Federal Securities Regulations

Question 1

A tombstone advertisement…

Answer 1

makes known the availability of a prospectus. The ad is generally placed during the “waiting period,” and thus cannot contain an offer to sell. It is attempting to generate interest in the security which will soon be offered for sale.

Question 2

What is the SEC responsible for?

Answer 2

Administrating federal securities law
Regulating brokers
Rules on retaining WP’s and audits
To de-list any issuer not in compliance with SOX

Question 3

Definition of a security

Answer 3

An investment in an enterprise where investor intends to make a profit through the managerial efforts of others rather than own efforts (not CD’s or general p/s0

Question 4

What must be filed for 1933 Act

Answer 4

1. Prospectus (offer to sell, must be available before/with every sale)
2. Registration Statement (disclosure- basic info, debt, BOD, intended use of proceeds)
   * Audited B/S (not more than 90 days old)
   * Audited P/L (for prev 5 years)

Question 5

When do securities become effective?

Answer 5

Once SEC deems registration statements complete, 20 days after filed they are “effective”

Question 6

What can the company do during the waiting period of 1933 Act?

Answer 6

1. Make oral offers
2. Issue preliminary prospectus called “red herring” (missing unavailable info)
3. After effective date, “tombstone ad” can be placed (announces availability of prospectus, not an offer to sell)
4. Shelf registration (issue on continuous basis, periodically update prospectus)
5. Blue sky laws (state law registration provisions)

Question 7

Registration statement must be filed and a prospectus made available when…

Answer 7

[SPIN]
offer Securities
Public issue (large # are issuers- officers, directors, dealer, underwriter)
Interstate Commerce (between states)
No other exemption available (exempt securities, 1933 exempt transactions, 1934)

Question 8

Exemptions to the 1933 Act

Answer 8

[ACID-BRAINS]
Regulation A (small offerings- raise 50 million over 12 months, freely advertised, no restrictions on resale)
Commercial paper (matures <9 months, not for investing)
* Casual sales- avail to all except issuer, dealers, under.
* Crowdfunding (up to 1 million up to 12 months)
Intrastate offering (80% sales in incorporating state, can’t re-sell outside state for 9 months)
Regulation D (Private placement offerings)
Brokerage transactions- ordinary business
Regulated industries (Saving/Loans, CD’s)
Agencies of the gov’t (muni bonds, railroads)
Insurance contracts (annuities)
Not for profit
Stock dividends/splits (no commissions)

Question 9

Regulation A disclosure requirements

Answer 9

Tier 1: Up to 20 million w/ up to 6 million in offers by affiliates (unaudited FS)
Tier 2: Up to 50 million w/ up to 5 million in offers by affiliates (audited FS)
* Non-accredited investors limited to 10% of annual income/net worth
* secondary sales limited to 30% original offering

Question 10

What are accredited investors?

Answer 10

Banks, Credit unions, insurance co, brokers, corps, p/s
Wealthy individuals- net worth > 1 million (excluding primary residence) or N/I of 200,00 (300,00 MFJ) for 2 most recent years

Question 11

Regulation D

Answer 11

To simplify sale of securities to sophisticated investors

Rule 504/506

Question 12

Rule 504

Answer 12

• Offering up to 5 million to be completed by 12 months
• SEC notify 15 days within first sale
• No general advertising
• Resale restricted for 1 year
• Unlimited # of investors
• No F/S info given
• Advertising and resale restriction may not apply due to blue sky laws

Question 13

Rule 506

Answer 13

• Unlimited dollar amount
• SEC notify 15 days of first sale
• Advertise allowed only to accredited investors
• Cannot resale for 1 year- investment purposes only
• Unlimited accredited investors, limit to 35 non-accredited (must be sophisticated)
• No F/S info for accredited, audited B/S and good representation for non-accredited

Question 14

Exemption under Rule 144

Answer 14

Reg D securities may re-sell without being subject to registration

• Must been held at least a year
• Must be trickled (no more than 1% of o/s shares sold every 3 months)
• SEC be notified of intention to sell restricted sec.
• Holding period 6 months

Question 15

10K filings

Answer 15

Annual comparative F/S within:
60 days= large accelerated (market value 700 million held by nonaffiliates)
75 days= accelerated (at least 75 million in equity)
90 days= all others

Question 16

10Q filings

Answer 16

Quarterly unaudited review for each of first 3 fiscal quarters due within:
40 days= large and accelerated
45 days= non-accelerated

Question 17

Regulation A requirements

Answer 17

Raise up to 50 million over 12 months
Must be unrestricted equity/debt/convertible debt into equity securities
SEC must be notified w/ in 20 days of first sale
Offer Circular provided to all investors (mini-registration contains key info, far less extensive than prospectus)

Question 18

What is Subpart F income?

Answer 18

foreign base company income by a controlled foreign corporation (CFC). If a CFC is deemed to have Subpart F income, that income may need to be currently included in the U.S. parent’s taxable income if there are not enough exceptions or deductions to reduce the Subpart F income to zero.

Question 19

Other Reporting requirements under SEC 1934?

Answer 19

Tender offer- only the bidder needs to file, the target co. doesn’t
Insider Trading
Proxy solicitations
Regulation Fair Disclosure