65- sec 4: Regulation of Securities and Issuers

Notice Filing

(1) Method by which a registered investment company and certain other federal covered securities file records with state securities Administrators. (2) SEC-registered advisers (federal covered) may have to provide state securities authorities (the Administrator) with copies of documents that are filed with the SEC and pay a filing fee. -Do this registration when there is more than one state that it is being registered in (when SEC registration is required) -**Basically individual, state-by-state registration --Register with each state individually

Initial or Primary offering

-An issuer transaction involving new securities is called a PRIMARY offering -If it is the first time an issuer distributes securities to the public, it is called an INITIAL PUBLIC OFFERING **ALL primary offerings are issuer transactions

The Administrator by rule can deny or revoke the registration exemption of:

-Any security issued by a person organized exclusively for religious, educational, charitable purposes -Any investment contract issued in connection with an employee's stock purchase, savings, pension, profit-sharing, or similar benefit

Exempted Securities under the Securities Act of 1933 (federal)

-Any security issued or guaranteed by the US (Canadian securities are not exempt) -Any commercial paper that has a maturity of no more than 9 months (270 days) -Any security issued by a person organized and operated exclusively for religious, educational, charitable purposes -Any interest in a railroad equipment trust -Any security issued by a federal or state bank

6 items that are not a security***

1. insurance or endowment policy or annuity contract 2. interest in a retirement plan like an IRA or 401k plan 3. collectibles 4. commodities (precious metals/grains) including futures and forward contracts 5. Condominiums used as personal residence 6. currency

Escrow (impound)

Administrator may require security to be placed in escrow if the security is issued: -within 3 years -to a promoter at a price substantially different than the offering price -to any person for a consideration other than cash There have been many instances where

Which of the following are defined as securities under the Uniform Securities Act? I. Real estate investment trust certificates II. Preorganization subscription agreements III. Shares of treasury stock IV. Voting-trust certificates issued by a corporation undergoing a reorganization

All

Are annuities a security?

Annuities with fixed payments are not securities, but variable annuities are because they are dependent on the investment performance of securities within the annuity

Rule 147 Exemption

Any security offered and sold exclusively to persons resident within a single state can be exempt from registration requirements. Persons buying security must have their primary residence in said state. -This exemption is ONLY available if the entire issue is offered and sold exclusively to residents within a single state -If any sales take place to non-residents, the entire issue loses it exemption -Purpose of this exemption is to allow issuers to raise money on a local basis, provided the business is operating primarily within that state

In general, registration statements for securities under the USA are effective for A. a period determined by the Administrator for each issue B. 1 year from the effective date C. 1 year from the date of issue D. 1 year from the previous January 1

B on the state level, securities registration statements are generally effective for 1 year from the effective date.

An agent can sell an unregistered security that is not exempt from registration in the state if the purchaser of the security is a bank or other institutional buyer. Why?

Because the sale of the securities to financial institutions is an EXEMPT TRANSACTION so the sale can be made without registration.

Which of the following is NOT an accredited investor? A) A registered open-end investment company with net assets of $600,000. B) Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. C) An individual with a net worth, including the value of her primary residence, that is greater than $1 million. D) An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year.

C

A bank purchases 200 shares of a stock. In regard to this purchase, the bank would be considered A) a corporate investor B) a small investor C) an institutional investor D) a public investor

C Banks and insurance companies are regarded as institutional investors, regardless of the size of orders they place.

SEC rule 501

Classifies an accredited investor for the purpose of Reg D

Q: Corporation has been in business for 20 years. They need additional capital for expansion and determine that a public offering in their home and neighboring states is appropriate. Which method of securities registration would most likely be used to register this initial public offering? -Coordination -Notice Filing -Qualification

Coordination Because this offering is being made in more than one state, SEC registration is necessary. The state registration would be coordination, which is the simultaneous registration of a security with both the SEC and the states

Each of the following persons is able to issue securities EXCEPT A) a corporation B) a credit union C) a partnership D) an individual

D Individuals, (non-natural persons), cannot issue securities. You can't sell stock in yourself.

All of the following securities transactions are exempt under the USA EXCEPT A) a sale of stock to a pension trust B) a purchase of stock by an underwriter from the issuer in a firm commitment underwriting C) an offer of preorganization certificates made to 25 persons that involves no commission or payment D) a sale of private placement securities to 25 noninstitutional investors in a state

D Private placements are exempt under the USA if they are offered to no more than 10 general public (retail) investors in a 12-month period. Institutional investors are not included in the numerical limitations. Transactions involving issuers and underwriters, pension trusts, and other financial institutions are also exempt. The sale of preorganization certificates is exempt if there is no commission for solicitation or payment by subscribers and no more than 10 subscribers; there is no limit to the number of offers that may be made.

Under the Securities Act of 1933, the definition of prospectus includes I. an offer of a security made orally II. a tombstone advertisement for a new issue of common stock III. an offer of a security made in an email communication

III

Regulation D

SEC rules concerning PRIVATE PLACEMENTS and defining related concepts such as ACCREDITED INVESTOR.

Issuer

any person who issues or proposes to issue any security -Most common issuers are companies and governments (federal, state, and municipal govs and their agencies/subdivisions)

private placement

primary offerings in which shares are sold directly to a small group of institutional or wealthy investors

3 methods of state securities registration

-notice filing -coordination -qualification

Registration by Qualification

A process that allows a security to be sold in a state. It is available to an issuer who files for the security's registration with the state Administrator, meets minimum net worth, disclosure, and other requirements, and files appropriate registration fees. The state registration becomes effective when the Administrator so orders. -Securities not eligible for registration by another method must be registered by qualification -Securities only sold in ONE state will be registered by qualification -***Registration by qualification becomes effective whenever the administrator says so

Under the USA, which of the following persons is responsible for proving that a securities issue is exempt from registration? A. Underwriter B. State Administrator C. The person requesting the exemption D. There is no need to prove eligibility for an exemption

B

Under the Uniform Securities Act, which of the following statements about federal covered securities is NOT true? A) Federal covered securities include securities sold under Regulation D of the Securities Act of 1933. B) Federal covered securities must be registered with the states. C) The issuer of a federal covered security may be required to pay fees to the states. D) A security issued by an investment company registered under the Investment Company Act of 1940 is a federal covered security.

B Federal covered securities are not required to be registered with the states, but issuers of federal covered securities may be required to pay fees to the states (notice filing). Private placements (Regulation D) and investment companies both describe types of federal covered securities.

An issuer wishing to comply with Regulation D of the Securities Act of 1933 must file a Form D with the SEC A) no later than 30 days after the first sale B) no later than the time of the first sale C) no later than 15 days after the first sale D) no less than 20 days prior to the first expected date of sale

C

All of the following describe exempt transactions EXCEPT A. a BD purchases securities from a corporation as part of an underwriting commitment B. a bank sells its entire publicly traded bond portfolio to another bank C. a bank sells its publicly traded bond portfolio to an insurance company D. an employee of a bank buys securities recommended by her agent at ABC brokerage corporation

D The purchase of securities from a BD by an employee of a bank is a nonexempt transaction It is a sale of a security by a BD to a member of the public and is therefore NOT exempt

Under the USA, which of the following are exempt transactions? I. A transaction between an issuer and an underwriter II. An unsolicited customer order to buy an exempt security III. U.S. Treasury bonds IV. Municipal securities

I and II Transactions that occur between an issuer and underwriter and an unsolicited customer order to buy any security (exempt or nonexempt) are exempt transactions. It is important to remember that a transaction's exempt status generally depends on the trade's participants and/or type of trade, rather than on the security. U.S. Treasury bonds and municipal securities are exempt securities. The manner in which they are sold and to whom determines whether it is an exempt transaction.

Which of the following are exempt transactions? I. A nonissuer transaction with a bank in a NASDAQ traded security II. An unsolicited request from an existing client to purchase a nonexempt security III. The sale of an unregistered security in a private, nonpublicly advertised transaction to 10 noninstitutional purchasers over a period not exceeding 12 months IV. The sale of unlisted securities by a trustee in bankruptcy

I, II, and IV III is not an exempt transaction because the private placement exemption is limited to 10 offerees, not 10 purchasers.

What is a security

Investment contract For an instrument to be a security, it must include (1) an investment of money (2) in a common enterprise (3)with the expectation of profits (4) to be derived primarily from the efforts of a person other than the investor

Issuer transaction

One in which the proceeds of the sale go to the issuer. -All newly issued securities (like IPOs) are issuer transactions -When a company raises money by selling securities to investors, the proceeds from the sale go to the company itself

Registration is effective when ordered by the Administrator in the case of registration by: -coordination -integration -notice filing -qualification

Qualification Registration by qualification is the only registration method where the administrator sets the effective date. The effective date under registration by coordination is set by the SEC, and notice filing is merely the filing of certain documents by certain federal covered securities

Rule 506 - Regulation D

Rule 506 merely requires that the securities not be advertised to the general public and not be sold to more than 35 unaccredited investors. Any type of security may qualify for this exemption, including stocks and debentures. There is no limit on the dollar value of the issue, so long as the other restrictions are met. -506b: can sell the offering to an unlimited amount of accredited investors and up to 35 non accredited investors -506c: permits offering to be advertised as long as: ---all purchasers are accredited investors ---issuer takes all reasonable steps to verify they are accredited investors

What is included as a federal covered security under the NSMIA?

Under the NSMIA, federal covered securities include all investment companies registered under the Investment Company Act of 1940, regardless of where they trade. Any stock listed on Nasdaq is federal covered, and that makes any security equal to or senior (like their bonds) also federal covered, regardless of where they trade. Canadian government and municipal securities are not federal covered (although under the Uniform Securities Act, they are exempt securities).

A closed-end investment company registered under the Investment Company Act of 1940 wishes to commence offering its shares to States A, B, C, and D. It could be required to: A. coordinate its federal registration with each of the 4 states B. notice file C. register by qualification in each of the states D. do none of these because the investment companies registered under the Investment Company Act of 1940 are federal covered securities and are exempt from registration

B Although these are federal covered securities and exempt from traditional registration, as a registered investment company, you can expect that it will be required to engage in a notice filing

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? I. The city of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds II. AAA Partnership, which issues certificates of interest or participation in its oil, gas, and mining titles III. The AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering IV. The United States government, which proposes to offer Treasury bonds

II 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."

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

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

Are condominiums a security?

-If a condo is purchased in a resort area with the goal of placing it into a rental pool and renting it out most of the year, and is used only for personal vacation time, it is considered a SECURITY because there is a profit motive, typically reliant on the efforts of a third party (the rental agent) -However, if someone has chosen to live in the condo as a personal residence, it is not a security

All of the following must be specified in the state registration statement of the security EXCEPT A) the total amount of the security that will be offered in each state B) all other states where the security is currently registered or will be registered C) a stop order from any other state that affects the offering of t

A

The Uniform Securities Act would consider which of the following insurance products to be a security? A) Variable life insurance B) Fixed annuity C) Modified endowment life insurance D) Mortgage life insurance

A The key is the word variable. Insurance products are excluded from the definition of a security unless the word variable is part of the description. So, variable life and variable annuities are securities—the rest are not.

As a federal covered security, the KAPCO Growth Fund is required to notice file under the laws of State A. State A's Administrator can require the issuer to provide copies of A) the schedule of compensation to the fund manager B) a report of the amount of the federal covered security sold in the state C) proxy statements D) a listing of the officers and directors of the issuer

B Because those companies that are required to notice file are levied a fee based on the amount of securities sold in the state, information relating to the amount of sales in the state must be reported.

Q: Which of the following securities is NOT exempt from registration under the USA? A. shares of investment companies registered under the Investment Company Act of 1940 B. Shares sold on NASDAQ C. AAA rated promissory notes of 100k that mature in 300 days D. Bonds issued by Canada

C To be exempted, promissory notes cannot have a maturity of beyond 270 days

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

D 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.

With regard to the Uniform Securities Act, which of the following statements regarding the omission of a material fact by an agent is NOT true? A) It is a violation even if material facts were unknowingly omitted. B) It is a violation even if the client failed to make a transaction. C) It is a violation because it is a unethical or fraudulent practice. D) It is not a violation if the security is exempt from registration under the Uniform Securities Act.

D Deliberate omission of material facts is a fraudulent practice under the Uniform Securities Act, whether securities are exempt or nonexempt or even if the transaction was exempt. If done unknowingly, then it is a unethical business practice (fraud requires deliberate action) and is still a violation.

nonissuer transaction

Transaction in which the proceeds of the sale do not go to the entity the originally offered the securities to the public -In a nonissuer transaction, the proceeds of the sale go to the investor who sold the shares -Because the shares are not new, they are called SECONDARY TRADING -EX: trades on the NYSE or NASDAQ

Exempt Security/Transaction

-excused from requirements 1. Security -does not need to be registered in order to be sold -no requirements to file advertising with Administrator 2. Transaction -does not need to be registered with the Administrator -filing of advertising material is not required -***exempt from regulations because of the manner in which the sale is made or because of the person to whom the sale is made

When a new issue of common stock is in registration, agents are permitted to A) furnish prospects with a final prospectus B) accept tentative orders C) send a copy of the preliminary prospectus D) receive indications of interest, along with a good-faith deposit

C An issue in registration has not yet become effective. A preliminary prospectus may be sent and indications of interest may be accepted, but no orders or money are accepted until the effective date.

Types of Exempt Securities

-Government/municipal securities (US, Canadian, foreign) -Depository institutions -Insurance company institutions (except for variable annuities those have to register) -Public utility & common carrier institutions -Federal covered securities -Securities issued by nonprofit organizations -securities of employee benefit plans -certain money market instruments

Which of the following can issue stock? A) A state B) A city C) A corporation D) The U.S. Treasury

C Corporations issue stock. Federal and state governments, including municipalities can issue debt securities, but not equity securities. Even though the Savings Bonds advertisements read, "Take stock in America, buy U.S. Savings Bonds," that is a fiction because you can't buy stock in a government and, of course, buying bonds is lending money.

Registration by Coordination

-Most common form of registration for those securities that are not federal covered -A process that allows A security to be sold in a state. It is available to an issuer that files for the security's registration under the Securities Act of 1933 and files duplicates of the registration documents with the state administrator. The state registration becomes effective at the same time the federal registration statement becomes effective. -**Effective date begins whenever the SEC says so

Q: Which group of instruments is NOT composed of securities? A. stock, treasury stock, rights, warrants, and transferable shares B. Voting trust certificates and interests in oil and gas drilling programs C. Commodity futures contracts and fixed payment life insurance contracts D. Options on securities and interests in multilevel distributorship arrangements

C

Types of Exempt Transactions

-Isolated nonissuer transactions -Unsolicited brokerage transactions -Underwriter Transactions -Bankruptcy, guardian, or conservatory transactions -Institutional investor transactions (banks, insurance) -Limited offering transactions (called a private placement directed at not more than 10 offerees) -Preorganization certificates -Transactions with existing security holders -Nonissuer transactions by pledgees --=pledgee=one who received the security as collateral for a loan ---Example: You pledged stock as collateral for a loan and defaulted on your obligation. The lender will sell your stock to try and recoup his loss

Which of the following does NOT have a federally imposed exemption from registration with the SEC? A) Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are not used for capital expenditures B) Shares of bank holding companies traded on the New York Stock Exchange C) Securities issued or guaranteed by a state or political subdivision of a state D) Securities issued or guaranteed by the U.S. government

B Under the Securities Act of 1933, shares of bank holding companies listed on the NYSE are not exempt securities and they must be registered with the SEC. However, securities of commercial banks are exempt because they are regulated by the Controller of the Currency or some other banking agency. What might be confusing is that these NYSE-listed shares are federal covered securities, which makes them exempt from registration with the states. Securities issued or guaranteed by the U.S. government are exempt from registration under federal law. All securities issued or guaranteed by a state or political subdivision of a state qualify for a federal exemption. Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are used for working capital purposes rather than the purchase of fixed assets also have federally imposed exemptions.

The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Which of the following qualify for an exemption from registration under the act? A) Common stock issued by life insurance companies authorized to conduct insurance sales in that state B) Commercial paper with no more than 9 months to maturity that is in 1 of the 3 highest ratings by a nationally recognized rating agency and in a minimum denomination of $10,000 C) Equipment trust certificates issued by railroads whose rates are not subject to regulation by a state or federal agency D) Bonds that are obligations of the People's Republic of North Korea

A A security issued by a life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads under the jurisdiction of other state or federal regulators carry an exemption from state securities registration for their equipment trust certificates, but if the railroad is not regulated (the case here), the exemption does not apply. The commercial paper would qualify if the denomination was $50,000 instead of $10,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations. At the time of this writing, North Korea is on a very short list of countries who do not qualify.