REG - Fed Tax Process

Question 1

When is someone considered an insider?

Answer 1

Includes officers, directors of any % ownership. Also includes owners of more than 10% of any class of an issuer’s equity securities.
Beneficial ownership adds to the individual’s equity ownership, when equity stock is owned by the spouse, minor children, relative in same house or held in trust for owner as beneficiary.
Read carefully - owners of debt aka creditors are not considered insiders

Question 2

Which are considered sales of securities covered by Securities Act of 1933?

Answer 2

Includes securities as part of business reorg, issuance of stock warrants, employee stock purchase plan.
Stock dividends or splits are not sales.

Question 3

What is the effective date of the registration statement?

Answer 3

Waiting period - 20th day after filing - effective date

Against the law to sell securities until the effective date but offers may be made

Question 4

What kind of offers can be made prior to effective date?

Answer 4

Offers,not sales, are permitted during the period between filing and effective date.
Oral offers - no restrictions
Tombstone ads that identify security, price, and who will take orders
Red-herring prospectus - preliminary prospectus with legend in red ink - written offers

Question 5

What are the forms - S1, S2, S3, SB1 and SB2?

Answer 5

S1 - basic long form registration statement
S2, S3 - require less detailed disclosures than S1
SB1, SB2 - permitted for small businesses (revenues <25M$)

Question 6

What are exempt securities?

Answer 6

• Commercial paper (eg note, draft, check) with a maturity of 9 months or less for commercial purpose, not investment
• Intrastate issues - securities offered and sold only within one state (issuer must be resident of state and doing 80% of business in state, purchasers are state residents, resales only to state residents)
• Govt securities, banks, quasi hospital authorities, savings and loans supervised by federal authorities, common carrier regulated by Interstate Commerce Commission
• Existing shareholder and issuer with no commissions or other consideration paid and same issuer - ex: stock split
• Non profit religious, educational or charitable org securities
• Certificates issued by receiver or trustee in bankruptcy
• Insurance and annuity contracts
  Exempt from registration under act of 1933.

Question 7

What are Regulation D exemptions?

Answer 7

Rule 504 - exempts an issuance of securities up to 1M sold in 12 month period to any number of investors - seed capital exemption
505 - exempts issuance of up to 5M in 12 month period - 35 unaccredited investors (need disclosure) limit and unlimited accredited, restricted right to resell
506 - private placement of unlimited amount of securities, 505 + unaccredited investors must be sophisticated

Question 8

What is a tombstone advertisement?

Answer 8

A tombstone advertisement is allowed to inform potential investors that a prospectus for the given company is available, not a substitute for the prospectus. It is not an offer to sell or the solicitation of an offer to buy the securities.

Question 9

What is the purpose of registration of securities under the Securities Act of 1933?

Answer 9

Provide potential investors with full and fair disclosure of all material info relating to the issuance of securities, including such info as the principal purposes for which the offering’s proceeds will be used, in order to make a prudent investment decision.
It does not imply that the SEC has evaluated the financial merits of the securities offered and it does not purport to prevent offerings in which mgmt fraud or unethical conduct is suspected. They have not determined the accuracy of the facts presented in FS.

Question 10

If no exemption is applicable under Securities Act of 1933, what is required to be prepared and filed?

Answer 10

Registration with SEC accompanied by prospectus - given to prospective purchasers of the securities
Act 1933 requires issuers to file both a registration statement and a prospectus.

Question 11

What are exempt securities under Securities Act of 1933? Dollar amount? For commercial or investment?

Answer 11

Notes if they have a maturity of 9 months or less and if they are used for commercial purposes rather than investment. If it is greater than 9 months and for commercial, it is not exempt.

Question 12

Definition of a security under Securities Act of 1933 vs 1934

Answer 12

1933 - very broad, as long as investor intends to make profit through others effort (incl notes, bond certificate of interest, and debentures)
1934 - same investor intention to profit through others effort, but does not include certificates of deposit

Question 13

What happens in a shelf registration?

Answer 13

If issuer makes offering using shelf registration, the actual issuance takes place over potentially a long time and thus, must keep the original registration statement updated.

Question 14

Blue sky laws - when must they be followed?

Answer 14

Even though the issuer may comply with the 1933 act, it must also comply with any applicable state blue sky laws that regulate the securities at the state level.

Question 15

What are some other rules for registration?

Answer 15

• unlawful for company to offer or sell securities prior to the effective registration date
• registration becomes effective on the 20th day after filing under SEC issues a stop order
• under 505 and 506, no general offering or solicitation is allowed

Question 16

Antifraud provision applied when and used by who

Answer 16

Securities subject even if exempt under 1933 act. Person defrauded and SEC can challenge fraud committed.
Act 1934 antifraud provisions apply to all transactions involving interestate commerce whether or not the corp involved has to register under the act.

Question 17

Why were S2 and S3 adopted by SEC

Answer 17

To decrease work that issuers have in preparing registration statements by permitting them to give less detailed disclosure under certain conditions than S1 which is the basic long form.

Question 18

Reg D- Rule 504

Answer 18

exempt issuance of securities up to 1M sold in a 12 month period to any number of investors.
Not required to restrict the purchasers resale. unlimited accredited
General offerings and solicitations are permitted

Question 19

Reg D- Rule 505

Answer 19

exempts issuance of up to 5M in a 12 month period. Permits sales to 35 unaccredited and to any number of accredited. If nonaccredited are involved, they must be furnished with at least an audited BS. Other audited FS and info should be provided if readily available.
Restricts purchasers right to resell for two years as required. Must notify the SEC of the offering within 15 days after the first sale of securities.
No general offering or solicitation is permitted.
The issuer must restrict the purchasers right to resell the securities.
Unaccredited must recieve a formal registration statement that has desc of offering. Accredited need not receive any formal info.

Question 20

Reg D- Rule 506

Answer 20

exempts issuance over 5M, up to 35 unaccredited investors (must be sophisticated), unlimited accredited
No general offering or solicitation is permitted.
The issuer must restrict the purchasers right to resell the securities.

Question 21

Regulation A

Answer 21

used only for issuances up to 1.5M. Issuer must file an offering circular (does not need to be audited) with SEC instead of more costly disclosure reqs of full registration under 1933 act. No rules to unaccredited or accredited.

Question 22

Intrastate issues - what and resales?

Answer 22

Issuer is resident of state, doing 80% of business in state, only sells/offers securities to residents of state - exempt under 1933 and 1934 act as intrastate issue, not regulated by SEC.
Resales can only be made to residents of that state nine months after the issuer’s last sale.
Note not all intrastate is exempt

Question 23

Private placement offerings under Reg D of Act 1933 conditions?

Answer 23

Cannot be subject of an immediate unregistered reoffering to public.

Question 24

What does the 1933 act apply to vs 1934 act?

Answer 24

1933 act applies to initial issuance of securities and not to the secondary market of publicly traded securities.

Question 25

What is the purpose of section 10b of the SEC 1934act?

Answer 25

Deterring fraud in the securities industry and encouraging disclosure of relevant info so investors can make better decisions
Material misinfo is a violation of the 1934 act.
Must be proven that a false statement or omission of material fact was made, and the individual knew it was false or acted with reckless disregard for the truth (intentional misconduct).

Question 26

What must be filed under the 1934 act?

Answer 26

Annual and quarterly reports with the SEC. Current reports covering certain material events such as a change in the amount of issued securities, a change in corporate control, or a change in newly appointed officers must be filed within 4 days. Annual report 10k, quarterly reports 10q, current reports 8k of certain material events, and proxy statements when proxy solicitations exist.
A competitor making a tender offer does not need to be reported. However, if unsolicited, must be reported. Short swing profits do not need to be reported.

Question 27

When must securities be registered?

Answer 27

If they are traded on any national securities exchange.
- or if they are traded in interstate commerce where the corporation has more than 10$M in assets and 500or more shareholders.

Question 28

What are the required specific disclosures of 1934 act?

Answer 28

bonus and profit sharing arrangements, financial structure and nature of business, and names of officers and directors

Question 29

What is rule 10b-5?

Answer 29

Antifraud provision
It is unlawfaul to use schemes to defraud in connection with the purchase and sale of any security.
To apply, must show a federal constitutional basis such as use of mail, interstate commerce, or a national securities exchange. Plaintiff must prove more than negligence (ie knowledge of falsity or reckless disregard of truth)

Question 30

What is a tender offer?

Answer 30

It is a request to the shareholders of a given company to tender their shares for a stated price. If the tender offer was unsolicited, the corporation must report this to the SEC under 193 act.
Trading by insiders must be registered with the SEC as well.
Solicitation of proxies must be reported to SEC.

Question 31

When does a report have to be filed with the SEC by a purchaser?

Answer 31

1934 applies if interstate commerce or mail is used. Any purchaser of more than 5% of a class of equity securities must file a report with the SEC.

Question 32

Wall street reform and consumer protection 2010 act aspects? aka Dodd frank act

Answer 32

Increased regulation of insurance companies
Prohibits banks from engaging in proprietary trading
Requires mortgage originators to retain an economic interest in a portion of the credit risk of any securitized asset that they create or sell
Requires all members of the compensation committee be independent

Question 33

Who does the sec act of 1933 specifically exempt from registration?

Answer 33

There is a broad specific exemption for securities offered by any person other than an issuer, underwriter, or dealer. Under the act, public offerings of securities are regulated but private offerings are exempted.
This exemption permits most investors to sell their own securities without registration, prospectus, or other regulations except the antifraud provisions.

Question 34

What is the 8k form?

Answer 34

8k is a current report that must be filed with the EC within 4 days after the material event occurs such as a significant acquisition of assets.

Question 35

What disclosure provisions apply under act 1934?

Answer 35

A corporation’s officers and all other insiders are required to report any changes in ownership of the corp’s stock within 15 days. Also under 1934, the proxy statement, the proxy itself, and any proxy soliciting material concerning securities required to be registered must be filed with and approved by the SEC before it can be sent to shareholders.

Question 36

When would an accountant be liable under act 1933?

Answer 36

An accountant is liable to a purchaser of securities if the purchaser proves a false financial statement (including statements with a material omission), and the specific securities were ones offered through a registration statement.
The max time limit for bringing such an action is three years after the security is offered to the public.
The purchaser does not need to prove negligence or fraud on the part of the accountant and does not need to prove reliance on the registration statement or prospectus.
Burden is shifted to accountant (defendant) to show he is not responsible for investment loss by purchaser (accountant must prove due diligence).

Question 37

Under section 12 of act 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC’s continuous disclosure system?

Answer 37

Over the counter and other equity securities traded in interstate commerce must be registered if the company has assets in excess of 10$M and 500 or more shareholders

Question 38

One of the clients of CPA firm plans to form a limited partnership and offer to the public in interstate commerce 2k limited partnership units at $5k per unit. What happens under 1933 act?

Answer 38

The issuance does not fall within the exemptions allowed by the small offering exemption under act 1933.
Limited partnership comes under the broad definition of a security in the 1933 act, which requires registration of the sale of all securities unless exempt.
Audited FS must be included in the registration statement whether or not the securities are issued by an old or new entity.
The potential liability imposed on CPA firm under 1933 act cannot be disclaimed.

Question 39

What happens if an issuer fails to meet the disclosure requirements of the 1933 act?

Answer 39

The buyer may ask for rescission of the sale, can sell it back to the issuer and recover the price paid.

Question 40

When does the registration of offering of common stock under 1933 act become effective?

Answer 40

The registration becomes effective 20 days after filing but the SEC may issue a stop order if the registration statement appears incomplete or misleading. The issuer cannot sell the securities prior to the effective registration date.
The act provides for criminal penalties as well as civil liability if the issuer fails to provide the prospectus in order to provide the public with important info about the security.

Question 41

What issuers must file under act 1934?

Answer 41

Issuers of securities which are traded over the counter must report only when they have in excess of $10M in total assets and more than 500 holders of record (stockholders) as of the last day of the issuer’s fiscal year.
Not all corporations engaged in interstate commerce fall within the jurisdiction and scope of the registration reqs.

Question 42

What must a company that is subject to SEC registration and continuing disclosure requirements furnish when soliciting proxies on behalf of mgmt for an annual meeting at which directors are to be elected?

Answer 42

An annual report containing its audited balance sheet for the 2 most recent years.
Note copies of the proxy statement are sent with the proxy solicitations.
Company is not required to furnish shareholders with copy of its registration statement and bylaws.

Question 43

What must the plaintiff prove in a civil action under section 11 of the 1933 act? (concerning liability for a misleading registration statement)

Answer 43

The plaintiff must prove that he was a purchaser of a security issued under a registration statement that contains a misleading statement or an omission of a material fact. He must also prove that he suffered an economic loss.
The plaintiff does NOT need to prove that the defendant intended to deceive or even that negligence existed or that he relied on the registration statement.