chapter 1 study notes

Question 1

Non-Traided REIT 18 month rule

Answer 1

Broker-dealers that are involved in the sale of these non-traded REITs or DPPs are required to provide valuations within 18 months after cessation of a non-traded REIT’s offering of shares.
investor assume the value 18 months later is the par value

Question 2

ADR general info

Answer 2

1. ADR shareholders have dividend rights,
2. Do not directly receive preemptive rights (where
   current shareholders are granted the opportunity to purchase a new issue security before the
   public).
3. exposed to foreign currency risk,

Question 3

Structured products are

Answer 3

derivative securities that may be linked to any of the following underlying
(reference) assets
a stock index
foreign currency
commodity
basket of securities
change inspread between asset classes
single security
an interest-rate and inflation-linked product

Question 4

Reverse Convertible Securities

Answer 4

These derivative instruments are considered structured products since the buyer is paid the enhanced coupon rate.
buyer may be required to accept shares of an underlying asset at maturity. Higher Coupon Higher Risk

Question 5

Reverse Convertible Securities

Knock in

Answer 5

If the underlying asset falls below the knock-in level, the investor will receive shares of the underlying
asset at maturity, which could be worth less than the principal, incurring a loss.

Question 6

Reverse Convertible Securities

Suitability

Answer 6

Reverse convertible holders must understand that they may lose principal on their investment if the underlying asset falls in value and they receive shares that have declined in value to purchase the asset at the agreed-to (knock-in) price. For this reason these products are not suitable for investors who are seeking safety of principal, even if the issue has a high credit rating

Question 7

Under SEC rules, a reporting company is defined as:

Answer 7

 An issuer of securities that is listed on a national securities exchange (e.g., NYSE, Nasdaq,
AMEX)
 Any other publicly traded corporation that has total assets of more than $10,000,000 and more
than 500 shareholders

Question 8

Qualified Institutional Buyer (QIB)

Answer 8

1. Only certain types of institutions are eligible, including insurance companies, registered
   investment companies, pension plans, corporations, and registered investment advisers.
2. The buyer must be purchasing for its own account or the account of other QIBs.
3. The buyer must own and invest at least $100 million of securities of issuers that are not
   affiliated with the buyer.

Question 9

Institutional Investors

Answer 9

 A bank
 A savings and loan association
 An insurance company or registered investment company
 An investment adviser registered with the Securities and Exchange Commission under Section
203 of the Investment Advisers Act of 1940 or registered with a state securities commission
 Any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with
total assets of at least $50 million, a government agency, or a subdivision of one
 A 403(b) employee benefit plan or a plan that meet the guidelines of Section 457 of the Internal
Revenue Code—excluding the individual plan participants
 A member or an associated person of that member, or a person acting on behalf of an
institutional investor

Question 10

Private Equity Firms (PE Firms)

Answer 10

These firms raise capital from institutional investors and invest
the proceeds in public and private companies. They will also purchase divisions or subsidiaries of
operating companies

Question 11

In a leveraged buyout

Answer 11

PE firms will contribute equity and use financial leverage for acquisitions, or take a public company private. The firms may take a minority stake or controlling equity interest, but generally have a predefined exit strategy. Their exit strategy may include an initial public offering (IPO), a recapitalization, or the sale of the business for cash or securities.

Question 12

SEC

Form S-1

Answer 12

This is the basic registration form that most companies that conduct initial public offerings
are required to use. Foreign issuers file an equivalent document, which is Form F-1.

Question 13

SEC

Form S-3

Answer 13

An S-3 registration statement—often referred to as a short form registration statement—
is used by seasoned issuers of securities. The minimum requirement to file an S-3 is a public float of
$75 million in voting and non-voting common equity. An issuer is prohibited from filing an S-3
registration statement if it has failed to pay a dividend on any issue of its preferred stock, failed to pay
interest on a bond, or if it is delinquent in its SEC filings. Foreign issuers file an equivalent document,
which is Form F-3.

Question 14

Form S-4

Answer 14

For situations in which securities are being offered as a result of business combinations due to mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets, the SEC requires the issuer to file Form S-4. The SEC believes that investors should be afforded the protection of securities laws when securities are offered in this manner

Question 15

Form S-8

Answer 15

Form S-8 is filed with the SEC to register securities that are made available through
employee benefit plans.

Question 16

If amendments are made under certain limited conditions, they will not delay the effective date.
These conditions are:

Answer 16

 The registration statement is for registering additional securities of the same (not a different)
class as were included in the original registration statement.
 The new registration statement registers additional securities in an amount and price that
represent together no more than 20% of the maximum offering price included in an earlier
registration statement.

Question 17

SEC registration effective date

Accelerated request

Answer 17

the SEC must be
notified by no later than the second business day before the day that the issuer wants the registration to
become effective.

Question 18

Pursuant to SEC Rule 424(b),

Final Offering Price

Answer 18

this information can be contained in the final prospectus which is filed
with the SEC, as long as any increase or decrease in volume, or deviation from the low or high end of the
price range, represents no more than a 20% change in the maximum aggregate offering price in the
registration statement and the total dollar value would not exceed that which was registered. If this is
not done within 15 business days after the effective date, it must be contained in a post-effective
amendment.

Question 19

registration statement must contain

Answer 19

 The character of the issuer’s business
 A balance sheet no older than 90 days prior to the filing of the registration statement
 Financial statements that show profits and losses for the latest fiscal year and for the two
preceding fiscal years
 The amount of capitalization and use of the proceeds of the sale
 Monies paid to affiliated persons or businesses of the issuer
 Shareholdings of senior officers, directors, and underwriters, and identification of individuals
holding at least 10% of the company’s securities

Question 20

Blue sky

Federally Covered Securities

Answer 20

Federal
covered securities include securities that are listed on the New York, Nasdaq, and American stock
exchanges, as well as mutual funds. Although federal covered securities are not subject to state registration
requirements, State securities administrators may still require an issuer to file Consent to Service of
Process and may also require issuers to provide copies of the documents that are filed with the SEC

Question 21

Post Effective Period

No Financial Reporting

Answer 21

In the case of a company that has not previously filed financial reports with the SEC, a preliminary
prospectus must be delivered to anyone expected to purchase the new issue at least 48 hours before the
sale is confirmed. This ensures that the final prospectus will not be the first written information that is
received by purchasers about the new issue. Broker-dealers should also be sure that registered
representatives have received a copy of the appropriate prospectus prior to soliciting orders for the
offering.

Question 22

Offering Stop Orders

Answer 22

If the SEC becomes aware of
information that leads it to believe the offering is not in compliance with the Act of 1933, it can issue
a stop order, which requires that all sales activity to cease. This may be the case if the SEC
determines that the registration contains an untrue statement or omits a material fact.

Question 23

The Securities Act of 1933 requires disclosure of the material facts
regarding securities that are sold publicly. Both criminal and civil penalties may be imposed for
violations of the law. The law is violated by:

Answer 23

 Failing to file the registration statement
 Making a material misstatement and/or material omission of important facts in the registration
statement
 Selling the security publicly before the registration is effective
 Failing to give a copy of the final prospectus to a purchaser

Question 24

Lock-Up Agreement

Answer 24

A lock-up agreement dictates an amount of time that pre-IPO holders, such
as management, venture capitalists, and other insiders, must wait to sell shares of their securities
after an IPO is trading in the aftermarket. Generally, a lock-up agreement will expire within six months following the closing of the company’s IPO, but there is no statutory time limit.

Question 25

SEC Rule 3a4-1 Associated Persons of Issuers

rule

Answer 25

In small offerings, an issuer may use its personnel
to sell its securities. According to SEC Rule 3a4-1, associated persons of an issuer may participate in
a securities offering without being defined as a broker-dealer, provided the associated person:
 Does not receive commissions or transaction-based compensation in connection with the offer
 Is not associated with a broker-dealer
 Is not subject to statutory disqualification

Question 26

SEC Rule 3a4-1 Associated Persons

Test

Answer 26

The associated person limits sales activities to financial institutions (broker-dealers, registered
investment advisers, registered investment companies, banks, savings and loans, and trust
companies), or to certain very limited types of transactions (for example, employee benefit
plans for stock options or retirement plans).
2. The associated person must primarily perform other duties for the issuer (or will be performing
these functions once the offering ends), has not been associated with a broker-dealer during
the last year, and does not participate in sales of securities for any issuers more than once a year.
3. The associated person prepares written communications (approved by an officer or director), but
does not solicit potential investors.

Question 27

Trust indenture Act Requirement

Answer 27

a corporation that issues more than $10 million of debt must
provide an indenture (agreement) between the issuer and a trustee who will act on behalf of the
bondholders. The trustee is usually a bank or trust company that must act in the bondholders’
interest. All the terms of the issue must be specified in detail in the indenture, which the trustee
signs on the bondholders’ behalf.

Question 28

Bond Indenture

Answer 28

(1) protective covenants and
(2) the process for handling issuer defaults. Covenants are protective agreements that the borrower
pledges for the protection of the lender.

Question 29

Majority-Owned Subsidiary of WKSI

Answer 29

A majority-owned subsidiary of a WKSI may act as a WKIS in connection with the offer and sale of its own securities if the following conditions are met:
1 The securities are non-convertible,
2 The securities are guarantees of non-convertible securities
3 The securities are non-convertible investment-grade.
4 The securities are not common equity
5 They are guaranteed fully and unconditionally by the parent company.

Question 30

Ineligible Issuer

Answer 30

 An issuer that is required to file reports under Section 13 or 15(d) of the Securities Exchange Act
of 1934, but has not done so
 A blank-check company
 A shell company
 An issuer offering penny stock
 A limited partnership offering and selling its securities through methods other than a firmcommitment
underwriting
 An issuer that has filed for bankruptcy, or a filing was made against the issuer for insolvency in
the past three years. This provision will terminate if the issuer has filed an annual report or a
registration statement which includes audited financial statements.
 An issuer or an entity of an issuer convicted of a felony or misdemeanor that involves securities laws violations or violations of antifraud provisions in the past three years
 An issuer that has been or is the subject of a refusal or stop order under the Securities Act of
1933, Section 8 or 8A

Question 31

Seasoned Issuer

Answer 31

Files S3 pending approval and minimum public float of 75 million

Question 32

Unseasonsed

Answer 32

files s-1 less than 75 million float

Question 33

Shelf Registration

Answer 33

Rule 415 allows issuers to file registration documents and offer the subject securities on a delayed or
continuous basis. The

Question 34

A shelf registration statement for offerings that fit the following criteria may be used for three years
after an initial effective date of a registration statement:

Answer 34

 An offering that will begin immediately and last for a period greater than 30 days from the
effective date, or
 An offering that is for securities registered on Form S-3 or F-3, offered and sold on an
immediate, continuous, or delayed basis by or on behalf of the registrant or a majority-owned
subsidiary of the registrant
If these terms aren’t met the maximum period for a shelf registration is 2 years

Question 35

S-3 ASR

Answer 35

The term “pay-as-you-go” refers to a WKSI issuer filing a Form 3 ASR and then paying the
registration fee to the SEC as it sells securities off the shelf. Only a WKSI is permitted to file a Form
S-3 ASR and utilize this type of procedure.

Question 36

Rule 134 – Communications Not Deemed a Prospectus

Answer 36

SEC Rule 134 permits the publication of
a simple advertisement describing the basic features of a new issue. Advertisements that meet the
conditions of this rule will not be considered a prospectus

Question 37

Tombstone Ads

Answer 37

Tombstone ads are not considered prospectuses.
They may include
 The name of the issuer
 The full title of the security
 The amount being offered
 A brief description of the issuer’s type of business
 The price of the security
 The date of sale
 The identity or names of the underwriters
 A statement indicating that the securities registration is not yet effective Orders won’t yet be accepted.
 The contact information of the person or organization sending the communication nd a statement of participation or expected
participation in the distribution of the security
 An anticipated schedule for the offering and marketing dates
 The securities exchanges or other markets where any class of the issuer’s securities are or will
be listed
 The names of selling security holders, if disclosed in the prospectus filed with the registration
statement

Question 38

Rule 135

Answer 38

According to SEC Rule 135, an issuer is permitted to publish a notice concerning an offering of
securities that contains only limited information. Such notices are not required to be filed with the SEC.
The only information permitted is:
 The name of the person whose assets are to be sold in exchange for the securities to be offered
 The names of any other parties to the transaction
 A brief description of the business of the parties to the transaction
 The date, time, and place of the meeting of the security holders to vote on, or consent to the
transaction
 A brief description of the transaction and the basic terms of the transaction

Question 39

Rule 135a – Generic Advertising for Investment Companies

Answer 39

permits the use of advertising that describes, in general terms, how investment companies (mutual funds) work
Can not mention a specific fund or desirability of mutual funds.
The material may refer to different generic types of funds, such as balanced funds, growth funds, income funds, etc.

Question 40

Gun-Jumping Safe Harbors

Answer 40

Rule 168 regularly factual continued reporting & Forward-looking information provides a safe harbor from liability for issuers,
Rule 169 allows non reporting issuers to continue reporting

Question 41

Gun Jumping 30 day safe harbor

Answer 41

communication that is made more than 30 days prior to the filing of the
registration statement and does not make reference to the offering.
30-day safe harbor applies
to all offerings, not just IPOs.

Question 42

Regulation S-K Board Meeting Disclosures

Answer 42

Under Regulation S-K, an issuer is required to disclose the following
in its annual filing with the SEC:
 The number of meetings of the BOD, including regular and special meetings that were held
during the last fiscal year
 The name of each director during the last fiscal year who attended less than 75% of the meetings

Question 43

Ratings Agencies

Answer 43

A registrant may
voluntarily disclose these ratings in its SEC filings on any classes of debt securities, convertible bonds, or
preferred stock. If the rating disclosed by the registrant differs materially from the rating of an NRSRO, the
rating of the NRSRO must be included.

Question 44

NRSRO

Answer 44

nationally recognized

statistical rating organizations

Question 45

Regulation S-K

general description

Answer 45

Regulation S-K is a crucial component of the SEC disclosure system and sets forth many of the
disclosure requirements for registration statements that are filed under the ‘33 Act and other reports
that are filed under the Securities Exchange Act of 1934.

Question 46

Regulation S-X

general description

Answer 46

Regulation S-X sets forth the form and content for financial statements filed under the Securities Act
of 1933 and for reports filed under the Securities Exchange Act of 1934. The regulation requires that
an attestation report be prepared by an independent accountant.

Question 47

According to Regulation S-X, financial statements

in a registration statement become stale

Answer 47

and may not be used For most issuers,
this period may not exceed 135 days and, in the case of an accelerated filer (a WKSI or seasoned
issuer), the period is 130 days.

Question 48

Securities act of 1933 parties that may be

sued for untrue statements and material omissions from a registration statement include

Answer 48

 Every person who signed the registration statement
 Every director or partner of the issuer at the time of the filing
 Every accountant, engineer, or appraiser named as having prepared or certified any part of the
registration statement
 Every underwriter of the security
Under Section 11, the above parties, except the issuer, are exempt from liability if they can prove
.

Question 49

Securities act of 1933

Section 11 defense

Answer 49

False Registration Statements exception
parties, except the issuer, are exempt from liability if they can prove
that they had no knowledge of the fraud and properly notified the Commission. This would include
an accountant or other professional, who refused to sign or certify any of the documents used to
prepare the registration statement.

Question 50

Civil Liability for Salespersons Registration Statement

Answer 50

Any person who offers or sells a security in violation of the registration
provisions of the 1933 Act, who did not exercise reasonable care regarding untrue statements, is
liable for the investment amount, a reasonable amount of interest on the investment, minus the
amount of income received from the investment. Any information conveyed to a purchaser after the
time of sale is not taken into account when determining whether a prospectus included an untrue
statement, or omitted to state a material fact.

Question 51

Securities Exempt from Registration

Answer 51

 U.S. government and U.S. government agency securities
 Municipal securities
 Securities issued by non-profit organizations
 Short-term corporate debt instruments (such as commercial paper) that have a maturity not
exceeding 270 days
 Securities issued by domestic banks and trust companies (but not bank holding companies)
 Securities issued by small business investment companies (exempted by federal legislation
regarding small businesses)

Question 52

Rule 147A

Answer 52

 Issuers will be permitted to use general solicitation and publicly available websites to locate
potential in-state investors. Although offers are able to be made outside of the state, all sales
must still be limited to in-state residents.
 Companies will be able to be incorporated or organized outside of the state in which they
conduct the offering as long as they have their principal place of business in that state. Principal
place of business is defined as the location from which the principal officers, manager, or
partners primarily direct, control, and coordinate the activities of the issuer.
− For example, ABC is incorporated in Delaware, but its principal business is conducted in New
Jersey. Under Rule 147A, ABC will be allowed to sell securities to residents of New Jersey.

Question 53

Reg A A+ and Rule 147 and 147 A domicile

Answer 53

Companies will be able to be incorporated or organized outside of the state in which they conduct the offering as long as they have their principal place of business in that state. Principal place of business is defined as the location from which the principal officers, manager, or partners primarily direct, control, and coordinate the activities of the issuer.

Question 54

Private Placement Negotiations

Answer 54

The process of structuring and pricing the securities may involve more (not less)
negotiation, due to demands by institutional investors.

Question 55

Private Placement

Investment Bank Capacity

Answer 55

The investment bank usually acts in an agency

(not a principal) capacity and does not commit its own capital for a private placement issue.

Question 56

Placement Agent

Answer 56

The term placement agent refers to a firm, usually a broker-dealer that agrees to
find institutional investors who, in turn, will purchase securities of an issuer in a private placement.

Question 57

Placement Agent Agreement

Answer 57

The placement agent agreement specifies all the terms and conditions
between a company that is planning on issuing securities in a private placement (the issuer) and the
investment bank that has been hired to act as its agent. The role of the investment bank is to find
institutional investors to purchase the securities.

Question 58

Engagement Letter

Answer 58

An engagement letter is signed by the company that plans to issue securities
and the investment bank that is hired (engaged) to market the securities to institutional investors

Question 59

Teaser

Answer 59

The executive summary of a private placement memorandum (PPM) is usually a short
document, referred to as a teaser. An investor would receive this document to determine whether
she might be interested in the offering. If she is, the investor would then receive the complete PPM.

Question 60

Confidentiality Agreement

Answer 60

Any investor who is provided a private placement memorandum (PPM) will
sign in advance a confidentiality agreement (also referred to as a non-disclosure agreement or NDA). The
investor agrees not to disclose confidential information found in the PPM, unless it is to provide
information to his financial adviser. The adviser may be an accountant, attorney, banker, or other
financial professional and would use the PPM to evaluate the offering.

Question 61

Subscription Agreement

Answer 61

The subscription agreement is a sales contract for the sale of securities in
a private placement and sets forth the terms and conditions of the offering. The agreement usually
contains the following information:

Question 62

Subscription Agreement contents

Answer 62

 A statement in which the investor agrees that she alone or, with the assistance of a purchaser
representative, has sufficient knowledge and experience to evaluate the risks and merits of the
investment
 A statement by the investor providing her annual gross income and net worth
 A statement regarding the status of the investor, and the category of accredited investor (This is
also referred to as the qualification of investor section.)
 The number of shares (or units) and the price per unit that the investor is purchasing
 A statement by the investor acknowledging that she has received and carefully reviewed a
numbered copy of the appropriate disclosure document and any other related information
concerning the issuer
 A statement that the investor understands that the investment is illiquid and involves a high
degree of speculative risk
 A statement that the investor understands that the securities being purchased have not been
registered and may not be sold unless a registration is effective
 A statement as to the investor’s state of residency

Question 63

Private Placement 
Section 4(2) Exemptions

Answer 63

Non Public offerings are exempt from registration. Rule 506 determines the standards to qualify.

Question 64

Private Placement
Section 4(5) Exemptions

Answer 64

 The amount of the offering does not exceed $5 million,
 No advertising or public solicitation is being used to offer the securities, and
 The offering is sold only to accredited investors

Question 65

Rule 504

Answer 65

Under Rule 504, which covers offerings not exceeding $5 million within a 12-month period,
an issuing corporation is permitted to offer and sell the securities to an unlimited number of
investors without regard to their experience and sophistication. Also, the issuer is not required to
provide a disclosure document to the investors.

Question 66

Rule 504 Prohibited Companies

Answer 66

There are three types of issuers that are not
permitted to use this exemption:
1. A company that is subject to the SEC’s reporting requirements (a reporting company),
2. An investment company, and
3. A development stage company that has no specific business plan or purpose (e.g., a blank-check
company)

Question 67

reg d

Answer 67

exempts registration for private placements of securities by an issuer if several
conditions are met. In addition, there is a requirement that a uniform notice of sale (Form D), be
filed with the SEC no later than 15 days after the first sale of the securities. Form D is a short form,
not a registration statement.

Question 68

reg d 506(c)

Answer 68

For issuers that seek to raise an unlimited amount of capital privately, the JOBS Act
established Rule 506(c). Rule 506(c) has the following requirements:
 The company CAN use general solicitation or advertising to market the securities.
 The privately placed securities are referred to as restricted securities.
 Sales may only be made to accredited investors (as defined above)
 The company must take reasonable steps to verify that its investors are accredited, which may
include reviewing documentation (e.g., W-2s, tax returns, bank and brokerage statements, and
credit reports).

Question 69

A U.S. person is defined as

Answer 69

any individual who is a resident of the U.S. as well as any partnership, estate, or account that is held
for the benefit of a U.S. resident.

Question 70

FINRA Rule 5122 Exemptions

Answer 70

FINRA Rule 5122 relates to a private placement of securities where a member firm issues the securities
and conducts the placement on its own behalf.
Types of offerings exempt from the rule are:
 Exempt securities defined under the Securities Act
 Exempt offerings under Regulation S, or Rule 144A
 Offerings of variable contracts
 Offerings of securities in a commodity pool
 Offerings of equity and credit derivatives
 Offerings of unregistered, investment-grade debt, or preferred securities
 Offerings of a member firm’s securities sold in a public offering

Question 71

Rule 144 - Holding Period

Answer 71

With restricted stock,
the purchaser must hold the stock for six months unless the issuer is a non-reporting company, in
which case, the holding period is one year.If the restricted securities are held by the estate of a deceased individual who is not affiliated with
the issuer, the holding period under Rule 144 is waived. If the deceased is affiliated with the issuer,
the normal holding period is applicable. The sale of the securities for an estate is subject to all other
provisions of Rule 144.

Question 72

Rule 144 Control stock

Answer 72

Control stock is stock acquired int he open market and is exempt from rule 144