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Unit 4: Regulation of Securities and Issuers

Terms in this set (129)

Perhaps the most important term in the USA is "security": the USA applies only to those financial instruments that are securities. The purchase, sale, or issuance of anything that is not a security is not covered by the act. The definition of security, is however, complex. Over the years, courts have determined case by case what constitutes a security. The US Supreme Court, in the Howey decision, defined the primary characteristics of what constitutes a security by concluding that an ___ ___ is a security. For an instrument to be a security, the court held, it must constitute 1) an investment of money, 2) in a common ___ 3) with the expectation of profit 4) to be derived primarily from the efforts of a person other than the investor. A common enterprise means an enterprise in which the fortunes of the investor are interwoven with those of either the person offering the investment, a third party, or other investors.
investment contract, enterprise
The USA provides a comprehensive list of more than a dozen financial instruments, (many of which you've never heard of), that are securities under the act and therefore covered by its provisions. Rather than waste your time with the list, please focus on the six items that are NOT a security:
1) an insurance or ___ policy or ___ contract under which an insurance company promises to pay a fixed sum of money either in a lump sum or periodically (this is basically any product from a life insurance company that does not use the word "variable")
2) interest in a ___ plan, such as an IRA or 401(k) plan
3) collectibles
4) commodities such as precious metals and grains, including ___ and forward contracts
5) condominiums used as a personal residence
6) currency
endowment, annuity, retirement, futures
Although collectibles, fixed annuities, precious metals, grains, real estate, and currencies can be attractive investments, they are not securities. Because these items are not securities, their sale is not regulated by state securities law. Furthermore, if a registered agent commits fraud in the ___ of any of these items, he has not committed a violation of any state securities law. He has violated the ___ provisions of another act prohibiting fraudulent commercial transactions
sale, antifraud
An individual's direct ownership of an automobile is not a security - it is just ownership of a car. However, if that individual makes an investment of money in the stock of an automobile manufacturer with the expectation of making money due to the efforts of the company's management skill, he has purchased a security. In the same manner, if a condominium is purchased in a resort area with the goal of placing it into a rental pool and renting it out most of the year, and it is used only for personal vacation time, the condo is considered a security because there is ___ motive, typically reliant on the efforts of a ___ ___ - the rental agent. On the other hand, if the individual has chosen to live in the condo as a personal residence, it is a home, not a security.
profit, third party
Annuities with ___ payouts are not securities, but variable annuities are because they are dependent on the investment ___ of securities within the annuity.
fixed, performance
An "issuer" is any person who issues (distributes) or ___ to issue a security. The most common issuers of securities are companies or ___ (federal, state, and municipal governments and their agencies and subdivisions).
proposes, companies
An issuer is ___, (not exempt from registering its securities), it must generally register its securities in the states where they will be sold under one of the registration methods described in this unit.
nonexempt
This is very strange wording, but might well appear on your exam. Under the USA, with respect to ___ of interest, participation in oil, gas, or mining titles or ___; or in payments out of ___ under such titles or leases, there is not considered to be any issuer.
certificates, leases, production
An "issuer transaction" is one in which the proceeds of the sale go to the ___. All ___ issued securities, such as an initial public offering (IPO), are issuer transactions. In other words, when a company raises money by selling (issuing) securities to investors, the proceeds from the sale go to the company itself.
issuer, newly
State X issues bonds as a way of borrowing money so that the state government can function. The state is the issuer of those bonds. Typically, they will be purchased by a ___ of a broker-dealer whose account is handled by an agent of the firm. This would be an ___ ___ because the proceeds of the sale of the bonds would go to State X, the issuer.

If the investor who purchased those State X bonds decided to sell them, she would contract her ___ who would then arrange for a sale to an interested buyer. In this case, because the proceeds of the bond sale would go to the investor, this is a nonissuer transaction, or ___ transaction (like when you sell your old car, it is a secondhand sale; the manufacturer received the money when the product was initially sold (primary) and you receive the money now (secondary)).
client, issuer transaction, agent, secondary
A "nonissuer transaction" is one in which the proceeds of the sales do not go, directly or indirectly, to the ___ that originally offered the securities to the public. The most common instance of this is everyday trading on exchange such as the New York Stock Exchange or the Nasdaq Stock Market. In a nonissuer transaction, the proceeds of the sale go to the ___ who sold the shares. Because the shares are not new, we refer to this as secondary trading.
entity, investor
An issuer transaction involving new securities is called a "primary offering." If it is the ___ time an issuer distributes securities to the public, it is called an initial public offering (IPO). All primary offerings are issuer transactions because the issuer (the company) receives the proceeds from the ___ investing in the company.
first, investor
The first time that ABC Shoe Co. issued shares to the public, ABC Shoe engaged in an IPO or a ___ ___ because it received the proceeds from distributing its shares to the public. After ABC Shoe went public, subsequent transactions between investors through agents of broker-dealers were nonissuer (___) transactions.
primary offering, secondary
The Securities Act of 1933 (also called the Paper Act, the Truth in Securities Act, and the Prospectus Act) regulates the issuing of ___ securities sold to the public. Unless the security or transaction is exempt (covered shortly), the act requires securities issuers to make full disclosure of all material information in their registration materials in order for investors to make fully ___ investment decisions. State law, under the Uniform Securities Act, requires similar disclosures as will be detailed in this unit. Depending on the nature of the issuer and/or the type of transaction, a security may or may not have to register under state and/or federal law. The following is a key statement regarding state law:

Under the USA, it is unlawful for any person to offer or sell an unregistered security in a state unless
1) it is registered under the Act
2) the security OR transaction is exempted from registration under the Act
3) it is a ___ covered security
corporate, informed, federal
If the security or transaction is not exempt or is not a federal covered security as defined by the National Securities Markets Improvement Act, it must be registered in the ___ or it cannot be lawfully sold in the state. What are federal covered securities? NSMIA of 1996 is a law that effectively ___ the responsibility for regulating investment advisers between the states and the SEC by creating the category of registration known as a federal covered adviser.
state, divided
The NSMIA also created the term "federal covered security," a security that was exempt from registration on the state level. State securities registration requirements were preempted with respect to federal covered securities. However, states, may require ___ ___, consisting of filing fees and copies of documents filed with the SEC, primarily in the case of registered investment companies (eg mutual funds)
Notice Filings
The major categories of covered securities (securities covered by federal securities laws), which therefore cannot be regulated by state securities Administrator (except for violating antifraud provisions), include:
- securities issued by an open-end or closed-end investment company, unit investment
...
The major categories of covered securities (securities covered by federal securities laws), which therefore cannot be regulated by state securities Administrator (except for violating antifraud provisions), include:
- securities listed on the New York Stock Exchange, the NYSE American LLC (formerly known as the American Stock Exchange (AMEX), the Nasdaq Stock Market, and (not testd) several other U.S. exchanged. In addition, any security equal in seniority (rights or warrants) or senior to these securities (bonds and preferred stock) is also considered federal covered
...
The major categories of covered securities (securities covered by federal securities laws), which therefore cannot be regulated by state securities Administrator (except for violating antifraud provisions), include:
- securities offered pursuant to the provisions of Rule 506(b) or 506(c) of Regulation D under the Securities Act of 1933 (qualifying under the private placement transaction exemption)
...
The major categories of covered securities (securities covered by federal securities laws), which therefore cannot be regulated by state securities Administrator (except for violating antifraud provisions), include:
- most securities exempt from registration under the Securities Act of 1933 (you do not have to known the exceptions other than the one we're going to describe following). If the federal government says the security does not have to register, no state can overstep that. Municipal bonds are included in the list of securities exempt from registration under federal (and state) law. However, under the NSMIA, if the municipal issuer is located in the state in which the securities are being offered, that security is not considered a federal covered security. Exemptions under the Securities Act of 1933 will be covered after those of the USA.
...
A bond issued by the City of Columbus, OH, is a ___ covered security everywhere but the state of Ohio. The effect of this is that no state regulator can enforce any of their rules against the bond. But, in the state of Ohio, even though the security is exempt under Ohio's securities laws, the ___ could request that the issuer (the city) furnish certain details about the issue. This Columbus, OH, bond is still exempt from ___ under both state and federal law, but, in Ohio, it is not known as a federal covered security (everywhere else, it is).
federal, Administrator, registration
It is important to note that registering a security with the SEC does not ___ make it federal covered. Yes, that is true of investment companies and those securities listed on certain stock exchanges and the Nasdaq Stock Market, but there are tens of thousands of stocks registered with the SEC that trade on the OTC Bullet Board or the OTC Link, formerly known as the ___ ___, and they are not federal covered. Furthermore, a security does not have to be registered with the SEC to be included in the definition of federal covered security. For example, U.S. government and municipal securities are ___ from registration with the SEC and are included in NSMIA's list of federal covered securities.
automatically, Pink Sheets, exempt
Although investment company securities such as mutual funds, are federal covered securities, the USA allows ___ to impose filing fees on them under a process called ___ ___.
states, notice filing
Under the USA, the exemptions discussed in this unit refer to an exemption from the act's registration and sales ___ filing requirements. In certain situations, the USA exempts both securities and transactions. A security, a transaction, or ___, can be exempt.
literature, both
An exempt security retains its exemption when initially issued and in subsequent trading. However, ___ as an exempt transaction must be established before each transaction.
justification
The USA provides for a number of categories of exempt securities and even more categories of exempt transactions. Those securities that are nonexempt must register unless sold in exempt transactions. Federal covered securities do not register with the Administrator but may, especially in the case of ___ ___, have to Notice File with the Administrator. As mentioned above, an exempt security retains its exemption at tis initial issue and in subsequent trading.
investment companies,
An exemption for a transaction, on the other hand, must be established with ___ transaction. Provided it is in the public interest, the state Administrator can deny, suspend, or revoke any securities transaction exemption other than that of a ___ covered security. This action may be taken with or without prior ___ (summarily).
each, federal notice
An exempt transaction is exempt from the regulatory control of the state Administrator because of the ___ in which a sale is made or because of the ___ to whom the sale is made. A transaction is an action and must be judged by the merits of each instance.
manner, person
An agent can sell an unregistered security that is not exempt from registration in the state if the purchaser of the security is a ___ or other ___ buyer. Why is that so? Because the sale of securities to certain financial institutions is an exempt transaction, the sale can be made without registration. This means that the securities sold in exempt transactions do not have to be registered in the state. If that same nonexempt security was not sold in an exempt transaction, such as to an ___ investor, it would have to be registered in the state.
bank, institutional, individual
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
- U.S. and Canadian ___ and municipal securities. These include securities issued, ___, or guaranteed by the U.S. or Canada, by a state or province, or by their political subdivisions, (states or provinces, cities, countries, etc.)*

*One of the only cases where an individual representing the issuer in the sale of its securities is excluded from the definition of an agent
government, insured
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
- Foreign government securities. These include securities issued, insured, or guaranteed by a foreign government with which the U.S. maintains ___ relations. However, unlike U.S. or Canadian issues, ___ ___ are not included (unless guaranteed by the sovereign government)*

*One of the only cases where an individual representing the issuer in the sale of its securities is excluded from the definition of an agent
diplomatic, political subdivisions
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
- Depository institutions. These include securities that are issued, guaranteed by, or are a direct obligation of a depository institution. The USA divides them into the following categories:
1) any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the U.S., or any bank, savings institution, or ___ company organized and supervised under the laws of any state*
2) any security issued by and representing an interest in or a ___ of, or similar association organized under the laws of any state and authorized to do business in this state and
3) any security issued or guaranteed by any federal credit union or any credit union, ___ loan association, or similar association organized and supervised under the laws of this state.

Please note that for 2) and 3), if the institution is not federal chartered, then it must be authorized to do business in the state (under the supervision of a regulator in that state).

*One of the only cases where an individual representing the issuer in the sale of its securities is excluded from the definition of an agent
trust, debt, industrial
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
-Insurance company securities. These include securities issued, insured, or guaranteed by an insurance company authorized to do business in the state. Insurance company securities refer to the stocks or ___ issued by insurance companies, not the ___ life policies and variable ___ sold by the companies.
bonds, variable, annuities
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
-Public utility and common carrier securities. These include any security issued or guaranteed by a public utility or public utility holding company, or an ___ trust certificate issued by a railroad or other common ___ regulated in respect to rates by federal or state authority; or regulated in respect to issuance or guarantee of the security by a governmental authority of the U.S., any state, Canada, or any Canadian province.
equipment, carrier
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
-Federal covered securities. These include any security of that issuer equal to or ___ to it. This would include rights, ___, preferred stock, and any debt security.
senior, warrants
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
-Securities issued by ___ organizations. These include securities issued by religious, educational, fraternal, charitable, social, athletic, reformatory, or trade associations. ___ is the key word.
nonprofit, Nonprofit
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
- Securities of ___ ___ ___. This includes any investment contract issued by an employee stock purchase, saving, pension, or profit-sharing plan*

*One of the only cases where an individual representing the issuer in the sale of its securities is excluded from the definition of an agent
employee benefit plans
Securities exempt from state registration are also exempt from state filing of sales literature. Exempt securities include the following:
- Certain ___ ___ instruments.*

*One of the only cases where an individual representing the issuer in the sale of its securities is excluded from the definition of an agent
money market
A promissory note (commercial paper), that matures within nine months, is issued in denominations of at least ___, and receives one of the three highest ratings by a ___ recognized rating agency is exempt from registration requirements. Please note that this is the only case where a security's rating is part of the registration or exemption under the USA.
$50,000, nationally
Before a security can be ___ in a state, it must be registered unless exempt from registration, or traded in an exempt transaction.
sold
There are many different types of exempt transactions. One type that is likely to be on the exam:
- Isolated ___ transactions. Isolated nonissuer transactions include secondary (nonissuer) transactions that occur infrequently (very few transactions per year; the exact number varies by state). However, these usually do not involve securities professionals. In the same manner that individuals placing a "for sale by owner" sign on their front lawns do not need a real estate license, one individual selling stock to another in a one-on-one transaction is engaging in a transaction exempt from the oversight of the Administrator, because the issuer is not receiving any of the ___, and the parties involved are not trading as part of a ___ ___.
nonissuer, proceeds, regular practice
There are many different types of exempt transactions. One type that is likely to be on the exam:
- Unsolicited brokerage transactions. These include transactions initiated by the ___, not the agent. This is probably the most common of the exempt transactions. If a client calls a registered agent and a requests that the agent buy or sell a security, the transaction is an unsolicited broker transaction exempt from state registration. But, the Administrator may by rule require that the customer acknowledge upon a specified ___ that the sale was unsolicited, and that a signed copy of the form be kept by the ___ for a specified period.
client, form, broker-dealer
There are many different types of exempt transactions. One type that is likely to be on the exam:
- Underwriter transactions. These include transactions between issuer and broker-dealers performing in the capacity of an underwriter (such as a ___ ___ underwriting) as well as those between underwriters themselves (as when functioning as members of a selling ___).
firm commitment, syndicate
There are many different types of exempt transactions. One type that is likely to be on the exam:
- Bankruptcy, ___, or conservator transactions. Transactions by an executor, administrator, sheriff, marshal, receiver, guardian, or trustee in bankruptcy are exempt transactions. Please note that a ___ under UGMA or UTMA is not included in this list and that the only trust is one in bankruptcy
guardian, custodian
There are many different types of exempt transactions. One type that is likely to be on the exam:
- Institutional investor transactions. These are primarily transactions with financial institutions such as banks, ___ companies, and investment companies, and there is no ___ order size used to define these trades.
insurance, minimum
There are many different types of exempt transactions. One type that is likely to be on the exam:
- Limited offering transactions. These include any offering, called a private placement, directed at not more than ___ persons (called offerees) other than institutional investors during the previous ___ consecutive months, provided that
1) the seller reasonably believes that all of the noninstitutional buyers are purchasing for investment purposes only
2) no ___ or other remuneration is paid for soliciting noninstitutional investors and
3) no general solicitation or advertising is used

Unlike federal law, where the private placement rule restricts the number of purchasers, the USA restricts the number of ___ that may be made.

The number ___ is the figure that will be tested. But, an Administrator may want to reduce it, for example, for uranium stocks or oil royalties, or increase it for a closely held corporation that wants to solicit 20 or 30 friends and relatives of the owners for additional capital. As we continue to learn, the Administrator has a great deal of power.
10, 12, commissions, offers, 10
...
...
Unlike federal law, where the private placement rule restricts the number of purchasers, the USA restricts the number of ___ that may be made.
...
There are many different types of exempt transactions. One type that is likely to be on the exam:
Preorganization certificates. An offer or sale of a preorganization certificate or subscription is exempt if
- no commission or other ___ is paid or given directly or indirectly for soliciting any subscriber
- the number of subscribers does not exceed 10, and
- no ___ is made by an subscriber

You have probably never heard of a preorganization certificate or subscription, so a little explanation is in order. A new corporation cannot receive a ___ unless its documents of incorporation provide evidence that minimum funding is assured. Because the purpose of these preorganization certificates is to enable a new enterprise to obtain the minimum amount of capital required by the corporation law of the state, the USA places a limitation on the number of ___ rather than the number of offerees (as in the previously described private placement exemption). Hence, there may be a publicly advertised offering of preorganization subscriptions. But there may be no payment until effective registration unless another exemption is available. This tool itself simply ___ registration; it does not excuse registration altogether.
remuneration, payment, charter, subscribers, postpones
There are many different types of exempt transactions. One type that is likely to be on the exam:
- Transactions with existing security holders. A transaction made under an offer to existing security holders of the issuer (including persons who are holders of ___ securities, rights, or warrants) is exempt as long as no ___ or other form of remuneration is paid directly or indirectly for soliciting that security holder.
convertible, commission
There are many different types of exempt transactions. One type that is likely to be on the exam:
- Nonissuer transactions by pledges. A nonissuer transaction executed by a bona fide pledgee (i.e., the one who received the security as ___ for a loan), as long as it was not for the purpose of evading the act, is an exempt transaction. For example, you pledged stock as collateral for a loan and defaulted on your obligation. The lender will ___ your stock to try to recoup his loss and, under the USA, this is considered an exempt transaction.
collateral, sell
The Administrator may, by rule or order, deny or revoke the registration exemption of:
- any security issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association (your basic ___ exemption); and
- any investment contract issued in connection with an ___ stock purchase, savings, pension, profit-sharing, or similar benefit plan.

Please note that a few pages ago, we gave you a list of nine different exempt securities, from U.S. and Canadian government issues through certain money market instruments. However, the Administrator can only deny exemption to the two in the previous bullet points. On the other hand, with the exception of those involving federal covered securities, the Administrator may deny any exempt transaction. This means that, for example, just because an agent solicited a transaction with an insurance company of a security that was not federal covered, the Administrator has the power, if he feels it is justified, to consider that transaction ___.

Under the USA, the burden of providing an exemption or an exception from a definition falls upon the person claiming it.
nonprofit, employees', nonexempt
There are only two securities exemptions that the Administrator may revoke, while all exempt transactions, other than in ___ covered securities, may be revoked
federal
USA: "It is unlawful for any person to offer or sell any security in this state unless (1) it is registered under this act or (2) the security or transaction is exempted under this act; or (3) it is a ___ covered security. These exemptions apply to the security or transaction only, not to the securities ___. So if a security is exempt, such as a government security, it can be sold in this state without any registration. But, the person who sells it must be properly registered in this state (unless that person qualifies for an exemption). Confusing!
federal, professional
Broker-dealers with no place of business in the state, dealing exclusively with other broker-dealers or institutional clients, are not considered to be a BD in the state (as long as they are properly registered in at least ___ state- the location of their principal office). Let's apply that to the following situation:
ABC Securities is a BD registered in State A. They have no place of business in State B, but they do effect transactions on behalf of a number of banks and insurance companies located in State B. Therefore, they are not considered BDs in State B and are exempt from registering. Should ABC Securities sell some government securities to these clients, neither ABC nor the agents making the sale are required to be registered. This is not because the government securities are ___ (that just means the securities don't have to register with the Administrator), but because, under the USA, ABC does not meet the definition of a broker-dealer in State B, it does not have to register.
However, should ABC decide to have any of their agents sell these government bonds to individual (sometimes referred to as ___) clients in State B, then even though the bonds are exempt securities both ABC and the selling agents must register in that state.
The same applies to exempt transactions. One of the most common cases is when a client calls an agent to purchase a security that is not exempt and not registered in your state. But, because the transaction has been ___ by the client, as an unsolicited trade, it is an exempt transaction and, therefore, the trade may be made even though the security is not registered.
one, exempt, retail, initiated
One way the exam will try to trick you is by asking about an individual calling an agent from a state in which the agent is not registered. The BD is registered in that state, and the individual is a client of the firm, but not that particular agent. The individual wishes to enter an unsolicited order - can the agent accept it? No! Although the ___ is exempt (which only means that the security does not have to be registered in that state), an agent can only do business with a resident of a state if the agent is properly licensed in that state. In this case, the agent would have to turn the order over to an agent who is licensed in that other state.
transaction
The exemptions under the federal law are similar to those under state law, but there are some significant differences. As a NASAA exam, the Series 65 exam will focus on the state laws, but you should be familiar with the federal as well. The Securities Act of 1933 makes it unlawful to sell or deliver a security through any instrument of interstate commerce unless a registration statement is in effect. However certain securities are exempted from the registration requirements of the act. The following issues qualify as exempted securities.
- any security issued or guaranteed by the U.S., any state, or any political subdivision of a state (all federal government issues and municipal securities are exempted securities). Note that ___ securities are not included in this exemption (NASAA membership includes ___ Administrators)
Canadian, Canadian
The exemptions under the federal law are similar to those under state law, but there are some significant differences. As a NASAA exam, the Series 65 exam will focus on the state laws, but you should be familiar with the federal as well. The Securities Act of 1933 makes it unlawful to sell or deliver a security through any instrument of interstate commerce unless a registration statement is in effect. However certain securities are exempted from the registration requirements of the act. The following issues qualify as exempted securities.
- any commercial paper that has a maturity at the time of issuance of no more than ___ months (___ days), with the stipulation that the proceeds are to be used by the issuer to increase working capital and not for the purchase of fixed ___ ___: there is no minimum denomination or rating requirement similar to that found in the USA
9, 270, fixed assets
The exemptions under the federal law are similar to those under state law, but there are some significant differences. As a NASAA exam, the Series 65 exam will focus on the state laws, but you should be familiar with the federal as well. The Securities Act of 1933 makes it unlawful to sell or deliver a security through any instrument of interstate commerce unless a registration statement is in effect. However certain securities are exempted from the registration requirements of the act. The following issues qualify as exempted securities.
- any security issued by a person organized and operated exclusively for ___, educational, benevolent, fraternal, or charitable purposes, and not for pecuniary profit
religious
The exemptions under the federal law are similar to those under state law, but there are some significant differences. As a NASAA exam, the Series 65 exam will focus on the state laws, but you should be familiar with the federal as well. The Securities Act of 1933 makes it unlawful to sell or deliver a security through any instrument of interstate commerce unless a registration statement is in effect. However certain securities are exempted from the registration requirements of the act. The following issues qualify as exempted securities.
- any interest in a railroad equipment trust (for purposes of the law, interest in a railroad equipment trust means any interest in an equipment trust, lease, or other similar arrangement entered into, guaranteed by, or for the benefit of a regulated ___ ___ to finance the acquisition of rolling stock, including motive power)
common carrier
The exemptions under the federal law are similar to those under state law, but there are some significant differences. As a NASAA exam, the Series 65 exam will focus on the state laws, but you should be familiar with the federal as well. The Securities Act of 1933 makes it unlawful to sell or deliver a security through any instrument of interstate commerce unless a registration statement is in effect. However certain securities are exempted from the registration requirements of the act. The following issues qualify as exempted securities.
- any security issued by a federal or state bank, savings and ___ association, building and loan association, or similar institution
loan
The exemption described for banks does not apply to bank holding companies. Most of the large U.S. banks today are owned by ___ ___.
holding companies
Any security issued under ___ ___ qualifies as an exempt security under federal law but is not exempt under the USA and will probably have to register with the state. This exemption from federal registration applies to any security offered and sold only to persons resident within a single state, where the issuer of such security is a person whose principal place of business is located within such state. Principal place of business means the location from which the officers, partners, or managers of the issuer primarily direct, control, and coordinate the activities of the issuer.
Rule 147
The Rule 147 exemption is available only if the ___ issue is offered and ___ exclusively to residents of a single state. If any sales take place to non-residents, the entire issue loses its exemption. The purpose of this exemption is to allow issuers to raise money on a local basis, provided the business is operating primarily within the state.
entire, sole
Unlike the USA, there are only two exempt transactions that might be tested and they are:
- transactions by any person other than an issuer, underwriter, or dealer, (basically private transactions between ___);
- transactions by an issuer that do not involve a public offering (___ placement under ___ ___)
individuals, private, Regulation D
In a major effort aimed at facilitating the capital formation needs of ___ businesses, the SEC adopted Regulation D, the private placement exempt transaction. Securities offered and sold in compliance with Regulation D are exempt from registration with the SEC and, as was listed earlier, are considered federal covered securities exempt from registration on the state level as well. Our primary concern is with SEC Rule 506, a ___ placement where there is no dollar limit on the amount sold.
small, private
The ___ Our Business Startups Act of 2012, or JOBS Act, made several important changes to Rule 506 of Regulation D. Rule 506 consists of two sections, 506(b) and 506 (c). A company seeking to raise capital through a private placement under Rule 506(b) can sell the offering to an ___ number of accredited investors (defined shortly) and up to ___ non-accredited investors. In addition, no ___ may be done on behalf of the offering.
Jumpstart, unlimited, 35, advertising
Section 506(c) permits the offering to be ___. There are two primary (and interrelated) requirements to do this.
- all purchasers are ___ ___, or the issuer reasonably believes that they are accredited investors
- the issuer takes reasonable steps to verify that all purchasers are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, ___ ___, and the like.
advertised, accredited investors, credit reports
An issuer can elect to make a typical Rule 506 offering without general solicitation or advertising under Section 506(b) to include up to 35 non-accredited investors in the offering or to avoid the heightened ___ procedures.
verification
The JOBS Act also included a provision that an issuer is disqualified from using Rule 506 under their "___ ___" provisions. Simply, if the issuer or other relevant persons, (such as underwriters, directors, officers, or significant shareholders of the issuer) have been convicted of securities ___ or certain other securities violations, an offering under Rule 506 may not take place.
bad actor, fraud
SEC Rule 501 classifies an accredited investor for the purposes of Regulation D into several categories. Investors are considered to be accredited under the rule only if the ___ or any ___ acting on the issuer's behalf has reasonable grounds to believe, and does believe after reasonable inquiry, that the investors are included in one of the categories in the definition.
issuer, person
The separate categories of accredited investors under Regulation D include:
- a bank, insurance company, or registered investment company
- an employee benefit plan if a bank, insurance company, or registered investment adviser makes the investment ___, or if the plan has total assets in excess of $5M
- a charitable organization, corporation, or ___ with assets exceeding $5M
- directors, executive officers, and general partners of the issuer
- any natural person whose individual net worth, or joint net worth with that person's spouse, excluding the net equity in his ___ ___, exceeds $1M at the time of his purchase
- any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has reasonable expectation of reaching the same income level in the current year and
- entities made up of accredited investors
decisions, partnership, primary residence, entities
The term accredited investor applies only to ___ ___. A favorite phrase of the regulations is, "eligibility does not equal suitability." Therefore, just because one meets the financial requirements of an accredited investor does not mean that suitability standards are ___.
private placement, ignored
Can assets in an account or property held jointly with another person who is not the purchaser's spouse be included in determining whether the purchaser satisfies the net worth test in Rule ___? YES, assets in an account or property held jointly with a person who is not the purchaser's spouse may be included in the calculation for the net worth test, but only to the extend of his ___ of ownership of the account or property.
501, percentage
What is Form D, and when does it have to be filed? Under Rule ___ of Regulation D, an issuer that is issuing securities in reliance on Regulation D must file Form D electronically with the SEC no later than___ days after the first sale of securities in the offering.

Rule 147 deals with an exempt ___ and Rule 506 an exempt ___.
503, 15, security, transaction
Just like the rules under state law, if the security is not exempt (a nonexempt security) or the transaction is not exempt (a non-exempt transaction), then the security must be registered with the ___.
SEC
Issuer information must be disclosed to the SEC in a ___ ___ and published in a ___. In addition, the act prohibits fraudulent activity in connection with the sale, underwriting, and distribution of securities. The act provides for both ___ and criminal penalties for violation of its provisions.
registration statement, prospectus, civil
Even though registration under the USA (the law that deals with ___ by the ___) will be covered directly after this, where appropriate, mention will be of the similarities and differences between certain federal and state definitions.
regulation, states
A "prospectus" is any notice, circular, letter, or communication, written or broadcast by radio or television, that offers any security for sale or ___ the sale of a security. A tombstone advertisement published on the effective date (one that simply ___ the security, the price, and the underwriters) is not considered a prospectus nor an offering of the subject security. The term prospectus does not include ___ ___
confirms, identifies, oral communications
An "issuer" is any person who issues or proposes to issue any security. Most issuers are businesses, and the term issuer would also apply to a government entity.
...
When we described the exclusion from the definition of agent for an individual who represented the issuer in the sale of its security, we said that this was not the usually method of distributing a new issue, but was used by ___ ___ who wished to reduce the cost. In almost all cases, securities are distributed by a ___ (or network of BDs) acting as underwriters of the issue. The term underwriter is defined as any person, usually a broker-dealer, who has purchased a ___ from an issuer with a view to the distribution of the security, or participates or has a direct or indirect participation in that distribution.
small firms, broker-dealer, purchased
The SEC does not ___ securities registered with it, does not pass on the investment merit of any security, and never guarantees the accuracy of statements in the registration statement and prospectus.

In its review process, the SEC merely attempts to make certain that all pertinent information is fully ___ in the registration statement and prospectus by requiring that
- the issuer file a registration statement with the SEC before securities are offered or sold in interstate commerce
- a prospectus that meets the requirements of the act be provided to prospective buyers, and
- penalties (civil, criminal, or administrative) be be imposed for violations of the act
approve, disclosed, penalties
An issuer must file a registration statement with the SEC disclosing material information about the issue. The registration statement must be signed by the principal executive officer (usually designated the ___), the principal financial officer (usually designated the CFO), and a majority of the board of ___.

All of the signers are subject to criminal and civil penalties for willful ___ and misstatements of material facts. The information required in the registration statement may be summarized as follows:
- purpose of issue
-public offering price (anticipated range, but not the actual price)
-underwriter's commissions or discounts
- ___ expenses
- expected use of the net proceeds of the issue to the company
- balance sheet
- earnings statements for the last ___ years
- names, addresses, and bios of officers, directors, stockholders owning more than 10% of the outstanding stock (ie, control persons), and underwriters of the issue
- copy of underwriting agreements
- copies of articles of incorporation
CEO, directors, omissions, promotion, 3
After the issuer files a registration statement with the SEC, a ___-day cooling-off period begins. After the issuer (with the underwriter's assistance) files with the SEC for registration of the securities, the cooling-off period begins before the registration becomes effective. The registration can become effective as early as ___ calendar days after the date the SEC has received it. In practice, however, the cooling-off period is seldom the minimum ___ days; the SEC usually takes longer to clear registration statements.
20, 20
The three phases of an underwriting are
1) Issuer ___ registration statement with the SEC
2) ___ off period
3) effective date - ___ period may begin
The cooling-off period can last several months because of the time it takes to make additions and corrections.
files, cooling, offering
During the first phase of an underwriting (issuer files registration statement with the SEC): Prior to filling of the registration statement, no sales can be solicited and no ___ can circulate.
prospectus
During the second phase of an underwriting (cooling-off period): No one can solicit sales during the cooling-off period, but indications of ___ can be solicited with a ___ ___
interest, red herring
During the third phase of an underwriting (effective date - offering period may begin): ___ can now be solicited, but the firm must use a final ___.
Sales, prospectus
The preliminary prospectus must be made available to any prospective purchaser who expresses interest in the security from the time the issue is filed with the SEC until it becomes publicly available for sale, the effective date (the previously described cooling-off period).

A red herring is used to acquaint investors with essential facts concerning the new issue. It is also used to solicit indications of buyer interest. However, it can't be used:
- as a ___ of sale
- in place of a registration ___
- to declare the ___ public offering price

However, along with stating the expected number of shares to be sold, a bona fide estimate of the price range per share must be included.
confirmation, statement, final
Under no circumstances may a broker-dealer or one of its agents accept money or orders prior to the ___ ___. All the agent can do is ask the client for an ___ ___ ___ as to whether she might be interested in the security once the registration is declared effective. This indication of interest is non-binding on both parties (the investor and the broker-dealer).
effective date, indication of interest
The term red herring was given to the preliminary prospectus because the front page contains the following statement printed in red ink:

A Registration Statement relating to these securities has been files with the Securities and Exchange Commission but has not ___ become effective. Information contained herein is subject to completion of ___. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective.
yet, amendment
No person connected with the offering is allowed to make marks on a preliminary prospectus under any circumstances. They cannot write short summaries or reviews on the preliminary prospectus. The preliminary prospectus must be given to customers without any alternations because, as stated previously, information is subject to change.
...
Two items missing from the preliminary prospectus (red herring) are the public offering price (expected range must be shown and the effective date)
...
During the cooling-off period, underwriters may not:
- take ___; or
- distribute sales literature or advertising material

However, they may
- take indications of interest
- distribute preliminary prospectuses or
- publish ___ advertisements to provide information about the potential availability of the securities
orders, tombstone
The registration statement is normally a very long and complex document for an ___ to read. The act requires the preparation of a shorter document called a prospectus. The prospectus summarizes the information contained in the registration statement. It must contain all the material facts in the registration statement, but in shorter form. The purpose of a prospectus is to provide the investor with adequate information to analyze the investment merits of the security. Even if an investor does not intend to read a prospectus, it still must be ___ to him. It is unlawful for a company to sell securities before the effective date of the registration statement.
investor, given
On the date a registration statement becomes effective (the SEC has cleared the security for sale), securities may be sold to the public by broker-dealers and their agents. A copy of the final (effective prospectus) must be delivered to each purchaser. This is normally accomplished by including the prospectus along with a ___ of the trade, although it would certainly be permitted to deliver it earlier. Additional sales literature may be used by the firm as long as the sales literature is preceded or accompanied by a prospectus. Just as with a preliminary prospectus, no markings of any kind may be placed on the prospectus. No areas of ___ ___ may be highlighted or have attention drawn to them by any other method. Money may be accepted by the broker-dealer from customers at this time.
confirmation, special interest
The first step in the registration procedure is for the issuer or its representative to complete a registration application and file it with the state securities Administrator. The person registering the securities is known as the ___. There are some provisions applicable to all registrations regardless of the method used. The exam will want you to know these well.
registrant
State Administrators require every issuer to supply the following information on their applications:
- amount of securities to be issued in the state
- states in which the security is to be offered, but not the ___ offered in those other states,
- any adverse order or judgement concerning the offering by regulatory authorities, court, or the SEC
- anticipated effective date
- anticipated ___ of the proceeds (why are we raising the money?)

The Administrator may, by rule or order, permit the ___ of any information she considers unnecessary
amounts, use, omission
Although most registration statements are filed by the issuer, the exam may require you to know that they may also be filed by any ___ ___, such as an insider making a large block sale, or by a broker-dealer.
selling stockholder
The issuer (or any other person on whose behalf the offering is to be made) must pay a ___ ___, as determined by the Administrator, when filing the registration. The filing fees are often based on a ___ of the total offering price.

If the registration is withdrawn or if the Administrator issues a stop order before the registration is effective, the Administrator may ___ a portion of the fee and refund the remainder to the applicant.
filing fee, percentage, retain
A stop order is used to deny effectiveness to, or suspend or revoke the effectiveness of, any registration statement. This applies only to securities, not ___ such as broker-dealers, agents, investment advisers, and investment adviser representatives
professionals
The Administrator may require the person who filed the registration statement to file reports to keep the information contained in the registration statement current and to inform the Administrator of the ___ of the offering. These reports cannot be required more often than quarterly.
progress
As a condition of registration under coordination or qualification, the Administrator may require that a security be placed in ___ if the security is issued:
-within the past three years
-to a promoter at a price substantially ___ than the offering price
- to any person for a consideration other than ___

In addition, the Administrator may require that the proceeds from the sale of the registered security in this state be impounded until the issuer receives a specific amount from the sale of the security either in this state or elsewhere. There have been many instances where companies were unable to raise their targeted goal and just took the money and ran. This impound, or escrow, lessens the likelihood that this will happen.
escrow, different, cash
The Administrator may also require, as a condition of registration, that the issue be sold only on a form specified by the Administrator and that a copy of the form or subscription contract be filed with the Administrator or preserved for up to ___ years.
3
The USA provides two methods for securities issuers to register their securities in a state, plus a special method for certain ___ covered securities. They are
-notice filing
-coordination and
-qualification
federal
As previously mentioned, the National Securities Markets Improvement Act of 1996 (NSMIA) designated certain securities as federal covered and, therefore, removed from the jurisdiction of the state regulatory authorities. Although the states are preempted from requiring registration for federal covered securities, ___ as a federal covered security is not a preemption of the licensing or antifraud laws. Any person that sells a federal covered security must be licensed as a broker-dealer or agent (unless otherwise exempted) and must also comply with the antifraud provisions of state laws.
status
The USA gives the Administrator the authority to require notice filings with respect to federal covered securities, generally investment companies registered with the SEC under the Investment Company Act of 1940. So, what is this notice filing? Primarily, it is an opportunity for the states to collect revenue in the form of ___ ___ because, unlike with the two actual methods of registration we are going to discuss, the Administrator has limited powers to ___ any documentation filed with her department. The fees for notice filing are generally lower than for the two forms of registration.
filing fees, review
Under the notice filing procedure, state Administrators may require the issuer of certain federal covered securities to file the following documents as a ___ ___ ___ of their securities in the state:
- documents filed along with their registration statements filed with the SEC
- documents filed as ___ to the initial federal registration statement
- a report as to the value of such securities offered in the state
- consent to service of process
condition of sale, amendments
Keep in mind the distinction between federal covered securities and SEC-registered securities. As stated earlier, SEC-registered does not mean ___ covered. Many are and many aren't and federal covered also includes those exempt from ___ registration.
federal, SEC
Before the initial offer of any federal covered security in this state, the Administrator, by rule or order, may require the filing of all documents that are part of a federal registration statement filed with the U.S. Securities and Exchange Commission under the Securities Act of 1933, together with a ___ ___ ___ of process signed by the issuer. However, unless there is an appearance of fraud, the ___ does not have the power (because of lack of jurisdiction) to prevent the sale of a federal covered security in his state.
consent to service, Administrator
Even though an issuer of a federal covered security (think about a Fortune 500 company listed on the NYSE) may not have to ___ ___, that does not mean that the company can make misrepresentations during an offer made in any state. To do so would violate the antifraud provisions of the USA.
notice file
The most common form of registration for those securities that are not federal covered (typically securities traded on the OTC Bulletin Board or the OTC Link) is coordination. A security may be registered by coordination if a registration statement has been filed under the ___ ___ of 1933 in connection with the same offering.
Securities Act
In coordinating a federal registration with state registration, issuers must supply the following records in addition to the consent to service of process

- copies of the latest form of ___ filed under the Securities Act of 1933, if the Administrator requires it
- Copy of articles of incorporation and bylaws, a copy of the underwriting agreement, or a ___ copy of the certificate
- if the Administrator requests, copies of any other information filed by the issuer under the Securities Act of 1933
- each amendment to the federal prospectus promptly after it is filed with the SEC
prospectus, specimen
Registration by coordination becomes effective at the same time the ___ ___ becomes effective, provided
- no stop orders have been issued by the Administrator and no proceedings are pending against the issuer
- the registration has been on file for at least the minimum number of days specified by the Administrator, a number that currently ranges from 10 to ___ days, depending on the state
- a statement of the maximum and minimum offering prices and underwriting discounts have been on file for two business days

Registration by coordination is by far the most frequently used method and, from a practical standpoint, is the only sensible way to register a multi-state offering.
federal registration, 20
Any security can be registered by qualification. Registration by qualification requires a registrant to supply any information required by the state securities Administrator. Securities not eligible for registration by another method must be registered by qualification. In general, securities that will be sold in one state (___) will be registered by ___.
intrastate, qualification
To register by qualification, an issuer must supply a consent to service of process and the following information:
- name, address, form of organization, description of property, and nature of business
- name and address of any person owning 10% or more of the outstanding shares of any class of equity security of the issuer
- estimated proceeds and the use to which the proceeds will be put
- type and amount of securities offered, offering price, and selling and underwriting costs
- copy of any prospectus, pamphlet, circular, or sales literature to be used in the offering
- a specimen copy of the security's certificate
...
The Administrator may require additional information by rule or order. The Administrator may require that a prospectus be sent to purchasers before the sale and that newly established companies register their securities for the first time in a state by qualification.
...
As we've noted previously, to register, even by notice filing, there must be a consent to service of process filed with the Administrator. However, a person (remember the broad definition) who has filed such a consent in connection with a previous registration or notice filing need note file another. A practical effect of this is if a company decides to raise additional capital by issuing more stock, a new consent is not required.
...
Unlike ___, where the effective date is triggered by SEC acceptance of the registration, a registration by qualification becomes effective whenever the state Administrator so ____.
coordination, orders
Regardless of the method used, every registration statement is effective for one year from its effective date. Unlike the registration of securities professionals, the date ___ ___ is of no consequence. One interesting facet of the law is that the registration may continue in effect past the first anniversary if there are still some ___ ___ remaining, as long as they are still being offered at the original public offering price by either the issuer or the underwriter.
December 31, unsold shares
Although the one year effective period applies to all methods of registration, as a practical matter, it would rarely apply other than in a security registered by ___. Those registered by coordination are also obviously registered with the SEC and therefore are sold by the major investment banking houses. Unless the issue is a real dog, it will sell out rather quickly. Even those that are not ___ are usually completely subscribed to in a week or two.
qualification, popular
On the other hand, what if the issue, regardless of the method of registration, is in very high demand? Is it possible to increase the number of shares in the offering without having to file a new registration statement? Yes. A registration statement may be ___ after its effective date so as to increase the securities specified to be offered and sold if two conditions are met:
- the public offering ___ is not changed from the amount stated in the original registration statement
- the underwriters' discounts and ___ are not changed from the respective amounts stated in the original registration statement
amended, price, commissions
A ___ statement may be amended after its effective date to change the number of shares to be offered and sold if the public offering price and underwriters discounts and commissions are unchanged.
registration
Under all regulatory bodies, in order for an action to be fraudulent, it must be committed willfully and ___. There is no such thing as "accidental" fraud. Although the SEC has antifraud statutes as well, the exam will focus on those of the USA. The applicability of the antifraud provisions is almost universal. For example, here is a statement about investment advisers:
"It is unlawful for any person who receives, directly or indirectly, any consideration from another person for advising the other person as to the value of securities or their purchase or sale, whether through the issuance of analyses or reports or otherwise, 1) to employ any device, scheme, or artifice to ___ the other person, 2) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the other person"
knowingly, defraud
A USA antifraud statement for securities:
"The antifraud provisions, apply regardless of whether the security is registered, exempted, or sold in ___ of the registration requirements."
violation
What these USA antifraud statements indicate that that no securities professional and no security is exempt from the antifraud rules. But what if the person is excluded from the definition of, say, an investment adviser? Or what if the investment is excluded from the definition of a security? What then?
"There are no exemptions from fraud. For example, persons availing themselves to the de minimis exemption as investment advisers would remain subject to the antifraud provisions."
A common example of fraudulent behavior is the use of material nonpublic information (___ ___)
insider trading
A USA antifraud statement for broker-dealers:
"It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly
1) to employ any device, scheme, or artifice to defraud
2) to make any untrue statement of a material fact or to ___ to state a material fact necessary to make the statements made, in the light of the circumstances under which they are made, not misleading, or
3) to engage in any act, practice, or course of business which operates or would operate as a fraud or ___ upon any person
omit, deceit
The distinction between exemptions and exceptions (or ___) from definitions is important in view of the fact that an exempt security is not exempt from the antifraud provisions of the USA.

The typical life insurance policy or fixed ___ is not a security, and is not covered under the antifraud statuses of the USA. On the other hand, we know that securities issued by insurance companies are exempted from registration under the conditions of the Act. Even though these securities are exempt from registration and the filing of advertising and sales literature with the Administrator, they are still subject to the antifraud provisions. Therefore, one could be charged with fraudulent behavior in the sale of stock in an insurance company (or any other exempt security).

Using the same logic, a federal covered investment adviser, although not registered in any state, can be charged by the ___ ___ when there is an alleged violation of the antifraud provisions of the USA.
exclusions, annuity, state Administrator
Is there ever a time when the antifraud provisions do not apply? Yes. they do not apply to an investment that is excluded from the definition of a security. An example of this would be a rare coin dealer who falsifies the dates on coins sold to a client. That certainly is fraud, but doesn't come under the ___'s antifraud provisions because rare coins are not securities. We previously mentioned the sale of a fixed annuity - it is not a security so the antifraud provisions of the USA do not apply. Of course, the state insurance department would have something to say about any fraudulent activity with insurance products, but, if they were not a security, the USA doesn't apply.
USA
Sets found in the same folder