Chapter 5 - Regulation of Securities and Issuers

Question 1

Definition of “person” (same as 79)

Answer 1

Can’t be dead, incompetent or a minor

Question 2

The Uniform Securities Act defines a “security” as

Answer 2

• stock
• bond
• mutual fund
• options
• oil and gas partnership
• ADRs and GDRs (certificates of deposit for a security)
• Voting trust certificate
• warrants or rights for a security
• investment contracts
• REITs

Question 3

Non-securities are;

Answer 3

• fixed annuity or other insurance contracts that don’t have a “variable” feature that allows people to pick out their own investments
• commodities
• futures contracts on commodities
• precious metals
• currency such as rare coins
• real estate used as a personal residence
• collectibles such as antiques, art, wine
• retirement plans

Question 4

Certificates of deposit issued by a bank ARE NOT ______

Answer 4

securities, most other “certificates” are

Question 5

Registration statement must include:

Answer 5

• amount of securities being issued
• other states the security has been registered in
• any adverse regulatory actions taken against the firm

Question 6

Incorporation by reference states that an issuer may

Answer 6

reference a previous filing about the same security or issuer in a new filing without having to include a copy of that file

Question 7

The three methods of registration are:

Answer 7

1) registration by qualification
2) registration by coordination
3) registration by filing

Question 8

All issuers of securities, when filing, must

Answer 8

1) provide a signed consent to service of process to the state
2) pay filing fees to the state

Question 9

Registration by qualification (starting from scratch) must provide the following information

Answer 9

• basics about the company
• general nature of business, key assets
• summary of business environment
• relevant details about security being issued
• total proceeds from the offering
• total debt and stock outstanding
• BS no more than 4 months old
• 3 years of IS
• breakdown of any officer/director who owns more than 10% of the securities of the issuer
• pending lawsuits
• copies of all marketing lit (prospectuses, circulars, etc)
• same of the actual security
• legal opinion
• written consent for any professional reports
• intended use of the proceeds
• description of any stock options
• anything the admin requires

Question 10

Registration by qualification becomes effective ________

Answer 10

when the administrator says so

Question 11

A prospectus (as defined in the 79) must delivered to a purchaser of an issue by __________

Answer 11

the time the trade settles

Question 12

Registration by coordination (coordinate both federal and state registrations - must file federal before state) and must submit

Answer 12

• three copies of latest prospectus
• copy of articles of incorporation and by-laws
• copy of agreement between issuer and underwriter
• copy of any instrument governing the issuance of securities
• copy of security itself
• anything the admin requests
• updates to the federal prospectus must be made at state level too

Question 13

Registration by coordination becomes effective when ___________

Answer 13

The federal registration becomes effective (so long as it has been on file with the state for 10 days and offering prices/commissions have been on file for 2 days)

Question 14

For registration by qualification or by coordination, admin may require them to be sold using a ______ and must be kept for up to _______ years

Answer 14

subscription form (sales contract form) and kept up to 3 years

Question 15

Registration by filing (for issuers who have already registered a security federally - mostly established companies) requires:

Answer 15

• issuer is organized under US laws
• issuer has been in business in the US and has filed all materials with the SEC for last 36 months
• issuer has a security registered under the Exchange Act of 1934 held by at least 500 shareholders
• 4 market makers in the securities for at least 30 days during prior 3 months
• if a registered equity security, must have a value of at least $5 share

Question 16

If using registration by filing for securities from a mutual fund or unit investment trust, must provide

Answer 16

• statement demonstrating eligibility for registration by filing
• name, address and form of organization of the issuer
• description of securities being registered
• copy of latest prospectus filed with the SEC
  IF this information has been on file with Admin for 5 days and filing fee is paid, registration is effective when federal registration is effective

Question 17

Notice filing is a heads up to the _____- that a federally covered security will be offered for sale in their jurisdiction

Answer 17

state admin

Question 18

A notice filing requires the issuer to

Answer 18

• submit all documents that are used in federal registation to state admin prior to sale
• deliver copies of all amendments to the federal docs to state admin at same time as delivered to federal
• report on value of federal covered securities
• consent to service of process
• filing fees

Question 19

State securities registrations and notice filings expire _____ after their _____ date

Answer 19

1 year after the effective date

Question 20

Post-registration requirements for the issuer are minimal, usually just some _________

Answer 20

administrative reports that are usually required quarterly

Question 21

Exemptions to the registration rules come in Sections ______ and ______

Answer 21

402(a) and 402(b)

Question 22

Section 402(a) exemptions apply to _______

Answer 22

every transaction of a security

Question 23

Section 402(b) exemptions must ________

Answer 23

must be granted individually for each transaction

Question 24

Section 402(a) exemptions include:

Answer 24

• US gov’t and municipal securities
• foreign gov’t securities (usually bonds) with which the US gov’t maintains diplomatic ties
• depository securities (issued or guaranteed by a bank)
• loan association securities
• insurance company securities (NOT variable annuities)
• credit union securities
• public utility securities (US and Canada)
• exchange-traded securities
• non profit securities
• commercial paper (investment grade, matures in less than 9 months)
• employee benefit plan investment contracts

Question 25

Section 402(b) exempt transactions include:

Answer 25

• isolated non-issuer transactions (two private parties, can involve BD, but not frequent)
• senior securities transactions (senior to common stock and no default in last 3 years)
• transactions in certain federally registered securities (non-issuer transactions in an outstanding security registered under Exchange Act of 1934 - must be 180 days old - or under Inv. Co Act of 1940)
• Unsolicited transactions (non-issuer transactions effected by a BD that were unsolicited)
• Underwriters transactions (transactions between the underwriter and issuer or among other underwriters
• Whole mortgage backed bond transactions (backed by mortgage)
• Bankruptcy and fiduciary transactions
• Transactions by a pledgee
• Institutional investor transactions
• Private placements
• Preorganization certificate transactions
• transactions with existing security holders
• offers of securities registered on the state and federal level
• non-issuer distributions
• small offerings offered under the JOBS Act

Question 26

A sale or purchase of securities is

Answer 26

an actual exchange of securities for some kind of compensation or a contract to do so in the future

Question 27

A sale or purchase can be a cash transaction, but can also be

Answer 27

• trading securities for other securities
• trading securities for other types of assets
• trading securities for services
• exercising options
• making gifts of assessable securities

Question 28

An offer, as opposed to a sale, is

Answer 28

any attempt to invite another party to engage in a purchase or sale transaction, which includes advertisements for securities

Question 29

An offer can originate in one state and target another state, in which case the offering party will need to meet exemptions in _______

Answer 29

both states

Question 30

The following are considered “offers”

Answer 30

• a warrant or right to purchase a security at a set price in the future
• a security given as a bonus for purchasing other securities or item of value
• gift of assessable stock (stock where additional fees can be levied for future improvements or expansions)
• sales calls
• any mailed marketing materials

Question 31

Things that ARE NOT considered “offers”

Answer 31

• stock dividends paid to shareholders without them having to anything additional
• stock splits where shareholders don’t pay anything additional
• any communication or action related to a legit corporate action such as a reorg, merger, or consolidation
• exchanges of securities made in connection with a judicially approved organization
• gifts of non-assessable stock

Question 32

Exceptions for media from other states

Answer 32

• ads in a bona fide newspaper or publication in regular circulation that are not published within a given state do not constitute offers within that state
• if 2/3 of publications circulation is outside of state where it is published, ads do not count as offers even in state where it is published

Question 33

Securities registered federally ______ have to be registered at the state level

Answer 33

DO NOT

Question 34

The following securities must be registered on the federal level (hence not on the state level)

Answer 34

• NYSE, American stock exchange and other national exchange securities
• debt securities or preferred stock of any of the companies who have stocks listed on above exchanges
• securities issued by an investment company that qualifies under the Investment Company Act of 1940

Question 35

The following transactions would be covered by federal regulation (hence not state level):

Answer 35

• transactions in most securities that are exempt from federal registration (exempt securities on the 79)
• offers or sales to qualified purchasers under Reg D
• Most transactions that are exempt under federal law

Question 36

Securities registration is valid from 1 year from the effective date and cannot be withdrawn within _____, afterwards it may be withdrawn at the discretion of the ______

Answer 36

1 year, the administrator

Question 37

A stop order is used to

Answer 37

deny, suspend or revoke a security’s registration because the issuer has not met important requirements

Question 38

In order for a state admin to issue a stop order, the order must be in the public interest and one of the following must be true

Answer 38

• the registration is materially false or misleading
• the filer, issuer (or officers/directors), or underwriter has violated securities law
• another state or federal regulator entered a stop order within last year
• issuer’s business is illegal
• offering is fraudulent
• offer involves unreasonable amounts of commission or comp
• security applies for registration by notification but isn’t eligible
• security applies for registration by coordination but doesn’t send through the federal documents
• fails to pay filing fee

Question 39

An admin cannot issue a stop order for an already effective security based on information they knew at the time of registration if they haven’t initiated the proceeding within ______ of the effective date

Answer 39

30 days