REG - Federal Securities

Question 1

Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC’s continuous disclosure system?

Answer 1

Companies with assets in excess of $10 million and 500 or more shareholders.

Question 2

Purpose of Securities Act of 1933

Answer 2

1. disclosure of material info for potential investors
2. prevent fraud

SEC can only compel full and fair disclosure; its function is not to detect fraud or stop offerings where fraud or unethical conduct is suspected

Question 3

What is required for intrastate security issues to be exempt from registration?

Answer 3

Issuer must be a resident of the state in which 80% of the business takes place using at least 80% of the sales proceeds within that state.

Resales can only be made to residents of that same state for 9 months.

Question 4

The exemption for commercial paper from registration requirements of the 1933 Act requires:

Answer 4

A maturity of 9 months or less

Question 5

Bankers Acceptance

Answer 5

a promised future payment or time draft which is accepted and guaranteed by a bank and drawn on a deposit at the bank.

Question 6

Form S-1

Answer 6

basic long-form registration statement

Question 7

Forms S-2 and S-3

Answer 7

less detailed disclosures than Form S-1

Question 8

Under Regulation D of the Securities Act of 1933, what is the maximum time period during which an exempt offering may be made?

Answer 8

12 months

Question 9

3 exemptions of Reg D

Answer 9

Rule 504: exempts issuance of securities up to $1M sold in 12 month period

Rule 505: exempts issuance up to $5M in 12 month period

Rule 606: allows private placement of an unlimited amount of securities

Question 10

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove

Answer 10

1. plaintiff was a purchaser of the security

2. plaintiff suffered an economic loss

Question 11

10-K

Answer 11

annual report must be certified by independent public accountant

Question 12

10-Q

Answer 12

quarterly report must be filed for each of first 3 fiscal quarters of each fiscal year

Question 13

8-K

Answer 13

monthly reports when material events occur such as a change in corporate control, significant change or revaluation of assets, or change in amount of issued securities

filed within 4 days after material event occurs

Question 14

Under all of Rules 504, 505, and 506, the SEC:

Answer 14

must be notified within 15 days of the first sale of securities

Question 15

Reg D

Answer 15

establishes 3 important exemptions (Rules 504, 505, 506) under the 1933 Act

Question 16

Rule 504

Answer 16

exempts an issuance of securities up to $1,000,000 sold in twelve-month period to any number of investors (this is also known as seed capital exemption)

(a) General solicitation and advertising are not allowed unless either (a) the securities are registered under a state law requiring public filing and delivery of a substantive disclosure document to investors before sale, or (b) the securities are issued under a state law exemption that permits general solicitation, as long as sales are made only to accredited investors.
(b) Issuer need not restrict purchasers’ right to resell securities
(c) No specific disclosure is required
(d) Must send notice of offering to SEC within fifteen days of first sale of securities

Question 17

Rule 505

Answer 17

exempts issuance of up to $5,000,000 in twelve-month period

(a) No general offering or solicitation is permitted within twelve-month period
(b) Permits sales to thirty-five unaccredited (nonaccredited term sometimes used) investors and to unlimited number of accredited investors within twelve months

1] Accredited investors are, for example, banks, savings and loan associations, credit unions, insurance companies, broker dealers, certain trusts, partnerships and corporations, also natural persons having joint or individual net worth exceeding $1,000,000 or having joint or individual net income of $200,000 for two most recent years
2] SEC must be notified within fifteen days of first sale

Question 18

Rule 506

Answer 18

Rule 506 allows private placement of unlimited amount of securities

(a) In general, same rules apply here as outlined under Rule 505
(b) However, an additional requirement is that the unaccredited investors (up to thirty-five) must be sophisticated investors (individuals with knowledge and experience in financial matters) or be represented by individual with such knowledge and experience

EXAMPLE: A growing corporation is in need of additional capital and decides to make a new issuance of its stock. The stock is only offered to ten of the president’s friends who regularly make financial investments of this sort. They are interested in purchasing the stock for an investment and each of them is provided with the type of information that is regularly included in a registration statement.

(4) Disclosures for offerings under $2,000,000 have been simplified to be similar to disclosures under Regulation A
(5) A controlling person who sells restricted securities may be held to be an underwriter (and thus subject to the registration provisions) unless requirements of Rule 144 are met when controlling person is selling through a broker

(a) If the following are met, the security can be sold without registration

1] Broker performs no services beyond those of typical broker who executes orders and receives customary fee
2] Ownership (including beneficial ownership) for at least two years
3] Only limited amounts of stock may be sold—based on a specified formula
4] Public must have available adequate disclosure of issuer corporation
5] Notice of sale must be filed with SEC

Question 19

Regulation D of the Securities Act of 1933 is available to issuers without regard to the dollar amount of an offering only when the

Answer 19

Number of purchasers who are nonaccredited is 35 or less.

an issuance of securities made pursuant to Regulation D of the Securities Act of 1933 may be for an unlimited dollar amount if the number of nonaccredited investors does not exceed 35. These nonaccredited investors must be sophisticated investors (i.e., have knowledge and experience in financial matters).