Series 24: Chapter 1

Question 1

What does the act of ‘33 cover?

Answer 1

**Primary market / New issues.
**Ensure public has full and fair disclosure.
Requirements for issuers. Issuers seeking to sell securities must file a registration statement (also applies to sale of large blocks pr previously issued stock.)

Question 2

What does the act of ‘34 cover?

Answer 2

Regulates secondary trading markets.
(NYSE and NASDAQ)
Established SEC.
Requires registration of both exchanges and market participants.

Question 3

What does the investment company act (ICA) of ‘40 cover?

Answer 3

Regulates companies that are formed to pool investor’s money
Also covers firms that are giving investment advice

Question 4

What does the Maloney Act cover?

Answer 4

Enabled the creation of non-exchange SRO’s (self-regulatory organizations)
NASD was created to oversee the OTC, over the counter market.)

Question 5

What is FINRA?

Answer 5

It is an SRO that regulates and enforces the securities industry.
FINRA was created in 2007 from merger of NYSE and NASD.
Oversees content of Series 24 exam

Question 6

Explain a REIT as a type of issuer?
What “tests” must it pass (initial and year 2)

Answer 6

A business entity formed to raise capital, invest proceeds into real-estate related investments and mortgages.

Must pass the test on an annual basis:
75% of gross income from real-estate related activity
95% of gross income come from real estate or dividend and interest (no more than 5% from non real-estate.)
Must be established as a trust
Must distribute 90% of income

During Year 2 it must also:
Have 100 shareholders
Five or fewer owners cannot own more than 50% of common stock in last half of year 2

Question 7

What is a non traded REIT?

Answer 7

Most REITS trade on an exchange.
Non-traded does not trade on exchange.
Limited liquidity.
Not suitable for all.
Are “pass through” vehicles Under IRS Reg “M” if they pass along at least 90% of income

B/D’s selling non-traded REIT’s must provide valuations within 18 mos. to shareholders.

Question 8

What is an ADR?

Answer 8

Facilitates in the trading of a foreign security in the U.S.
Represent a claim on a foreign security.
Shares held by US banks abroad by a depository bank that issues the ADR.
Allows company to raise money in the U.S. also pay dividends in USD.
ADR owners do not have same dividend rights, also have some f/x risk.

Question 9

What is the difference between sponsored and unsponsored ADR?

Answer 9

ADR is a claim on a foreign security that trades in the US.
Sponsored: company issuing the underlying common stock sponsors the ADR.
Unsponsored: company does not pay for cost associated with ADR (and trades in the OTC market with private quotes in the “pink sheets.”)

Question 10

What are structured products?

Answer 10

Derivatives that may be linked to something else (reference asset)
Typically built around a fixed income note and a derivative product.
Note usually pays regular interest, the derivative determines the final payoff at maturity.

Not bank deposits.
Not insured by FDIC.
Should be disclosed by RR

Question 11

What are Reverse Convertible Securities?

Answer 11

Short-term notes issued by banks and b/d’s which pay above market rate coupon.
Buyer receives a higher than market coupon rate, but may receive an unrelated asset at maturity.

Issuer pays a higher rate to be able to “lock in” the sale of an asset at a specific price at maturity.

Buyer could have asset put to them at a price below current market value, less principal received.
Not suitable for those seeking safety of principal.

Question 12

What is an SEC reporting company (as it related to issuing securities)?

What are the aum $ and # of s/h’s needed to qualify?

Answer 12

An issuer is a reporting company if it is listed on an exchange (NYSE, Nasdaq, AMEX)

Any other publicly traded corporation with aum over $10m and more than 500 shareholders.

Question 13

Explain the following types of investors:
Institutional

Answer 13

• Bank
• Savings and Loan Insurance
• RIA
• Person or entity with +**$50m aum **
• A member or an associated person of that member, or a person acting on behalf of an institutional investor

Question 14

Explain the following types of investors:

Qualified Institutional Buyer

Answer 14

QIB: 3 part test - Insurance, RIA, Pensions, Corp. + Purchasing for own account or other QIB + Buyer must own +100m.

Question 15

Explain the following types of investors:
Qualified Institutional Buyer

Answer 15

QIB:
Must pass 3 part test:

Insurance,
RIA,
Pensions,
Corp.

Purchasing for own account or other QIB

Buyer must own +$100m of securities (that are not affiliated with the buyer -aka their own stock.)

Question 16

Explain the following type of institutional buyer:
Hedge Fund

Answer 16

Hedge Funds:
Like a mutual fund but accredited investor only, risky
No SEC filing required (given accredited investors buy them)

Question 17

What is the difference between an IPO and a Follow-On Offering?

Answer 17

IPO is the “first time” an issuer is selling securities to the public.

Follow on is when company is already public and issues more stock.

Question 18

Explain the difference b/w a public and private offering.

Answer 18

Public offerings require more registrations and time.
Going to privates markets is faster and less onerous

Question 19

Financing Transactions:
Public vs. Private

Answer 19

Public: access to more $, but more regulatory filings (under 33 act.)

Question 20

Financing Transactions:
IPO vs. Follow-on

Answer 20

IPO: initial share to public
Follow on: additional shares of common stock sold to public

Question 21

What is a PIPE (Private investment public equity)

Answer 21

Broker Dealer helps issuer with a private placement of restricted shares to a small group of accredited investors. (Usually not a good sign - dilution & difficul to raise capital.)

Question 22

What is objective of 33 act?

Answer 22

Covers non-exempt securities to be registered with SEC.
Issuers must file a registration statement (prospectus)
Prevent fraud with new issuance by requiring investors to be in formed with relevant information to make informed investment decision.
Filed with SEC.

Question 23

Explain the following SEC registration forms (as it relates to issuing a new secuirty)?
Who is able to issue new securities under the following forms.
* S-1 (F3)
* S-3
* S-4
* S-8

Answer 23

All forms of registration forms for new issues (‘33 act)

**S-1: **Basic registration that most co’s use for an IPO (F-3 is for foreign co.’s)

**S-3: Short form of registration: must have $75 in public float common equity (not missed a preferred or bond payments)

**S-4: **Used when securities are being offered as a result of a merger, acquisition, etc

S-8: Registration of securities offered through retirement plans.

Question 24

As it related to the registration process for a new issue - what must be offered to the purchasers of a new security?

Answer 24

For a new issue the following must be done to register the security.

Registration statement (prospectus) must be provided to all purchasers of new issues.

5 copies of the preliminary prospectus must be provided** in the filling of the registration statement (prospectus.)**

Question 25

What form must an issuer file for a new IPO?
What would require an ammendment to the form?

Answer 25

New issue requires form S-1 to be completed by issuer
The S1 includes red herring (preliminary prospectus)
Price range (not exact price of security is offered)
An amendment must be filed if financials are outdated or there is a change to business model.

Question 26

What will require an S-1 to be ammended during the new issue registration process?

What will create a delay / what won’t?

When does a registration statement become effective?

How is the final amendment handled?

Answer 26

If material information is added / altered an amended filing is required

Items creating a delay:
* Stale or outdated financial data will create a delay
* Change in the # of shares offered
* Material change to issuer business or directors

Will not be a delay in registration if:
* Statement is for issuing additional shares of same share class
* New registration statement registers additional securities at no more than 20% of maximum offering price included in prior registration statement.

Effective date:
Registration statement effective 20th day after the filing date.
(New amendments “reset” the clock back to 20 more days from new date)

Final amandement is usually an accelerated amendment (so as to not wait 20 days)
* Final amendment must be requested by at least 2nd business day before requested effective date.
* Oral request must be followed by a letter.

Question 27

What is contained in the final prospectus (during the filing for an IPO?)

Answer 27

Offering Price
Underwriting spread
Underwriter allocation
Underwriter discounts
Proceeds to issuer
Final price must be included in the final prospectus (ok if it is different than price listed in red herring) to avoid amendment.
If the price changes by +/- 20% you have 15 days following the effective date , otherwise the information must be added to the post-effective document.

Question 28

What must the registration statement contain (per the act of ‘33?)

Answer 28

1. Character of issuer’s business
2. Balance sheet not older than 90 days
3. Financial statements showing profit and loss for latest fiscal yr end and two preceding fiscal years
4. Amount of capitalization and use of the proceeds of the same
5. Monies paid to affiliated persons or business of the issuers
6. Shareholdings of senior officers, directors & those holding 10% of more

Question 29

Explain the “Pre-Registration / Pre-Filling Period.”

Answer 29

Period when issuer prepares registration statement w/help of underwriters.

Underwriters may not discuss with client before the actual filing date. “quiet period”

Question 30

Explain what occurs during each state of the new issue registration process timeline?
1. Pre-registation period
1. Waiting period
1. Post-Effective priod

Answer 30

Pre-Registration Period
* Prepare registration statement w/underwritters
* No Discussions with customers
* when ready, issuer files registration period marking end of pre-reg period

Waiting Period
* Lasts 20 days from Last Amendment (unless accelerated)
* Issue Preliminary Prospectus
* Blue SKy the Issue
* Hold Due Doligence Meeting
* Accept Indications of interest (no sales)

** Post-Effective Period**
* Issue Final Prospectus
* Confirm Sales
* 25/40/90 Day After-Market Prospectus requirement for Dealers

Question 31

Explain the due diligence process of the registration process?

Answer 31

During the new issue process, the underwritter does due diligence to ensure accuracy of registration statement.
Final meeting held by underwriters and issuer to ensure all information is correct prior to issuance of final prospectus / registration statement.
The Final Meeting is called the “Bring Down Due Diligence”

Question 32

What is the waiting period during registration process?
What can underwritters do?
What can they not do?

Answer 32

“Waiting off period” occurs after pre-registration period.

Cooling off period
When SEC reviews materials for factual accuracy

Not allowed to:
Underwritters cannot sell during this period or accept $

Are allowed to:
Discuss the issue
Provide red herring (prelim prospectus)
Record names of potential interest

Question 33

What are Blue Sky Laws

Answer 33

Designed to protect investors from fraudulent offerings.
State and Federal laws could overlap or conflict
States have limited authroity to regulate (Federally covered securities - ie, those on an exchange, NYSE, Nasdaq, etc.)
Regulation at the state level
State securities administrators may require and usser to file a consent to service

Question 34

What is the effective date for a registration statement?

Answer 34

Represents the end of the cooling off period and beginning of post-effective period.

The effective date of the registration statement is usually** 20 days after the last ammendment** filed in response to a deficiency letter.

Question 35

What is the Post-Effective date?

Answer 35

Offering price is set the morning of effective date.

Once price is set, the sales may begin and Post-effective starts

Final prospectus must be given to a customer by no later than when the time a sale is confirmed.

If a** new co issuing first time - must send preliminary prospectus to cleint at least 48 hours in advance of sale**

During cooling off period - preliminary prospectus can be ent.
Post Effective Date - Final Prospectus must be sent.

Question 36

What is a stop order?

Answer 36

1. **During the registration process. **
2. If material new information becomes available after the effective date but prior to completion of offering, the issuer filed a post-effective amondment with the SEC.
3. SEC can issue a stop order - requires all activity to cease (if SEC determines issue is not in compliance with Act of ‘33.)

Question 37

What is gun jumping?

Answer 37

Violating the terms prior to the filing of the registration statement.
Activity that takes place between the filing date and the effective date that is considered to be in violation.

Question 38

Explain the prospectus delivery requirements for a dealer in the seconday markets?
[If the issuer already has publicly available securities how long must the dealer deliver a prospectus to the clients after the effective date?]

Answer 38

A Dealer selling in secondary market - must provide the customer a prospectus if new securities of that class were recently sold by the issuer under registration statement.

If issuer** already has publicly traded securities outstanding** - prospectus must be delivered for 40 days after the effective date, for an IPO 90 days after effective date.

Question 39

Explain the time requirements for dealers to offer a prospectus for the following issuers:

Reporting status at time of filing / Exchange or Nasdaq listing status
1. Non-reporting / will be listed
1. Non-reporting / will not be listed / not IPO
1. Non-reporting / will not be listed / IPO
1. Reporting / currently listed

Answer 39

The purpose of the rule is to provide investors with information concering an issue of securitites.
If the** issuer was a reporting company subject to act of ‘34 prior to filing date, no prospectus requirement is required as information is already available through the SEC’s Edgar database. [example 4]
If the issuer was a non-reporting company prior to the filing date**, but will be listed on an exchange as of the effective date, the requirement applies for 25 days.

1. 25 days
2. 40 days
3. 90 days
4. aftermarket prospectus requirement does not apply

Question 40

What is a lock up period?

Answer 40

Period when pre-IPO holders such as management, Venture Capitalists and other insiders cannot sell shares following an IPO that is trading in the aftermarket.
Usually 6 mos after the company’s IPO a lockup will expire

Question 41

Explain SEC Rule 3a4-1 and what it pertains to?

Answer 41

Pertains to employees of the issuer selling the security.

Ok to do if Employee is:
* Not receiving compensation
* Not associated with broker dealer
* Not subject to statuory disqualification

AND (meets one the the 3 below)
1. Sells to financial institutions
1. Person has other primary job at firm (not a sales person)
1. Person prepares written communications approved by officers but does not solicit potential investors.

Question 42

What does the Trust Indenture Act of 1939 cover?
Whos must adhere to it?

Answer 42

New Issue of Corporate Bonds (not muni or govt.) must be registered under ‘33 Act and Trust Indenture Act ‘39.

Adherence:
An corporation that issues more than $10m in corp bonds must have an indenture (agreement) between issuer and trustee (usually a bank) who acts on behalf of bondholders.

The Trustee (bank acts in the bondholders best interest.)

Question 43

What is covered in a bond’s indenture?

Answer 43

1. Protective Covenants
2. Process for handling issuer defaults

Question 44

For existing public companies - they may fall under various classifications which impacts the process of raising capital.

Explain the following issuer: Well Known Seasoned Investor

Answer 44

Files reports under S3 (or F3)
$700m in public float common equity (or)
$1b in non-convertible debt (during last 3 years)

Allows for 3-year shelf registration

Question 45

Explain the categories of the following issuers:
Majority Owned Subsidiary of Well Known Seasoned Investor

Answer 45

Majority-owned subsidiary of a well known seasoned issuer qualifies as as well know seasoned issuer in connection with the offer and sale of its own securities if:

Securities are non convertible, other than common equity (and parent guarantees)
Securities are guarantees of non convertible, other than common equity
Securities are non convertible investment grade

Question 46

What is a Free Writing Prospectus?

Answer 46

Available to be used by seasoned investors
Offer to sell or solicitation of an offer to buy in** form of written communication.**
Used with registration statement - not in lieu of

Question 47

Explain the categories of the following issuers:
Seasoned Issuer

Answer 47

Can register securities under form S3 or (F3 for foreign) for primary offering.
Generally not as large as a WKSI

Question 48

Explain the categories of the following issuers:
Unseasoned Issuer

Answer 48

Is a “reporting” issuer, but is not “seasoned” as they might have too low of a public float or are not listed on a national exchabge.

File reports under Section 13 or 15d of 1934 act
but does not meet minimum for a primary offering of its securities.

Question 49

Explain the categories of the following issuers:
Non-reporting Issuer

Answer 49

Not required to file reports under Section 13 or 15d of 1934 act
A non-reporting issuer is a company that is **not required to file periodic reports **with the Securities and Exchange Commission (SEC). This means that they do not have to regularly share information about their financial performance with the public.

Usually Private Company (U.S. or non-U.S.)

Question 50

Explain the categories of the following issuers:
Ineligible Issuer

Answer 50

Firms deemed inelgile to use streamlined procedures to access capitla markets
Not permitted to use a Free Writing Prospectus

Question 51

Explain the Filing Form and Requirements for:
* WKSI (Well Known Seasoned Investor)
* WKSI’s Majority Subsidiary
* Seasoned Issuer
* Unseasoned Issuer
* Non reporting Issuer
* Ineligible Issuer

Answer 51

WKSI: S3, $700m publi float or a minimum of $1b in debt issued during last 3 years.
WKSI Majority Subsidiary: S3 also qualifies as a WKSI if securities are non-convertible, other than common equity, and the parent unconditionally guarnatees the security.

Seasoned: S-3, at least $75m public float

Unseasoned: S-1, less than $75m public float

Non-reporting: S-1, N/A

Ineligible: (could be a company with a violation, or not eligible for streamlined reporting.)

Question 52

Explain “Shelf Registration”

Answer 52

A shelf registration is the filing of a registration statement to issue new securities that are not meant to be sold immediately
Allows dealers to sell shares at most opportune times vs. immediately

Rule 415:
allows issuers to file registration documents and offer the securities on a delayed or continuous basis for the purpose of:
* Employee Benefit Plans
* To be issued upon conversion of other securities
* In connection with business transactions

May be used for 3 yrs after initial effective date

Question 53

What is an S3ASR?

Answer 53

A form of registration available to a WKSI (mot available to seasoned investor)
Benefit: Allows the issuer to offer securities without SEC review

Question 54

What is an “at the market offering”?

Answer 54

A shelf offering (allows securities to not be sold immediately) in which the securities are sold at whatever the market price is at the time of the sale.

• Securities sold at prevailing market rate directly to secondary market via designated broker dealer.
• Issuer may use shelf registration
• Issuer has to be S-3 or F-3 eligible
• If b/d is participating in primary or secondary distribution security that is not allowed to trade on national securities exchange may not represent in “at the market” (Can’t make a market and and then offer ‘at the market” when you control the market.)

Question 55

What is a prospectus?
What is a tombstone?

Answer 55

Any notice, circular, prospectus, advertisement, letter or communication (written or broadcast) that offers a security for sale - is a** Prospectus**

If the notice only lists the price, underwriters and where prospectus can be obtained it is a Tombstone.

Question 56

What is a Free Writing Prospectus?

Answer 56

A statutory prospectus is the large disclosure document that is typically
provided to purchasers of new issues.
**
A free writing prospectus (FWP) is any communication that does not meet the standards of a statutory prospectus.**

Instead, an FWP is **any written communication that constitutes an offer to sell or a solicitation to buy the securities **related to a registered offering which is generally used after the registration statement has been filed.

Only eligible issuers are able to use FWP

Examples of FWP:
* Press releases
* E-mails
* Term sheets
* Marketing materials.

A FWP may be used by a WKSI prior to the final prospectus

Question 57

When can a FWP be used by the following:
WKSI:
Seasoned Issuer
Unseasoned Issuer
Non-Reporting Issuer

Answer 57

WKSI: Anytime / Reference delivery

Seasoned Issuer: Can use a FWP after a registration statement has been filed.

Unseasoned: Can use a FWP after a registration statement has been filed but must be preceded by or delivery w/statutory prospectus

Non-Reporting: Can use a FWP after a registration statement has been filed but must be preceded by or delivery w/statutory prospectus

Question 58

Explain the** types of offering communications** that can be made by issuers or broker dealers engaged in an offering:

• Written
• Oral
• Research report
• Internal Syndicate Memorandum

What kind of communication can take place during the cooling off period between

Answer 58

Written: print, broadcast, radio
Oral: told real-time
Research report: could be 33 act violation if it includes information about a new offering
Internal Syndicate: not allowed to be shared with clients

Cooling off period: b/d’s allowed to discuss securities but not in writing unless via preliminary prospectus (period between filing date and effective date)

Question 59

What does Rule 134 cover?

Answer 59

SEC Rule 134 permits the publication of
a simple advertisement describing the basic features of a new issue.
Allows a Tombstone to be used.

Communication that is not a prospectus:
Allows for publication of simple advertisement describing basic features of a new issue.
So basic - not considered and ad.
Also called a tombstone.

Question 60

What does Rule 135 cover?

Answer 60

**Allows an Issuer to publish a notice concerning an offering of securities that contains only limited information. **
Does NOT need be filed with SEC.
Must have legend that **does not contain an offer to sell securities. **

Contains very basic information
* The name of the person whose assets are to be sold in exchange for the securities to be offered
* The names of any other parties to the transaction
* A brief description of the business of the parties to the transaction
* The date, time, and place of the meeting of the security holders to vote on, or consent to the
* transaction
* A brief description of the transaction and the basic terms of the transaction

Question 61

What does Rule 135a cover?

Answer 61

Generic Advertising of Mutual Funds

SEC Rule 135a permits the use of advertising that describes, in general terms, how investment companies (mutual funds) work.

If the material does not mention a specific investment company, it is not considered an offer and may be used without a prospectus.

Question 62

What some Gun Jumping Safe Harbors?

Answer 62

“Gun jumping provisions limit the kinds of communications made to the public during the cooling off period.)

Safe Harbors are exceptions that exist to permit certain forms of communication.

Permitted activity allowed during “quiet” or cooling offer periods
1. regularly released factual information
2. “sort of” regularly released factual information
3. Forward looking statements made in good faith

Non reporting issuers

Question 63

What is gun jumping?

Answer 63

The gun-jumping provisions of the Securities Act of 1933 restrict the type of communications that may be made during a registered public offering (during the quiet period)

Clients should make purchase decisions based on the contents of a prospectus, rather than on ancillary information released by the issuer and/or its underwriter(s) during the cooling off period (filing date and effective date.)

allows certain types of activities and communication during the time period
between the filing date and the effective date (quiet period).

Question 64

How are gun jumping safe harbors and IPOs handled?

Answer 64

A company that is planning an IPO is permitted to communicate with the public at least 30 days prior to the filing of a registration statement, but may not make a reference to an offering.
The 30-day safe harbor applies to all offerings, not just IPOs.

Question 65

How are Electronic Roadshows treated when “live” vs. recorded?

Answer 65

“Live”: treated as a communication
Recorded: written - and commentary can be considered a free writing prospectus

A non-reporting issuer must file the electronic road show with the SEC.

Question 66

What does Regulation S-K cover?

Answer 66

S-K lays out the disclosure requitements for the registration of securities.
Regulation S-K requires that a registrant have a reasonable basis for making assessments regarding the company’s future performance.

• Establishes disclosure requirements for registration statements that are filed under ‘33 and ‘34 act.
• Also governs forward looking projections made by company management.
• Management must have a reasonable basis for projections
• Mgmt can use prior projections to help make point
• Full and Fair disclosure of both favorable and unfavorable elements
• Mgmt may resume or discontinue operations.
• MUST disclose # of Board of Director meetings held annually (all)
• MUST include directors who missed 75% of meetings

Question 67

What must be disclosed by an issuer registrant when a rating agency has a different rating than the registrants?

Answer 67

Registrant must include the rating from the Nationally Recognized
Statisticalrating Organizations (NSRO i)f it differs from their own disclosed rating

Question 68

What does regulation S-X cover?

Answer 68

Establishes the form and content for financial statements.
The regulation requires that an attestation report be prepared by an independent accountant.
(S-K covers forward projections, S-X covers financial documents.)

Question 69

When do financial statements become stale during the registration process.

Answer 69

Financial statements used in a registration period become stale and require an amendment if:
older than 135 days (or)
older than 130 days for WKSI or seasoned investor

Question 70

Explain communication related liability (Section 11 of 1933 act.)

Answer 70

Focuses on false information act.
All people signing the registration statement can he held accountable, director/partner at firm when signed, accountant or certifier, underwriter of security.

Question 71

Which Securities are Exempt from the Registration Process?

Answer 71

US Govt & Agencies
Muni’s
Securities issued by non-profit
Short-term corporate issues (Less than 270 days - CP)
Securities issued by banks and trusts (not bank holding co.’s though)
Securities issued through small business investment companies.

Question 72

What does Section 11 of 1933 Act cover

Answer 72

Parties may be sued for untrue statements and material omissions from a registration

Question 73

What does SEC Rule 176 cover?

Answer 73

Sets the framework for who can be sued under Section 11 under ‘33 Act

Any person who offers or sells a security in violation of the registration
provisions of the 1933 Act, who did not exercise reasonable care regarding untrue statements, is liable for the investment amount, a reasonable amount of interest on the investment, minus the amount of income received from the investment. Any information conveyed to a purchaser after the time of sale is not taken into account when determining whether a prospectus included an untrue statement, or omitted to state a material fact

Question 74

Explain Rule 147 and 147a

Answer 74

Permits an exemption from the registration process for a new security due to state location

147: Allows for registration exemption when securities are offered for sale only in to in state investors.
Became outdated: resulted in 147a

147a: Allows for offers to be made to out of state investors, but only in-state are eligible to buy.

State is determined by principal place of business

Question 75

What are the “new” requirements under 147 / 147a

Answer 75

Allows companies within a state to raise funds within their state without going through Federal Regulation registration process.

If a company changes its principal place of business it will not be able to do another in state offering for 6 months in new state.

Considered doing business as meeting 1 of 4:
80% gross revenues in state
80% of consolidate assets
80% of net proceeds
Majority of issuers employees are based in the state.

Issuer must have reasonable belief that buyer is in state.

Resales to out of state can only happen after 6 mos.

Question 76

Explain Regulation A and A+
1. Max offering size
1. Time period
1. Max Amt offered by existing shareholders
1. Req’d audited financial statements

Answer 76

Allows for registration exemption of a new security
Simpler form of registration in most cases.

Under Regulation A, if an issuer offers a new issue of securities valued at $5m or less sold over a 12-month period, the offering is exempt under the Act.

Reg A, Reg A+ Tier ,1 Reg A+ Tier 2
1. $5 m $20m $50m
1. 12 mos 12 mos 12 mos
1. $1.5m $6m $15m
1. No No Yes

Companies do not have to file a registration statement but do still have to file a a Form 1-A offering statement if they wish to make any oral or written communication.

Offering statement is qualified on the 20th calendar day after filing with SEC (assuming no delays)

Question 77

When may a preliminary offering circular be used?

Answer 77

**After filing with SEC but before qualification, preliminary circular can be used if it contains virtually all the same information as the final (except price).

Preliminary or Final offering circular must be sent 48 hours prior to mailing the confirmation of the sale.

Question 78

What does testing the waters allow an issuer to do?

Answer 78

Solicit interest before filing an offering statement with the SEC.
Firm may use general solicitation and advertising.
Issuer may not accept money until SEC signs off on final offering statement.

Question 79

How are private placements handled in the registration process?

Answer 79

Private placements do not need to be registered.

Question 80

For a private placement explain the following:

1. Placement agent
2. Placement agent agreement
3. Engagement letter
4. Teaser
5. Term Sheet
6. Confidentiality agreement
7. Subscription Agreement

Answer 80

1. B/D that finds institutional investors
2. agreement and terms b/w issuer and placement agent
3. agreement b/w issuer and placement agent
4. Private Placement Memorandum (PPM) shared to clients - basic info
5. Basic information on securities being offered.
6. Potential investor must sign to see PPM
7. Sales contract for the investor to sign knowing the are aware of what they are buying, etc.

Question 81

Private Placement Exemption:

Section 4(2)

Answer 81

Section of 1933 act:
Registration exemption for securities that do not involve a public offering (aka a “private placement”)
No form of public communication can be used.

Question 82

Private Placement Exemption:

Section 4(5)

Answer 82

Section of 1933 act:
Registration exemption for securities if following are met:
amount of offering < $5m
no advertising or public solicitation
Only sold to accredited investors

Question 83

Private Placement Exemption:

Regulation D

504
506(b)
506(c)

Answer 83

Reg D is a form that must be filed.
Registration exemption for securities if following are met:
Short form (Not registration statement)
Exemption from filing registration if conditions are met:
For D must be filed at least 15 days after first sale
Issuer is allowed to sell up to** $5m** in 12-mos without regard to sophistication
No Disclosure statement required

504
Covers offerings not exceeding $5 million within a 12-month period
Three types of issuers allowed:
Company subject to SEC reporting guidelines
Investment Company
Development Stage Company (blank check co.)

506(b)
Offerings over $5m
Unlimited # of accredited and 35 non-accredited allowed to participate in offering. (must be able to evaluate risks and merits of investment.)

506(c)
Unlimited capital raise
Company can use general solicitation or advertising
Securities are referred to as restricted
Sales may be made only to accredited investors

Question 84

What is defined as an accredited investor?

Answer 84

• Financial Institution
• Director or general partner of issuer
• Individual who meets either test:
• net worth of at least $1m
• Gross income for each of last two years of $200k ($300k with spouse.)

Question 85

What does rule 144A cover?

Answer 85

Permits sales of restricted security to qualified institutional buyers. (QIB)
If same class of security is listed on exchange, not eligible for exemption.
Securities offered by RIAs are ineligible.
Created to provide more liquidity

QIB

Question 86

What does Regulation S Cover

Answer 86

Exemption for registration of securities sold to investors outside the U.S.
Do not need to be registered in U.S.
Offshore transaction.
Not sold to a U.S. person
Debt can be re-sold to U.S. person after 40 day holding period
Equity can be re-sold to U.S. person after 1 year

Question 87

Explain FINRA Rule 5122

Answer 87

**Private placement where member firm issues securities and does placement on own behalf. **
Firm must provide a term sheet or PPM and must file this with FINRA Corporate Financing Department

Two types of exemptions
Type of buyer: institutional / QIB under guideline of 144A
Type of Security:
Exempt securities, variable contracts, commodities, equity and credit derivatives

Question 88

Explain FINRA Rule 5123

Answer 88

Member firms (underwritter) that sell an issuer’s security as part of a private placement, must file a copy of the Private Placement Memorandum / Term sheet with FINRA.

Must be done within 15 days of first sale.
If no documents filed, FINRA must also be notified.

Question 89

Selling unregistered securities

Answer 89

Can only be done if owner finds an exemption

Question 90

What is Rule 144

Answer 90

Rule 144 allows the resale of unregistered securities by someone who purchased them.
Also covers the resale of control stock.

Rule 144 allows people to resell their unregistered securities after they complete form 144

Must meet certain criteria:
Information must be available
Holding period must be 6 mos. or 12 mos. (non-reporting co.)

Deceased persons have no holding period.
Control stock has no holding period
Restricted stock has holding period.

If a person has been an unaffiliated for 3 mos with co and held security for at least 12 mos, they may sell security without complying with 144.

Question 91

What is Rule 145?

Answer 91

Covers types of reclassifications as sales that are subject to prospectus and registration requirements of 33 act.

Relassificaiton of 1 security to another
A merger or consolidation of one corp for another
Transfer of assets from one firm to another.

Filing is required for all transactions above.

Not requires for stock split, change in par value, reverse stock split.

Question 92

What does the Investment Advisors Act of ‘40 cover?

Answer 92

Regulates the companies offering investment advice for a fee.
Mutual fund companies must register with the Investment Advisor act of ‘40 and the funds register with the ICA of ‘40.

Question 93

What is an SRO?

Answer 93

A self-regulatory organization may create its own set of rules to deal with day-to-day operations.
They create and enforce their own rules within the SEC and Federal law.

Question 94

What is the NASD and what does it oversee?

Answer 94

NASD = National Association of Securities Dealers.
An SRO that oversees the OTC (over the counter market).
It also created the MSRB (Muni Rules Making SRO.)

Question 95

What is a “PIPE”?

Answer 95

Private Placement of securities in which a broker dealer helps place restrcited shares to a small group of wealthwealtherer accredited investors

Question 96

Explain when can a well known seasoned investor use a Free Writting Prospectus?

Answer 96

WKSI can use a FWP for securities that will be the subject of a registration

Question 97

When a prospectus is used for more than 9 months after the effective date for reedemable open-end investment companies, the prospectus must contain information that is not older than how many months?

Answer 97

For an open-end mutual fund the prospectus** data cannot be older than 16 months.**