,000. The maximum offering amount is limited to $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 raised 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.)

Which of the following statements are TRUE about Regulation A offerings? I The maximum offering amount permitted under the exemption is $50,000,000 within a 12 month period II An offering circular must be provided to all purchasers III Sales are limited to purchasers who are "resident" in the state where the issuer resides IV The issue can only be sold to a maximum of 35 non-accredited investors

I The maximum offering amount permitted under the exemption is $50,000,000 within a 12 month period II An offering circularmust be provided to all purchasers Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 "tiers" to the rule. Tier 1 gives a exemption from registration 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. Note that Tier 2 is also known as Regulation A+. While no prospectus is required, each buyer must be given disclosure in an Offering Circular. There is no limitation on the number of purchasers or the number of states in which this offering is made.

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

I This rule allows seasoned issuers to file a blanket registration which covers a 3 year period IV The issuer avoids the 20 day cooling off period and is allowed to issue the securities 2 business days after filing 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.

The final prospectus for a new registered securities issue: I contains the Public Offering Price II does not contain the Public Offering Price III must be given to the customer at, or prior to, confirmation of sale IV must be given to the customer at, or prior to, settlement of the transaction

I contains the Public Offering Price III must be given to the customer at, or prior to, confirmation of sale The final prospectus contains the Public Offering Price and the underwriter's spread on the front cover (this is not in the preliminary prospectus). Any purchaser of the new issue must be given the final prospectus, at, or prior to, confirmation of sale.

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

I exempt from the Securities Act of 1933 IV not required to be sold with a prospectus 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.

Under SEC rules, filing of the Form 144, required when selling restricted stock, is: I the responsibility of the seller II the responsibility of the broker-dealer III filed at, or prior to, the time that the sell order is placed IV filed within 10 business days of the placement of the sell order

I the responsibility of the seller III filed at, or prior to, the time that the sell order is placed Filing of the Form 144 to sell restricted stock is the responsibility of the seller. The form must be filed with the SEC at, or prior to, the time that the sell order is placed.

A registered representative who handles the accounts of wealthy clients is told the following by one of her customers: "I made a "seed" money investment of $8,000,000 in a venture capital financing of a start-up tech company and received unregistered stock. Now I want to sell $4,000,000 of that company's shares." In order to handle the sale, which of the following "due diligence" items must be reviewed by the representative? I The company must have registered shares with the SEC and must be current in its SEC filings II The customer must have held the stock fully paid, for at least 6 months III The customer must intend to make a bona fide public offering of the shares IV The dollar amount of shares that the customer wishes to sell cannot exceed the amounts stipulated under Rule 144

I, II, III, IV These are unregistered shares that are "restricted" as to resale. A public resale can be made under the provisions of Rule 144, and by selling via the rule, this will register the shares. In order to use the rule: The company must have gone public and must be current in its SEC filings. The customer must have held the stock fully paid, at risk for at least 6 months. The customer must intend to make a bona fide offer of the shares in the public trading markets. The customer must file a Form 144 with the SEC (notice of sale), that details the maximum permitted sale (the greater of 1% of the outstanding shares or the weekly average of the prior 4 weeks' trading volume). This amount can be sold every 3 months under Rule 144.

Which of the following statements are TRUE during the period that a non-exempt new issue is "in registration"? I No advertising or sale of the issue is permitted II The SEC may issue a deficiency letter requesting additional information before allowing registration to become "effective" III The preliminary prospectus with the final price is distributed IV The offering participants perform due diligence on the offering

I, II, IV During the 20 day cooling off period, no advertising or sale of the issue is permitted because registration is not yet effective. If the SEC has problems with the filing, it will issue a deficiency letter requiring more information. During the cooling off period, due diligence is performed by the parties involved in the offering. A preliminary prospectus (red herring) may be distributed, but it does not contain the final offering price because this is not known until the effective date.

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

II A preliminary prospectus may be sent to a prospective customer once the issue has entered into the 20 day cooling off period IV The use of the preliminary prospectus does not constitute an offer to sell under the Securities Act of 1933 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").

Which of the following statements are TRUE regarding restricted securities being sold under Rule 144? I The securities must be sold on a dealer basis II The securities must be sold on an agency basis III The firm is prohibited from soliciting orders to buy 144 shares IV The firm can solicit potential customers to buy 144 shares

II The securities must be sold on an agency basis III The firm is prohibited from soliciting orders to buy 144 shares 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.

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 distributionof 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

II This is a primary distribution of 300,000 shares IV Proceeds from the sale of 300,000 shares will go to the company 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.

Which statements are TRUE regarding purchase limitations under Regulation A? I Tier 1 offerings are subject to purchase limitations II Tier 1 offerings are not subject to purchase limitations III Tier 2 (Regulation A+) offerings are subject to purchase limitations IV Tier 2 (Regulation A+) offerings are not subject to purchase limitations

II Tier 1 offerings are not subject to purchase limitations III Tier 2 (Regulation A+) offerings are subject to purchase limitations There are no purchase limitations on Tier 1 (up to $20 million) Regulation A offerings. However, Tier 2 offerings (up to $50 million, also known as Regulation A+ offerings) 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.

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

II Trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person IV A bank or savings and loan institution 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!

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

II, III, IV 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.

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

II, III, IV 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.

Which of the following securities is NOT exempt from the Securities Act of 1933? Municipal revenue bond issues Common carrier issues Income bond issues U.S. Government bond issues

Income bond issues Income Bonds (a.k.a. Adjustment Bonds) are issued to existing bondholders by corporations which are in default. On these bonds, the corporation is only obligated to pay the interest on the bonds if it has sufficient income. Since these are corporate issues, they are not exempt. U.S. Government bonds, municipal bonds, and common carrier issues (airlines, railroads, etc.) are all exempt.

Which of the following best describes a tombstone announcement? It is an advertisement that is used to solicit the public to buy a new registered securities offering It is the document that is sent to prospective investors to give them information about the new securities offering It is the disclosure document that gives the purchaser the most complete information about a new securities offering It is an announcement of a new issue offering that is being registered with the SEC

It is an announcement of a new issue offering that is being registered with the SEC The "tombstone" is an announcement of a new issue offering that is being registered with the SEC. It is not an advertisement because new issue advertising is prohibited. Rather, it is a non-promotional announcement of the offering - and the information in it is limited to the name of the issuer, the type of security, the size of the offering, the price of the issuer and the names of the underwriter(s). The disclosure document for a registered new issue offering is the prospectus.

What risk is the greatest concern in a Rule 144A transaction?

Marketability risk 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 SEC rule gives an exemption to offerings of no more than $50 million within a 12 month time frame?

Regulation A Regulation A is intended to make it easier for start-up companies to raise capital. It gives an exemption from full registration 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. Tier 2 issues are also called Regulation A+ issues and can be exchange listed. Form 1-A is filed with the SEC to claim the exemption. It gives disclosure about the issue and a "20 day review period" must be completed before the issue can be sold. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

A start-up company looking to raise a small amount of "seed" capital would most likely use:

Regulation Crowdfunding "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.

How does restricted stock differ from control stock in a Rule 144 sale? Restricted stock must be held fully paid for a minimum of 6 months prior to sale while control stock can be sold immediately Control stock must be held fully paid for a minimum of 6 months prior to sale while restricted stock can be sold immediately Restricted stock is subject to the Rule 144 quarterly sales limitation while control stock is not Control stock is subject to the Rule 144 quarterly sales limitation while restricted stock is not

Restricted stock must be held fully paid for a minimum of 6 months prior to sale while control stock can be sold immediately Rule 144 covers resales of both restricted and control stock in the public market. Restricted stock is private placement stock that is not registered. It cannot be sold in the public market unless the company has gone public; it must have been held for a minimum of 6 months fully paid prior to sale; and it can only be sold over 3-month windows with limits placed on the maximum sale amount each quarter (no more than 1% of the outstanding shares, or the weekly average of the prior 4 weeks' trading volume). In contrast, control stock is registered stock owned by top-level officers of the company. To be registered, the company must be publicly trading. Sale of control stock is not subject to the minimum 6 month holding period requirement, but is still subject to the quarterly sales volume restrictions.

A brokerage research department has been following the common stock of Acme Corporation and has prepared a favorable research report on the company. The brokerage firm is a member of a syndicate handling an issue of Acme common stock that is currently in registration. A registered representative wishes to send the research report to all of his customers. Which statement is TRUE? The report can be sent only if it has been approved by a supervisory analyst The report can be sent only if it is accompanied, or preceded by, a preliminary prospectus The report can be sent only if it has been approved by the branch office manager The report cannot be sent until registration is effective

The report cannot be sent until registration is effective When an issue is "in registration," meaning it is in the 20 day cooling off period, nothing can be sent to a customer that can be considered to be an "offer" of the securities. Under the Securities Act of 1933, no offer can be made unless a final prospectus accompanies the offer. Since no final prospectus is available, the research report cannot be sent to customers since it would constitute an "offer." Furthermore, because the member firm is in the syndicate underwriting the issue, the research report cannot be issued for 10 days following the effective date (this is for an add-on offering; if this were an IPO, a research report could not be issued for 40 days following the effective date).

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

The research report may not be sent 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 statement is FALSE about Rule 147? Both the issuer and all purchasers must be state residents Resale is permitted to state residents only, for the 180 day period following the offering The rule exempts intrastate issues from State registration The rule exempts intrastate issues from Federal registration

The rule exempts intrastate issues from State registration The best answer is C.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."

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? This is prohibited under SEC rules 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 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 This is permitted without restriction

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 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.

To claim a private placement exemption:

a Form D must be filed with the SEC 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.

Capital market instrument:

a debt obligation with a maturity longer than one year. This is a source of long term capital for the issuer, hence the name.

Banker's acceptance (BA):

a money market instrument that is a time draft used to finance international trade. A bank issues a draft payable at face amount to the seller of the goods at a future date (typically 30 - 90 days in the future; the time that it takes to ship the goods to their destination). This draft can be traded at a discount to the face amount. The difference between the discount price and the face value is the interest on the banker's acceptance.

Treasury bond:

a negotiable, long term U.S. Government security issued at par with thirty years to maturity. Interest is paid semi-annually. The minimum denomination is $100.

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.

Under SEC rules, the purchaser of a Regulation D private placement must complete and sign a(n):

accredited investor questionnaire 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.

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."

Small Business Investment Company:

an exempt issue under the Securities Act of 1933, an investment company formed under SBA (Small Business Administration) rules to invest in minority businesses.

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.

Regulation D:

an exempt transaction under the Securities Act of 1933 that allows a private placement of securities to the public without the filing of a registration statement with the SEC. Under Regulation D, a private placement can be sold to an unlimited number of accredited (wealthy) investors, but only to a maximum of 35 non-accredited investors.

Regulation A:

an exemption 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.

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.

U.S. Government agency securities: trades settle same day are guaranteed by the U.S. Government are exempt securitiesunder the Securities Act of 1933 are sold through competitive bidat the weekly Treasury Auction

are guaranteed by the U.S. Government Under the 1933 Act, Agency securities are exempt and are not required to be registered with the SEC, nor are they required to be sold with a prospectus. Generally, agency securities trades settle in 1 business day, not the same day (for the purpose of the exam, though, because of the complexity of Agency settlements, these are NOTtested). Agencies are not guaranteed by the U.S. Government (with the sole exception of GNMA). Agencies are not sold through competitive bid. They are sold though selling groups on a negotiated basis.

All of the following are required to sell "144" stock EXCEPT: seller's representation letter buyer's representation letter issuer's representation letter broker's representation letter

buyer's representation letter 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.

American Depositary Receipts (ADRs):

commonly known as ADRs, these are negotiable securities representing ownership of the common or preferred stock of a foreign company that is being held in trust. The securities of the company are deposited in a foreign branch of an American bank. Receipts (ADRs) are issued against this deposit which entitle the ADR holder to receive all the dividends and to participate in the capital appreciation of the foreign company's securities. The number of ADRs issued against the shares on deposit may or may not be on a one-for-one basis. ADRs are perhaps the easiest and most popular way for Americans to invest in the securities of foreign companies. Another name for these securities is American Depositary Shares (ADSs).

An indication of interest for a new stock offering is normally taken:

during the 20 day cooling off period 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).

Indication of interest:

during the 20-day "cooling off" period for a new non-exempt securities issue that is in registration under the Securities Act of 1933, orders to buy the issue cannot be solicited; however, underwriters are permitted to accept non-binding indications of interest from customers to get an idea of investor interest in the securities.

A new issue private placement offering is: I exempt under Regulation D II non-exempt under Regulation D III allowed to be sold to a maximum of 35 non-accredited investors IV allowed to be sold to a maximum of 35 accredited investors

exempt under Regulation D allowed to be sold to a maximum of 35 non-accredited investors 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.

All of the following are QIBs under Rule 144A EXCEPTa(n): pension fund with at least $100 million of assets to invest employee benefit fund with at least $100 million of assets to invest institution with at least $100 million of assets to invest individual with at least $100 million of assets to invest

individual with at least $100 million of assets to invest 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.

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.

Crowdfunding offerings are typically purchased by: small investors accredited investors institutional investors qualified investors

small investors 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. (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.)

Under SEC Rule 145, all of the following corporate distributions by an issuer are exempt from the requirement to file a registration statement EXCEPT: stock dividend fractional stock split whole stock split stock spin off

stock spin off Corporate distributions that result in an issuer distributing the exact same class of security to existing shareholders do not require a registration statement filing with the SEC. Thus, a corporation distributing a stock dividend or splitting its stock would not require a registration statement filing. However, if a corporation spins off a subsidiary to its shareholders, the shareholders are receiving stock in a different company, so a registration statement must be filed for those shares.

Which statement is TRUE about the use of a "red herring" preliminary prospectus? The preliminary prospectus may only be sent to customers: once registration is effective who have paid for the issue who have expressed an indication of interest or who are likely purchasers, during the cooling off period who have expressed an indication of interest or who are likely purchasers, prior to the cooling off period

who have expressed an indication of interest or who are likely purchasers, during the cooling off period 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. Nothing may be sent to the customer prior to the start of the "20 day cooling off" period. 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.