Securities Act of 1933

Question 1

The Securities Act of 1933:

A. requires the registration of all securities
B. does not require the registration of exempt securities
C. requires the registration of municipal bonds
D. requires the registration of U.S.Treasuries

Answer 1

The best answer is B.

The Securities Act of 1933 requires registration of non-exempt securities - these are issues that are not exempt from the registration provisions of the Act. Exempt securities do not have to be registered under the 1933 Act. U.S. Treasuries and Municipal debt issuers are exempt.

Question 2

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT:

A. U.S. Government bonds
B. Government National Mortgage Association Pass Through certificates
C. Collateral Trust certificate
D. General Obligation bonds

Answer 2

The best answer is C.

Securities that are exempt from the registration provisions of the Securities Act of 1933 are principally governmental debt issues, including U.S. Government debt, U.S. Government agency debt, such as Ginnie Mae debt, and municipal debt such as general obligation bonds.

Collateral trust certificates are issued by corporations, where the stock of a subsidiary is put up as collateral for the bond issue. This is a non-exempt security.

Question 3

The maximum maturity on a banker’s acceptance is:

A. 30 days, because a longer maturity would cause the issue to be non-exempt
B. 90 days, because a longer maturity would cause the issue to be non-exempt
C. 270 days, because a longer maturity would cause the issue to be non-exempt
D. 360 days, because a longer maturity would cause the issue to be non-exempt

Answer 3

The best answer is C.

Banker’s acceptances issued by banks are an exempt security under the Securities Act of 1933, as long as the maturity does not exceed 270 days.

Question 4

Which statement is TRUE regarding Commercial Paper?

A. Commercial Paper may be sold without a prospectus
B. Commercial Paper must be sold with a prospectus
C. Commercial Paper must be sold with an Official Statement
D. Commercial Paper must be sold with an Offering Memorandum

Answer 4

The best answer is A.

Since Commercial Paper is an exempt security under the Securities Act of 1933, it may be sold without a prospectus. The prospectus is the disclosure document for new issues that are not exempt from registration.

The Official Statement is the disclosure document for municipal bonds (which are an exempt issue).

An Offering Memorandum is the disclosure document for a private placement - which is a security sold in an exempt transaction.

Question 5

Common carrier issues are:

A. exempt from the Securities Act of 1933 but required to be sold with a prospectus
B. exempt from the Securities Act of 1933 and not required to be sold with a prospectus
C. subject to the Securities Act of 1933 but required to be sold with a prospectus
D. subject to the Securities Act of 1933 and not required to be sold with a prospectus

Answer 5

The best answer is B.

Common carrier issues such as railway issues are exempt under the Securities Act of 1933 because they were regulated by the Interstate Commerce Commission (I.C.C.) before the Act was written; and Congress did not want to subject them to “double” regulation.

Question 6

Which of the following is an exempt security under the Securities Act of 1933?

A. Unit Investment Trust
B. Small Business Investment Company
C. Open-End Investment Company
D. Closed-End Investment Company

Answer 6

The best answer is B.

Small business investment companies are an exempt security under the Securities Act of 1933. Other investment companies - whether they be open-end or closed-end management companies; or unit investment trusts; are non-exempt and must be registered with the SEC.

Question 7

Which of the following are NOT exempt issues under the Securities Act of 1933?

A. Real Estate Investment Trusts
B. Savings and Loan Issues
C. U.S. Government Bonds
D. G.O. Bonds

Answer 7

The best answer is A.

Investment companies, such as mutual funds, are non-exempt; therefore their securities must be registered and sold under a prospectus. Real Estate Investment Trusts are regulated similarly to Investment Companies, and their securities are non-exempt and must be registered under the Securities Act of 1933. U.S. Government issues, municipal debt, savings and loan issues, and municipal issues are exempt.

Question 8

All of the following are non-exempt issues under the Securities Act of 1933 EXCEPT:

A. Fixed annuity contracts
B. Variable annuity contracts
C. Listed option contracts
D. Listed common stock

Answer 8

The best answer is A.

Insurance company offerings are exempt from the 1933 Act with the exception of variable annuity and variable life contracts. Thus, a fixed annuity offered by an insurance company is exempt from the 1933 Act.

Listed stocks, and stock options are non-exempt issues that must be registered with the SEC.

Question 9

Which of the following is an exempt issue?

A. Fixed annuity contract
B. Variable annuity contract
C. Government bond mutual fund
D. Municipal bond unit investment trust

Answer 9

The best answer is A.

Fixed annuity contracts are considered to be an insurance product, since the insurance company bears the investment risk, and are exempt from SEC registration.

On the other hand, variable annuity contracts, where the investor bears the investment risk, are a non-exempt security under the 1933 Act and must be registered.

Investment company issues such as mutual funds and unit trusts are also non-exempt and must be registered with the SEC. It makes no difference that the investment company is investing in exempt securities such a U.S. Governments or municipals.

Question 10

Which of the following is a non-exempt security under the Securities Act of 1933?

A. Government National Mortgage Association Mortgage Pass Through Certificates
B. Small Business Investment Company Shares
C. Commercial Paper maturing in over 270 days
D. Fixed Annuity Contracts

Answer 10

The best answer is C.

Government National Mortgage Association is owned by the U.S. Government. Its issues are exempt from the provisions of the Securities Act of 1933.

Small Business Investment Companies operate under Small Business Administration rules and are also exempt from the Act’s provisions (though regular Investment Company issues are non-exempt).

For commercial paper to be exempt, its maturity must be 270 days or less. Since the maturity in this question is over 270 days, this issue is non-exempt.

Variable annuity contracts are also a non-exempt security that must be registered under the 1933 Act, because the customer is basically buying a mutual fund in an insurance company “wrapper.” Note, in contrast, that fixed annuities sold by insurance companies are not defined as a security and hence are not subject to registration requirements.

Question 11

Which of the following is NOT subject to the registration requirements of the Securities Act of 1933?

A. American Depositary Receipts
B. American Depositary Shares
C. American Style Options
D. Foreign Currency Contracts

Answer 11

The best answer is D.

ADRs (American Depositary Receipts) are non-exempt securities and must be registered with the SEC under the Securities Act of 1933. ADRs are the way that most foreign corporate issues trade in the United States. The bank that structures the ADRs handles the registration. Another name for an ADR is an American Depositary Share.

Listed option contracts are registered with the SEC, as are investment company issues. These securities are “continuously issued” and the prospectus delivery requirement is met by giving the customer an Options Disclosure Document (which used to be called the Options Clearing Prospectus); or a fund prospectus.

Foreign currency contracts are not securities, and hence are not subject to the 1933 Act (though foreign currency option contracts traded on the Philadelphia Stock Exchange are subject to the Act).

Question 12

Which of the following securities is required to be registered with the SEC?

A. American Depositary Receipts
B. Eurodollar Debt
C. Foreign Government Debt
D. Municipal Debt

Answer 12

The best answer is A.

ADRs (American Depositary Receipts) are non-exempt securities and must be registered with the SEC under the Securities Act of 1933. ADRs are the way that most foreign corporate issues trade in the United States. The bank that structures the ADRs handles the registration.

Municipal debt, U.S. Government debt and Foreign Government debt are all exempt.

Eurodollar bonds are sold outside the U.S. and thus do not fall under the Act.

Question 13

All of the following issues are exempt from registration under the Securities Act of 1933 EXCEPT:

A. Investment companies
B. Insurance companies
C. Agency issues
D. Municipal issues

Answer 13

The best answer is A.

Governments, agencies and municipals are all exempt issues. Insurance company and bank issues are exempt as well. Investment company issues are non-exempt and must be registered and sold with a prospectus under the 1933 Act.

Question 14

Which of the following activities is allowed prior to the filing of the registration statement?

A. Sending a customer a “red herring” preliminary prospectus
B. Accepting an indication of interest from the customer after sending the red herring
C. Accepting a deposit to buy the security from the customer
D. None of the above

Answer 14

The best answer is D.

Prior to the filing of the registration statement, nothing can be done.

Once the registration statement is filed, a preliminary prospectus may be used to obtain indications of interest.

Once the registration is effective, the final prospectus can be used to offer and sell the issue.

Question 15

Which of the following activities may a Registered Representative do prior to the filing of a registration statement for a new issue securities offering?

A. Solicit potential buyers and collect indications of interest
B. Solicit customer to place order to buy the issue
C. Send a preliminary prospectus to interested customers
D. Read background material on the industry

Answer 15

The best answer is D.

Prior to the filing of a registration statement for a new issue, nothing can be done with customers.

Of course, Registered Representatives are allowed to educate themselves on the industry the issuer is involved in.

Once the registration statement is filed, a preliminary prospectus can be sent; indications of interest can be accepted; and a “tombstone” announcement can be published.

Once the registration is effective, orders can be accepted if customers receive the final prospectus, at or prior to, confirmation of sale.

Question 16

Which statement is TRUE regarding the use of a “red herring” preliminary prospectus?

A. A preliminary prospectus may be sent to a prospective customer before the issue has entered into the 20 day cooling off period
B. A preliminary prospectus may be highlighted to note important sections
C. The use of the preliminary prospectus constitutes an offer to sell under the Securities Act of 1933
D. The use of the preliminary prospectus does not relieve firms of the responsibility to provide buyers with a final prospectus

Answer 16

The best answer is D.

A “red herring”/preliminary prospectus may be sent to any prospective purchaser of that new issue once the issue has entered into the “20 day cooling off” period that commences upon filing of the registration statement with the SEC.

Prior to the “20 day cooling off period,” the filing had not been made, so nothing can be done that involves contacting the public about that issue.

The use of the “preliminary prospectus” does not constitute an “offer” under the 1933 Act, and the red ink statement on the cover of the preliminary prospectus states this (hence the name “red herring”). A prospectus may never be underlined, highlighted or modified in any fashion. All buyers will also receive a copy of the final prospectus.

Question 17

Which statement is TRUE about the acceptance of an “indication of interest” for a registered offering during the 20 day cooling off period?

A. The indication cannot be canceled by the customer; the indication cannot be canceled by the brokerage firm
B. The indication cannot be canceled by the customer; the indication can be canceled by the brokerage firm
C. The indication can be canceled by the customer; the indication cannot be canceled by the brokerage firm
D. The indication can be canceled by the customer; the indication can be canceled by the brokerage firm

Answer 17

The best answer is D.

Indications of interest which are accepted prior to the effective date of an issue in registration are not binding. The customer or the firm can cancel the indication at any time without penalty. During the cooling off period, orders cannot be accepted (these are binding) because the final prospectus is not yet available. Under the Securities Act of 1933, an offer or sale can only be made with the final prospectus. The final prospectus is available, and sales commence, as of the effective date.

Question 18

When a proposed new issue securities offering is “in registration,” what statement could NOT be made to an interested institutional investor?

A. “The lead underwriters on the issue are PDQ and RFP investment banks”
B. “The road show on the issue is scheduled to be in your city on November 5th”
C. “The issue is expected to be priced on or around November 20th”
D. “Our research report shows that the expected POP is undervalued”

Answer 18

The best answer is D.

When a new issue of securities is “in registration,” it is in the 20-day cooling off period, also called the quiet period. During this time, the SEC reviews the registration filing for full and fair disclosure. And during this time, also called the “quiet period,” the issue cannot be sold, advertised or recommended to potential purchasers.

During the cooling off period, a red herring preliminary prospectus can be distributed to interested investors, and indications of interest can be collected. In addition, the issuer very often runs a “road show” in major cities to invite interested institutional investors to learn about the company, its officers and business, and the securities being offered. The officers of the company who make presentations must make sure that the keep the road show informational and not promotional – because the issue cannot be “promoted” during the quiet period.

Choices A, B, and C are factual and non-promotional statements. Choice D is the problematic statement. Stating that the underwriters are “undervaluing” the issue is leading potential investors to believe they will be getting a bargain, so they better start lining up now to buy or they might miss out! This is a promotional statement and is not permitted.

Question 19

Which of the following activities is prohibited during the “cooling off” period?

A. Distribution of a “Red Herring”
B. Answering questions from customers about the offering
C. Attending a road show
D. Confirming an indication of interest

Answer 19

The best answer is D.

During the cooling off period, an offer or sale of the issue is prohibited, as are recommendations of the issue or the advertising of the issue. Sending a preliminary prospectus (Red Herring) or accepting an indication of interest does not constitute an “offer” under the Securities Act of 1933 and thus is permitted. However, no confirmation of purchase can be made prior to the issue being priced and declared effective.

Part of the IPO marketing process is to schedule road shows during the 20-day cooling off period, attended by invited large institutional investors, portfolio managers and research analysts. These are informational only - not promotional. The officers of the company make presentations and the attendees get to have their questions answered. This process helps build investor interest in the offering.

Question 20

A registered representative has prepared a research report about a new stock issue that is currently in registration. The registered representative wishes to send the report to customers. Which statement is TRUE?

A. The report can be mailed without restriction
B. The report constitutes an “offer” under the 1933 Act and cannot be sent
C. The report can only be mailed if approved or prepared by a Supervisory Analyst
D. The report can only be sent if accompanied or preceded by a preliminary prospectus

Answer 20

The best answer is B.

During the “cooling off” period, the only items that do not constitute an “offer” or “sale” are the sending of a preliminary prospectus and the acceptance of an indication of interest. Anything more, such as sending a research report, is considered to be an “offer,” which is prohibited until the registration is effective.

Question 21

If the SEC sends a deficiency letter to the issuer regarding an issue in registration, which statement is FALSE?

A. Disclosure in the registration documents is not complete
B. The issuer must file an amendment with the SEC to cure the deficiency
C. The 20-day cooling off period starts again once the amendment is filed
D. The SEC has cancelled the deal since the disclosure documents were deemed deficient

Answer 21

The best answer is D.

An SEC “deficiency letter” indicates that there is not adequate disclosure in the registration documents to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow the registration to be effective. Once the amendment is filed, the 20-day cooling off period starts counting again from the beginning. If the SEC finds that there is not adequate disclosure after the amendment is filed, it can issue subsequent deficiency letters. Thus, the registration for the issue may never “go effective.”

Question 22

All of the following statements are true during the period that a non-exempt new issue is “in registration” EXCEPT:

A. the preliminary prospectus with the final public offering price is distributed
B. the offering participants perform due diligence on the offering
C. the SEC may issue a deficiency letter requesting additional information before allowing registration to become “effective”
D. no advertising or sale of the issue is permitted

Answer 22

The best answer is A.

During the 20-day cooling off period, due diligence is performed by the parties involved in the offering. During this time, no advertising or sale of the issue is permitted because registration is not yet effective. If the SEC has problems with the filing, it will issue a deficiency letter requiring more information. A preliminary prospectus (red herring) may be distributed but it does not contain the final offering price because this is not known until the effective date.

Question 23

If the Securities and Exchange Commission sets the effective date for a new issue in registration, which statement is FALSE?

A. All proper documents have been filed with the SEC
B. The SEC approves of the new issue
C. The issue may be priced
D. The issue may be offered to the public

Answer 23

The best answer is B.

If the SEC sets the “effective date” for an issue in registration, this means that all proper documents have been filed with the SEC. The SEC does not approve (nor does it disapprove) of any new issue in registration. Once the proper documents relating to a new issue offering are filed, the issue may be priced and offered to the public.

Question 24

When a customer buys a new stock issue from a syndicate member, the customer pays:

A. the public offering price as stated in the prospectus plus a commission
B. the public offering price as stated in the prospectus plus a mark-up
C. the public offering price as stated in the prospectus without any commission
D. any price since this is a negotiated market offering

Answer 24

The best answer is C.

New stock issues are sold under a prospectus that states the Public Offering Price which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.

Question 25

Which statement is TRUE about new registered stock offerings?

A. Any purchaser who received a preliminary prospectus must also receive the final prospectus
B. The final prospectus must be delivered within 10 business days of the effective date
C. Any purchaser will pay the Public Offering Price plus a small sales charge
D. Any purchaser will pay the Public Offering Price plus a nominal commission or mark-up

Answer 25

The best answer is A.

New stock issues are sold under a prospectus that states the Public Offering Price, which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the POP are not allowed. Whether or not the purchaser received a preliminary prospectus is a moot point - any purchaser must get the final prospectus at, or prior to, confirmation of sale, which will occur far sooner than 10 days from the effective date!

Question 26

The final prospectus for a new registered securities issue:

A. contains the Public Offering Price and must be given to the customer at, or prior to, confirmation of sale
B. does not contain the Public Offering Price and must be given to the customer at, or prior to, confirmation of sale
C. contains the Public Offering Price must be given to the customer at, or prior to, settlement of the transaction
D. does not contain the Public Offering Price must be given to the customer at, or prior to, settlement of the transaction

Answer 26

The best answer is A.

The final prospectus contains the Public Offering Price and the underwriter’s spread on the front cover (this is not in the preliminary prospectus). Any purchaser of the new issue must be given the final prospectus, at, or prior to, confirmation of sale.

Question 27

Electronic delivery of a prospectus is NOT permitted for:

A. common stock issues
B. preferred stock issues
C. corporate debt issues
D. investment company issues

Answer 27

The best answer is D.

The “access equals delivery” rule that permits electronic delivery of a prospectus (instead of paper) to those customers that have internet access is permitted for all securities offerings with the exception of investment company issues. For example, the purchaser of a mutual fund must still get a paper prospectus.

Question 28

Credit can be extended on new issues:

A. immediately after the offering is complete
B. after 30 days have elapsed from the completion of the offering
C. after 60 days have elapsed from the completion of the offering
D. after 90 days have elapsed from the completion of the offering

Answer 28

The best answer is B.

New issues are not eligible for margin until 30 days have elapsed from the completion of the offering.

Question 29

A company has filed a registration statement with the SEC that uses a method that is only available to seasoned issuers. This registration statement is good for:

A. 1 year
B. 2 years
C. 3 years
D. 4 years

Answer 29

The best answer is C.

SEC Rule 415, the “shelf registration rule” allows “seasoned issuers” to file a blanket registration statement with the SEC, covering a period of 3 years, for any securities that the issuer may wish to sell. It is only available to “seasoned” companies that already have completed a registered IPO, that have been registered for 1 year, and that have a minimum market captialization of $75 million.

If the seasoned issuer wishes to sell any securities during this 3 year period, it simply files a notification with the SEC that it is selling under that registration statement. This procedure avoids the “20-day cooling” off period, and allows seasoned issuers to enter the market quickly (such as when interest rates have dipped) to sell their securities.

Question 30

Which statement is TRUE regarding intrastate offerings?

A. Intrastate offerings are subject to the Securities Act of 1933
B. Many intrastate offerings are subject to provisions of the Uniform Securities Act
C. Intrastate offerings are subject to the Securities Exchange Act of 1934
D. Intrastate offerings are subject to the Investment Company Act of 1940

Answer 30

The best answer is B.

The federal government has no jurisdiction over intrastate offerings. The federal government only has jurisdiction over interstate offerings. Thus, intrastate offerings of securities are exempt from federal registration, but still are subject to registration within that state under the state’s “Blue Sky” laws. Blue Sky laws are based on the Uniform Securities Act (USA) of 1956, which is a model law that most state regulators use for the basis of local statutes.

Question 31

Which statement is TRUE regarding intrastate offerings?

A. Intrastate offerings are subject to federal registration only
B. Intrastate offerings are exempt from state registration only
C. Intrastate offerings are subject to “Blue Sky” laws
D. Intrastate offerings are subject to both state and federal registration

Answer 31

The best answer is C.

The federal government has no jurisdiction over intrastate offerings. The federal government only has jurisdiction over interstate offerings. Thus, intrastate offerings of securities are exempt from federal registration, but still are subject to registration within that state under the state’s Blue Sky laws.

Question 32

Under Rule 147, intrastate offerings cannot be resold out of state for how long following completion of the initial offering?

A. 3 months
B. 6 months
C. 12 months
D. 24 months

Answer 32

The best answer is B.

Rule 147 requires that resale of securities sold under the intrastate exemption be restricted to intrastate only for 6 months following completion of the initial offering. Thereafter, they can be resold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a “private transaction.”

Question 33

A customer who has his primary residence in Colorado, has a vacation home in Montana. An intrastate offering is being made in the state of Montana. Which statement is TRUE regarding the customer purchasing this securities offering?

A. The customer is permitted to buy these securities
B. The customer is prohibited from buying these securities
C. The customer can buy the securities if he spends at least 2 weeks per year in the state of Montana
D. The customer can buy the securities if he files an affidavit of domicile in the state of Montana

Answer 33

The best answer is B.

To purchase an intrastate offering, the purchaser must be a primary resident of that state. Having a vacation home in another state does not constitute a “primary residence.”

Question 34

A new issue private placement offering is:

A. exempt under Regulation D and is allowed to be sold to a maximum of 35 non-accredited investors
B. exempt under Regulation D and is limited to a maximum sale of $50,000,000 within 1 year
C. exempt under Regulation A and is allowed to be sold to a maximum of 35 non-accredited investors
D. exempt under Regulation A and is limited to a maximum sale of $50,000,000 within 1 year

Answer 34

The best answer is A.

Regulation D allows a “private placement” exemption if an issue is sold to a maximum of 35 “non-accredited” investors. The issue can be sold to an unlimited number of “accredited” (wealthy and institutional) investors under this exemption and still be considered a private placement. There is no dollar limitation on the amount of securities that can be sold under a private placement exemption.

Regulation A is not an exemption. Rather, it is an “EZ” registration rules for small dollar issues, with the maximum amount permitted being $50 million.

Question 35

Which statement is FALSE about a private placement?

A. Securities from these offerings are typically restricted from immediate resale.
B. The offering may be made to a maximum of 35 non-accredited investors
C. The offering may be made to an unlimited number of accredited investors
D. The offerings is made under Rule 147.

Answer 35

The best answer is D.

A private placement is an offering of securities to a maximum of 35 “non-accredited investors” and an unlimited number of accredited (wealthy or institutional) investors.

Private Placements are made under a Regulation D exemption and securities purchased are typically subject to a 6 month restriction on resale. Rule 147 exempt intrastate offerings from registration with the SEC and has nothing to do with private placements.

Question 36

Who is defined as an accredited investor under Regulation D?

A. Retired dentist who owns a primary residence valued at $1,200,000 and who has a net worth of $500,000
B. Married couple, both of whom are lawyers, with a net worth of $300,000
C. Individual who buys $250,000 of the issue in staged payments of $50,000 per year
D. Chief Financial Officer of the issuer with an annual income of $175,000

Answer 36

The best answer is D.

Private placements under Regulation D can be sold to an unlimited number of accredited (generally wealthy) investors. The accredited investors are:

Individual with $200,000 of annual income;
Married Couple with $300,000 of annual income;
Individual or Couple with a $1,000,000 net worth (excluding home);
Institution with at least $5,000,000 available for investment; and
Officers and directors of the issuer.
Notice that there is no minimum net worth or income test for an officer or director of the issuer to be accredited when buying a private placement (and they should know what they are getting into, so that is why there is no $$$ test). Also note that there is no accreditation based on how much an individual purchases.

Question 37

To be defined as an “accredited investor” under Regulation D, a purchaser of a private placement offering must have a net worth (exclusive of residence) of:

A. $200,000
B. $300,000
C. $400,000
D. $1,000,000

Answer 37

The best answer is D.

For a purchaser of a private placement unit to be accredited, he or she must have a net worth of at least $1,000,000 (exclusive of residence).

Question 38

All of the following individuals are “accredited” investors under Regulation D EXCEPT:

A. Person with an annual income of $200,000 this year and for the preceding 2 years
B. Person with a Net Worth of $200,000 this year and for the preceding 2 years
C. An institution making the investment
D. An officer of the issuer making the investment

Answer 38

The best answer is B.

To be an accredited investor under Regulation D, a person must either: earn $200,000 per year ($300,000 for a married couple); have a net worth of $1,000,000 (exclusive of residence); be an officer or director of the issuer; or be an institution buying the issue. Otherwise, the person counts towards the 35 non-accredited investor limit.

Question 39

All of the following are accredited investors under the provisions of Regulation D EXCEPT a(n):

A. married couple with a $1.2 million net worth exclusive of residence
B. individual with $220,000 of annual income
C. officer or director of the issuer
D. individual that invests $50,000, which is approximately 20% of that person’s liquid net worth

Answer 39

The best answer is D.

Accredited investors in a private placement under Regulation D include an individual with an annual income of at least $200,000 per year ($300,000 for a couple); or any person with at least a $1,000,000 net worth exclusive of residence. In addition, institutional investors and officers and directors of the issuer are accredited investors. There is no accredited investor definition based on the size of a person’s investment.

Question 40

Which of the following is defined as an “accredited investor” under Regulation D?

A. Non-profit organization with assets in excess of $2,000,000
B. Trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person
C. The president of an insurance company
D. An individual investor who buys $2,000,000 of the offering

Answer 40

The best answer is B.

There is no limit on the number of accredited investors that can purchase a private placement under Regulation D. Regarding institutional investors, any investment company, insurance company, bank, or savings and loan is accredited.

The president of an Insurance Company is not necessarily accredited even though his or her employer is. A non-profit organization, trust, or institutional investor is accredited if it has at least $5,000,000 of assets and was NOT formed with the intent of buying the private placement. The idea here is that people could attempt to get around the 35 non-accredited investor limit by having these non-accredited investors contribute to a trust that would buy the issue. If the trust accumulated $5,000,000 for investment, it would be accredited. But the rule disallows this if the trust is formed for the purpose of buying the private placement!

Regarding individual investors, either a minimum income ($200,000 for an individual or $300,000 for a married couple) or net worth test ($1,000,000 net worth) must be met to be accredited. There is no minimum purchase amount that makes an individual accredited.

Question 41

Under SEC rules, the purchaser of a Regulation D private placement must complete and sign a(n):

A. subscription agreement
B. hypothecation agreement
C. accredited investor questionnaire
D. arbitration agreement

Answer 41

The best answer is C.

Private placements are typically only offered to “accredited investors.” These are wealthy individuals and institutional investors. To document that the purchasers are, indeed, accredited, an “accredited investor questionnaire” must be completed and signed by the potential purchaser. This is retained by the broker-dealer or issuer selling the securities and is proof that the purchasers were accredited.

Question 42

To offer a private placement, which statement is TRUE?

A. A registration statement must be filed with FINRA prior to sale
B. A registration statement must be filed with the SEC prior to sale
C. A registration statement must be approved by the principal of the firm prior to sale
D. The offering is exempt, so no registration is required

Answer 42

The best answer is D.

Private placements are exempt transactions under the Securities Act of 1933. No registration is required. The issuer must file a Form D with the SEC within 15 days of the offering to claim the exemption. The filing of Form D is not a registration. It simply notifies the SEC that the issue has been offered in compliance with the exemption.

Question 43

Under Regulation D, purchasers of private placement offerings must be given full disclosure through a(n):

A. Prospectus
B. Offering memorandum
C. Registration statement
D. Form D

Answer 43

The best answer is B.

Under Regulation D, purchasers of private placements must be given full disclosure about the issue, even though no prospectus is required (the issue is exempt). Disclosure is accomplished by providing the purchaser with a copy of an “Offering Circular,” which for smaller private placements is called the “Offering Memorandum.” There is no registration statement for private placements because they are exempt - the exemption is claimed by filing a Form D with the SEC.

Question 44

Which statement is TRUE regarding restricted shares?

A. They are normally acquired through Rule 144 transactions
B. They are normally acquired through Regulation D private placement transactions
C. They can be sold freely after 3 months
D. They can be sold publicly under a Rule 147 exemption

Answer 44

The best answer is B.

Restricted shares are normally acquired through private placements under Regulation D and restricted from resale for 6 months. If there is a public market for the stock at a later date, to sell the restricted shares in the market, they must either be registered or sold under a Rule 144 exemption.

Question 45

An officer of an issuer has received restricted stock as part of her compensation package. If she wishes to sell some of the stock under Rule 144, which statement is TRUE?

A. The officer can sell the stock immediately without restriction
B. The officer can sell the stock within 90 days of purchase
C. The officer can sell the stock within 6 months of purchase
D. The officer can sell the stock within 90 days and 6 months of purchase

Answer 45

The best answer is D.

In order to sell restricted stock under Rule 144, the stock must have been held fully paid, at risk, for at least 6 months. Once the 6 month holding period is cleared, a Form 144 can be filed, specifying the amount that can be sold over the next 90 days.

Question 46

In order to sell restricted stock under the provisions of Rule 144, the stock must be held, fully paid, for:

A. 3 months
B. 6 months
C. 1 year
D. 2 years

Answer 46

The best answer is B.

In order to sell restricted stock under Rule 144, the seller must have held the stock, fully paid for 6 months.

Question 47

Under Rule 144, the Form 144 is filed:

A. by the seller of the restricted shares
B. by the issuer of the restricted shares
C. 10 business days prior of the placement of the order
D. within 24 hours of placing the order

Answer 47

The best answer is A.

The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not approve of the sale. The Form must be filed by the seller at, or prior to, with the placement of the sell order.

Question 48

Under SEC rules, filing of the Form 144, required when selling restricted stock, is the responsibility of the:

A. issuer
B. broker-dealer
C. seller
D. transfer agent

Answer 48

The best answer is C.

Filing of the Form 144 to sell restricted stock is the responsibility of the seller.

Question 49

Rule 144 allows the sale, every 90 days, of:

A. 1% of the outstanding shares
B. 10% of the outstanding shares
C. the daily average of the prior 4 weeks’ trading volume
D. the weekly average of the prior 8 weeks’ trading volume

Answer 49

The best answer is A.

Rule 144 allows the sale, every 90 days, of the greater of 1% of the outstanding shares of that company; or the weekly average of the prior 4 week’s trading volume.

Question 50

Under SEC Rule 144, calculated amounts to be sold of restricted or control stock are permitted over the upcoming:

A. 30 days
B. 60 days
C. 90 days
D. 180 days

Answer 50

The best answer is C.

Rule 144 under the Securities Act of 1933 most often applies to the public resale of restricted stock granted to officers and directors of privately held companies. These are typically start-up companies that don’t have the funds to pay large salaries, so to attract quality people, they give these officers stock instead. Because the company is still private, these are restricted private placement shares that cannot be sold in the public market, unless the company goes public.

Assuming that the company does go public later on, these officers can now “cash out” their holdings under Rule 144. By using the rule, the officers can sell metered amounts of the stock into the public market over each 90-day time window (and they can get very wealthy in the process!). The rule authorizes the registration of the stock with the SEC, so the buyer in the market gets clean registered shares.

Question 51

A director of a publicly held company wants to sell 5,000 registered shares of that company’s stock at $8 per share that she has held for 3 months. Does the Form 144 filing requirement apply to this sale?

A. Yes, because any sale of shares by a director requires the filing of a Form 144
B. No, because the shares are being sold under a “de minimis” exemption
C. Yes, because she has not held the shares for 6 months
D. No, because the shares are not restricted

Answer 51

The best answer is B.

Rule 144 includes a “de minimis” exemption, permitting the sale every 3 months of 5,000 shares or less, worth $50,000 or less, without having to file a Form 144. The transfer agent is authorized by the SEC to transfer the shares without a copy of the Form 144. Because this sale is 5,000 shares @ $8 = $40,000, it can be done under this exemption. Rule 144 applies to the public resale of restricted (unregistered private placement) stock and to the sale of registered control shares. Control shares are registered shares owned by a key officer or director. These do not have to complete the 6 month holding period requirement because they are registered, but to sell them, the officer must file a Form 144 Notice of Sale and is subject to the rule’s volume restrictions.

Question 52

Under Rule 144, no filing is required if the sale amount every 90 days does not exceed:

A. $10,000
B. $25,000
C. $50,000
D. $100,000

Answer 52

The best answer is C.

Form 144 does not have to be filed to sell restricted or control stock if 5,000 shares or less, worth $50,000 or less, is sold during each 90 day period.

Question 53

An officer of a company has acquired shares of that issuer in the open market. If the officer wishes to sell the shares, the officer must meet all of the following requirements EXCEPT:

A. filing of the Form 144 with the SEC
B. a maximum of 4 sales per year are permitted
C. the stock must be held for 6 months, fully paid
D. each sale is limited to the greater of 1% of the outstanding shares; or the weekly average of the prior 4 weeks’ trading volume

Answer 53

The best answer is C.

“Control stock,” which is registered stock of a company bought in the open market by an officer or director of that company, is subject to all Rule 144 requirements when the officer or director wishes to sell, except for the 6-month holding period. The 6-month holding period is required for restricted stock, but not for control stock.

Question 54

The Chief Executive Officer of PDQ Company is married and has a husband who owns 5% of the common equity of PDQ. Which statement is TRUE regarding the husband and his PDQ stock holdings?

A. The husband is considered to be an “affiliate” under Rule 144
B. The husband is not permitted to sell any shares since his wife is CEO and any sale would be considered insider trading.
C. To sell PDQ securities, the CEO and her husband must obtain the permission of the PDQ Board of directors
D. To sell PDQ securities, the husband is not required to file a Form 144

Answer 54

The best answer is A.

The provisions of Rule 144 apply to not only insiders but also “affiliates” who are individuals “related” to someone who is an insider. The husband of the Chief Executive Officer of PDQ Corporation is an “affiliate,” and sales of PDQ stock by the husband are subject to Rule 144. There is no requirement under rule Rule 144 to obtain the permission of the PDQ Board of directors prior to any sales.

Question 55

Which of the following is NOT required to sell “144” stock?

A. Buyer’s representation letter
B. Issuer’s representation letter
C. Broker’s representation letter
D. Seller’s representation letter

Answer 55

The best answer is A.

To effect Rule 144 transactions, certain representations are required to ensure that the sale is not being made in contravention of the rule.

The issuer must represent that the corporation is current with all required SEC filings because it is prohibited to use Rule 144 to sell if this is not the case.

The seller must represent that the securities have been held fully paid for 6 months, otherwise Rule 144 cannot be used.

Finally, the broker must represent that it did not solicit the transaction and that it acted as agent in executing the transaction.

There is no representation required on the part of the buyer - when the restricted stock is sold through the rule, the buyer receives “clean” unrestricted shares from the transfer agent.

Question 56

A registered representative who handles the accounts of wealthy clients is told the following by one of her customers: “I made a “seed” money investment of $8,000,000 in a venture capital financing of a start-up tech company and received unregistered stock. Now I want to sell $4,000,000 of that company’s shares.” In order to handle the sale, the registered representative makes several disclosures to the client. Which of the following “due diligence” disclosures is INCORRECT?

A. The company must have registered shares with the SEC and must be current in its SEC filings
B. The customer must have held the stock fully paid, for at least 6 months
C. The customer must intend to make a bona fide public offering of the shares
D. If more than one filing is required due to the large size of the holding, the customer must wait 30 days to sell the next tranche.

Answer 56

The best answer is D.

These are unregistered shares that are “restricted” as to resale. A public resale can be made under the provisions of Rule 144, and by selling via the rule, this will register the shares. In order to use the rule:

• **The company must have gone public and must be current in its SEC filings.
• **The customer must have held the stock fully paid, at risk for at least 6 months.
• **The customer must intend to make a bona fide offer of the shares in the public trading markets.
• **The customer must file a Form 144 with the SEC (notice of sale), that details the maximum permitted sale (the greater of 1% of the outstanding shares or the weekly average of the prior 4 weeks’ trading volume). This amount can be sold every 3 months under Rule 144.
• **Filing windows are every 90 days, not every month.

Question 57

“Qualified Institutional Buyers” are permitted to buy and trade large blocks of unregistered securities among themselves under:

A. Rule 144
B. Rule 144A
C. Rule 147
D. Rule 415

Answer 57

The best answer is B.

Rule 144A should not be confused with SEC Rule 144. Rule 144A allows qualified institutional buyers (“QIBs”) to buy and trade between themselves large blocks of privately placed issues. Thus, issuers can sell private placements to these QIBs, who can then trade the private placement issues among themselves. This market is not available to individuals. Do not confuse Rule 144A with Rule 144, which covers the sale of “restricted” and “control” stock in the open market.

Question 58

Which of the following is NOT defined as a “QIB” under the provisions of Rule 144A?

A. Insurance Company with $1.5 billion of assets available for investment
B. Individual with $1 billion of assets available for investment
C. Small Business Investment Company with $1.5 billion of assets available for investment
D. 503(c)(3) Charity with $1 billion of assets available for investment

Answer 58

The best answer is B.

Under Rule 144A, a “QIB” is a “Qualified Institutional Buyer.” It makes no difference how rich an individual is - he or she is not a QIB. Rule 144A allows issuers to sell blocks of private placements to QIBs, which can trade them with other QIBs (this occurs in the PORTAL market). QIBs include insurance companies, investment companies (including Small Business Investment Companies), pension plans, employee benefit plans, charitable organizations, etc. as long as they have at least $100 million of assets available for investment.

Question 59

All of the following are QIBs under Rule 144A EXCEPT a(n):

A. pension fund with at least $100 million of assets to invest
B. employee benefit fund with at least $100 million of assets to invest
C. institution with at least $100 million of assets to invest
D. individual with at least $100 million of assets to invest

Answer 59

The best answer is D.

Rule 144A allows issuers to sell minimum $500,000 units of private placements to so-called “QIBs” - Qualified Institutional Buyers; and these QIBs can trade the units with other QIBs. Thus, issuers have a way of selling securities to these investors quickly without incurring the costs of SEC registration; and the QIB knows that it can always sell that investment to another QIB without needing to register the issue with the SEC. A Qualified Institutional Buyer must be an institutional investor (not an individual) with at least $100 million of discretionary funds available for investment. Included are investment companies, insurance companies, banks, trust funds, employee benefit plans, and employee retirement funds.

Question 60

What risk is the greatest concern in a Rule 144A transaction?

A. Inflation risk
B. Marketability risk
C. Interest rate risk
D. Credit risk

Answer 60

The best answer is B.

Rule 144A issues are private placement securities sold in minimum $500,000 blocks only to QIBs - Qualified Institutional Buyers (institutions with at least $100MM of assets available for investment). Whereas normal private placements cannot be traded, these can be traded from QIB to QIB. The market for this is PORTAL, but trading activity is thin in this market, especially as compared to the market for publicly traded securities.

Question 61

Which statement is TRUE?

A. Rule 144A issues trade on the NYSE, AMEX and NASDAQ
B. Rule 144A issues trade on PORTAL
C. The general public can trade Rule 144A issues
D. All institutions can trade Rule 144A issues

Answer 61

The best answer is B.

Rule 144A issues are private placement securities sold in minimum $500,000 blocks only to QIBs - Qualified Institutional Buyers (institutions with at least $100MM of assets available for investment). Whereas normal private placements cannot be traded, these can be traded from QIB to QIB. The market for this is PORTAL, but trading activity is thin in this market, especially as compared to the market for publicly traded securities.

Question 62

Under SEC Rule 145, all of the following corporate distributions by an issuer are exempt from the requirement to file a registration statement EXCEPT:

A. stock dividend
B. fractional stock split
C. whole stock split
D. stock spin off

Answer 62

The best answer is D.

Corporate distributions that result in an issuer distributing the exact same class of security to existing shareholders do not require a registration statement filing with the SEC. Thus, a corporation distributing a stock dividend or splitting its stock would not require a registration statement filing. However, if a corporation spins off a subsidiary to its shareholders, the shareholders are receiving stock in a different company, so a registration statement must be filed for those shares.

Question 63

Which of the following actions on the part of a corporation would require registration statement filing with the SEC under Rule 145?

A. Stock dividend distribution
B. Merger with another publicly held company
C. 3 for 2 Stock split
D. 1 for 4 Reverse Stock split

Answer 63

The best answer is B.

Corporate distributions that result in an issuer distributing the exact same class of security to existing shareholders do not require a registration statement filing with the SEC. Thus, a corporation distributing a stock dividend or splitting its stock would not require a registration statement filing. However, if a corporation spins off a subsidiary to its shareholders, the shareholders are receiving stock in a different company, so a registration statement must be filed for those shares. If a corporation merges with another publicly held company, a new corporation is being created, and a registration statement must be filed as well.

Question 64

What type of securities offering is NOT exempted from registration with the SEC?

A. Regulation S
B. Rule 147
C. Shelf offering
D. Regulation D

Answer 64

The best answer is C.

Shelf offerings under Rule 415 allow seasoned issuers to file a blanket registration statement that goes on the SEC’s “shelf,” good for 3 years. The issuer simply gives 2 day notice to the SEC and can sell. This is a simplified registration process.

Regulation S states that if a U.S. company sets up a non-U.S. subsidiary, and offers securities only to non-U.S. residents, then it is exempted from having to register those securities with the SEC (because the offering is not being made in the U.S.).

Rule 147 is an intrastate exemption. If an issue is only sold within 1 state, then federal law does not apply (the transaction must cross state lines for federal law to apply). Only that state’s blue sky registration laws apply. Rule 147 says that if 100% of the issue is offered and sold to residents of a single state, then there is no federal registration with the SEC.

Regulation D is the private placement exemption from registration. It basically states that private placements that are not offered to the general public are exempt from registration. Rule 506 (the major rule under Regulation D) states that if an offering is made to a maximum of 35 non-accredited investors and to an unlimited number of accredited (wealthy) investors, then it is exempt from SEC registration.