Unit 8

Which of the following would fall under the USA's definition of exempt transaction? A) An issuer sells a new issue to a broker-dealer. B) An investment adviser purchases securities from the issuer. C) A real estate partnership sells interests to the public with no commission charge. D) An agent accepts an order from a client after having sent a research report dealing with that security.

A) An issuer sells a new issue to a broker-dealer. Transactions between issuers and broker-dealers (but not investment advisers) are exempt transactions. As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt. Don't be lured into thinking that accepting an order from a client is unsolicited. That's not true in this case because it is the result of the research report.

What is the procedure by which federal covered securities, registered under the Investment Company Act of 1940, file their offerings with state securities Administrators? A) Notice filing B) Federal covered securities need not file with state securities Administrators C) Qualification D) Coordination

A) Notice filing Notice filing primarily applies to securities issued by investment companies, such as mutual funds, registered under the Investment Company Act of 1940. Offerings of securities that are not federal covered securities must be registered with the states by either coordination or qualification, unless exempt.

Under the NSMIA, state securities Administrators retain authority to A) enforce antifraud provisions. B) impose state registration requirements on all investment advisers. C) forward all filing fees received from issuers, broker-dealers, and agents to the SEC. D) regulate the securities registration and offering process for registered investment companies.

A) enforce antifraud provisions. Under the NSMIA, state Administrators are not prohibited from enforcing the antifraud provisions of state and federal securities laws. Investment companies and SEC-registered advisers are exempt from state registration, but they may be required to pay state filing fees.

Which of the following statements regarding the private placement exemption under the USA are TRUE? 1. There may be no more than ten offers to noninstitutional purchasers during any consecutive 12-month period. 2. The seller reasonably believes that the retail buyer is purchasing for investment only. 3. No investors may resell stock acquired in a private placement without a prescribed holding period. 4. Commissions may be paid on sales to noninstitutional purchasers. A) II and III. B) I and II. C) III and IV. D) I and III.

B) I and II. There is a limit of 10 offers during any 12 months to noninstitutional (retail) purchasers. Because the purchase is "for investment purposes only", the seller must have reason to believe that retail buyers intend to hold the security rather than turn it over quickly. However, that holding period is only for retail buyers; there is no holding period for institutional purchasers and it is only on institutional transactions that commissions may be paid.

Which of the following securities is not exempt from the registration procedures of the Uniform Securities Act? A) Common stock issued by a public utility company whose rates are subject to state regulation B) Variable annuities issued by an insurance company authorized to do business in this state C) General obligation bonds issued by a city located in this state D) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3)

B) Variable annuities issued by an insurance company authorized to do business in this state Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA.

The Securities Act of 1933 regulates A) investment advisory firms. B) offerings of new securities. C) broker-dealers and associate members. D) self-regulatory organizations (SROs).

B) offerings of new securities. The Securities Act of 1933 is designed to prevent fraud and protect the public from misrepresentation in the marketing of new issues. Remember, the Securities Act of 1933 deals with new issues, whereas the Securities Exchange Act of 1934 deals with the secondary market, persons (i.e., broker-dealers, associate members), and exchanges.

Alpha Electronics Company wishes to raise capital by issuing some securities in its home state. They have been advised by their legal counsel that registration with the Administrator is unnecessary because the issue is exempt. Should Alpha be served with an order, the burden of proving its issue is exempt is on A) the Administrator. B) the company. C) the lawyers. D) the court.

B) the company. In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption.

Under the Uniform Securities Act, which of the following circumstances would exempt a security from registration? 1. The security is exempt from registration under the act. 2. The transaction in which the security is sold is exempt under the act. A) II only B) I only C) Both I and II D) Neither I nor II

C) Both I and II It is illegal to sell securities that are not registered unless the security or the transaction itself is exempt from state registration requirements. This applies to new issues (primary distributions) and secondary market transactions.

The registration requirements of the Securities Act of 1933 would not apply to which of the following? A) Securities issued by foreign governments with whom the United States has diplomatic relations B) Stocks listed on the New York Stock Exchange C) Stocks and bonds issued by insurance companies D) Fixed annuities and other fixed insurance contracts

D) Fixed annuities and other fixed insurance contracts Although federal covered securities, such as those listed on the NYSE, and securities issued by insurance companies and foreign governments are exempt under the Uniform Securities Act, they are not exempt under the Securities Act of 1933. The registration requirements never apply to non-security products, such as fixed annuities.

As defined in the Uniform Securities Act, the term security would include which of these? 1. Debentures 2. Keogh plans 3. A preorganization subscription 4. Whole life insurance policies that pay dividends to their policyholders A) II and III B) I and IV C) II and IV D) I and III

D) I and III It is always easier to remember the things that are not securities—retirement plans, nonvariable insurance policies, collectibles, commodities, condominiums, and currencies. Unless the insurance contract has the word variable, it is not a security.

Which of the following are exempt transactions as defined in the Uniform Securities Act? 1. An agent selling a security issued by a foreign government with which the United States has diplomatic relations to an individual client 2. An agent filling a buy order based upon an unsolicited request from an existing client to purchase a nonexempt security 3. The sale of an unregistered nonexempt security in a private, nonpublicly advertised transaction to 14 noninstitutional investors over a period not exceeding 12 months 4. The sale of unlisted securities by a trustee in bankruptcy A) III and IV B) I and II C) I and III D) II and IV

D) II and IV Unsolicited customer orders, regardless of the type of security involved, are always exempt transactions, as are sales by fiduciaries. The private placement exemption is limited to 10 noninstitutional offerees, so 14 purchasers would certainly be over the limit. While a security issued by a foreign government with which the United States has diplomatic relations is an exempt security, a solicited sale by an agent to an individual client is not an exempt transaction.

Which of the following is an issuer transaction? A) John sold the securities he had inherited from his father to his neighbor, Peter, at the market price without charging a commission. B) John purchased shares of XYZ Corporation in a transaction made in the over-the-counter market. C) John inherited securities of XYZ Corporation from his father, who—as a founder to the company—received the shares directly from the company as a result of stock options. D) John's father, a founder of XYZ Corporation, purchased shares of XYZ directly from the corporation subsequent to its founding without paying a commission.

D) John's father, a founder of XYZ Corporation, purchased shares of XYZ directly from the corporation subsequent to its founding without paying a commission. An issuer transaction is one where the issuer of the securities receives the proceeds of the sale. John's father, although a founder of the company, purchased shares directly from the company. This transaction is an issuer transaction because the firm received the funds from the sale of the shares. In all the other instances, the firm—the original issuer of the securities—did not receive the proceeds of the transaction. These transactions are called nonissuer transactions.

In the Howey decision, the U.S. Supreme Court held that in order for an investment contract to be considered a security, it must represent A) debt in a publicly traded corporation whose managers are engaged in commercial activity. B) an investment of money in a common enterprise with the expectation of profit from the efforts of the investor. C) personal interest in a business. D) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.

D) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others. In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.

Under the Uniform Securities Act, 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.

Which of the following transactions are not exempt from registration? A) Isolated nonissuer transactions B) Unsolicited nonissuer transactions C) Transactions with intrastate manufacturing companies D) Transactions with pension or profit-sharing trusts

C) Transactions with intrastate manufacturing companies A transaction with a corporation that is not a financial institution is neither an exempt transaction nor exempt from the registration rules.

All of the following are exempt transactions under the Uniform Securities Act except A) a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator. B) a securities transaction by an executor. C) a rescission offer, sale, or purchase. D) initial sale of shares to in-state residents of a local manufacturing company.

D) initial sale of shares to in-state residents of a local manufacturing company. An initial sale of shares to in-state residents is an intrastate initial public offering and must be registered with the state securities Administrator. A securities transaction by an executor; a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator; or a rescission offer, sale, or purchase are exempt transactions.

A discussion referring to blue-sky laws would include all of the following except A) forms requiring issuers selling securities in the state to comply with state securities laws. B) a state securities law that grants state securities Administrators the power to deny or revoke a broker-dealer's or an agent's registration within its state. C) state laws that are designed to protect the public against fraud in securities sales within a state. D) the Securities Act of 1933 and Securities Exchange Act of 1934.

D) the Securities Act of 1933 and Securities Exchange Act of 1934. Blue-sky laws are state securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal securities laws.

Which of the following transactions would be included in the USA's definition of exempt transaction? 1. A banker liquidating stock pledged as collateral for a loan that has gone into default 2. An offer to purchase a new stock made to 5 individuals and 15 institutional investors in this state during the past 12 months 3. An isolated nonissuer transaction 4. The sale of preorganization certificates to 10 individuals with no commission being paid A) I, II, III, and IV B) II and III C) I and II D) III and IV

A) I, II, III, and IV All of these are included in the USA's definition of an exempt transaction. Sales made by a bona fide pledgee are exempt. Even though the number of offerees in the private placement exceeds 10, that limitation does not apply to institutional investors. A preorganization certificate may be sold to as many as 10 persons, while a private placement may not be offered to more than 10 (not counting institutional investors).

Under the Uniform Securities Act, one method of securities registration is qualification. When that method is used, which of the following statements is correct? 1. The registration is valid for one year from the effective date. 2. The registration is valid for one year from the effective date unless the underwriter or issuer still has some unsold shares. 3. The registration is valid until the next December 31st. 4. The registration statement may be amended to increase the number of shares in the offering as long as the public offering price and the underwriter's compensation are not changed. A) II and IV B) II and III C) I and III D) I and IV

A) II and IV Under the USA, when a security is registered, the registration is valid for one year after the effective date. However, the act provides that if the issuer or underwriter still has unsold shares from the offering, the effective date may be extended, so this is a more accurate choice. The act also allows the registration statement to be amended to allow for an increase in the number of shares to be offered as long as the public offering price and the underwriter's compensation are not changed.

All of the following situations are exempt transactions complying with the requirements of the Uniform Securities Act except A) the executor of an estate liquidates 1,000 shares of IBM held by the estate. B) Mammoth Mutual Fund purchased 250,000 shares of common stock in a nonissuer transaction. C) Broker-Dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days. D) Broker-Dealer A has put together a syndicate of 15 insurance companies and pension funds to purchase the entire issue of XYZ Corporation's preferred stock.

C) Broker-Dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days. Under the Uniform Securities Act, an unregistered private placement may be offered to no more than 10 prospective purchasers, with the exception of financial institutions and other broker-dealers. Transactions by executors, the sheriff, marshals, receivers, trustees in bankruptcy, guardians, or conservators are exempt. Sales to financial institutions, such as mutual funds and insurance companies, are also exempt.

Which of the following are exempt from state registration? `. A common stock traded on the OTC Link whose bonds are listed on the NYSE 2. An isolated nonissuer transaction 3. A transaction by an administrator of an estate 4. A transaction with no commissions, directed by the offeror to no more than 50 persons in the state who buy the security for investment purposes only A) II and III B) I and IV C) III and IV D) I and II

A) II and III Isolated nonissuer transactions and transactions by an ​administrator are included in the list of exempt transactions​. The private placement exemption is limited to a maximum of 10 offers to retail clients. If this were to institutions (where there is no numerical limitation), commissions would be paid and immediate resale is permitted. If the common stock is federal covered (listed on the NYSE) and, therefore, exempt from registration, then a senior security (such as the bond) would also be covered. But it doesn't work in reverse.

ABC Securities is a two-office broker-dealer in State X that intends to underwrite an initial public offering of 1 million shares of stock for Circular, Inc. If the issue will be offered exclusively to residents of State X, registration of this offering A) will most likely occur by coordination. B) will most likely occur by qualification. C) will most likely occur by notice filing. D) is not required because of the de minimis test.

B) will most likely occur by qualification. An issue done solely within one state (intrastate offering) is registered using qualification. Notice filing is used by certain issues of federal covered securities, primarily investment companies. Coordination is the simultaneous registration on both the federal and state levels; neither of those two could possibly apply to the circular offering.

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 Uniform Securities Act, which of the following are not issuers? 1. The City of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds 2. AAA Partnership, which issues certificates of interest or participation in its oil, gas, and mining titles 3. AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering 4. The United States government, which proposes to offer Treasury bonds A) I, II, and IV B) I, II, and III C) II only D) I only

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

Ways in which offerings under Rule 506(c) of Regulation D of the Securities Act of 1933 differ from those under Rule 506(b) include each of these except A) the issuer must take "reasonable steps" to verify that all purchasers are accredited investors in a 506(c) offering, while no such obligation falls upon issuers in a 506(b) offering. B) all purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501, whereas Rule 506(b) permits a limited number of sophisticated but not accredited investors. C) general solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b). D) securities issued under Rule 506(c) are federal covered, while those under Rule 506(b) are not.

D) securities issued under Rule 506(c) are federal covered, while those under Rule 506(b) are not. Under the NSMIA, any security issued under the federal transaction exemption offered under Rule 506, either (b) or (c), is considered a federal covered security. Rule 506(c) permits advertising (general solicitation) but requires that the issuer take reasonable steps to ensure all purchasers meet the accredited investor standard. In a Rule 506(b) offering, up to 35 nonaccredited investors are permitted with no limit placed on the number of accredited investors.