Chapter one

Question 1

Retail Communicaitions

Answer 1

Written Communication >25 retail investors
(non institutional)
Qualified registered principal member must approve each communication (Exception, another member filed with FINRA advertiising dpearment and received letter consistent or in reliance letter not materially altered
Kept on file for three years
ie. market research report or website
Page 6 - 1.2.1 - Public Appearances

Interactive electronic forums (chat rooms) are NOT considered public appearances. They are retail communications, but, unlike most retail communications, do not require principal pre-use approval requirements as pointed out previously at 1.1.2.

Page 10 - 1.3.1 Filing Requirements

There is a ten-day pre-filing requirement for any retail communication involving option contracts (for all broker-dealers).

Question 2

Correspondence

Answer 2

<25 retail investors in 30 day calendar year
Evidence suprervisory procedurs implemented and carried out must be maintained and avialble FINRA upon request
Principal review may take place before or after distribution

Question 3

Institutional

Answer 3

made only to institutional investors, ie. bank, SL, insurance company, gov entity, >50M asset like gov entity , employee benefit plan >100,
Individual participants of employed benefit palns and qualified plans not convered
Exclude internal communication

Question 4

Accredited investor

Answer 4

net worth $1MM not including primary residence, annual income of $200K ($300K married couple), officers and directors count
Professiona, sophisticated institutional investor (Rule 501)

Question 5

Regulation D

Answer 5

no registration if privately placed with accredited investor that do not need SEC protection OR max 35 individual non accredited investor
Must filed form D
If the private placement sells to any nonaccredited investors (with the maximum number being 35) no advertising or general solicitation is allowed. If the sale is exclusively to accredited investors, the private placement may advertise.

Question 6

Rule 144A

Answer 6

No holding period requirements if sell to a QIB ($100MM in assets)

Question 7

Rule 144

Answer 7

Restricted securities- 6 month holding period
Affiliate (insider)- Volume limits apply; 90 day period sell > of 1% shares out and average weekly trading volume over 4 weeks; whichever greater
Does not apply to primary offerings
Also note that there is a de minimus exemption for Rule 144. Under Rule 144, Form 144 need not be filed if 5,000 or fewer shares are sold and the dollar amount is $50,000 or less. This de minimus rule applies to sales in any 90-day period.
If an affiliate sells (restricted) control stock for a profit prior to satisfying the holding period, this is called a short swing profit. If a short swing profit occurs, the affiliate is disgorged of the profit and is responsible for any capital gains tax!

The term disgorged can certainly show up on an exam question. In this case it means the profit is returned to the issuer.

1.7.5 Rule 144a

Question 8

Private placement synonyms

Answer 8

Restricted, unregistered, letter stock, legend stock

Question 9

Securities Act 1933 exemptions

Answer 9

US Gov, US municipalities , nonprofit religions, banks and savings and loans, public utilities,
Securities exampt: commercial paper, (<270 days), BA’s (maturity <270), restricted stock

muni bond funds (not exempt), REITS NOT EXEMPT

Question 10

Securities act 1933

Answer 10

require issuers new securities to file registration statement with SEC
Full and fair disclosure
regulates securities fraud in primary markets

Question 11

IPR (Independently prepared report)

Answer 11

Must be preapproved by a principal and exempted from FINRA filing requiremtes

Question 12

State registration (3 types)- Blue Sky

Answer 12

Qualification- issuer file with state, meets requirements. If the registration is just with one state, the registration will be done through qualification. Qualification means that the state will collect all the information and decide whether or not to clear the offering for sale in the state.
Coordination- issuer register simulataneoulsy with state and the SEC, both effective same date
Notice filing; registered under inv act 1940, federally covered secuirty

Question 13

Syndicate members

Answer 13

Take on financial liability and act as a principal

Question 14

Selling group members

Answer 14

No financial liablity and act as agents b/c they have no commitment to buy securities from the issuer

Question 15

Best efforts

Answer 15

agent capacity, underwriter no risk,
AON- underwriter either sell all shares or cancel the underwriting
Mini max- sets a floor needs to hit

Question 16

Firm Commitment

Answer 16

Underwriter takes on financial risk, principal, most common

Question 17

Rule 147

Answer 17

Offering entirely in one state exempt from registration when:
issuer has its principal office and receives at least 80% income in state
At least 80% of issuer assets located within state
Majority of issuer employes based wihin state
All purchasers are residents of the state (only 1/3 80% rule must be met)

Question 18

Generic advertising (135A)

Answer 18

Does not refer to specific secuirty
Often includes nature of investment comopanies, services offered in connection with described securities, expalaniton of various types of investment coompanies, description of excahnge and reinvestmen privleges and where public can wrtie or call for more info
Must contain the name and sponsor of advertisement
Firm must have available fund if they advertise it

Question 19

Public appearance

Answer 19

Preapproval of principal may be required but not mandatory
reasonable basis to recommend secuirty
Must disclose any conflict of interest
Must complete firm training before doing

Question 20

Established firm wanting to promote mutual fund

Answer 20

Must be filed with FINRA within 10 days of use, approved registered principal

Question 21

Securities Act 1934

Answer 21

Created SEC
No manipulating secondary market
Extension credit to customers

Question 22

Securities Act 1939

Answer 22

The Trust Indenture Act of 1939 protects investors in corporate bonds should the issuing company default.
Issue size of >$50MM within 12 months
Maturity of nine months or more
Offered inserstate
The Trust Indenture Act of 1939 requires corporate bond issues of $50 million or more sold interstate to be issued under a trust indenture, a legal contract between the bond issuer and a trustee representing bondholders.

Question 23

Restricted person

Answer 23

Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue.

Question 24

FINRA fairness underwriting compensation

Answer 24

Relevant factors considered by FINRA in determining the fairness of underwriting compensation include the size of the offering (total dollar amount), the type of commitment (firm commitment or best efforts), the type of securities (i.e., stocks or bonds), the form of compensation (i.e., cash or stock), the total value of all forms of compensation, the underwriter’s relationship to the issuer, and any form of potential conflicts of interest.

Question 25

Buying new issues at pubic offering price

Answer 25

Member firms and employees of members (registered and nonregistered) are prohibited from buying a new equity issue at the public offering price

Question 26

Reg A+

Answer 26

made for small and medium offering- excludes investment compnaies (PE, VC, hedge funds)
Investors provided with notice of sale/offering circular
tier 1: up to $20MM raise in 12 month, no more than $6M by existing investors
The cooling-off period is 20 days between the filing date and effective date, and, under Tier 1, the issuer need not provide audited financial information. Individuals buying securities in a Regulation A+ offering must receive a final offering circular at least 48 hours before confirmation of sale.
tier 2: Up to $50MM in 12 month, no more than $15M. SEC review only, must be qualified investors (accredited OR Max of of greater 10% investor net worth or 10% of investor’s net income per offering)

Question 27

Rule 147:

Answer 27

Offering in 1 state exempt from registration if 1/3 80% rule met:
issuer has principal offer and receives 80% of income in state
at least 80% of issuer’s assets located within state
at least 80% offering proceeds are used within state
Majority of issuer’s employees are based within state
All purchasers are resident of state
Purchasers within state may not sell to another state for at least 6 months

Question 28

Syndicate members vs. Selling group

Answer 28

Syndicate members: Take on financial liability and act in a principal capacity
Selling group members: No financial liability and act as agents b/c no commitment to buy securities

Question 29

SAI

Answer 29

A statement of additional information (SAI) need not be in a prospectus but available for both open and closed-end investment companies. It consists of information not necessarily needed to make an informed purchase decision but still useful to the investor. The SEC however mandates that “enhanced disclosure” in the form of a summary section be included in the prospectus of open-end investment companies (mutual funds). It must be written in plain language and the SEC mandates the order of, and the items to be addressed in the summary.

Question 30

Advertising private placement

Answer 30

Advertising private placements is considered a solicitation to sell. If the securities are advertised, all purchasers must be accredited or the company must reasonably believe they are. In this instance, the intent is to sell to up to 35 allowable nonaccredited investors and with that intent clearly stated the offering could not be advertised to anyone.
Make reasonable effort to ensure advertising to accredited investors

Question 31

Prospectus

Answer 31

A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers.
Use of proceeds
Offering price
History of business
Risks etc

Question 32

Due diligence meeting

Answer 32

The final meeting before the end of the cooling-off period is known as a due diligence meeting and is always held before the effective date of the new offering.
A due diligence meeting is held between the issuer and the underwriter before the effective date and is one of the final meetings held before the sale of the security so that each party may review all aspects of the issue.

Question 33

MSRB requirements official statement

Answer 33

A final official statement must be delivered to retail buyers of a new issue on or before the settlement date. The MSRB does not regulate issuers, but does make this requirement of bond dealers.

Question 34

SEC Rule 134 tombstones

Answer 34

Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering’s effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.

Question 35

Prime brokerage

Answer 35

$500K minimum

Question 36

Chat room/electronic forum communication

Answer 36

Interactive electronic forums (chat rooms) are NOT considered public appearances. They are retail communications, but, unlike most retail communications, do not require principal pre-use approval requirements as pointed out previously at

Question 37

Option contract filing

Answer 37

There is a ten-day pre-filing requirement for any retail communication involving option contracts (for all broker-dealers).

Question 38

Exempt transactins vs. securities

Answer 38

C.Securities that are exempt from SEC registration include securities issued by the U.S. government or federal agencies, municipal bonds, securities issued by banks and savings institutions, public utility stocks or bonds, securities issued by religious or educational institutions, securities issued by nonprofit organizations, notes, banker’s acceptances, commercial paper, insurance policies, and fixed annuities. Exempt transactions (which differ from exempt securities) include intrastate offerings, Regulation A offerings, and Regulation D offerings.