Ch 2 State Reg Of Securities Flashcards
what is a security (examples) and why does this definition matter
Defines what must be registered
Stocks, debt instruments
participation in profit sharing agreement
oil, gas or mining leases but NOT the commodities themselves
variable annuities and life insurance but NOT endowment policies
Viatical investments
Registration by Filing (Notification)
Method of state registration
WHO: used by well established corps only available for follow-on interstate (all states) offerings (new shares for a company already selling shares).
Requirements:
- registration statement filed under 1933 act and with SEC
- 500+ shareholders
- net worth $4M+ or $2M+income in last 2/3 years
-400K+ units held publicly
- in business 36 months +
-4+ market makers in 30 days prior
-underwriting commission < or =10%
-share price $5+
Effective the date of federal registration unless already federally registered in which case it is when state registration is effective
Not very common anymore since most securities are now considered federal covered securities (not all states have adopted this)
Methods of state registration
Filing (notification)
Coordination
Qualification
Registration by coordination
Method of state registration
WHO: smaller companies who are not already registered with SEC and are conducting interstate (all states) offerings (likely IPOs)
Requirements
-registered under 1933 act
-provide registration statement, 3 copies of prospectus
- admin may request additional documentation or info
Higher fee, more extensive requirements
Effective same date as fed registration or once state req met if after fed registration
Registration by qualification
Method of state registration
Used when fed registration is already effective. Or isn’t required
For very small companies issuing intrastate (one state) only
Most difficult because SEC isn’t involved at all
Extensive disclosures to provide to administrator
Effective when determined by administrator
How long are securities registered for?
One year from registration
For state registered securities, who must a prospectus be provided to?
Anyone being offered the security (I.e. not just purchasers)
When can administrator revoke or deny registration and what is a stop order
Misleading, illegal, fraudulent, issuer violated USA, underwriter compensation is unreasonable, filing fee hasn’t been paid
Stop order: denial issued by a court but can’t be issued based on info known to administrator at registration unless within 30 days
Which securities are exempt from registration
Exempt because the investment is safe
-federal covered securities
-treasury bonds, muni bonds
-commercial paper (<270 days to maturity)
-Canadian and some foreign governments
-insurance companies (except variable annuities)
-common carriers (railroad because gov subsidy)
-public utility companies
-non-profits
Never exempt from anti fraud provision of USA
Regulation D rule 506
Securities issued under this regulation are exempt from federal and state registration
Private offering
Can raise unlimited amount
Can market and advertise the securities
Notice filing required
Can administrator prohibit sale of federally covered security?
No
Test to determine whether something is a security
Investment of money
Common enterprise
Expectation of profits
Solely from efforts of others
What isn’t a security
4 C’s (commodities, collectibles, currencies, condominiums unless it’s an investment property)
whole and term life insurance
endowment policies fixed annuities
IRAs, keogh plans, 401k, etc
What does USA investment guarantees apply to
Principal
Dividends
Interest
NOT capital gains
Who is a suitable investor and why does it matter
They are the only ones who viatical settlements can be sold to because they are risky investments and no secondary market
Includes:
- Person who meets definition of accredited investor in regulation D of 1933 act (net worth $1M or income $200K+)
- executive, director, partner of issuer
- net worth $250K+ OR $150K+ AND income $100K+. Net worth excludes residence
Which security transactions are exempt
Exempt from state registration because investors are sophisticated and limited aka not public. They represent secondary market trades that are regulated at the federal level i.e. issuing entity is not involved (not IPO)
Key terms:
- non-issuer
- fiduciary
- isolated
- private
- unsolicited
- between issuer and underwriter
- institutional investors (unlimited #)
- <11 retail investors over 12 months
- not involving public
Detail:
- isolated infrequent non-issuer (secondary market and not affiliated with financial industry)
- non-issuer by broker dealer agent provided issuer is engaged in business
- Toronto stock exchange
- non-issuer transaction for company subject to SEC regulation, registered under 1940 act
- unsolicited non-issuer transaction through broker dealer
- between issuer and underwriter
- mortgage backed securities sold to a bank
- fiduciary transactions (trustees, executors, administrators, sheriffs)
- private placements limited to <10 non-institutional investors
What are federally covered securities
Securities not required to be registered at state level (but may be required to notice file)
- listed on exchange
- sold to qualified purchasers as defined by 1940 act ($5m+ in investments)
- investment companies (mutual fund shares because already registered with SEC)
- regulation D Rule 506 (private offering)
Can any registration info be changed after the effective date?
Yes, the number of shared.
Cannot change price or underwriting spread (compensation)
