Sarbanes Oxley Act: Chapter 37

Question 1

What are the three different ways the SEC creates a law?

Answer 1

Rules, Releases, and No-Action Letters

Question 2

SEC

Answer 2

Securities and Exchange Commission

Question 3

Rules

Answer 3

SEC uses to fill in details for the securities statutes

Question 4

Releases

Answer 4

informal pronouncements from the SEC on current issues, usually asks for comments as well

Question 5

No-Action Letter

Answer 5

response where anyone who is in doubt about whether a particular transaction complies with the securities laws can ask the SEC directly - “ the staff will recommend that the commissions that no action”

Question 6

Security

Answer 6

any transaction in which the buyer (1) invests money in a common enterprise and (2) expects to earn a profit predominantly from the efforts of others

Question 7

Securities Act of 1933

Answer 7

requires that, before offering or selling securities, the issuer must register the securities with the SEC, unless the securities qualify for an exemption

Question 8

issuer

Answer 8

company that uses the stock

Question 9

When an issuer registers securities, does the SEC investigate the quality of the offering?

Answer 9

No

Question 10

Anyone who issues fraudulent securities in violation of what act?

Answer 10

the 1933 Act

Question 11

What securities are exempt from registration according to the 1933 Act?

Answer 11

Government Securities, Bank securities, short-term notes, nonprofit issues, insurance policies and annuity contracts

Question 12

Short-term notes

Answer 12

high-quality negotiable notes or drafts that are due within nine months of issuance and are not sold to the general public

Question 13

Do transactions in a private offering have to be registered according to the 1933 Act?

Answer 13

No, exempts “transactions by an issuer not involving any public offering”

Question 14

What’s the difference between exempt securities and exempt transactions?

Answer 14

securities always exempt, transaction only that one time

Question 15

What are three different trypes of private offerings?

Answer 15

intrastate, Rgulation D, and Regulation A

Question 16

Intrastate Offering Exemption

Answer 16

Under SEC Rule 147, an issuer is not required to register securities that are offered and sold only to residents of the state in which the issuer is incorporated and does business

Question 17

Why is Rule 147 a safe harbor?

Answer 17

if an issuer totally complies with it, the offering definitely qualifies as instrastate

Question 18

What are the three different types of private offerings that can be made under Regulation D?

Answer 18

Rules 504, 505, and 506

Question 19

Rule 504 of Regulation D

Answer 19

“seed capital” rule
a company may sell up to 1 million in securities in a year
a company may advertise the stock and solicit an unlimited number of investors(if it’s registered and sales are limited to accredited investors)

Question 20

Accredited Investors

Answer 20

institutions such as banks and insurance companies or wealthy individuals with net worth of more than 1 million or an annual income of more than 200K

Question 21

Restricted Stock

Answer 21

securities that aren’t registered under state law nor sold exclusively to accredited investors, must be purchased for investment purposes

Question 22

Can a buyer resell restricted securities?

Answer 22

Neither publicly or privately for one year

Question 23

Rule 505 under Reg D

Answer 23

permits a company to sell up to 5 million of stock during a year with restrictions

Question 24

Restrictions to Rule 505 under Reg D

Answer 24

company may not advertise stock publicly, issuer can sell to as many accredited investors, but is limited to only 35 unaccredited investors, no info to accredited - some to unaccredited, stock purchased under this rule is restricted

Question 25

Rule 506 under Reg D

Answer 25

similar to Rule 505 with differences: no limit on amount of stock a company can sell, unaccredited purchasers must have a purchaser representative to help evaluate investment

Question 26

Regulation A

Answer 26

permits an issuer to sell 5 million of securities publicly in any year, requires disclosure

Question 27

DPO

Answer 27

Direct Public Offerings, issuer typically sells shares to its stakeholders, requires disclosure ($)

Question 28

IPO

Answer 28

Initial Public Offering; a company's first public sale of securities

Question 29

Firm Commitment Underwriting

Answer 29

the underwriter buys the stock from the issuer and resells it to the public

Question 30

best efforts underwriting

Answer 30

the underwriter does not buy the stock but instead acts as the company's agent in selling it

Question 31

Registration Statement's two purposes

Answer 31

to notify the SEC that a sale of securities is pending and to disclose info to prospective purchasers

Question 32

red herring

Answer 32

a preliminary prospectus

Question 33

Registration Statement

Answer 33

a document filed with he SEC under the Act of 1933 by an issuer seeking to sell securities in a public transaction

Question 34

prospectus

Answer 34

under the Securities Act of 1933, an issuer must provide this document to anyone who purchases a security in a public transaction. The prospectus contains detailed information about the issuer and its business, a description of the stock, and audited financial statements

Question 35

Quiet Period

Answer 35

begins when a company hires an underwriter and ends 25 days after the stock is first sold to the public

Question 36

Waiting Period

Answer 36

the time after the registration statement has been filed but before the SEC has approved it

Question 37

tombstone ad

Answer 37

a simple unadorned announcement of the offering that includes the amount and type of security, name of underwriter, and the price of stock

Question 38

makes book

Answer 38

meaning that it talks with traders to determine how many shares it can sell and at what price

Question 39

Road Show

Answer 39

the cross-country road trip to convince traders that it's a stock their clients should buy

Question 40

comment letter

Answer 40

lists changes that must be made to the registration statement

Question 41

go effective date

Answer 41

date to begin selling the stock

Question 42

Rule 144

Answer 42

limits the resale of two types of securities: control and restricted

Question 43

control security

Answer 43

stock held by any shareholder who owns more than 10 percent of a class of stock or by an officer or director

Question 44

restricted security

Answer 44

any stock purchased from the issuer in a private offering (such as Reg D)

Question 45

What happens if a final registration statement contains a material misstatement or omission?

Answer 45

the purchaser of the security can recover from everyone who signed the reg statement

Question 46

Material

Answer 46

Important or significant. Information that would affect a person's decision if he knew it

Question 47

due diligence

Answer 47

an investigation into everyone else who signed the registration statement and making sure they didn't know about the misstatement

Question 48

Under the 1934 Act, an issuer must register with the SEC if :

Answer 48

1 - it completes a public offering under the 33 Act 2 - its securities are traded on a national exchange (NYSE) or 3 - it has at least 500 shareholders and total assets that exceed $10 million