Ch. 2 State Registration of Securities

Question 1

SEC vs. WJ Howey Co uses what 4 criteria for a security?

Answer 1

• an investment of money
• in a common enterprise
• with the expectation of profit
• solely from the efforts of others

Question 2

The following are NOT securities:

Answer 2

insurance, endowment policies, IRAs, commodity futures contracts, currencies, collectibles, condominiums, art, antiques,

However, options on currencies, commodities and futures are securities

Question 3

What is a ponzi scheme?

Answer 3

a pyramid scam where returns received by earlier investors are derived from the capital contributed by subsequent investors

Question 4

What are viatical investments?

Answer 4

also referred to as life settlements, represent the purchase of the rights to the death benefits from individual life insurance policies

Question 5

Are viatical investments securities?

Answer 5

Yes

Question 6

Are viatical investments securities under state or federal law? Where must they be registered?

Answer 6

State and must be registered in the state in which they are sold

Question 7

Agents and broker-dealers who sell viatical investments must be registered where?

Answer 7

In the states in which they sell the viatical investments

Question 8

An issuer that wants to sell its securities to the public must register the offering where?

Answer 8

Both the federal (SEC) and the state level (each state in which it intends to sell)

Question 9

Under Uniform Securities Act, it’s unlawful for a person to offer or sell a security unless the security is ____ or ____.

Answer 9

Registered or exempt from registration

Question 10

When do issuers pay filing fees for state registration?

Answer 10

At initial registration and annual renewal

Question 11

What is the effective date of registration?

Answer 11

Date on which the appropriate regulator releases the security for public distribution.

Question 12

For any amendments from an issuer, the issuer does not have to file a new registration statement so long as:

Answer 12

issuer’s public offering price, underwriter’s discount (spread) and commission schedule are not being changed

Question 13

When does a security’s registration expire?

Answer 13

one year after its effective date

Question 14

How can an expired security continue to be sold?

Answer 14

Re-registered or sold through an exemption

Question 15

Each state’s security registration must meet what requirements?

Answer 15

1) General registration requirements
2) notification, coordination, qualification
3) meet 1 of 4 “doing business” requirements

Question 16

Which registration is used by well-established corporations that meet stringent financial requirements?

Answer 16

Registration by notification (filiing)

Question 17

Do all states permit the use of registration by notification?

Answer 17

No

Question 18

Notice filing and notification filing are note the same thing!

Answer 18

Notice filing and notification filing are note the same thing!

Question 19

If the same offering is being registered under the Securities Act of 1933, a security can use what filing?

Answer 19

Registration by coordination

Question 20

What registration is used when either a security’s federal registration has already become effective or when no federal registration will be filed?

Answer 20

Registration by qualification

Question 21

Are intrastate offerings exempt from federal registration?

Answer 21

Yes

Question 22

The effective date for securities registered by what 2 methods are the same as the effective date as federal registration?

Answer 22

Registration by notification (filing)

Registration by coordination

Question 23

What does rule 147A do?

Answer 23

allows a company to raise money from investors within the state is offering those securities without having to register offers and sales at the federal level

Question 24

Can companies offer securities in a state in which it’s not incorporated?

Answer 24

Yes, so long as their principal place of business occurs in the state for the sale of the securities

Question 25

For an issuer to sell securities in a state, what must be met?

Answer 25

1) have its principal place of business occur in that state

2) satisfy one of four “doing business” requirements

Question 26

If an issuer subsequently changes its principal place of business after issuing securities, it will not be able to make another instrate offering for how long?

Answer 26

6 months

Question 27

What are the 4 doing business criteria?

Answer 27

1) 80% of revenue comes from the state
2) 80% of the assets are in the state
3) 80% of the proceeds are going to be used in the state
4) A majority of the issuer’s employees are based in the state or territory

Question 28

What are the advantages of using a Regulation A offering rather than a full-registration?

Answer 28

Lower legal fees, lower filing fees and a shorter time period to create the documents

Question 29

Can an administrator deny, suspend or revoke a registration based solely on an issuer’s weak financial condition?

Answer 29

No

Question 30

Are there exemptions from the anti-fraud provisions of the Uniform Security Act? Does that include both state and federal?

Answer 30

No

Yes, must adhere to federal and state anti-fraud provisions

Question 31

What are federal covered securities?

Answer 31

Securities that are not required to be registered at the state level

Question 32

What are exchange listed securities and are they federally covered?

Answer 32

Securities listed on an exchange. Yes, they are federally covered

Question 33

What are securities sold to qualified purchasers? Are they federally covered?

Answer 33

Securities sold to people who own at least $5 million in investments. Yes, they are federally covered.

Question 34

What is the amount of $ investments need to be a qualified purchaser?

Answer 34

$5 million

Question 35

What are Securities Issued Pursuant to Regulation D- Rule 506? Are they federally covered?

Answer 35

Private offerings of securities not available to the public. Yes, they are federally covered.

Question 36

How many regulation D securities can be sold to accredited investors? How about non-accredited investors?

Answer 36

unlimited; 35

Question 37

Under Regulation D, what is an accredited investor?

Answer 37

1) a financial institution, a large tax-exempt plan or a private business development company
2) any director, general officer or general partner of the issuer
3) An individual who has a net worth of at least $1m and a gross income of at least $200k ($300k married)

Question 38

What is a notice filing?

Answer 38

a state’s demand that certain issuers of federal covered securities satisfy state requirements

Question 39

Who is required to file a Notice File?

Answer 39

1) issuers of investment company securities

2) issuers who distribute securities via Rule 506 Private Placement

Question 40

x

Answer 40

x

Question 41

Key words that identify if an exemption applies:

Answer 41

non-issuer, fiduciary, isolated, private and unsolicited

Question 42

Key phrases if an exemption applies:

Answer 42

trades between issuer and underwriter, trades with institutional investors, directed to no more than 10 retail clients or not involving the public

Question 43

Acme Inc. is planning to expand its business and is in need of additional capital. Acme’s financial advisers recommend that it offer shares of the company to the public. Are the securities being offered by Acme required to be registered? And, what role will Acme play in the offering?

Answer 43

Since there’s no indication of an exemption, Acme is required to register the securities prior to offering them to public investors. Generally, when public investors are involved, registration is required. In this example, Acme is the issuer of the securities.

Question 44

A corporation is offering its stock only in California. If the company’s stock will be listed on Nasdaq, what method of state registration will the corporation use?

Answer 44

Since the corporation is offering its stock only in California, it may seem as though the intrastate method of registration (qualification) would be used. However, since the corporation will be listed on Nasdaq, it’s not required to register at the state level as the securities are considered federal covered.

Question 45

Which of the following choices are considered securities according to the Uniform Securities Act? (Choose all that apply.)

a. Commodity futures contracts
b. Commodity options contracts
c. Voting trust certificates
d. American depositary receipts
e. Variable annuities
f. Variable universal life insurance
g. Fixed annuities
h. An investment contract
i. An IRA
j. Universal life insurance
k. A participation in a Keogh plan

Answer 45

(B, C, D, E, F, H, and K) Try memorizing what’s NOT a security.
 Fixed annuities
 Life insurance (term, whole, or universal) or endowment policies
 Commodity futures contracts
 An IRA or Keogh plan

Question 46

Which of the following factors must be present for an investment contract to be considered a security?
I. There must be an investment of money in a common enterprise.
II. The issuer must have registered the investment under the Uniform Securities Act.
III. The investors must expect a profit solely from the efforts of the promoter or other third party.
IV. The issuer must generate profits within a reasonable period.
a. I only
b. I and III only
c. II, III, and IV only
d. I, II, III, and IV

Answer 46

(B) The basic test to determine if an investment instrument is a security is described by the Supreme Court in the Howey decision. It states, “The person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Many securities are exempt and not subject to registration and it’s certainly possible for an issuer to create a security, sell it to the public, and never earn a profit.

Question 47

Under the USA, which method of securities registration is used if the issuer is planning to offer the securities in only one state?

a. Filing (Notification)
b. Qualification
c. Coordination
d. Application

Answer 47

(B) If a security is going to be offered in only one state, the registration method of qualification is typically used. The registration becomes effective when determined by the Administrator.

Question 48

In order to register securities by filing, an issuer must meet all of the following conditions, EXCEPT:

a. Be in business for 36 months preceding registration
b. Have at least four market makers
c. Pay its underwriters no more than 10% of the offering price
d. Pay a dividend on its common stock every quarter

Answer 48

(D) In order to use registration by filing, the issuer or a subsidiary may not have failed to pay a dividend on preferred stock or have defaulted on any bond or long-term lease, since the end of the fiscal year before filing the registration statement. There are no provisions that require common stock dividends.

Question 49

In order to use registration by coordination, an issuer must file a:

a. Registration statement with the SEC
b. Notice with the SEC
c. Registration statement with the issuer
d. Notice filing with the Administrator

Answer 49

(A) An issuer may only use registration by coordination if the securities are also being registered under the Securities Act of 1933. In order to register a securities offering under the Act of 1933, the issuer must file a registration statement with the SEC.

Question 50

Which of the following becomes effective upon the Administrator’s declaration?
I. Registration by filing
II. Registration by coordination
III. Registration by qualification
a. I only
b. III only
c. I and II only
d. II and III only

Answer 50

(B) Registration by qualification becomes effective whenever the Administrator so determines. Registration by coordination becomes effective at the same time as the federal registration, provided certain other conditions are met.
The effectiveness of registration by filing is dependent on whether the federal registration is already in force. If the federal registration is pending, then the state registration becomes effective at the same time as the federal registration. If the federal registration is already effective, then the state registration becomes effective when all the required conditions are met.

Question 51

For each of the following choices, indicate the most likely type of registration: Qualification (Q), Filing (F), or Coordination (C) and, if no registration is required, use (N).
I. Interstate issue of stock by a newly formed company
II. An intrastate issue of stock by a well-established corporation
III. An intrastate issue of stock by a newly formed company
IV. An issue of securities also being registered with the SEC under the Securities Act of 1933
V. An issue of securities of an established company that meets certain financial conditions
VI. The type of registration that requires a specific response from the Administrator prior to issue

Answer 51

I. (C) A newly formed company will typically use registration by coordination since it couldn’t meet the financial requirements needed for registration by filing. Since this is an interstate issue (i.e., it’s being sold in more than one state), the issuer is likely required to file a registration statement with the SEC.
II and III. (Q) Since an intrastate offering will typically not be registered federally, registration by qualification is the only option. This is true regardless of whether the issuer was a well-established company or a newly formed one.
IV. (C) Since it’s unknown as to whether the company can meet the financial requirements for registration by filing, registration by coordination is the most appropriate choice.
V. (F) Registration by filing is generally used by well-established companies that meet stringent financial requirements.
VI. (Q) Registration by qualification is the only type of securities registration that requires a specific response from the Administrator prior to the issuance of the securities.

Question 52

Under the Uniform Securities Act, an Administrator may deny the registration of a security for all of the following reasons, EXCEPT:

a. The security is already subject to a stop order or an injunction by a federal or state court
b. An officer of the issuer was convicted of a crime involving securities 13 years ago
c. She feels the SEC was in error in registering the security
d. The issuer’s enterprise or method of business includes activities that are illegal

Answer 52

(C) An Administrator may issue a stop order denying a securities registration if she finds that the security is already subject to a stop order or an injunction by a federal or state court, an officer of the issuer was convicted of a crime involving securities (there’s no time limit), or the issuer’s enterprise or method of business includes activities that are illegal. If a security is registered with the SEC, the Administrator doesn’t have the authority to deny the registration.

Question 53

For the following securities, indicate whether they’re Exempt (E) or Non-exempt (N).
I. Securities issued by the national government of Japan
II. Securities issued by the city of Albany, New York
III. Securities issued by the city of Montreal, Quebec
IV. Securities issued by an insurance company
V. Microsoft common stock
VI. A bond issued by the Reading Railroad

Answer 53

(E) Choices (I) through (VI) are all exempt from registration. Securities issued by the U.S. government or foreign government with whom the U.S. has diplomatic relations are exempt. Securities issued by insurance companies, common carriers (e.g., railroad companies), or companies that have securities listed on a national exchange (e.g., Microsoft) are exempt from registration.

Question 54

For each of the following transactions, indicate whether it’s Exempt (E) or Non-exempt (N).
I. The sale of securities to a mutual fund
II. The sale of securities by the executor of an estate
III. The sale of stock through a public offering
IV. The execution of an unsolicited order
V. The offer of unregistered securities to a maximum of 10 non-institutional investors in a 12-month period with no commission being paid
VI. A private placement where a commission is charged to retail investors
VII. The initial public offering of a start-up company’s common shares
VIII. Securities that trade on the Toronto Stock Exchange

Answer 54

. (E) The sale of securities to an investment company (mutual fund) is an exempt transaction.
II. (E) Sales of securities by executors or administrators are exempt transactions.
III. (N) Selling securities through a public offering is not an exempt transaction (although the securities themselves may be exempt depending on the nature of the issuer).
IV. (E) The execution of an unsolicited order is exempt provided it’s a non-issuer transaction processed through a registered broker-dealer.
V. (E) This qualifies for the private placement exemption since the securities are being offered to a maximum of 10 retail investors and no commission is being paid.
VI. (N) Despite its name, this sale doesn’t qualify for the private placement exemption under the USA since a commission is being charged to non-institutional investors.
VII. (N) Since this is an issuer transaction (an IPO), it’s a non-exempt transaction. Numerous exemptions are provided for non-issuer transactions only.
VIII. (E) Trades executed on the Toronto Stock Exchange are considered exempt transactions.

Question 55

Notice Filing may be required by which of the following federal covered securities?

a. Securities issued by an investment company
b. Securities issued by a Nasdaq-listed company
c. Securities issued by an NYSE-listed company
d. Securities issued by the U.S. government

Answer 55

(A) Federal covered securities are required to register with the SEC. However, some may also be required to notice file. Notice filing refers to the state’s requirement that issuers of such securities file the same information as provided to the SEC. Although investment companies are federal covered securities, they’re also required to notice file.