Chapter 3 - Primary/Secondary Markets Flashcards
True or False
The Securities Act of 1934 was passed regulating the primary market -issuance of new issues.
False.
The Securities Act of 1933 was passed regulating the primary market -issuance of new issues.
True or False
The Securities Act of 1933 was passed regulating the primary market -issuance of new issues.
True
Which Securities Act was passed to regulate the primary market?
The Securities Act of 1933
Included in the ___________ is the general character of the business:
the uses of the proceeds of the offering;
historical audited financial statements;
biographical data on officers and directors as well as their percentage holdings;
legal issues;
the proposed price of the issue;
underwriting spread;
a copy of the proposed prospectus;
and any other relevant information.
Registration Statement - Form S-1
Once the registration statement is filed, the issue enters into the “____________” period.
During this time, the SEC reviews the filing for “full and fair disclosure.”
20-Day Cooling Off period
True or False
During the 20-day Cooling-off period, the issue may not be sold, but it may be advertised.
False.
During the “20-day cooling off” period, the issue cannot be sold or advertised; recommendations of the issue are prohibited; soliciting orders to buy are prohibited. If any of these occur, this is a violation called “gun jumping.”
During this period, lists of interested customers may be drawn, but no orders can be taken and no sales can be made. This is termed “taking indications of interest.”
True or False
During the 20-day cooling off period, underwriters are allowed to distribute preliminary prospectuses.
True.
the underwriters are allowed to distribute a “preliminary prospectus” to interested parties. This is called a “red herring.”
The “red herring” is not considered to be “offering” the securities to investors, so it is allowed.
If the SEC finds that there is an untrue statement of material fact in the registration statement at any time during the “20-day cooling off”, it can issue a “stop” order suspending effectiveness. What two conditions must be met for a stop order to be issued?
The stop order can only be issued after 15 days’ notice is given to the issuer and underwriters and an opportunity for a hearing is given.
True or False
The final prospectus must be given to purchasers during the 30-day period following the effective date.
False.
The final prospectus must be given to purchasers during the 90-day period following the effective date.
What is required of firms who wish to send prospectuses to clients by email?
The firm has to confirm that the client has internet access.
True or False
During the prospectus delivery period, dealers effecting purchases of the security for customers must be “quiet” about the issue - they cannot “hype” the issue.
True
True or False
Under the Act of 1933, an omission or misstatement of material fact in a registration statement or prospectus is fraud. It is fraud for the underwriter only, because it is the underwriters responsibility to check for these types of errors.
False
It is fraud for all those individuals involved in the offering: the issuer, the underwriters, the accountants, and the lawyers.
What do the following have in common?
Direct obligations of the U.S. Government and Agency issues.
Municipal obligations.
Foreign government obligations.
Banker’s Acceptances and Commercial Paper as long as the maturity does not exceed 270 days.
Insurance company offerings such as life insurance policies and fixed annuities, EXCEPT for variable annuities (covered under state insurance laws which predate the Act of ‘33).
Bank issues (covered under state banking laws which predate the Act of ‘33).
Common carrier issues such as railroads, trucking companies (covered under Interstate Commerce Commission - I.C.C. - laws that predate the Act of ‘33).
-and-
Issues of Benevolent organizations (non-profit corporations such as farmer’s cooperatives).
These are the primary “exempt” securities that will be tested on the exam.
What do the following transactions have in common?
Intrastate offerings under Rule 147
Private placements under Regulation D
Certain trades of securities that would otherwise require the use of a prospectus defined under Rule 144
Private placements that can only be sold to large institutional investors under Rule 144A
Transactions between private parties
Transactions outside the U.S. to non-U.S. residents under Regulation S
These are exempt transactions that do not require registration.
if new issues of non-exempt securities are offered through an exempt transaction, no prospectus is required. For example, if a new issue of common stock (a non-exempt security) is sold in a private placement (an exempt transaction), no registration is required.
True or False
The Act of 1933 defines an intrastate transaction as one that takes place:
between 2 states;
between the United States and a territory such as Puerto Rico;
between the United States and the District of Columbia;
and between the United States and any foreign country.
False.
This describes interstate transactions, not intrastate.
For an intrastate offering to be exempt from federal registration under Rule 147, the requirements are:
(4 answers)
- 100% of the issue must be offered and sold to residents of that state. The issue cannot be sold to a non-resident; all purchasers must submit written verification of residency.
- The issuer must be a “resident” of that state. To determine residency, the SEC applies the “80%” tests. The issuer must meet all of the following to be considered a “resident” of that state. 80% of the:
A. issuer’s assets must be located m the state.
B. issuer’s sales revenue must be derived in that state.
C. proceeds of the offering must be used within that state .
- In addition, the issuer must be incorporated in that state, if it is a corporation; or the issuer’s principal office must be located in that state, if it is a partnership.
- For a 9-month period after the sale is completed, resale is only permitted to residents of that state. The issue cannot be resold “interstate” until after the 9-month waiting period. To enforce this, a legend is printed on the certificates with the restriction .
True or False
Under a Regulation D private placement, the issue can be sold to a maximum of 25 “non-accredited” investors and an unlimited number of accredited investors.
False.
The issue can be sold to a maximum of 35 “non-accredited” investors and an unlimited number of accredited investors.
True or False
The issue can be sold to a maximum of 35 “non-accredited” investors and an unlimited number of accredited investors.
True
True or False
Under rule 501, an accredited investor is a purchaser who meets all of the following tests;
- Individual with a net worth of $1,000,000, exclusive of home.
- Individual with annual income of $200,000 a year for the past 2 years; or couple with a joint income of $300,000; and the expectation of continuing to earn that level of income in the future.
- Individual who is an officer or director of the issuer.
- Financial Institutions (banks, insurance companies, . mutual funds), and non-profit institutional investors (pension plans and college endowment funds), with assets in excess of $5,000,000.
False.
To be an accredited investor, the entity must only meet one of the above tests.
True or False
Under Regulation D for private placements, there is no limit on the dollar amount sold, the number of units sold, or the number of states in which the offering is made.
True
Under Regulation D for private placements, even though the issue is exempt from registration and prospectus requirements, full disclosure to investors must be given to investors through an “______________”.
Offering Circular
All non-accredited purchasers of private placements under Reg D must be “sophisticated” investors.
What is a “sophisticated investor”?
This means that the investor is able to evaluate the merits of the issue.
This does not mean that the purchaser cannot bear the investment’s economic risk.
True or False
Registered representatives must act as purchaser representatives in offerings that they are selling.
False
Registered representatives are prohibited from acting as purchaser representatives in offerings that they are selling.
The only exception is given to purchasers who are related by blood to the registered representative.
True or False
A Rule 506 private placement offering that includes non-accredited investors (up to the 35 maximum), cannot be advertised, but if it excludes non-accredited investors, it can be advertised.
True
Until September 2013, private placements could not be advertised to potential investors. To promote small business formation, this was changed for Rule 506 (unlimited dollar amount) offerings made only to accredited investors.