Chapter 5 - Regulation of Securities and Issuers Flashcards Preview

Series 63 > Chapter 5 - Regulation of Securities and Issuers > Flashcards

Flashcards in Chapter 5 - Regulation of Securities and Issuers Deck (39):

Definition of "person" (same as 79)

Can't be dead, incompetent or a minor


The Uniform Securities Act defines a "security" as

- stock
- bond
- mutual fund
- options
- oil and gas partnership
- ADRs and GDRs (certificates of deposit for a security)
- Voting trust certificate
- warrants or rights for a security
- investment contracts


Non-securities are;

- fixed annuity or other insurance contracts that don't have a "variable" feature that allows people to pick out their own investments
- commodities
- futures contracts on commodities
- precious metals
- currency such as rare coins
- real estate used as a personal residence
- collectibles such as antiques, art, wine
- retirement plans


Certificates of deposit issued by a bank ARE NOT ______

securities, most other "certificates" are


Registration statement must include:

- amount of securities being issued
- other states the security has been registered in
- any adverse regulatory actions taken against the firm


Incorporation by reference states that an issuer may

reference a previous filing about the same security or issuer in a new filing without having to include a copy of that file


The three methods of registration are:

1) registration by qualification
2) registration by coordination
3) registration by filing


All issuers of securities, when filing, must

1) provide a signed consent to service of process to the state
2) pay filing fees to the state


Registration by qualification (starting from scratch) must provide the following information

- basics about the company
- general nature of business, key assets
- summary of business environment
- relevant details about security being issued
- total proceeds from the offering
- total debt and stock outstanding
- BS no more than 4 months old
- 3 years of IS
- breakdown of any officer/director who owns more than 10% of the securities of the issuer
- pending lawsuits
- copies of all marketing lit (prospectuses, circulars, etc)
- same of the actual security
- legal opinion
- written consent for any professional reports
- intended use of the proceeds
- description of any stock options
- anything the admin requires


Registration by qualification becomes effective ________

when the administrator says so


A prospectus (as defined in the 79) must delivered to a purchaser of an issue by __________

the time the trade settles


Registration by coordination (coordinate both federal and state registrations - must file federal before state) and must submit

- three copies of latest prospectus
- copy of articles of incorporation and by-laws
- copy of agreement between issuer and underwriter
- copy of any instrument governing the issuance of securities
- copy of security itself
- anything the admin requests
- updates to the federal prospectus must be made at state level too


Registration by coordination becomes effective when ___________

The federal registration becomes effective (so long as it has been on file with the state for 10 days and offering prices/commissions have been on file for 2 days)


For registration by qualification or by coordination, admin may require them to be sold using a ______ and must be kept for up to _______ years

subscription form (sales contract form) and kept up to 3 years


Registration by filing (for issuers who have already registered a security federally - mostly established companies) requires:

- issuer is organized under US laws
- issuer has been in business in the US and has filed all materials with the SEC for last 36 months
- issuer has a security registered under the Exchange Act of 1934 held by at least 500 shareholders
- 4 market makers in the securities for at least 30 days during prior 3 months
- if a registered equity security, must have a value of at least $5 share


If using registration by filing for securities from a mutual fund or unit investment trust, must provide

- statement demonstrating eligibility for registration by filing
- name, address and form of organization of the issuer
- description of securities being registered
- copy of latest prospectus filed with the SEC
IF this information has been on file with Admin for 5 days and filing fee is paid, registration is effective when federal registration is effective


Notice filing is a heads up to the _____- that a federally covered security will be offered for sale in their jurisdiction

state admin


A notice filing requires the issuer to

- submit all documents that are used in federal registation to state admin prior to sale
- deliver copies of all amendments to the federal docs to state admin at same time as delivered to federal
- report on value of federal covered securities
- consent to service of process
- filing fees


State securities registrations and notice filings expire _____ after their _____ date

1 year after the effective date


Post-registration requirements for the issuer are minimal, usually just some _________

administrative reports that are usually required quarterly


Exemptions to the registration rules come in Sections ______ and ______

402(a) and 402(b)


Section 402(a) exemptions apply to _______

every transaction of a security


Section 402(b) exemptions must ________

must be granted individually for each transaction


Section 402(a) exemptions include:

- US gov't and municipal securities
- foreign gov't securities (usually bonds) with which the US gov't maintains diplomatic ties
- depository securities (issued or guaranteed by a bank)
- loan association securities
- insurance company securities (NOT variable annuities)
- credit union securities
- public utility securities (US and Canada)
- exchange-traded securities
- non profit securities
- commercial paper (investment grade, matures in less than 9 months)
- employee benefit plan investment contracts


Section 402(b) exempt transactions include:

- isolated non-issuer transactions (two private parties, can involve BD, but not frequent)
- senior securities transactions (senior to common stock and no default in last 3 years)
- transactions in certain federally registered securities (non-issuer transactions in an outstanding security registered under Exchange Act of 1934 - must be 180 days old - or under Inv. Co Act of 1940)
- Unsolicited transactions (non-issuer transactions effected by a BD that were unsolicited)
- Underwriters transactions (transactions between the underwriter and issuer or among other underwriters
- Whole mortgage backed bond transactions (backed by mortgage)
- Bankruptcy and fiduciary transactions
- Transactions by a pledgee
- Institutional investor transactions
- Private placements
- Preorganization certificate transactions
- transactions with existing security holders
- offers of securities registered on the state and federal level
- non-issuer distributions
- small offerings offered under the JOBS Act


A sale or purchase of securities is

an actual exchange of securities for some kind of compensation or a contract to do so in the future


A sale or purchase can be a cash transaction, but can also be

- trading securities for other securities
- trading securities for other types of assets
- trading securities for services
- exercising options
- making gifts of assessable securities


An offer, as opposed to a sale, is

any attempt to invite another party to engage in a purchase or sale transaction, which includes advertisements for securities


An offer can originate in one state and target another state, in which case the offering party will need to meet exemptions in _______

both states


The following are considered "offers"

- a warrant or right to purchase a security at a set price in the future
- a security given as a bonus for purchasing other securities or item of value
- gift of assessable stock (stock where additional fees can be levied for future improvements or expansions)
- sales calls
- any mailed marketing materials


Things that ARE NOT considered "offers"

- stock dividends paid to shareholders without them having to anything additional
- stock splits where shareholders don't pay anything additional
- any communication or action related to a legit corporate action such as a reorg, merger, or consolidation
- exchanges of securities made in connection with a judicially approved organization
- gifts of non-assessable stock


Exceptions for media from other states

- ads in a bona fide newspaper or publication in regular circulation that are not published within a given state do not constitute offers within that state
- if 2/3 of publications circulation is outside of state where it is published, ads do not count as offers even in state where it is published


Securities registered federally ______ have to be registered at the state level



The following securities must be registered on the federal level (hence not on the state level)

- NYSE, American stock exchange and other national exchange securities
- debt securities or preferred stock of any of the companies who have stocks listed on above exchanges
- securities issued by an investment company that qualifies under the Investment Company Act of 1940


The following transactions would be covered by federal regulation (hence not state level):

- transactions in most securities that are exempt from federal registration (exempt securities on the 79)
- offers or sales to qualified purchasers under Reg D
- Most transactions that are exempt under federal law


Securities registration is valid from 1 year from the effective date and cannot be withdrawn within _____, afterwards it may be withdrawn at the discretion of the ______

1 year, the administrator


A stop order is used to

deny, suspend or revoke a security's registration because the issuer has not met important requirements


In order for a state admin to issue a stop order, the order must be in the public interest and one of the following must be true

- the registration is materially false or misleading
- the filer, issuer (or officers/directors), or underwriter has violated securities law
- another state or federal regulator entered a stop order within last year
- issuer's business is illegal
- offering is fraudulent
- offer involves unreasonable amounts of commission or comp
- security applies for registration by notification but isn't eligible
- security applies for registration by coordination but doesn't send through the federal documents
- fails to pay filing fee


An admin cannot issue a stop order for an already effective security based on information they knew at the time of registration if they haven't initiated the proceeding within ______ of the effective date

30 days