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Series 24 > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

Regulation D

A

Adopted by the SEC aimed at facilitating the capital formation needs of small business.

If an issuer of securities meets the requirements of Reg D, the issue can be sold without meeting full reg requirements that non exempt issues must meet. (Rules 504-506)

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2
Q

SEC Rule 504

A
  • provides exemption for offering of 5M or less in any 12 month period
  • no disclosure requirements, no requirement concerning investors qualification
  • exemption under rule 504 not for public- its a private offering
  • no limit to number of investors if agg. offering not over 5m
  • If offering is not conducted exclusively in states where it’s registered and disclosure doc not delivered, they are restricted and limited in ways it can be resold.
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3
Q

8 categories of accredited investors

A
  • institutional investors (banks, insurance companies)
  • private business development companies
  • tax exempt organizations
  • directors, executives, partners of issue
  • individuals w 1M of networth or 1M of networth for investor + investors spouse excluding personal residence
  • Excess income of 200k in last 2 years, reasonably expects 200k in current year
  • trust in excess of 5m in assets not formed for purpose of purchasing securities offered
  • any entities made up of accredited investors
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4
Q

SEC Rule 506(b) Offering - Traditional Private Placement

A
  • issuers can conduct quiet private placements without general advertising. Non accredited investors can participate if they get a disclosure doc, usually in a Private Placement Memorandum
  • Provides exemption for offering if sold to no more than 35 sophisticated investors + unlimited accredited investors (no dollar limit)
  • company cant use general solicitation / advertising
  • Non accredited investors must either be a sophisticated investor or with a purchaser rep (accountant or attorney)
  • securities are restricted for 6 months
  • direct sale of entire new issue to institutional investor = private placement
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5
Q

SEC Rule 506 (c) offering

A

Issuers can use general solicitation/advertising, but all purchasers must be accredited investors (NOT SOPHISTICATED)
- issuers must believe they are accredited by taking the reasonable steps to verify.

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6
Q

Control securities

A

Owned by a control person or affiliated person of a company. control shares can be registered or unregistered (satisfied 6 month holding period)

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7
Q

SEC Rule 144

A

Covers the sale of restricted securities and control stock by individuals and members of their immediate families

  • issuers cannot sell shares under rule 144
  • satisfying this rule allows holders to sell their stock in public market (control or restricted holders)
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8
Q

Holding periods of control/restricted stock

A
  • restricted shares have to have been owned for 6 months prior to sale and fully paid for 6 months prior to sale
  • no holding period for control stock
  • no holding period is required if securities are owned by the estate of a deceased non-affiliated person
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9
Q

How long is form 144 notice of sale effective for?

A

90 calendar days

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10
Q

When does no notice have to be filed with the SEC under rule 144?

A
  • if amount of stock sold by affiliated person does not exceed 5000 shares, or dollar amount does not exceed 50,000 in any 90 day period.
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11
Q

Rule 144 legend

A
  • restricted stock must be identified w legend that states securities may not be resold in marketplace unless registered w SEC or exempt
  • non affiliate required to remove restricted legend. a transfer agent approved by issuer would do this.
  • control securities do NOT have a legend if shares were purchased in open market
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12
Q

Amount of stock that can be sold by affiliates (restricted and /or registered) of the issuer under rule 144 is limited to:

A
  • greater of 1% OF OUTSTANDING shares or
  • average weekly trading volume for previous 4 weeks immediately prior to sale in any 90 calendar day period
  • non affiliates may sell after 6 months without meeting volume limit
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13
Q

Under rule 144, Adequate public information concerning the issuer must be available, meaning periodic filings must be made

A

SEC wants facts, not forecasts

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14
Q

Statutory underwriter

A

if someone/org purchases unregistered shares and reoffers shares without getting them registered or complying with rule 144, they are a statutory underwriter

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15
Q

Solicitation of 144 orders by a broker dealer:

A
  • there is no solicitation of buy orders allowed. if a customer indicated unsolicited bonafide interest in security within preceding 10 biz days, or abroker indicated interest in preceding 60 days, either may be contacted in attempt to sell shares. broker must keep written evidence of unsolicited request
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16
Q

Purchasers of unregistered securities have available the following recourses with regard to the security

A
  • purchaser has the right to rescind
  • action can be taken against seller
  • no time limit on recourses
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17
Q

SEC Rule 144-A

A
  • Allows sale of restricted securities to Qualified Institutional buyers during 6 month period
  • equity and bond transactions are allowed under 144a. mutual funds not sold under 144a.
  • NO VOLUME LIMITS under rule 144A
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18
Q

QIB’s

A
  • insurance companies, banks, trust funds with assets of 100m+. individual investors are NOT qibs
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19
Q

Regulation A Offering Limits and Offering Circular

A
  • permits securities offerings using abbreviated statement called offering circular. Rather than full registration statement when value of corp does not exceed 50M in any 12 month period.
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20
Q

Reg A Offering Circular filing guidelines

A

must be filed electronically with the SEC’s regional office, and will be qualified 20 business days after filing. The SEC can shorten the 20 business day period upon written request

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21
Q

A preliminary offering circular can be distributed before the effective date if it does not contain the:

A
  • final offering price
  • underwriters discount
  • selling concession
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22
Q

When should REG A documents be filed with FINRA?

A
  • no later than one business day after they are filed with the SEC and are subject to FINRA’s communication with the public rules
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23
Q

Sales by Selling Security Holders, Regulation A Tier 1

A

available for offerings of up to 20M in a 12 month period, including no more than 6M on behalf of selling security holders that are affiliates of the issuer.

24
Q

Sales by Selling Security Holders, Regulation A Tier 2

A

available for offerings of up to 50M in a 12 month period including no more than 15M on behalf of selling security holders that are affiliates of the issuer.

25
Q

Sales by selling security holders in a Reg A offering are limited to what?

A

no more than 30% of the aggregate offering price in an issuers first reg A offering and any subsequent Reg A offerings in following 12 month period

26
Q

Selling Reg A offerings: Before effective date of a Reg A offering, member firms can/cannot:

A
  • can send out preliminary offering circular
  • can publish tombstone ads in local newspapers
  • can send simple announcements
  • can publish generic ads
  • can sell to unlimited amount of persons once effective (private placement is limited persons)
  • can not send out research reports or magazine articles
  • can not take subscription payments
  • must send offering circular 48 hrs prior to receiving confirmation

REG A offering exemption - not available to registered investment companies or oil and gas rights

27
Q

Private Investment in Public Equities (PIPEs)

A
  • used by small and mid-size publicly traded companies to raise additional capital by issuing shares. generally at a discount to current market price. normally purchased by private investors/hedgefunds.
28
Q

Regulation S

A

Provides exemption from registration under the 33 act for offerings and sales of securities outside of the US.

29
Q

Securities under Reg S may not be resold in the US for:

A
  • equity securities are considered restricted and are under the distribution compliance period of 1 year. must satisfy most of requirements of rule 144 as well, 1 year is different than normal 144 6 month holding period
  • 40 days for non-convertible debt
  • one year and 40 day holding periods are called distribution compliance period
    (domestic=6 month holding period, offshore = 1 year)
30
Q

Regulation M-A (mergers & acquisitions) and info around them must be provided/reported to:

A
  • both SEC and security holders
31
Q

SEC Rule 147- INTRAstate offerings

A

provides exemption from SEC registration for a security issue sold by a resident corporation only to purchasers located within one particular state

32
Q

Under SEC Rule 147, how is ‘principally doing business within the state’ defined?

A
  • 80% of its gross revenues are from sales in state
  • 80% of assets within the state
  • 80% of offering proceeds must be used in the state
  • 100% of purchasers must be full time residents of the state
33
Q

An issuer must adhere to the following in order to sell or offer a security to the public under rule 147:

A
  • place legend on certificate stating securities are unregistered
  • issue stop transfer instructions to issuer’s transfer agent (sold to non resident, it will be locked)
  • obtain written statement from each purchaser as to his residence
  • obtain written statement from purchaser that no resales will be made outside of the state for 6 months (Restricted period)
34
Q

SEC Rule 147A is identical to rule 147 but allows issuers to:

A
  • be incorporated or organized outside of state which offer takes place
  • no restrictions on offers, provided sales are only made to residents of the state (offers may be made out of state)
  • may use internet and social media to reach investors.
  • online orders, rule 147amazon
35
Q

SEC Rule 145

A
  • covers exchanges of shares
  • investors whose shares of a company will be exchanged or reclassified must be given an opportunity to vote or consent if change is a result of a:
  • reclassification
  • merger
  • consolidation
  • does NOT apply to changes in par or stock splits
36
Q

Crowdfunding

A
  • jobs act allows start up companies to offer up to $1,070,000 worth of common shares without having to register with SEC.
  • Investor may invest up to 10,000 based on their income/net worth
  • disclosure docs are required for crowdfunding, but not SEC registration
37
Q

FINRA Rule 4518 provides that a FINRA member shall notify FINRA:

A
  • prior to engaging, for the first time, in a transaction involving offer or sale of securities in reliance on crowdfunding exemption
  • within 30 days or directly/indirectly controlling, being controlled by, or under common control of funding portal pursuant to SEC crowdfunding rules
38
Q

Funding Portal:

A
  • any person acting as intermediary in a transaction involving offer or sale of securities for account of others, solely pursuant to crowdfunding transactions
39
Q

Funding Portal Members are Required to:

A
  • report to FINRA all contact info, update their required contact info within 17 business days after end of each calendar year
  • report to FINRA members gross revenue on form FP no later than 60 days following each calendar year end
  • preserve all applicable records for 5 years, first 2 readily accessible
  • keep current all broker-check info, update such info no later than 10 days following any change
  • must use pre dispute arbitration agreements for investor accts
40
Q

Tender offer

A
  • think takeover - company 1 trying to take over company 2
  • formal proposal to stockholders to sell shares in response to large purchase bid. company initiating usually assumes all costs, reserves right to accept # of shares
41
Q

In order to legally tender shares, a person must own the security. SEC Rules state that an owner of a security:

A
  • owns or agent has title to it
  • has purchased it, or entered into unconditional contract to purchase
  • owns security convertible or exchangeable for it, tendered such a security for conversion or exchange
  • has option to purchase or acquire it and HAS exercised option
  • has rights or warrants to subscribe to it and HAS exercised such rights or warrants
42
Q

Short against the box and wants to sell long side

A

person would have to execute the sale as a short sale to sell long side of the position

(short against the box = same amount short as they have long)

43
Q

If a person is short against the box and wishes to tender the long side of the position

A
  • person would be required to first cover the short. same would be true if the person was long the stock and written call options against the long stock
  • only net long positions may participate in tender offers
44
Q

Illegal tender would occur:

A

when an investor tenders shares that were borrowed through a short margin account. the person does not own the shares, can not tender them

45
Q

A company that’s a target of a tender offer must disclose to its shareholders its position on the offer when?

A

no later than 10 business days from the date of the tender offer.

46
Q

SEC Rules require a tender offer to remain open for how long?

A

at least 20 business days from the day the offer is announced.

  • if the terms of the offer is changed, the offer must remain open for 10 business days from date of revision
  • when a tender offer is changed or extended, a public announcement is required no later than 9 am on the business day after the date the original offer is due to expire
47
Q

Disclosures Required in a fairness opinion

A
  • if firm acted as an advisor to any party to the transaction subject
  • if firm will receive any significant payment or compensation contingent on completion of transaction
  • if firm has any material relationships that existed during last 2 years. or if any comp was or is to be received.
  • if firm has verified info received regarding the transaction and procedures.
  • whether firm’s fairness committee approved or issued fairness opinion
  • whether or not fairness opinion expresses an opinion about fairness of compensation to insiders
48
Q

Affirmative defense scenarios for an insider to claim they were not involved in insider trading

A
  • insider had a prior binding contract to purchase or sell securities
  • insider was involved in plan or contract which included a formula, algorithm, or program to purchase or sell security
49
Q

Insider filing requirements

A
  • insiders must file record of ownership w SEC within 10 days of when they become insiders on form 3
  • insiders must file changes in ownership on form 4 within 2 business days after the change.
50
Q

Short swing recovery provision

A
  • profits received by insiders made within 6 month period shall be recoverable by the company.
51
Q

Monetary sanction awards for whistleblowers

A
  • shall pay an award or awards to one or more whistleblowers who provide original info to the SEC which leads to successful recovery equal to: no less than 10%, no more than 30% of what’s been collected.
52
Q

SEC Rule 10b-18: Conditions for Issuers to Repurchase stock

A
  • corps can buy back they own common stock in the secondary market, provided they follow provisions of the rule and of the 34 act:
  • issuer must use a single broker-dealer per day to bid.
  • issuer may not repurchase own shares at market opening and during last half hour of trading each day
  • purchase price may be no higher than highest bid by dealer on last sale of security, whichever is higher
  • purchases may not exceed 25% of the adtv
53
Q

Affirmative determination or ‘Locate’

A

Requires member firms to confirm and document that security they are shorting is available to borrow and will be delivered by settlement

54
Q

Affirmative determination is NOT required for:

A
  • corporate debt securities
  • bona fide market making transactions by a member in securities registered as a NASDAQ market maker
  • bona fide market making transactions by member in non-nasdaq securities which market maker publishes two sided quotation
  • transactions which result in fully hedged position

affirmative determination required for non-NASDAQ stock publishing ONE sided quotes

55
Q

Under Reg SHO, when must a firm report total shorts to FINRA?

A
  • no later than 2 business days after reporting settlement date.
56
Q

Mandatory close-out for short sales

A
  • have to purchase securities of ‘like kind and quantity’ to close out failure-to-deliver positions in threshold securities that have persisted for 13 consecutive settlement days
57
Q

The Threshold List

A

daily list of equity securities that have failed to deliver for FIVE consecutive settlement days and meet the following:

  • aggregate fails-to-deliver at a clearing agency of 10k shares or more per security
  • level of fails-to-deliver equal to one half of one percent of issuer’s total outstanding
  • security included on a list published by an SRO (like FINRA)

A security ceases to be a threshold security if it does not exceed level of fails for FIVE consecutive settlement days. 5 to get on, 5 to get off

Series 24 (13 decks)

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