Unit 4

Question 1

For an instrument to be a security, it must constitute:

Answer 1

1. An investment of money 2. in a common enterprise 3. with the expectation of profits
2. to be derived primarily from the efforts of a person other than the investor

Question 2

What is NOT a security?

Answer 2

1. Insurance or endowment policy or annuity (any product from a life insurance company that does not use the word “variable”)
   - Remember: variable annuities are securities
2. Retirement plans (IRA or 401k)
3. Collectibles
4. Commodities such as precious metals and grains, including futures and forward contracts
5. Condominiums used as a personal residence
6. Currency

Question 3

What is an issuer?

Answer 3

any person who issues (distributes) or proposes to issue a security

Question 4

Under the USA, with respect to certificates of interest; participation in oil, gas, or mining titles or leases; or in payments out of production under such titles or leases…

Answer 4

there is not considered to be any issuer.

Question 5

What is an issuer transaction?

Answer 5

one in which the proceeds of the sale go to the issuer (IPO)

Question 6

What is a non-issuer transaction?

Answer 6

the proceeds of the sales do not go, directly or indirectly, to the entity that originally offered the securities to the public (everyday trading on exchanges) referred to as secondary trading

Question 7

What is a primary offering?

Answer 7

issuer transaction involving new securities

Question 8

What is an IPO?

Answer 8

(initial public offering)

the first time an issuer distributes securities to the public

Question 9

Securities Act of 1933

Answer 9

regulates the issuing of corporate securities sold to the public

The act requires securities issuers to make full disclosure of all material information in their registration materials in order for investors to make fully informed investment decisions

(also called the Paper Act, Truth in Securities Act, and the Prospectus Act)

Question 10

Under the USA, it is unlawful for any person to offer or sell an unregistered security in a state unless:

Answer 10

• It is registered under the act
• the security or transaction is exempted from registration under the Act
• it is a federal covered security

Question 11

Categories of Federal Covered Securities

Answer 11

• Securities issued by an open- or closed-end investment company, UIT, or face amount certificate company
• Securities listed on the NYSE, Nasdaq, and several other U.S. exchanges
• Securities offered to the provisions of Rule 506(b) or 506(c) of Regulation D (private placement)
• If the federal government says the security does not have to register, no state can overstep

Question 12

Under the NSMIA, if the muni issuer is located in the state in which the securities are being offered:

Answer 12

-T he security is NOT a federal covered security.

Example: a bond issued by the city of Columbus, OH is a federal covered security everywhere but in the state of Ohio. Even though it is still exempt from registration under both fed and state laws, in Ohio it is not known as a federal covered security (everywhere else, it is).

Question 13

The Admin can deny exemption to the two following:

Answer 13

• Any security issued by a nonprofit
• Any investment contract issued in connection with an employee’s stock purchase, savings, pension, profit-sharing, or similar benefit plan

Question 14

The burden of proof for claiming eligibility for an exemption falls to:

Answer 14

the person claiming the exemption

Question 15

Exempt transactions under the Securities Act of 1933:

Answer 15

• private transactions between individuals

- private placement under Reg D

Question 16

Under regulation D, SEC rule 506 permits:

Answer 16

private placement where there is no dollar limit on the amount sold

Question 17

Under regulation D, SEC rule 506(b) permits:

Answer 17

can sell the offering to an unlimited number of accredited investors and up to 35 non-accredited investors. No advertising may be done on behalf of the offering.

Question 18

Under regulation D, SEC rule 506(c) permits:

Answer 18

permits the offering be advertised as long as:

• All purchasers are accredited investors or the issuer reasonably believes that they are accredited investors
• The issuer takes reasonable steps to verify that all purchasers are accredited investors, which would include reviewing documentation, such as W-2s,tax returns, bank and brokerage statements, credit reports, and the like.

Question 19

Under regulation D, SEC rule 501:

Answer 19

classifies an accredited investor

Remember: Assets in an account/property can be held jointly with a person other than spouse to be included in determining net worth but only to the extend of ownership %

Question 20

Form D

Answer 20

An issuer that is issuing securities reliance on Regulation D but file Form D electronically with the SEC no later than 15 days after the first sale of securities in the offering

Question 21

Rule 147 deals with

Answer 21

an exempt security

Question 22

Rule 506 deals with

Answer 22

an exempt transaction

Question 23

What is a prospectus?

Answer 23

any notice, circular, letter, or communications, written or broadcast by radio or television, that offers any security for sale or confirms the sale of a security.

Tombstone advertisement published on the effective date is not considered a prospectus nor an offering of the subject security.

Question 24

The Registration Statement must be signed by:

Answer 24

the principal executive officer (CEO) and the principal financial officer (CFO), and a majority of the board directors

All of the signers are subject to criminal and civil penalties for willful omissions and misstatements of material facts.

Question 25

How long is the cooling-off period?

Answer 25

20 calendar days but can take longer

Question 26

Although most registration statements are filed by the issuer, the exam may require you to know that:

Answer 26

they may also be filed by any selling stockholder, such as an insider making a large block sale, or by a broker-dealer.

Question 27

Filing Fee

Answer 27

• Often based on a % of the total offering price
• If registration is withdrawn or if the Admin issues a stop order, the Admin may retain a portion of the fee and refund the remainder to the applicant.
• This applies only to securities!!

Question 28

Ongoing Reports

Answer 28

The Admin may require the person who filed the registration statement to file reports to keep the info contained in the registration statement current and to inform the Admin of the progress of the offering

***These reports cannot be required more often than quarterly

Question 29

As a condition of registration under coordination or qualification, the Admin may require that a security by placed in escrow if the security is issued:

Answer 29

• Within the past 3 years
• To a promoter at a price substantially different than the offering price
• To any person for a consideration other than cash

Question 30

Notice Filing

Answer 30

Certain securities are designated as federal covered and are removed from the jurisdiction of the state regulatory authorities

Opportunity for the states to collect revenue in the form of filing fees

Question 31

Coordination

Answer 31

• Most common
• Necessary if offering is being made in more than 1 state
• May be registered by coordination if a registration statement has been filed under the Securities Act of 1933 in connection with the same offering
• Becomes effective at the same time the federal registration does

Question 32

Qualification

Answer 32

• Requires a registrant to supply any information required by the state securities Admin
• Securities not eligible for registration by another method must be registered by qualification
• In general, securities that will be sold only in one state (intrastate) will be registered by qualification
• Effective date is whenever the Admin so orders

Question 33

On the state level, securities registration statements are generally effective:

Answer 33

or 1 year from the effective date

Question 34

Antifraud

Answer 34

• In order for an action to be fraudulent, it must be committed willfully and knowingly. There is no such thing as “accidental” fraud.
• A common example of fraudulent behavior is the use of material nonpublic information (insider trading).