Chapter 5 - Exempt Transactions

Question 1

Regulation A+ offerings

Answer 1

small- and medium-sized enterprises

Question 2

Rule 147 offerings

Answer 2

intrastate offerings

Question 3

Regulation D offerings

Answer 3

private placements

Question 4

Rule 145 transactions

Answer 4

Corporate reclassifications

Question 5

Regulation S transactions

Answer 5

offshore transactions

Question 6

Tier 1 Securities Offering

Answer 6

Reg A+ securities offerings up to $20 million in a 12-month period, including no more than

$6 million sold on behalf of selling shareholders. Subject to a coordinated review by states and the SEC.

Question 7

Tier 2 Securities Offering

Answer 7

Reg A+ securities offerings up to $50 million in a 12-month period, including no more than $15 million of securities sold on behalf of selling shareholders. The $50 million limit is subject to a periodic review by the Commission.

Question 8

Must Regulation A+ offering statements and disclosures must be filed on EDGAR in the same fashion as S-1 registrations for IPOs ?

Answer 8

Yes

Question 9

Tier 2 issuers are required to concurrently file ?

Answer 9

Tier 2 issuers are required to concurrently file a short-form Form 8-A to register a class of securities under Exchange Act.

Question 10

Is general public solicitation available for Tier 2 Securities Offerings ?

Answer 10

General public solicitation is permitted on television, social media, etc

Question 11

Are Tier 2 offerings limited to “accredited investors” ?

Answer 11

Tier 2 offerings are open to the public, not limited to “accredited investors.”

Tier 2 investors must be “qualified” investors.

Question 12

Tier 2 investors must be “qualified” investors. There are two ways to qualify:

Answer 12

There are two ways to qualify.

— Be an accredited investor as defined in Rule 501 of Regulation D.

— Limit the investment to a maximum of the greater of 10% of their net worth or 10% of their net income per offering. Tier 1 has no investment limits.

Question 13

Can Reg A+ investors self-certify income or net worth ?

Answer 13

Investors may self-certify their income or net worth. No burdensome documentation is required to prove income or net worth.

Question 14

To qualify for a Reg A+ offering what disclosure document must issuers prepare and with whom ?

Answer 14

Must file a disclosure document and audited financials with the SEC and await qualification from the SEC. The Offering Circular will receive the same level of scrutiny as a Form S-1 in an IPO.

Question 15

Reg A+ issuers must provide what type of financials statements ?

Answer 15

Tier 2 issuers are required to provide two years (or such shorter time as the issuer has been in existence) of audited financial statements. Tier 1 offerings require reviewed financials, not audited.

Question 16

Reg A+ Issuers are required to provide what type of disclosure ?

Answer 16

Tier 2 issuers are required to make an annual disclosure filing, a semiannual report, and current reports (similar to Form 10-K, Form 10-Q, and Form 8-K), which can be terminated after the first year if the shareholder count drops below 300. There is no ongoing qdisclosure requirement for Tier 1.

Question 17

State requirements for Reg A+ securities

Answer 17

Tier 2 preempts state law. Tier 1 offerings remain subject to state regulation.

Question 18

What are the shareholder limits under Reg A+ ?

Answer 18

There are no shareholder limits.

Question 19

Can issuers impose transfer restrictions on certain shareholders for Reg A+ securities ?

Answer 19

Securities issued in a Reg A+ offering are unrestricted and freely transferable. However, issuers may choose to impose transfer restrictions on certain shareholders.

Question 20

Can investment companies use Reg A+ to raise capital ?

Answer 20

Investment companies (i.e., private equity funds, venture funds, hedge funds) may not use Reg A+ to raise capital.

Question 21

The Rule 147 exemption is available only if what % of an issue is offered and sold to residents of that state ?

Answer 21

The Rule 147 exemption is available only if the entire issue is offered and sold exclusively to residents of that single state. If any sales take place to non-residents, the entire issue loses its exemption. It is incumbent upon the issuer to obtain a written statement from each buyer that they reside in that state. This exemption permits issuers to raise money locally, provided the business was operating primarily within that state.

Question 22

Rule 147 - For how long from the date of the last sale by the issuer of any part of the issue, will resales of any part of the issue by any person be made only to persons resident within the same state (or territory) ?

Answer 22

For six months from the date of the last sale by the issuer of any part of the issue, resales of any part of the issue by any person will be made only to persons resident within the same state (or territory).

Question 23

Rule 147 - The issuer must meet at least one of the following in order to be considered doing business with the state.

Answer 23

At least 80% of the issuer’s gross revenue must be derived from operations within the state.

At least 80% of the proceeds of the offering must be used for business purposes within the state.

At least 80% of the issuer’s assets must be located within the state.

A majority of the issuer’s employees are based in the state.

Question 24

To qualify, the issuer files Form 147 with the SEC ?

Answer 24

To qualify, the issuer files Form 147 with the SEC at least 10 business days prior to the effective date of the offering. Member firms underwriting the issue must ensure that all persons to whom offers or sales are made are residents of that state.

Question 25

Other limitations for Rule 147 include the following :

Answer 25

All shares being offered must be primary shares.

Sales by affiliates are not permitted.

Question 26

Rule 147A

Answer 26

Rule 147A -

SEC Rule 147A is nearly identical to Rule 147 except that it permits offers to be accessible to out-of-state residents and for companies to be organized or incorporated out-of-state.

Question 27

Regulation D Offerings

Answer 27

A private placement involves the sale of unregistered securities by either a publicly traded (SEC-reporting) company or a privately held company.

ie Rule 504, 506 (b), and 506 (c)

Question 28

For the purposes of Reg D, in counting the number of nonaccredited investors, the following rules apply. A corporation, partnership, or other entity is counted as ?

Answer 28

In counting the number of nonaccredited investors, the following rules apply. A corporation, partnership, or other entity is counted as one purchaser.

If, however, the entity was organized for the purpose of acquiring the securities, each owner will be counted separately.

Question 29

For the purpose of counting non-accredited investors under Reg D, any relative or a spouse of a purchaser who has the same principal address as the purchaser is ?

Answer 29

Any relative or a spouse of a purchaser who has the same principal address as the purchaser is excluded from the count (if husband and wife each purchase units of a private placement, they count as one purchaser).

Question 30

For the purpose of counting non-accredited investors under Reg D, any trust, estate, or corporation in which a purchaser or relative/spouse has more than a 50% interest is ?

Answer 30

Any trust, estate, or corporation in which a purchaser or relative/spouse has more than a 50% interest is excluded from the count (if a purchaser and a trust that he controls each purchase units, they will be counted as one purchaser).

Question 31

Offering Circular

Answer 31

All prospective investors must receive a copy of the offering circular (known as the private placement memorandum) within a reasonable period prior to confirmation of sale. All investors must sign an investment letter attesting to their understanding of the risks being assumed. The amount of disclosure required in the offering circular depends on the dollar amount of the private placement. The greater the amount, the greater the disclosure:

Question 32

Rule 506 (b)

Answer 32

Size - Unlimited
Accredited Investors - Unlimited
Unaccredited Investors - 35
General Solicitation - No

Question 33

Rule 506 (c)

Answer 33

Size - Unlimited
Accredited Investors - Unlimited
Unaccredited Investors - unlimited
General Solicitation - Yes

Rule 506(c) also permits private investment funds (pooled investments) to solicit generally, as well, so long as they point their sales efforts at “qualified purchasers” as defined under the Investment Company Act of 1940.

Question 34

Qualified Investor

Answer 34

A qualified investor under the Investment Company Act of 1940 is a natural person who owns at least $5 million in investments or any entity acting for its own account, or that of other qualified investors who own and invest on a discretionary basis at least $25 million in investments.

Question 35

Rule 504

Answer 35

A Rule 504 offering, which is distinct from most of the Regulation D rules, involves the offering of securities in which the dollar amount does not exceed $5 million. It is distinct from 506 in that:

■ there are no limitations on the number of purchasers, accredited or non;

■ there is no requirement that purchasers meet suitability or sophistication standards, though bad actors, as mentioned above, are prohibited from participating;

■ there are no restrictions on solicitation or advertising;

■ it can be used by an issuer to make a public offering of its securities; and

■ there are no restrictions as to resale

Question 36

FINRA Firm Gateway

Answer 36

Unit 1 provided information about Firm Gateway and becoming a member. Understand that the Gateway supplies FINRA with many different types of information. Other than private offering memoranda and Form NMA, requests for exam waivers, changes to the membership agreement, annual audit reports, clearing arrangements,and much more are submitted through the Gateway. The Gateway also provides filing reminders of upcoming rule changes

Question 37

Private Placements of Securities Issued by Member Firms

Answer 37

Rule 5122 requires that a member firm offering its own securities in a private placement, known as a member private offering (MPO), file a copy with FINRA’s Corporate Financing Department of any private placement memorandum used at or prior to providing PPM or a term sheet to any prospective investor.

Question 38

Amendments to the PPM or term sheet must be submitted

Answer 38

Amendments to the PPM or term sheet must be submitted to the Corp Finance department within 10 calendar days of being provided to an investor or prospective investor.