Lesson 8.1: What Are Securities and Who Issues Them? Flashcards
Which of the following is not a security under the Uniform Securities Act?
A) Gold
B) Options on foreign currencies
C) Investment contracts
D) Options on common stock
Precious metals, such as gold, are commodities and are NOT securities subject to the provisions of the Uniform Securities Act. Options on common stock and foreign currencies are securities subject to the USA. Investment contracts are specifically listed as securities in the USA and subject to its provisions. In an investment contract, a person invests money in a common enterprise with the expectation of profits from the managerial efforts of others. A good example of an investment contract is a share of a mutual fund because it represents an investment of money into a pooled enterprise with the expectation of profits through the efforts of a third party (the fund’s manager).
Which of the following best describes a nonissuer transaction?
A) One that provides capital to a corporation that is offering stocks or bonds to the public
B) One that is generally prohibited under the Uniform Securities Act
C) One that involves investors in the primary market
D) One that occurs between investors in the secondary market
D) One that occurs between investors in the secondary market
In a nonissuer transaction, none of the proceeds go to the issuer, and the most common nonissuer transaction occurs between investors in the secondary market. An issuer transaction provides capital to issuers.
Under the Uniform Securities Act, which of the following are securities?
I. Stock option contract
II. Treasury stock
III. Keogh plan
I & II
A stock option contract and treasury stock are securities under the USA. NOT a security** in and of itself.
Which of the following is not a security?
A) A variable annuity
B) A $1 million whole life insurance policy
C) A promissory note with a six-month maturity
D)An interest in a real estate condominium sold with a rental pool
B) A $1 million whole life insurance policy
Under the Uniform Securities Act, whole life insurance policies are not securities. Condominiums used as a personal residence are not securities, but when a rental pool arrangement exists, third-party management seeking a profit for the investor exists, which meets the Howey definition of an investment contract. Commercial paper is an example of a promissory note.
Which of the following financial instruments are considered securities under the Uniform Securities Act?
I. Collateral trust certificates
II. Investment contracts, including interests in oil and gas drilling partnerships
III. Options listed on the Chicago Board Options Exchange
IV. Foreign currency options contracts traded on the Philadelphia Stock Exchange
I, II, III, and IV
Collateral trust certificates, investment contracts, options, and option contracts, regardless of the underlying asset, are identified as securities in the Uniform Securities Act and are subject to its provisions. Currencies are not securities, but options on currencies are securities. The key to questions like this is to remember those things that are not securities.
Under the Uniform Securities Act, the term nonissuer refers to:
a person other than the issuer.
Under the Uniform Securities Act, a nonissuer is any person (as defined under the act) that is not the issuer of the security. This would include an individual investor or a securities dealer selling from inventory.
Which of the following investment vehicles is not considered a security under the Uniform Securities Act?
A) Commercial paper maturing in fewer than 270 days
B) U.S. government bonds
C) Annuities with a fixed rate of return
D)Common stock issued and sold intrastate
C) Annuities with a fixed rate of return
A fixed annuity is not defined as a security and is subject to the rules and regulations of the state insurance commissioners. As such, a fixed annuity does not fall under the provisions of the Uniform Securities Act. Even though the U.S. government bonds (and, under certain conditions, the commercial paper) are exempt securities, they are still securities.
In the Howey decision, the U.S. Supreme Court held that in order for an investment contract to be considered a security, it must represent:
an investment of money in a common enterprise with the expectation of profit from the efforts of the investor.
In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.
A discussion referring to blue-sky laws would include?
Blue-sky laws are state securities laws
Life insurance and fixed annuities are?
Life insurance and fixed annuities are not listed as securities under the USA, while their variable counterparts are securities. It is best to concentrate on learning the few things that are not securities.
An interest in which of the following is a security under the Uniform Securities Act?
I. Evidence of indebtedness
II. Certificate of deposit for a security
III. Oil and gas drilling program
IV. Cattle feeding program
I, II, III, and IV
The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are. An example of a certificate of deposit for a security is an American depositary receipt (ADR). Oil and gas drilling programs and cattle feeding programs are types of direct participation program (DPPs). A common example of an evidence of indebtedness is a bond or a debenture.
In the SPAC process,
the targeted private company becomes public by virtue of a merger with an SPAC.
After the SPAC has its IPO, the SPAC then merges with a private company, making it a publicly traded security. A major benefit is that becoming a public company as a result of being acquired by an SPAC is accomplished with little of the time and hassle of a traditional IPO. It is incorrect to say that SPACs have complicated operations because they generally have limited or no operations. SPAC founders may invest in or receive private placement warrants. The warrants let investors increase their stake in cases of a successful acquisition and motivate founders to find a good acquisition target.
It would not be a prohibited practice under the Uniform Securities Act for an agent to tell a client that
A) the fact that she passed her licensing exams is ample proof of her qualifications.
B) registration of securities implies tacit approval of the Administrator.
C) her commissions are structured so that she makes money only if the client makes money.
D) registered nonexempt securities may properly be sold in the state.
D) registered nonexempt securities may properly be sold in the state.
Nonexempt securities are those that must register. The Administrator never approves of any security, passing a licensing exam does not give one the right to assert one’s qualifications, and performance-based compensation is never permitted for agents.
Which of the following are securities under the Uniform Securities Act?
I. A variable annuity
II. A subscription right to purchase common stock
III. A condominium purchased solely as a place of residence
IV. Certificate of interest or participation in an oil, gas, or mining partnership
I, II, and IV
Securities include stocks, bonds, notes, certificates of interest in any profit-sharing agreement or participation plan (oil, gas, mining, lease, or real estate partnerships), preorganization certificates or subscription agreements, certificates of deposit for a security, evidence of indebtedness, warrants, rights, options, variable annuities, commodity options, and multilevel distributorships. Excluded from the definition are insurance contracts, endowments with fixed benefits, fixed annuities, Keogh or IRA plans, written confirmations of a trade, futures contracts, real estate held as a personal residence, currencies, precious metals, and collectibles.
As defined in the Uniform Securities Act, an issuer is any person who?
issues, or proposes to issue, a security for sale to the public.
The Uniform Securities Act defines an issuer as any person who issues, or proposes to issue, a security. The resale of a partnership interest by an investor is a nonissuer sale because the investor is not the issuer. Examples of issuers are municipalities such as the City of Chicago, which issues tax-exempt highway improvement bonds; AAA Manufacturing Company, which proposes to offer shares to the public even though it has not completed the offering; and the United States government, when it offers Treasury bonds.
