Securities Exchange Act of 1933

Question 1

U.S. Government securities:

A. trades settle “regular way” in 3 business days
B. are exempt securities under the Securities Act of 1933
C. are sold through prospectus offerings
D. are implicitly backed by the U.S. Government

Answer 1

The best answer is B.

Under the 1933 Act, U.S. Government securities are exempt and are not required to be registered with the SEC, nor are they required to be sold with a prospectus. Trades of U.S. Governments settle “regular way” in 1 business day. U.S. Government securities are guaranteed by the U.S. Government and have the government’s direct backing.

Question 2

Banker’s Acceptances are:

I Money Market Instruments
II Capital Market Instruments
III Exempt Securities
IV Non-Exempt Securities

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 2

The best answer is A.

Bankers Acceptances are a money market instrument used to finance imports and exports. They are an exempt security under the Securities Act of 1933 and can be sold without a prospectus.

Question 3

Commercial paper is a(n):

I Money Market Instrument
II Capital Market Instrument
III Exempt Security
IV Non-Exempt Security

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 3

The best answer is A.

Commercial paper is a money market instrument issued by corporations. It is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed 270 days and can be sold without a prospectus.

Question 4

Which of the following securities are exempt from registration under the Securities Act of 1933?

I Insurance company issues
II Bank issues
III Savings and loan issues
IV Common carrier issues

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 4

The best answer is D.

When the Securities Act of 1933 was written, issuers that were already regulated under other laws were generally exempted from the provisions of the Act. Insurance companies were already regulated under State insurance laws; banks and savings and loans were regulated by both State and Federal banking laws; common carriers were regulated by the Interstate Commerce Commission (now part of the Department of Transportation).

Question 5

Which of the following are exempt securities under Securities Act of 1933?

I Corporate Bonds
II Municipal Bonds
III U.S. Government Bonds
IV Small Business Investment Companies

A. III only
B. I and II
C. II and III only
D. II, III, IV

Answer 5

The best answer is D.

Government bonds, municipal bonds, and Small Business Investment Company issues are all exempt securities under the 1933 Act. Corporate bonds are non-exempt securities that must be registered with the SEC under the Securities Act of 1933.

Question 6

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

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

Answer 6

The best answer is C.

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, savings and loan issues, and municipal issues are exempt.

Question 7

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 7

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 8

Which of the following are non-exempt issues under the Securities Act of 1933?

I Fixed annuity contracts
II Variable annuity contracts
III Listed option contracts
IV Listed common stock

A. I and II only
B. III and IV only
C. II, III, IV
D. I, II, III, IV

Answer 8

The best answer is C.

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 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 9

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 10

Which of the following securities are NOT required to be registered with the SEC?

I American Depositary Receipts
II Eurodollar Debt
III Foreign Government Debt
IV Municipal Debt

A. I and II only
B. III and IV only
C. II, III, IV
D. I, II, III, IV

Answer 10

The best answer is C.

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 11

Which of the following securities are exempt from the Securities Act of 1933?

I Benevolent Association issues
II Small Business Investment Company issues
III Common Carrier issues
IV Industrial Company issues

A. I and III
B. II and IV
C. I, II, III
D. I, II, III, IV

Answer 11

The best answer is C.

Benevolent association, small business investment company, and common carrier issues are all exempt under the Securities Act of 1933. Industrial companies are not exempt - their securities must be registered and sold with a prospectus.

Question 12

Prior to the filing of a registration statement, which of the following activities is (are) permitted?

I A member firm signing a syndicate agreement to become part of the underwriting group for the issue
II A member firm distributing preliminary prospectuses for the issue to customers
III A member firm taking indications of interest for the sue from customers
IV A member firm selling the issue to customers

A. I only
B. II and III only
C. I, II, III
D. I, II, III, IV

Answer 12

The best answer is A.

Prior to the filing of a registration statement, the issue cannot be promoted in any manner - so the use of a preliminary prospectus to take indications of interest is prohibited; as is selling the issue. Once the registration statement is filed, the issue enters the 20 day cooling off period. At this point, a preliminary prospectus can be used to take indications of interest, but the issue cannot be sold. Once the registration is effective, the issue can be sold with the prospectus. There is no prohibition on the underwriter joining the syndicate or selling group prior to the filing of the registration statement, since this does not involve offering the issue to the public.

Question 13

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

I Sending a customer a “red herring” preliminary prospectus
II Accepting an indication of interest from the customer
III Accepting a deposit from the customer
IV Accepting a firm order from the customer

A. I and II
B. III and IV
C. II and IV
D. None of the above

Answer 13

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 14

Which statement is TRUE about the use of a “red herring” preliminary prospectus? The preliminary prospectus may only be sent to customers:

A. once registration is effective
B. who have paid for the issue
C. who have expressed an indication of interest or who are likely purchasers, during the cooling off period
D. who have expressed an indication of interest or who are likely purchasers, prior to the cooling off period

Answer 14

The best answer is C.

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. Nothing may be sent to the customer prior to the start of the “20 day cooling off” period. 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”). The red herring is used to obtain non-binding indications of interest in the issue, and may be sent to anyone during the cooling off period, whether or not that person has previously expressed any interest in the issue.

Question 15

Which of the following statements are TRUE regarding indications of interest received during the “cooling off” period for a registered initial public offering?

I The indication is binding on the customer
II The indication is not binding on the customer
III The indication is binding on the underwriter
IV The indication is not binding on the underwriter

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 15

The best answer is D.

An indication of interest is taken during the 20 day cooling off period before a new issue’s registration is effective. The issue may never “go effective” and the indication can be canceled by the underwriter. Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or change his indication. These are not binding because the issue cannot be legally “offered or sold” until the effective date.

Question 16

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

I Sale of the issue to the public
II Acceptance of an indication of interest
III Distribution of a preliminary prospectus
IV Distribution of an advertisement

A. I and II only
B. III and IV only
C. II and III only
D. I and IV only

Answer 16

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 or accepting an indication of interest does not constitute an “offer” under the Securities Act of 1933 and thus is permitted.

Question 17

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 17

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 18

All of the following statements are true if the SEC sends a deficiency letter to the issuer regarding an issue in registration EXCEPT:

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 effective date of the issue is unaffected by the deficiency notice

Answer 18

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 19

Which of the following activities are allowed once a registration statement for a new issue is filed with the SEC?

I Sending a customer a “red herring” preliminary prospectus
II Accepting an indication of interest from the customer
III Accepting a deposit from the customer
IV Accepting a firm order from the customer

A. I and II
B. III and IV
C. II and III
D. I, II, III, IV

Answer 19

The best answer is A.

Once the registration statement is filed, the issue enters the 20-day cooling off period. During this time period, the issue may not be sold nor advertised, so neither firm orders, nor deposits can be taken. It is permitted to send a preliminary prospectus (red herring) to obtain indications of interest during the cooling off period, because legally, these are not offers to sell the security. Once the registration is effective, the final prospectus is used to offer and sell the issue.

Question 20

If the Securities and Exchange Commission sets the effective date for a new issue in registration, which of the following statements are TRUE?

I All proper documents have been filed with the SEC
II Additional documents must be filed with the SEC
III The SEC approves of the new issue
IV The issue may be offered to the public

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 20

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 offered to the public.

Question 21

When the Securities and Exchange Commission sets the effective date for a new issue in registration, which of the following statements is (are) TRUE?

I The SEC has certified that the offering documents give full and fair disclosure
II The proper documents for registration have been filed with the SEC
III The SEC has approved the offering for sale to the public
IV The SEC has established the final offering price

A. I only
B. II only
C. I, II, IV
D. I, II, III, IV

Answer 21

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 of any new issue in registration, does not “certify” the issue, nor do they establish the offering price. Think of the SEC as a big filing cabinet - once the proper documents relating to a new issue offering are filed, the issue may be offered and sold to the public.

Question 22

When the Securities and Exchange Commission sets the effective date for a new issue in registration, this means that the:

A. SEC has approved the offering for sale to the public
B. SEC has certified that the offering documents give full and fair disclosure
C. proper documents for registration have been filed with the SEC
D. effective cost to potential purchasers has been established by the SEC

Answer 22

The best answer is C.

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 of any new issue in registration, does not “certify” the issue, nor do they establish the offering price. Think of the SEC as a big filing cabinet - once the proper documents relating to a new issue offering are filed, the issue may be offered and sold to the public.

Question 23

Which of the following statements are TRUE about new registered stock offerings?

I Any purchaser who received a preliminary prospectus must also receive the final prospectus
II Any purchaser who received a preliminary prospectus need not receive the final prospectus
III Any purchaser will pay the Public Offering Price
IV Any purchaser will pay the Public Offering Price plus a commission or mark-up

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 23

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 P.O.P. 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.

Question 24

“Access equals delivery” means that any purchaser of a new securities issue offered by prospectus:

A. must be delivered a paper copy of the prospectus, at or prior to confirmation of sale
B. must be delivered an electronic copy of the prospectus, at or prior to confirmation of sale
C. can be delivered an electronic copy of the prospectus in lieu of a paper copy if the member firm knows that the customer has internet access
D. can be delivered a paper copy of the prospectus in lieu of an electronic copy if the member firm knows that the customer has internet access

Answer 24

The best answer is C.

“Access equals delivery” allows a broker-dealer to deliver an electronic copy of a prospectus to a purchaser of a new issue rather than a paper copy. However, the rule only permits such electronic delivery if the broker-dealer knows that the customer has internet access - which basically means that the broker-dealer has an e-mail address for the customer. If the broker-dealer does not know that the customer has internet access, then a paper prospectus is still required.

Question 25

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 25

The best answer is B.

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

Question 26

A Regulation A exemption from full SEC registration is available for new issue offerings that do not exceed:

I $20,000,000 within a 12 month period for Tier 1 offerings
II $20,000,000 within a 12 month period for Tier 2 offerings
III $50,000,000 within a 12 month period for Tier 1 offerings
IV $50,000,000 within a 12 month period for Tier 2 offerings

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 26

The best answer is B.

Regulation A is intended to make it easier for start-up companies to raise capital. It gives an “E-Z” registration method for offerings of up to $50 million within a 12 month period. The rule is split into Tier 1 and Tier 2.

Tier 1 offerings, up to a maximum amount of $20 million, are given the easiest registration method and do not require audited financial statements.

Tier 2 offerings allow a maximum of $50 million to be raised, but require audited financial statements.

An abbreviated registration statement is filed with the SEC (Form S1-A) and the issue must go through a 20 day review period, similar to a regular registered offering. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

Question 27

Which statement is TRUE regarding Regulation A?

A. Offerings are limited to a maximum of 35 non-accredited investors
B. Offerings are limited to a maximum size of $50,000,000
C. A Prospectus must be delivered to purchasers
D. The Offering is exempt from registration with the Securities and Exchange Commission

Answer 27

The best answer is B.

Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 “tiers” to the rule. Tier 1 gives an “E-Z” registration process to offerings of no more than $20 million in a 12 month period. Tier 2 requires more detailed information, including audited financial statements, and can be used for offerings of up to $50 million. While no prospectus is required, each buyer must be given disclosure in an Offering Circular.

Anyone can purchase a Regulation A offering - it is not limited solely to accredited (wealthy) investors. Customers in any state can buy - this is not being sold under an “intrastate exemption” (Rule 147) that limits purchasers to residents of 1 state.

Question 28

Which of the following statements are TRUE about Regulation A offerings?

I The maximum offering amount permitted under the exemption is $50,000,000 within a 12 month period
II An offering circular must be provided to all purchasers
III Sales are limited to purchasers who are “resident” in the State where the Issuer resides
IV The issue can only be sold to a maximum of 35 non-accredited investors

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 28

The best answer is A.

Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 “tiers” to the rule. Tier 1 gives an “E-Z” registration process to offerings of no more than $20 million in a 12 month period. Tier 2 requires more detailed information, including audited financial statements, and can be used for offerings of up to $50 million.

While no prospectus is required, each buyer must be given disclosure in an Offering Circular. There is no limitation on the number of purchasers or the number of states in which this offering is made.

Question 29

All of the following statements are true about Regulation A offerings EXCEPT:

A. the maximum offering amount permitted under the rule is $50,000,000 within a 12 month period
B. an offering circular must be provided to all purchasers
C. sales are limited to purchasers who are “resident” D. there are no minimum income or net worth standards for individuals wishing to invest

Answer 29

The best answer is C.

Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 “tiers” to the rule. Tier 1 gives an “E-Z” registration process to offerings of no more than $20 million in a 12 month period. Tier 2 requires more detailed information, including audited financial statements, and can be used for offerings of up to $50 million. While no prospectus is required, each buyer must be given disclosure in an Offering Circular.

Anyone can purchase a Regulation A offering - it is not limited solely to accredited (wealthy) investors. Customers in any state can buy - this is not being sold under an “intrastate exemption” (Rule 147) that limits purchasers to residents of 1 state.

Anyone can purchase a Regulation A offering, however the amount that can be purchased of a Tier 2 offering by a non-accredited investor (basically, a person who is not wealthy) is limited to the greater of 10% of that person’s annual income or net worth.

Question 30

Which offering of securities under Regulation A is subject to purchase limitations?

A. Tier 1 offerings
B. Tier 2 offerings
C. Both Tier 1 and Tier 2 offerings
D. Neither Tier 1 nor Tier 2 offerings

Answer 30

The best answer is B.

There are no purchase limitations on Tier 1 (up to $20 million) Regulation A offerings. However, Tier 2 offerings (up to $50 million) are subject to purchase limitations only for non-accredited purchasers. (Regulation D -the private placement exemption - sets the requirements for “accredited” investors - these are wealthy individuals.) Non-accredited investors buying a Tier 2 Regulation A offering cannot invest an amount that is the greater of 10% of that person’s annual income or net worth. Note that there is no similar limitation on Tier 1 purchases.

Question 31

Which statement is TRUE regarding purchase limitations under Regulation A?

A. Non-accredited investors buying Tier 1 offerings are subject to purchase limitations
B. Accredited investors buying Tier 1 offerings are subject to purchase limitations
C. Non-accredited investors buying Tier 2 offerings are subject to purchase limitations
D. Accredited investors buying Tier 2 offerings are subject to purchase limitations

Answer 31

The best answer is C.

There are no purchase limitations on Tier 1 (up to $20 million) Regulation A offerings. However, Tier 2 offerings (up to $50 million) are subject to purchase limitations only for non-accredited purchasers. (Regulation D -the private placement exemption - sets the requirements for “accredited” investors - these are wealthy individuals.) Non-accredited investors buying a Tier 2 Regulation A offering cannot invest an amount that is the greater of 10% of that person’s annual income or net worth. Note that there is no similar limitation on Tier 1 purchases.

Question 32

Which of the following statements are TRUE regarding Rule 415?

I This rule allows seasoned issuers to file a blanket registration which covers a 3 year period
II This rule allows seasoned issuers to file a blanket registration which covers a 5 year period
III The issuer must still go through a 20 day cooling off period during which the SEC may require more information to be submitted
IV The issuer avoids the 20 day cooling off period and is allowed to issue the securities 2 business days after filing

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 32

The best answer is B.

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 capitalization 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 33

A company that has just completed its Initial Public Offering has raised $200 million of capital and has been listed on the NYSE. How long must the company wait in order to do an add on share offering without having to file an S-1 full registration with the SEC?

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

Answer 33

The best answer is C.

Once an issuer has completed its IPO, as long is it has been reporting to the SEC for at least 1 year and has a minimum $75 million market capitalization, it can do any subsequent “add on” offering under Rule 415 - the shelf registration rule.

Rule 415 is a much easier registration rule for established seasoned issuers. Rather than filing an S-1 full registration statement with the SEC and having to go through the 20 day cooling off period, where the SEC examines the registration statement in detail, the company can file an S-3 shelf registration statement with the SEC.

Because the SEC knows this company already (remember, it has been reporting for a year to qualify for a shelf registration), it accepts the shelf registration with minimal review. The company outlines the securities it might sell over the next 3 years, and to sell, the company gives 2 day notice to the SEC. Furthermore, instead of having to provide purchasers with a detailed prospectus, the company only has to provide a much slimmer prospectus supplement. This is a much faster and cheaper registration process for established issuers.

Question 34

Under Rule 415, which permits seasoned corporate issuers to file a “shelf” registration statement for securities offerings, the filing covers a period of:

A. 30 days
B. 90 days
C. 3 years
D. 5 years

Answer 34

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 capitalization 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 35

Intrastate offerings are subject to:

I SEC registration
II State registration
III FINRA regulation

A. I only
B. II only
C. II and III
D. I, II, III

Answer 35

The best answer is C.

Intrastate offerings are exempt from SEC registration, but are still subject to registration within the state where the offer is being made. In addition, the terms of the offering must be filed with FINRA and must comply with FINRA rules.

Question 36

Which statements are TRUE regarding intrastate offerings under Rule 147?

I Resale of the securities is permitted within that state immediately following the initial offering
II Resale of the securities is permitted outside that state immediately following the initial offering
III Resale of the securities is not permitted within that state for 6 months following the initial offering
IV Resale of the securities is not permitted outside that state for 6 months following the initial offering

A. I and II
B. III and IV
C. I and IV
D. II and III

Answer 36

The best answer is C.

Securities that are sold under a Rule 147 exemption (intrastate exemption) cannot be resold outside that state for 6 months following the initial offering. There is no restriction on resales within that state. 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 37

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 37

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 38

A new issue private placement offering is:

I exempt under Regulation D
II non-exempt under Regulation D
III allowed to be sold to a maximum of 35 non-accredited investors
IV allowed to be sold to a maximum of 35 accredited investors

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 38

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.

Question 39

Under Regulation D regarding private placements, how many accredited investors are allowed to invest in the offering?

A. 10
B. 35
C. 50
D. An unlimited number

Answer 39

The best answer is D.

Regulation D permits a private placement to be sold to a maximum of 35 non-accredited investors and an unlimited number of accredited (wealthy and institutional) investors.

Question 40

All of the following are accredited investors EXCEPT:

A. individual earning $200,000 per year
B. couple earning $300,000 per year
C. person with a net worth of $1,000,000 exclusive of residence
D. person buying $150,000 of the issue within 5 years

Answer 40

The best answer is D.

To be accredited, an individual must have an annual income of $200,000 per year; or a couple must have an annual income of $300,000 per year; or the purchaser must have a net worth of at least $1,000,000, exclusive of residence. One is not accredited because a large purchase of the private placement is made.

Question 41

Which of the following are defined as “accredited investors” under Regulation D?

I Non-profit organization with assets in excess of $2,000,000
II Trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person
III Partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered
IV A bank or savings and loan institution

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 41

The best answer is D.

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. 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!

Question 42

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 42

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 43

Which of the following statements are TRUE about private placements?

I Private placements are exempt transactions
II Private placements are non-exempt transactions
III To claim a private placement exemption, a Form D must be filed with the SEC
IV To claim a private placement exemption, no filing with the SEC is required

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 43

The best answer is A.

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. Form D notifies the SEC that the issue is being offered in compliance with the exemption.

Question 44

Under Regulation D, issuers must provide which of the following to investors to obtain a private placement exemption?

A. Copy of the Prospectus
B. Copy of the Official Notice of Sale
C. Copy of the Offering Circular or Private Placement Memorandum
D. Copy of the Official Statement

Answer 44

The best answer is C.

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.”

Question 45

Restricted shares subject to sale under Rule 144 are most commonly acquired through:

A. private placements
B. registered secondary distributions
C. tender offers
D. ESOPs (Employee Stock Ownership Plans)

Answer 45

The best answer is A.

Restricted shares are normally acquired through private placements. 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 46

Restricted stock is best described by which of the following?

A. A security which was never registered and can only be sold in the public markets when it is either registered, or sold under an exemption provision
B. A security of an issuer which has been bought in the open market by an officer or director of that company
C. A security purchased by a non-accredited investor in a Regulation D private placement
D. A security which is purchased by an issuer that is not exempt from the provisions of the Securities Acts

Answer 46

The best answer is A.

Restricted stock is stock which was never registered and cannot be sold in the public markets unless registration takes place or an exemption (such as Rule 144) is available. Note, however, the restricted securities may always be sold in a so-called “private transaction” - these are not considered to be public offers of that restricted security.

Question 47

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 47

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 48

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

I the responsibility of the seller
II the responsibility of the broker-dealer
III filed at, or prior to, the time that the sell order is placed
IV filed within 10 business days of the placement of the sell order

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 48

The best answer is A.

Filing of the Form 144 to sell restricted stock is the responsibility of the seller. The form must be filed with the SEC at, or prior to, the time that the sell order is placed.

Question 49

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

I 1% of the outstanding shares
II 10% of the outstanding shares
III the weekly average of the prior 4 weeks’ trading volume
IV the weekly average of the prior 8 weeks’ trading volume

A. I or III, whichever is greater
B. I or IV, whichever is greater
C. II or III, whichever is greater
D. II or IV, whichever is greater

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

A seller who has filed Form 144 can sell 1% of the outstanding shares or the weekly average of the last 4 weeks’ trading volume whichever is greater. This amount can be sold how many times a year?

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

Answer 50

The best answer is D.

Rule 144 allows the sale of 1% of the issuer’s outstanding shares or the weekly average of the preceding 4 weeks’ trading volume (whichever is greater). This amount can be sold every 90 days (every 3 months), so a sale can occur 4 times per year.

Question 51

ABC corporation has 100,000,000 shares outstanding. An officer of ABC wishes to sell ABC stock on November 15th under Rule 144. The prior weeks’ trading volumes are:

Week Ending Volume
Nov. 12th 1,500,000 shares
Nov. 5th 1,200,000 shares
Oct. 30th 800,000 shares
Oct. 23rd 600,000 shares
Oct. 16th 400,000 shares

If the Form 144 had been filed the preceding week, the maximum permitted sale is:

A. 500,000 shares
B. 750,000 shares
C. 1,000,000 shares
D. 1,025,000 shares

Answer 51

The best answer is C.

Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 100,000,000 shares = 1,000,000 shares.

If the Form 144 was filed the preceding week, then the week ending November 12th would not yet have occurred. The 4 weeks’ trading to be averaged are:

Nov. 5th 1,200,000 shares
Oct. 30th 800,000 shares
Oct. 23rd 600,000 shares
Oct. 16th 400,000 shares

3,000,000 shares / 4 weeks = 750,000 share average

The greater amount is 1% of outstanding shares, or 1,000,000 shares.

Question 52

On December 1st, an officer of ABC Corporation wishes to sell stock under Rule 144. ABC has 20,000,000 shares outstanding. The previous weeks’ trading volumes are:

Week Ending Volume
Nov 28 100,000 shares
Nov 21 220,000 shares
Nov 14 230,000 shares
Nov 7 210,000 shares
Oct 31 180,000 shares

If the Form 144 is filed today, the maximum sale is:

A. 190,000 shares
B. 200,000 shares
C. 210,000 shares
D. 230,000 shares

Answer 52

The best answer is B.

Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 20,000,000 shares = 200,000 shares. The last 4 weeks’ trading volumes are:

100,000 shares
220,000 shares
230,000 shares
210,000 shares

760,000 shares / 4 weeks = 190,000 share average

The greater amount is 1% of the outstanding shares, or 200,000 shares.

Question 53

On December 1st, an officer of ABC Corporation wishes to sell stock under Rule 144. ABC has 20,000,000 shares outstanding. The previous weeks’ trading volumes are:

Week Ending Volume
Nov 28 100,000 shares
Nov 21 220,000 shares
Nov 14 230,000 shares
Nov 7 210,000 shares
Oct 31 180,000 shares

If the Form 144 had been filed one week prior to December 1st, the maximum sale would be:

A. 190,000 shares
B. 200,000 shares
C. 210,000 shares
D. 230,000 shares

Answer 53

The best answer is C.

Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 20,000,000 shares = 200,000 shares. If the Form 144 was filed the preceding week, the trading volumes would have been:

220,000 shares
230,000 shares
210,000 shares
180,000 shares

840,000 shares / 4 weeks = 210,000 share average
(this is the greater amount)

Question 54

On November 23rd, an officer of MNO Corporation wishes to sell stock under Rule 144. MNO has 50,000,000 shares outstanding. The previous weeks’ trading volumes are:

Week Ending Volume
Nov 21 500,000 shares
Nov 14 525,000 shares
Nov 7 485,000 shares
Oct 31 450,000 shares
Oct 24 400,000 shares

If the Form 144 is filed today, the maximum sale is:

A. 490,000 shares
B. 500,000 shares
C. 506,250 shares
D. 515,725 shares

Answer 54

The best answer is B.

Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 50,000,000 shares = 500,000 shares. The last 4 weeks’ trading volumes are:

500,000 shares
525,000 shares
485,000 shares
450,000 shares

1,960,000 shares / 4 weeks = 490,000 share average
The greater amount is 1% of outstanding shares, or 500,000 shares.

Question 55

On December 1st, an officer of MNO Corporation wishes to sell stock under Rule 144. MNO has 60,000,000 shares outstanding. The previous weeks’ trading volumes are:

Week Ending Volume
Nov 28 515,000 shares
Nov 21 500,000 shares
Nov 14 525,000 shares
Nov 7 485,000 shares
Oct 31 450,000 shares

The maximum permitted sale under Rule 144 is:

A. 490,000 shares
B. 500,000 shares
C. 506,250 shares
D. 600,000 shares

Answer 55

The best answer is D.

Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 60,000,000 shares = 600,000 shares.

515,000 shares
500,000 shares
525,000 shares
485,000 shares

2,025,000 shares / 4 weeks = 506,250 share average

The greater amount is 1% of outstanding shares, or 600,000 shares.

Question 56

A high-ranking officer of ABC Corporation owns 10,000 shares of ABC Corporation control stock that she wishes to sell under the provisions of Rule 144. The company has 900,000 shares outstanding. The average weekly trading volume over the preceding 4 weeks was 3,000 shares. The maximum permitted sale under Rule 144 is:

A. 1,000 shares
B. 3,000 shares
C. 9,000 shares
D. 10,000 shares

Answer 56

The best answer is C.

Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 900,000 shares = 9,000 shares. This is greater than the 3,000 share average trading volume over the preceding 4 weeks, so this is the maximum permitted sale.

Question 57

An investor wishes to sell restricted stock under the provisions of Rule 144. The company has 30,000,000 shares outstanding. The Form 144 is filed on Monday, September 28th. The previous weeks’ trading volumes are:

Week Ending Volume

August 30th	        260,000 shares
September 6th	300,000 shares
September 13th	280,000 shares
September 20th	310,000 shares
September 27th	330,000 shares

Assuming that all other requirements of the rule are met, the maximum permitted sale amount is:

A. 275,000 shares
B. 295,000 shares
C. 300,000 shares
D. 305,000 shares

Answer 57

The best answer is D.

Rule 144 permits the sale of the greater of 1% of the shares outstanding or the weekly average of the preceding 4 weeks’ trading volume.

1% of 30,000,000 shares = 300,000 shares.

The weekly average of the preceding 4 weeks’ trading volume is:

Week Ending	Volume
September 6th	300,000 shares
September 13th	280,000 shares
September 20th	310,000 shares
September 27th	330,000 shares

1,220,000 shares / 4 = 305,000 shares

The greater amount, 305,000 shares, can be sold during the next 90 days.

Question 58

Restricted securities can be sold under Rule 144 if all of the following conditions are met EXCEPT:

A. they are sold on a dealer basis
B. they are sold on an agency basis
C. solicitation of orders to buy is restricted to customers expressing interest within the past 10 days
D. the issuer is reporting currently to the SEC

Answer 58

The best answer is A.

Rule 144 requires that restricted securities be sold on an agency basis only. Your firm cannot act as a market maker in “144” shares. Solicitation of orders to buy “144” shares is prohibited (to stop you from soliciting potential customers to buy 144 shares, which would tend to push the price up). However you are allowed to recontact individuals expressing buying interest in “144” transactions within the past 10 days. Since 144 shares are being sold in the open market, the issuer must comply with SEC issuer reporting rules to maintain the public market in the securities.

Question 59

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 59

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 60

Under Rule 144, no filing is required if the sale amount every 90 days is for no more than 5,000 shares, worth no more than:

A. $50,000
B. $100,000
C. $500,000
D. $1,000,000

Answer 60

The best answer is A.

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 61

An officer of a company has acquired shares of that issuer in the open market. If the officer wishes to sell the shares:

I a 6 month holding period must be completed
II there is no holding period requirement
III a Form 144 must be filed with the SEC
IV there is no requirement to file a Form 144 with the SEC

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 61

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 62

An investor owns 20% of the outstanding shares of ABC Corporation, a publicly traded company. The investor’s spouse owns 5% of that company’s stock. If the spouse wishes to sell her holding, which of the following statements are TRUE?

I The spouse is considered to be an affiliated person subject to Rule 144
II A Form 144 must be filed if the shares are to be sold
III Solely from the standpoint of percentage of shares outstanding, a maximum of 1% of the company’s shares can be sold at this time
IV Up to 6 sales per year are allowed

A. I and IV only
B. I, II, III
C. II, III, IV
D. None of the above

Answer 62

The best answer is B.

Rule 144 is applicable to officers, directors, and “affiliated” persons - meaning someone whom they “control.” A spouse is considered an affiliated person. To sell, a Form 144 must be filed. The rule allows the greater of 1% of the outstanding shares or the weekly trading average of the last 4 weeks to be sold under the filing. 4 filings are allowed per year.

Question 63

An unaffiliated investor wishes to sell a large amount of “144” shares. This person can do so, without being subject to the Rule 144 volume limitations, after holding the securities for:

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

Answer 63

The best answer is D.

Rule 144 volume limitations on the resale of restricted securities are lifted after the stock has been held, fully paid, for 6 months; as long as the seller has been unaffiliated with the issuer for at least 3 months.

Question 64

Which of the following are required to sell “144” stock?

I Issuer’s representation letter
II Broker’s representation letter
III Seller’s representation letter
IV Buyer’s representation letter

A. I and II only
B. II and IV only
C. I, II, III
D. I, II, III, IV

Answer 64

The best answer is C.

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 65

A wealthy customer has been asked by his neighbor to invest in the private placement of a “start-up” technology company as a venture capital investor. This is the first time that the customer has considered such an investment. The customer contacts his registered representative and asks: “Aside from the investment risk associated with a “start-up” company, what are the other issues that I should consider before making such an investment.” The registered representative should inform the customer that:

I because these securities are not registered with the SEC, such an offering would be illegal in the United States
II because the securities are not registered with the SEC, they can only be resold in the public markets if the company effects a registered primary distribution and is current in its SEC filings
III public resale of these securities can only occur if the customer holds the securities for 6 months “at risk” and then sells the securities in measured quantities
IV these securities can only be resold by the customer to underwriters that will buy the securities into their inventory and then register them with the SEC

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 65

The best answer is C.

Private placements under Regulation D are completely legal. These securities are not registered and hence, cannot be publicly traded. Only if the company subsequently “goes public” and begins reporting its results to the SEC can the shares trade in the public markets. However, these securities can be resold “privately” - but there is not much of a market for private resales of unregistered securities. If the company does go public, and if the customer holds these securities for 6 months fully paid, “at risk” (meaning that the customer has not purchased protective puts on the shares), then they can be sold under Rule 144. The sale via Rule 144 will register the shares.

Question 66

Rule 144A applies to trading of:

A. restricted stock in the open market
B. private placements by qualified institutional buyers
C. restricted stock in a private securities transaction
D. private placements by individuals

Answer 66

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 67

Which of the following statements are TRUE regarding Rule 144A?

I Rule 144A allows qualified institutional buyers to buy and trade between themselves large blocks of privately placed issues
II Rule 144A limits the amount of restricted securities that can be sold in the public markets
III Rule 144A permits issuers to sell tradeable private placement units to qualified institutional buyers
IV Rule 144A permits issuers to sell tradeable private placement units to individual investors

A. I and III
B. II and IV
C. I, II, III
D. I, II, III, IV

Answer 67

The best answer is A.

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 68

“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 68

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 69

For an institutional investor to qualify as a “QIB” under Rule 144A, the institution must have at least:

A. $1,000,000 of assets that it invests on a discretionary basis
B. $10,000,000 of assets that it invests on a discretionary basis
C. $100,000,000 of assets that it invests on a discretionary basis
D. $1,000,000,000 of assets that it invests on a discretionary basis

Answer 69

The best answer is C.

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 70

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 70

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 71

Which statements are TRUE?

I Rule 144A issues trade on the NYSE, AMEX and NASDAQ
II Rule 144A issues trade on PORTAL
III The general public can trade Rule 144A issues
IV Only QIBs can trade Rule 144A issues

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 71

The best answer is D.

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 72

Regulation Crowdfunding is intended as a means of raising capital for:

A. Start-up companies
B. Small capitalization companies
C. Mid-capitalization companies
D. Large-capitalization companies

Answer 72

The best answer is A.

“Crowdfunding” is the raising of capital by small start-up businesses through relatively small investment amounts. These are private placement securities that are exempt from registration with the SEC. The intent is to help early-stage companies raise investment capital with little regulatory burden, improving job formation and economic growth in the U.S. economy.

Question 73

Crowdfunding offerings are typically purchased by:

A. small investors
B. accredited investors
C. institutional investors
D. qualified investors

Answer 73

The best answer is A.

Crowdfunding offerings are targeted at small investors. The investment minimum is only $2,000 and the investor is not required to meet any income or net worth tests.

(Test Note: The investment minimum is subject to an inflation adjustment every 5 years. In April 2017, it was adjusted to $2,200. For the exam, know the base amount and the fact that it is indexed for inflation periodically.)

Question 74

The maximum amount that can be invested by a client in a single issue under Regulation Crowdfunding is:

A. $100,000
B. $500,000
C. $1,000,000
D. $5,000,000

Answer 74

The best answer is A.

The maximum amount that can be invested in a single offering under Regulation Crowdfunding is $100,000. The maximum size of single offering under the rule is $1,000,000.

(Test Note: The maximum investment amount and the maximum amount that can be raised are subject to an inflation adjustment every 5 years. In April 2017, the maximum investment amount was increased to $107,000 and the maximum amount that can be raised was adjusted to $1,070,000. For the exam, know the base amounts and the fact that they are indexed for inflation periodically.)

Question 75

The maximum amount that can be raised by an issuer under Regulation Crowdfunding is:

A. $100,000
B. $500,000
C. $1,000,000
D. $5,000,000

Answer 75

The best answer is C.

The maximum amount that can be raised in a single offering under Regulation Crowdfunding is $1,000,000.

(Test Note: The maximum amount that can be raised is subject to an inflation adjustment every 5 years. In April 2017, it was adjusted to $1,070,000. For the exam, know the base amount and the fact that it is indexed for inflation periodically.)

Question 76

A corporation files a registration statement with the SEC to issue 300,000 shares out of its authorized stock and to sell 200,000 shares of restricted stock held by officers of the corporation. Which statements are TRUE?

I This is a primary distribution of 500,000 shares
II This is a primary distribution of 300,000 shares
III Proceeds from the sale of 500,000 shares will go to the company
IV Proceeds from the sale of 300,000 shares will go to the company

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 76

The best answer is D.

This is a combined primary and secondary distribution. The primary distribution of 300,000 shares consists of the newly issued shares where the proceeds will go to the issuer. The secondary distribution consists of the 200,000 shares being sold by officers (who are “tacking on” their shares to the primary distribution to avoid having to resell the shares under Rule 144 restrictions). Only the proceeds from the primary distribution will go to the company. The proceeds from the secondary distribution go to the selling shareholders.

Question 77

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

I Stock dividend distribution
II Stock split
III Merger with another publicly held company
IV Spin off of a subsidiary as a publicly held company

A. I and II only
B. III and IV only
C. I, II, and IV
D. I, II, III, IV

Answer 77

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.