Unit 4 Flashcards
For an instrument to be a security, it must constitute:
- An investment of money 2. in a common enterprise 3. with the expectation of profits
- to be derived primarily from the efforts of a person other than the investor
What is NOT a security?
- Insurance or endowment policy or annuity (any product from a life insurance company that does not use the word “variable”)
- Remember: variable annuities are securities - Retirement plans (IRA or 401k)
- Collectibles
- Commodities such as precious metals and grains, including futures and forward contracts
- Condominiums used as a personal residence
- Currency
What is an issuer?
any person who issues (distributes) or proposes to issue a security
Under the USA, with respect to certificates of interest; participation in oil, gas, or mining titles or leases; or in payments out of production under such titles or leases…
there is not considered to be any issuer.
What is an issuer transaction?
one in which the proceeds of the sale go to the issuer (IPO)
What is a non-issuer transaction?
the proceeds of the sales do not go, directly or indirectly, to the entity that originally offered the securities to the public (everyday trading on exchanges) referred to as secondary trading
What is a primary offering?
issuer transaction involving new securities
What is an IPO?
(initial public offering)
the first time an issuer distributes securities to the public
Securities Act of 1933
regulates the issuing of corporate securities sold to the public
The act requires securities issuers to make full disclosure of all material information in their registration materials in order for investors to make fully informed investment decisions
(also called the Paper Act, Truth in Securities Act, and the Prospectus Act)
Under the USA, it is unlawful for any person to offer or sell an unregistered security in a state unless:
- It is registered under the act
- the security or transaction is exempted from registration under the Act
- it is a federal covered security
Categories of Federal Covered Securities
- Securities issued by an open- or closed-end investment company, UIT, or face amount certificate company
- Securities listed on the NYSE, Nasdaq, and several other U.S. exchanges
- Securities offered to the provisions of Rule 506(b) or 506(c) of Regulation D (private placement)
- If the federal government says the security does not have to register, no state can overstep
Under the NSMIA, if the muni issuer is located in the state in which the securities are being offered:
-T he security is NOT a federal covered security.
Example: a bond issued by the city of Columbus, OH is a federal covered security everywhere but in the state of Ohio. Even though it is still exempt from registration under both fed and state laws, in Ohio it is not known as a federal covered security (everywhere else, it is).
The Admin can deny exemption to the two following:
- Any security issued by a nonprofit
- Any investment contract issued in connection with an employee’s stock purchase, savings, pension, profit-sharing, or similar benefit plan
The burden of proof for claiming eligibility for an exemption falls to:
the person claiming the exemption
Exempt transactions under the Securities Act of 1933:
- private transactions between individuals
- private placement under Reg D
Under regulation D, SEC rule 506 permits:
private placement where there is no dollar limit on the amount sold
Under regulation D, SEC rule 506(b) permits:
can sell the offering to an unlimited number of accredited investors and up to 35 non-accredited investors. No advertising may be done on behalf of the offering.
Under regulation D, SEC rule 506(c) permits:
permits the offering be advertised as long as:
- All purchasers are accredited investors or the issuer reasonably believes that they are accredited investors
- The issuer takes reasonable steps to verify that all purchasers are accredited investors, which would include reviewing documentation, such as W-2s,tax returns, bank and brokerage statements, credit reports, and the like.
Under regulation D, SEC rule 501:
classifies an accredited investor
Remember: Assets in an account/property can be held jointly with a person other than spouse to be included in determining net worth but only to the extend of ownership %
Form D
An issuer that is issuing securities reliance on Regulation D but file Form D electronically with the SEC no later than 15 days after the first sale of securities in the offering
Rule 147 deals with
an exempt security
Rule 506 deals with
an exempt transaction
What is a prospectus?
any notice, circular, letter, or communications, written or broadcast by radio or television, that offers any security for sale or confirms the sale of a security.
Tombstone advertisement published on the effective date is not considered a prospectus nor an offering of the subject security.
The Registration Statement must be signed by:
the principal executive officer (CEO) and the principal financial officer (CFO), and a majority of the board directors
All of the signers are subject to criminal and civil penalties for willful omissions and misstatements of material facts.
How long is the cooling-off period?
20 calendar days but can take longer
Although most registration statements are filed by the issuer, the exam may require you to know that:
they may also be filed by any selling stockholder, such as an insider making a large block sale, or by a broker-dealer.
Filing Fee
- Often based on a % of the total offering price
- If registration is withdrawn or if the Admin issues a stop order, the Admin may retain a portion of the fee and refund the remainder to the applicant.
- This applies only to securities!!
Ongoing Reports
The Admin may require the person who filed the registration statement to file reports to keep the info contained in the registration statement current and to inform the Admin of the progress of the offering
***These reports cannot be required more often than quarterly
As a condition of registration under coordination or qualification, the Admin may require that a security by placed in escrow if the security is issued:
- Within the past 3 years
- To a promoter at a price substantially different than the offering price
- To any person for a consideration other than cash
Notice Filing
Certain securities are designated as federal covered and are removed from the jurisdiction of the state regulatory authorities
Opportunity for the states to collect revenue in the form of filing fees
Coordination
- Most common
- Necessary if offering is being made in more than 1 state
- May be registered by coordination if a registration statement has been filed under the Securities Act of 1933 in connection with the same offering
- Becomes effective at the same time the federal registration does
Qualification
- Requires a registrant to supply any information required by the state securities Admin
- Securities not eligible for registration by another method must be registered by qualification
- In general, securities that will be sold only in one state (intrastate) will be registered by qualification
- Effective date is whenever the Admin so orders
On the state level, securities registration statements are generally effective:
or 1 year from the effective date
Antifraud
- In order for an action to be fraudulent, it must be committed willfully and knowingly. There is no such thing as “accidental” fraud.
- A common example of fraudulent behavior is the use of material nonpublic information (insider trading).
