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レグ 1 Ethics and Business Law > II-4 Government Regulation of Business > Flashcards

II-4 Government Regulation of Business Flashcards

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1
Q

What are common examples of security? What are other categories that are not specifically named?

A

Corporate stock, bonds, debentures, collateral trust certificates, puts, calls, straddles, options.

Investment contracts and “any interest or instrumentality commonly known as a security.”

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2
Q

What are 4 elements of investment contracts?

A
  • Investment of money.
  • In a common enterprise.
  • With an expectation of profit.
  • To be earned primarily by the action of others.
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3
Q

Exception to security registration?

A
  • Notes that have maturity of 9 months or less and used for commercial purpose rather than investment purpose.
  • Stock split
  • Municipal bond
  • SALE of stock
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4
Q

What does security represent?

A

Securities represent either a right to assets or a corporation’s indebtedness.

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5
Q

What law governs security?

A

The Security Act of 1933.

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6
Q

What must an issuer do before selling securities?

A

File a registration stmt with SEC and waits for 20 business days for SEC to declare the registration stmt effective.

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7
Q

What are 3 period of security process and what can issuers do within each period?

A
  1. Pre-filing: No offers, no sales.
  2. Waiting: Oral offers, a few written offers, but no sale.
  3. Offers and sales.
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8
Q

What is the primary written doc allowed during the waiting period called? What will happen to this after the effective date?

A

Red herring prospectus.

Will be replaced by the final prospectus.

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9
Q

What changed regarding procedure of red herring prospectus by SEC?

A

In Securities Offering Reform Package (SORP) - Shelf registration - company registration - was enacted to allow the largest companies to fill one registration stmt to cover all shares it intended to issue during the next 3 yrs.

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10
Q

“Company registration” How is the “largest companies” determined? What are they allowed to use?

A

WKSIs: Well known seasoned issuers.
30% of the market. Controls 95%.

Can freely use FWPs (Free writing prospectuses - broachers, other literature) if they file them with SEC. Other can also, but don’t have the same freedom or leeway.

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11
Q

What is the requirement of using shelf registration?

A

Must keep the original registration updated.

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12
Q

Does a registration statement with the SEC automatically result in compliance with the “blue-sky” laws of the states in which the offering will be made?

A

No. still have to be compliant with the state laws.

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13
Q

What is prospectus?

A

A part of registration stmt. The prospectus describes the issuing corporation, risks, and type of security being sold.

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14
Q

What is tombstone ad?

A

During the waiting period of 20 days immediately after registering with the SEC, tombstone ads may be placed. Tombstone ads are heavily restricted and may contain only limited information, such as the type of security and where a potential investor would acquire a now-available prospectus.

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15
Q

What are listed under registration stmt?

A
  • a description of the security
  • how the corporation will use the proceeds from the sale
  • a description of the registrant’s business and management
  • a financial statement.
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16
Q

Why are certain securities exempt from SEC regulation?

A

Because they are already regulated by other state or federal agencies usually.

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17
Q

What are examples of exempt securities? Are they exempt completely from SEC?

A

Government securities: ex - municipal bonds.
Bank and Saving and Loan securities.
Short-term notes (less than 9 months).
Non-profits securities.
Insurance and annuity policies.
Securities issued by receivers or trustee in bankruptcy (with court approval).

No, SEC still regulates for fraud - anti-fraud rules. If there is any fraud, can be prosecuted by SEC still.

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18
Q

What is exempt transactions?

A

In exchange for granting exemption from registration, the law usually restricts;

  1. The amount that can be raised.
  2. The methods by which offerings can occur.
  3. The investors to whom securities may be marketed.
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19
Q

What are 3 major categories and rule examples of exempt transactions?

A
  1. Small offering exemptions: Rule 504, Regulation A, Crowdfunding.
  2. Private Placement exemptions: Rule 506.
  3. Intrastate Offering exemptions: Rule 147, Rule 147A.
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20
Q

What are 3 key concepts that determine exempt transactions?

A
  1. Accredited investors (who can protect themselves without SEC help) - millionaire, individual income over $200,000, high level insiders (officers), institutional investors (banks etc), charitable organization with assets of 5 million.
  2. General solicitation (don’t want unsophisticated investors who can’t protect themselves) - ads, article, notice on newspaper, magazines etc
  3. Integration - law prohibits issuers from artificially separating one offering into 2 in order to qualify for exemption.
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21
Q

How can issuer avoid having a large-scale communication deemed a general solicitation?

A

Need preexisting relationship with the offerees.

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22
Q

How does SEC determine 2 offerings might need to be considered as 1 offering (integration)?

A
  • Are the sale part of a single plan offering?
  • Does sale involve the same class of securities?
  • Sale made at about the same time?
  • Same type of consideration received?
  • Same general purpose?
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23
Q

Rule 504 (small offering exemptions - part of Regulation D): Who can use it?

A

Not;

  • Reporting companies (those file with SEC - (1) shares traded publicly or (2) those with $10 million assets and 2000 shares of single class).
  • Blank check companies (ask investment money without specific purposes).
  • Investment companies (ex: mutual fund).
  • Companies who got in trouble with SEC before (bad actors).
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24
Q

Rule 504 (small offering exemptions): how much can they raise?

A

$5 million in 12 months.

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25
Q

Rule 504 (small offering exemptions): is general solicitation allowed?

A

Yes, if one of 3 criteria indicates adequate state protection applies;

  1. Issuer only sells in states where the state laws make you register with the states and provide sales literature so that investor are informed.
  2. Issuer sells in several states where at least one state laws make you register with the states and provide sales literature in all states.
  3. Issuer only sells in states where both state and federal laws exempt you as well and sold to only accredited investors.
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26
Q

Rule 504 (small offering exemptions): Purchaser qualification? Provide which information to purchasers?

A

None - can sell to sophisticated or unsophisticated investors.
None.

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27
Q

Rule 504 (small offering exemptions): Filing requirement with SEC? Time frame?

A

Form D - notifying of sale under Rule 504.

Must file within 15 days after begin sale.

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28
Q

Rule 504 (small offering exemptions): Resale restrictions?

A

None if one of 3 criteria for general solicitation applies.

If not, purchasers must wait 1 yr before reselling.

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29
Q

Rule 504 (small offering exemptions): integration determination?

A

If there is 6 months period between offerings, they will not be integrated.

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30
Q

Reg A (small offering exemptions): known as?

A

mini-IPO.

31
Q

Reg A (small offering exemptions): Who can use it?

A

Not reporting companies, investment companies, non-Canadian foreign companies, bad actors.

32
Q

Reg A (small offering exemptions): how much can issuer raise?

A

Tier 1: $20 / 12 months.

Tier 2: $50 / 12 mo.

33
Q

Reg A (small offering exemptions): general solicitation allowed? What about “testing waters”?

A

Yes to both.

34
Q

Reg A (small offering exemptions): Purchaser qualification?

A

Tier 1: none.
Tier 2: has cap (10% of net income or assets) on amount non accredited investors can buy unless the stock is listed on an exchange market (indication of legitimate stock). Then, there is no cap.

35
Q

Reg A (small offering exemptions): information to investors?

A
  • Offering circular with basic info about the company.
  • 2 yrs balance sheets and income stmts.

Tier 2 FS must be audited, but not Tier 1.

36
Q

Reg A (small offering exemptions): Filing with SEC?

A

Form 1-A (short-form registration form) and test-the-water documents.

37
Q

Reg A (small offering exemptions): Resale restrictions?

A

No.

38
Q

Reg A (small offering exemptions): Integration?

A

Yes, but many exceptions. Ex: not integrated with registered offering, crowdfunding etc.

39
Q

JOBS Act of 2012: Crowdfunding (small offering exemptions): who can use it?

A

Not Reporting companies, Blank check companies, Investment companies, foreign companies, bad actors

40
Q

JOBS Act of 2012: Crowdfunding (small offering exemptions): how much? Information for investors?

A

$1 mi / 12 months.

Less disclosure.

41
Q

JOBS Act of 2012: Crowdfunding (small offering exemptions): general solicitation?

A

Yes, but must sell through intermediaries such as broker, funding portal

42
Q

JOBS Act of 2012: Crowdfunding (small offering exemptions): what are 3 things funding portal do?

A
  1. tell investors risks
  2. little due diligence - investigation on officers, directors, and 20% shareholders.
  3. make sure money goes into escrow account and won’t come out until the target is met
43
Q

JOBS Act of 2012: Crowdfunding (small offering exemptions): purchase qualification? Limitation?

A

No, but strong limitations on how much a person can invest in crowdfunding (total in any) in single yr.

A person with less than $100,000 assets or net income - can invest greater of $2,000 or 5% of net income or assets. More than $100,000 - lesser of 10% or $100,000.

44
Q

JOBS Act of 2012: Crowdfunding (small offering exemptions): resale restrictions?

A

Must hold for a yr unless selling back to issuer or selling to family, accredited investors, a few others.

45
Q

JOBS Act of 2012: Crowdfunding (small offering exemptions): Filing with SEC? Disclosure requirement - Financial info?

A

Investor disclosures must be filed.
Must notify SEC when 50% and 100% target are collected.

More required as it raises more money.

46
Q

JOBS Act of 2012: Crowdfunding (small offering exemptions): integration?

A

Yes, but many exceptions.

It will not be integrated with Rule 504, RegA, Registered offering.

47
Q

Rule 506 (Private placement exemption - Part of Regulation D): who can use it?

A

All but bad actors.

48
Q

Rule 506 (Private placement exemption - Part of Regulation D): how much?

A

Unlimited.

49
Q

Rule 506 (Private placement exemption - Part of Regulation D): General solicitation?

A

506(b) - no.

506(c) - yes, but with purchaser limitations.

50
Q

Rule 506 (Private placement exemption - Part of Regulation D): Purchaser qualifications? What is the requirement to follow the qualification?

A

506(b): can sell to unlimited # of accredited investors and up to 35 non-Als, but they must be all “sophisticated” or acting through Purchase Reps (PRs - advisors).

506(c): can sell only to All or investors acting through PRs.

Take “reasonable” steps.

51
Q

Rule 506 (Private placement exemption - Part of Regulation D): what is “sophisticated” investors?

A

Someone who teaches investment strategy at community college level.

52
Q

Rule 506 (Private placement exemption - Part of Regulation D): Information to investors?

A

506(b): Basic financial info - the more money raised, more disclosure required.

506(c): none.

53
Q

Rule 506 (Private placement exemption - Part of Regulation D): Filing with SEC? Time frame?

A

Form D within 15 days after starting sale.

54
Q

Rule 506 (Private placement exemption - Part of Regulation D): resale restrictions?

A

Can’t sell for 6 months.

55
Q

Rule 506 (Private placement exemption - Part of Regulation D): integration?

A

Yes, many exceptions.

6 months between.

56
Q

Rule 147 (Intrastate offering exemption): who can use it?

A 
No investment companies, bad actors.
Others must be;
*Residents in the state (incorporated and principal place of business) AND
*Doing business (meet any 1 of 4 tests).
1. 80% of gross revenue there.
2. 80% of assets located there.
3. 80% of money raised will be used there.
4. Majority of employees are there.
57
Q

Rule 147 (Intrastate offering exemption): how much?

A

Unlimited.

58
Q

Rule 147 (Intrastate offering exemption): general solicitation?

A

no; any offer to nonresident disqualifies.

59
Q

Rule 147 (Intrastate offering exemption): Purchaser qualification?

A

Can offer and sell only to residents (reasonably believed).

60
Q

Rule 147 (Intrastate offering exemption): Information to investors? Filing with SEC?

A

None to both.

61
Q

Rule 147 (Intrastate offering exemption): resale restrictions?

A

None when reselling to residents.

Can’t sell to non-resident for 6 months.

62
Q

Rule 147 (Intrastate offering exemption): integration?

A

Yes, but many exceptions.
6 months.
Registered offering, RegA, crowdfunding.

63
Q

Rule 147A (Intrastate offering exemption): who can use it?

A 
No investment companies, bad actors.
Others must be;
*Residents in the state (principal place of business - ok NOT be incorporated there) AND
*Doing business (meet any 1 of 4 tests).
1. 80% of gross revenue there.
2. 80% of assets located there.
3. 80% of money raised will be used there.
4. Majority of employees are there.
64
Q

Rule 147A (Intrastate offering exemption): how much?

A

Unlimited.

65
Q

Rule 147A (Intrastate offering exemption): general solicitation?

A

Ok, but ads should indicate that sales will be made only to residents.

66
Q

Rule 147A (Intrastate offering exemption): Purchaser qualification?

A

Must be state residents (reasonably believed)

67
Q

Rule 147A (Intrastate offering exemption): Info to investors? Filing with SEC?

A

None to both.

68
Q

Rule 147A (Intrastate offering exemption): resale restrictions?

A

No when reselling to residents.

Can’t sell to non-resident for 6 months.

69
Q

Rule 147A (Intrastate offering exemption): integration?

A

Yes, but many exceptions.
6 months.
Registered offering, RegA, crowdfunding.

70
Q

What is Emerging Growth Companies based on JOBS Act?

A

Provides an “IPO on-ramp” by delaying full regulation of companies going public for up to 5 yrs if they declare themselves to be EGCs.

71
Q

JOBS Act of 2012: EGC: who can use it?

A

Companies (even foreign) that:

  • have less than $1 billion in annual gross revenues during their most recently completed fiscal yr.
  • have been publicly traded for less than 5 yrs.
  • have a public float of less than $700 million.
  • have not issued $1 billion in non-convertible debt in the prior 3 year period.
72
Q

JOBS Act of 2012: What are benefits for EGCs?

A
  • Must include only 2 (instead of 3) yrs of audited FS on registration stmt.
  • Reduce disclosures and other requirement re: executives compensation.
  • Right to submit to SEC a draft registration stmt for confidential review prior to a public filing.
  • Exempt for up to 5 yrs from complying with Sec. 404(b) of SOX re: auditor report re: internal control over financial reporting (still need SOX 404(a) certification by CEO and CFO).
  • New PCAOB rules.
73
Q

What did JOBS Act of 2012 impacted?

A
  • Emerging Growth Companies.
  • Crowdfunding.
  • Ban general solicitation rule for Rule 506 as long as security is purchased by accredited investors.
  • Raised the money cap from $5 mil to $50 mil for RegA
  • Preempt state regulations if: Shares are listed on national exchange, sold only to “qualified purchasers”
  • Private Company Flexibility and Growth Act: changed the threshold for being a “reporting” or “public” company from $10m in assets and 500 shareholders to $10m and 2,000 shareholders (exclude employees with compensation stocks and crowdfunding investors).

レグ 1 Ethics and Business Law (11 decks)

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