REG 12 - Federal Securities Regulation

Question 1

What are Securities?

Answer 1

A security is defined as an investment in an enterprise, where the investor intendends to make a profit through the managerial efforts of others rather than through his own efforts. Some examples include:

• Common Stock
• Preferred Stock
• Treasury Stock
• Bonds, Debentures, Options, Warrants
• Limited Partnership Interest
• All Investment Contracts

NOTE: CDs are is NOT a security.

Question 2

The SEC is responsible for?

Answer 2

• Administering federal securities law
• Regulating brokers
• Issuing rules on details of retaining workpapers & other relevant records connected w/ audits & reviews
  
  • Sarbanes-Oxley Act
• Ability to de-list any issure not in compliance with SOX
• Created by the 1934 Act

Question 3

Securities Act of 1933

(“Truth in Securities Act”)

Answer 3

The 1933 Act is concerned with the original issuance of securities intended for the sale to the public. One cannot sell securities unless they are registered with the SEC. A registration stmt, which onsists of 2 parts, must be filed, unless exempt.

1. Prospectus (Part 1) - A written offer to sell
   
   • Historical company information
   • Discusses the risks involved
2. Registration Statement (Part 2) - Disclosure Information
   
   • Basic Information (intended use of proceeds)
   • Financial Information (Aud BS 90 days, P&L 5yrs)

NOTE: Offers may be made as soon as securities are filed, but can only be sold after the SEC approves the registration.

Question 4

Prospectus (2)

Answer 4

Prospectus is a written offer to sell. Consists of summary information of the Registration Statement. “Stuff that the buyer may want to look at.” Must be available to investors before or with every sale.

• Historical company information
• Discusses the risk in the company

Question 5

Registration Statement (2)

Answer 5

The registration statement is a disclosure document which consists of two parts:

1. Basic Information
   
   • Names/Addresses & amount of securities held by directors, officers, underwriters, & shareholders with atleast 10% of the stock
   • Intended use of the proceeds
   • Company’s debt
   • Company’s operating history & pending litigation
2. Financial Information
   
   • Audited Balance Sheet (NOT more than 90 days old)
   • Audited P&L statement (for previous 5 years)

Question 6

A Registration Statement must be filed & a Prospectus made available when? (SPIN)

Answer 6

Applicable offerings are based on (SPIN):

• Securities
  
  • Stocks, bonds, debentures, options, warrants
  • Limited parnership interest (considered as a security)
• Public Issue (large # of people that are issuers of securities)
  
  • Issuing company
  • Officer, director, major shareholder >10%
  • Dealer or Underwriter
• Interstate Commerce (between states)
• No other Exemption is available
  
  • 2 types of exemptions
    
    • Exempt securities
    • Exempt transactions

Question 7

Sales of securities under the 1933 Act

(“Waiting Period” & “Effective Date)

Red Herring & Tombstone Ads

Answer 7

• Before registration of the securities, NO sales may occur.
• Before registration is effective, called the waiting period, the company may still:
  
  • Make oral offers to sell
  • Issue a “red herring” a preliminary prospectus
• Sale of securities may take place once the registration statement becomes “effective”, normally 20 days after it is filed with the SEC. After effective date:
  
  • “Tombstone Ads” can be placed which announces how to aquire a prospectus
    
    • Correct! A tombstone advertisement is used to inform potential investors of the availability of a prospectus.

Question 8

Shelf Registration

Answer 8

Incorrect! A shelf registration allows various sales of securities over a long period of time and requires the issuer to periodically update the statement for changes in the company

Question 9

Exempt Securities & Transactions under 1933 Act

(ACID-BRAINS)

Answer 9

Section 3 of the Securities Act of 1922 describes certain securities that are exempt, while Section 4 describes certain transactions that are exempt. (ACID-BRAINS).

• Regulation A - Small offerings that raise up to
  
  • • Must file an offering circular w/ the SEC
• Commercial Paper - (Notes, Bonds <9 mos)
  
  • Short-term loans that mature within <9mos
• Intrastate Offerings
  
  • Atleast 80% of co’s business w/in state
  • Securities offered exclusively to residents of that state.
• Regulation D - Private Placement offerings (504,505,506)
• Brokerage Transactions
• Regulated Industries - Banks (Ex: Savings, Loans, CDs)
• Agencies of the Govt (Municipial Bonds, railroads)
• Insurance Contracts & Policies
  
  • NOTE: Stock issued by Insurance Co is NOT exempt
• Not for Profit (Charity/Church) Securities
• Stock Dividends & Splits - as long as no commission paid
  
  • Correct! An exemption is available for stock issued in stock splits or dividends or given in exchange for another class of stock provided there is no monetary consideration paid to the issuer.

Question 10

Regulation A - Small Offering

Answer 10

This applies to offerings by issuers that:

• Must notify SEC of first sale within 15 days
• Can be freely advertised & available for resale
• Raise up to $5M
• Over a period NOT exceeding 12 mos.
• An “offering circular” (mini registration stmt) must be prepared & provided to all prospective investors

Question 11

Casual Sales

Answer 11

Casual Sales are exempt. (Sale by other than issuer, underwriter, dealer.) These refer to sales by persons not connected with the issuing company, & are available to all sellers except:

• Issuers
• Underwriters
• Dealers
• Directors
• Officers
• Owners of atleast 10% of any class of shares

Question 12

Regulation D Exemption - Private Placement

Rule 504

Answer 12

Securities sold by Private companies may be excluded from the 1933 Act under Regulation D Exemption Private Placement - Rule 504:

• Notify the SEC w/in 15 days of first sale
• NO advertising to NONaccredited investors
  
  • Okay for Accredited investors
• Resale to nonaccredited investors permitted
• Offerings ≤​ $1M
• Offerings must occur w/in a 12 month period
• Unlimited number of Investors (accredited or nonaccredited)
• Financial Information Given - NONE

Question 13

Regulation D Exemption - Private Placement

Rule 505

Answer 13

Securities sold by Private companies may be excluded from 1933 Act under Regulation D Exemption Private Placement - Rule 505:

• Notify the SEC w/in 15 days of first sale
• NO Advertising
• Cannot resell for 2 years (investment purpose only)
• Offerings ≤ $5M
• Offerings must occur w/in a 12 month period
• Unlimited Accredited Investors
  
  • Nonaccredited ≤ 35 Investors
• Financial Information Given
  
  • Accredited = Nothing
  • NONaccredited = Audited Balance Sheet

Question 14

Regulation D Exemption - Private Placement

Rule 506

Answer 14

Securities sold by Private companies may be excluded from 1933 Act under Regulation D Exemption Private Placement - Rule 506:

• Notify the SEC w/in 15 days of first sale
• NO Advertising
  
  • Under Jobs Act, General Solicitations to Accredited are permissable.
• Cannot resell for 2 years (investment purpose only)
• Offerings Amount = UNLIMITED (=> $5M)
• Offerings Period = UNLIMITED
• Unlimited Accredited Investors
  
  • Nonaccredited ≤​ 35 Investors & MUST BE represented by Accredited
• Financial Information Given:
  
  • Accredited = Nothing
  • Nonaccredited = Audited Balance Sheet

Question 15

Securities Act of 1934

Answer 15

Created the SEC & gave it broad powers to regulate the securities industry. The application of this law is unrelated to the 1933 Act.

Question 16

Securities Act of 1934 - Registration/Reporting Reqs (2)

(Form S-1)

Answer 16

Under the 1934 Securities Act, Form S-1 must be filed if a company’s stock is either:

• Listed/traded on a national exchange or
• At least $10M in assets AND 500 shareholders
  
  • Under JOBS Act Title V:
    
    • Up to 500 NONaccredited OR 2,000 total shareholders.
    • Securities held by employees of the company offering securities are exempt shares.

Question 17

What are the Periodic Reports needed to be filed by a company with the SEC under the 1943 Act? (4)

Answer 17

1. Form 10K - Annual Audited FS
2. Form 10Q - Quarterly Reviewed FS
3. Form 8K - Current reports
   
   • Change in officers,directors,control, to be filed within 4 days of major change in the company
4. Proxy Statement - Identification & objective disscussion of matters to be voted on at the upcoming shareholder meeting

Question 18

Form 10K, 10Q, 8K - Due Dates

(Large Acc, Accelerated, Non-Acc)

Answer 18

Form 10K - Annual comparative audited FS

• Large Accelerated, =>$700M, 60 Days
• Accelerated, $700M => $75M, 75 Days
• Non-Accelerated,

Form 10Q - Quarterly Reviewed FS

• Large Accelerated, =>$700M, 40 Days
• Accelerated, $700M => $75M, 40 Days
• Non-Accelerated,

Form 8K - Major change in company must be filed w/in 4 days

Question 19

What are three reporting requirements under the 1934 Act?

(TIP)

Answer 19

Tender Offer - attempt to buy 5% or more of a class of stock, is a takeover bid by a prospective aquirer to all stockholders to tender thier stock at a specified price.

Insider Trading - buys & sells by directors, officers & by 10% or greater shareholders.

Proxy Solicitations - attempts to get right to vote shares of others at meeing/notify SEC 10 days prior to mailing.

Question 20

Schedule 13D

Answer 20

Owners of 5% or more must file Schedule 13D showing:

• Source of funds used for purchase
• Amount of stock owned
• Price offered for the shares
• Future plans for the company
  
  • Disclose to the SEC

Question 21

JOBS Act of 2012

Answer 21

The JOBS Act (Jumpstart Our Business Startups) was enacted as a means of stimulating the economy by making it less difficult for businesses & particularly emerging grown companies (EGC), to access public markets. An EGC is a business that had revenues of less than $1B as of the end of this most recent fiscal year. An entity is no longer an EGC at the earliest of:

• Last day of the year in which the 5th anniversary of IPO
• Last day of the year in which revenues are >$1B
• Date on which an entity has issued >$1B of non-convertible debt in the previous 3 years
• Date on which an entity is considered a large accelerated filer (>$700M)

Question 22

What are the 7 Titles/sections of the JOBS Act?

Answer 22

1. Reopening American Capital Markets to EGC
   
   • Reducing reporting/disclosure requirements for EGC to 2 years rather than 5 years
2. Access to Capital for Job Creators
   
   • (In Regulation D 506) enables general solicitation & advertising of securities to accredited investors
3. Crowdfunding
   
   • Allows to obtain small investments from Large number of investors
4. Small Company Capital Formation
   
   • Expands Regulation A, $5M offerings to $50M
5. Private Company Flexibility & Growth
   
   • Amends 1934 act registration/reporting requirement, from 500 shareholders to 500 non-accredited or 2,000 total
6. Capital Expansion
   
   • Employee stock compensation is not required to be part of the 500 shareholder rule to register under the 1934 Act
7. Outreach on Changes to the Law
   
   • Requires the SEC to provide information about the changes online