Series 66 Day Two State Registration of Securities

Chapter 2 State Registration of Securities

Securities

• An investment of money
• In a common enterprise
• With the expectation of profits
• Solely from the efforts of others

List of Securities

• Stock, treasury stock, right, warrant, transferable share, or certificate of deposit for a security (e.g. American Depositary Receipt)
• Note, bond, debenture, collateral trust certificate, or other evidence of indebtedness
• Interest in any profit-sharing agreement
• Rights
• Warrants
• Options on Stocks
• Options on Currencies
• Options on Futures
• Variable Life Insurance
• Variable Universal Life Insurance
• Investment Companies (Face-Amount Certificates, Unit Investment Trusts, and Management Companies)
• Packaged Real Estate Investments, such as Interests in a Condominium Pool, REITs, or Real Estate Limited Partnerships
• Participation in a Profit Sharing Plan
• Investment Contracts
• Limited Partnerships
• Whiskey Warehouse Receipts
• Multilevel Distribution Arrangements
• Merchandise Marketing Schemes
• Profit-Sharing Arrangements
• Voting or Collateral Trust Certificates
• Preorganization Certificates
• Interests in Farmland or Livestock
• Variable annuity and variable life insurance contract
• Voting trust certificate, certificate of interest in an oil, gas, or mining title or lease, preorganization certificate or subscription
• Investment contract, including interests in oil and gas drilling programs, real estate condominiums and cooperatives, farm lands or animals, whiskey warehouse receipts, multilevel distributorship arrangements, and merchandising marketing schemes
• Stock option or an option on a commodity futures contract

NOT Securities

• Fixed annuity
• Life insurance or an endowment policy
• Commodity futures contract
• Individual retirement account (IRA) or Keogh plan
• Currency
• Collectibles
• Condominiums (primary residence)
• Whole Life Policies
• Universal Life Policies
• Endowments
• Fixed Annuities
• Individual Real Estate Properties and Mortgages
• Keogh Plans
• IRAs, 401 (k) Plans, and other Retirement Plans
• Art, Antiques, and Other Collectibles

Case Study

Bruce and Ben are silent partners in an oil and gas drilling program. Gwen, the general partner who runs the program, tells Bruce and Ben that their investment will pay off if it strikes oil.

Does this arrangement between the partners and Gwen constitute an investment contract?

• Bruce and Ben made an investment in a common enterprise—the drilling program
• Bruce and Ben expect to receive profits based on the management efforts of Gwen

Ponzi scheme

• Pyramid scam
• Early investors get returns from later investors
• Leads to investors losing money

General Registration Process

• Security MUST be registered OR exempt

State Administrators WANT

• The amount of securities to be offered
• Any adverse ruling entered in connection with the offering by a state regulatory authority, a court, or the SEC
• Other states in which a registration statement WAS or WILL BE filed

Filing Fees

• Pay at initial registration AND annual renewal
• If NOT paid, Administrator MAY issue a stop order

Effective Date of Registration

• When it is released to the public
• Registration statement lasts one year
• The person who prepared the registration statement MAY need to file quarterly reports

Expiration Dates

• Registration EXPIRES one year after effective date (release to the public)

Case Study

HCI Company’s public offering of securities became effective on January 14, 2011. When will the registration expire?

• One year after effective date (release to the public)
• December 31

Types of Securities Registration

• Filing (Notification)
• Coordination
• Qualification

Registration by Filing

• AKA notification
• Big companies with STRICT requirements
• Large companies, high quality securities
• Notification IS GONE

Filing Conditions

• A registration statement MUST filed with Securities Act of 1933
• MUST be a registered issuer under the Securities Exchange Act of 1934 AND have a registered class of equity securities held by 500 or more shareholders
• MUST have a total new worth of $4,000,000 or a total net worth and net pretax income of $2,000,000 for at LEAST 2 of the last 3 years
• MUST be in business for AT LEAST 36 calendar months before registration
• MUST be four market makers for the securities registered with the 1934 Act for AT LEAST 30 days during the 3 months before filing
• Commissions or discounts that the underwriters get MAY NOT be more than 10% of the offering price
• The issuer MAY NOT have skipped paying a dividend on preferred stock OR defaulted on any bond or long-term lease since the end of the last fiscal year before the filing of the registration statement
• Offering price MUST be $5 or more per share

Filing Application

• A statement of eligibility
• The name, address, and form of organization of the issuer
• A statement that describes the offering
• A copy of the prospectus filed with the SEC

Nonissuer Distribution

• Name, address, and amount of securities held by the other person AND the reasons for making the offering

Registration by Coordination

• If Federally registered, NOT state registered
• Registration statement & 3 copies of prospectus that the SEC has
• Valid when federal registration statement is valid

Registration by Qualification

• Valid when Administrator says it is!
• Federal registration IS valid
• General data about issuer OR relevant subsidiary
• Info about directors and officers
• Info about 10% or MORE holders
• Name and address for offering of nonissuer distribution
• A description of worth and long-term debt
• Type, amount, price, likely selling fees, underwriting agreements
• Likely cash that will be received, how cash will be used
• Prospectus, letter, advertisement, and literature as marketing materials
• Balance sheet with profit and loss for 3 years

Denial, Suspension, and Revocation of Registration

• IF registration statement Is incomplete OR false OR misleading
• IF violation of USA or Administrator rules
• IF officer/underwriter IS convicted of securities crime
• IF business does illegal activities
• IF fraudulent OR unfair OR unjust OR inequitable terms
• If seller is overpaid for trade
• If the proper filing fee isn’t paid
• Administrator can suspend registration
• MUST notify registered person, CAN write for a hearing

Registration Exemptions

• NOT registered IS EXEMPT

Exempt Issuers

• United States: municipality OR agency OR state agency
• Canada: state, province OR municipality
• Foreign national governments that deal with the United States
• Banks OR savings companies OR trust companies
• Federal OR credit union OR industrial loan associations
• Insurance companies
• Railroads, common carriers, public utility holding companies regulated under Public Utility Holding Company Act of 1935
• Not for profits: religious, educational, charitable, social, athletic, trade, professional

Exempt Securities

• Promissory note, draft, bill of exchange, banker’s acceptance that matures in 9 MO or less in 50K amounts or MORE AND rated by one of the 3 Nationally Recognized Statistical Rating Organization (NRSRO)
• Any investment contract WITH employee stock purchase OR savings OR pension OR profit-sharing OR similar benefit plan IF Administrator knows 30 days before plan starts

Federal Covered Securities

• NOT registered with the state
• Exchange listed: New York Stock Exchange, Nasdaq, the American Stock Exchange, the Chicago Stock Exchange
• Qualified purchases via the Investment Company Act of 1940
• Investment Companies via the SEC 1933 Act
• Notice filing MUST happen

Exempt Transactions

• EXEMPT from registration
• Isolated, NOT frequent NON issuer transaction through broker-dealer OR NOT
• NON issuer by registered agent of a broker-dealer & issuer IN business. Securities MUST be senior to the issuer’s common stock OR outstanding at least 3 years AND issuer has not defaulted on obligations OR securities held by the public for 90 days or MORE AND price is related to security price AND securities were not part of underwriter’s batch that didn’t sell AND information about issuer is available AND issuer stock is on the exchanges
• NON issuer transaction can happen if issuer is a reporting issuer in Canada OR allowed by Administrator AND did reporting requirements for 180 days or more OR security is on Toronto Stock Exchange, TSX Venture Exchange, or designated by rule OR order of the Administrator
• NON issuer transaction complies with SEC Act of 1934
• OR is registered under the Investment Company Act of 1940
• Gave Administrator information, complies with Securities Exchange Act of 1934
• NON issuer transaction on unsolicited basis
• Transaction between issuer And underwriter
• Transaction in a bond, backed by real estate mortgage or deed of trust
• Transaction by executor, administrator, sheriff, marshal, trustee, guardian, conservator
• Transaction by bond fide pledgee, can NOT evade USA
• Sale OR offer to a bank OR savings company or trust company OR insurance company OR investment company OR pension or profit-sharing trust OR other financial OR institutional buyer OR to a broker dealer
• Transaction to 10 or less noninstitutional retail investors FOR investment purposes only and seller does not receive commissions AND Form D is filed
• If no commission AND Administrator does NOT turn down in 5 days
• Registration is filed AND NO stop order

Case Study

Acme Inc. is planning to expand its business and is need of additional capital. Acme’s financial advisers recommend they offer shares of the company to the public. Would the securities Acme offers need to be registered? What role will Acme play in the offering?

• Acme IS required to register before offering securities to the public

Coolidge Corporation is offering its stock only in California. The company’s stock will be listed on the NASDAQ. What method of state registration would Coolidge use?

• Coolidge IS listed on NASDAQ
• No state registration

State Registration of Securities Test

• 1) Which of the following choices are considered securities according to the Uniform Securities Act? Fixed annuities, Life insurance (term, whole, OR universal) or endowment policies
• 2) Which of the following factors MUST be present in order for an investment contract to be considered a security? Invests money in a common enterprise and expects profits
• 3) Under the USA, which method of securities registration would be used if the issuer is only planning to offer the securities in one state? Qualification
• 4) In order to register securities by filing, an issuer MUST meet all of the following conditions, EXCEPT Pay a dividend on its common stock every quarter
• 5) In order to use registration by coordination, an issuer MUST file a Registration statement with the SEC
• 6) Which of the following becomes effective when the Administrator so declares? Registration by Qualification
• 7) Interstate issue of stock by a newly formed company coordination
• An intrastate issue of stock by a well-established corporation qualification
• An intrastate issue of stock by a newly formed company qualification
• An issue of securities also being registered with the SEC under the Securities Act of 1933 coordination
• An issue of securities of an established company that meets certain financial conditions Filing
• The type of registration that requires specific response from the Administrator prior to issue Qualification
• 8)Under the Uniform Securities Act, an Administrator may deny the registration of a security for all of the following reasons, EXCEPT: She feels the SEC was in error in registering the security
• 9) Corporate bonds trading over the counter Nonexempt
• Securities issued by the national government of Japan Exempt
• Securities issued by the city of Albany, New York Exempt
• Securities issued by the city of Montreal, Quebec Exempt
• Securities issued by an insurance company Exempt
• Microsoft common stock Exempt
• A bond issued by the Reading Railroad Exempt
• 19(The sale of securities to a mutual fund Exempt
• The sale of securities by the executor of an estate Exempt
• The sale of stock through a public offering Nonexempt
• The execution of an unsolicited order Exempt
• The offer of unregistered securities to a maximum of 10 noninstitutional investors in a 12-month period Exempt
• A private placement where a commission is charged to retail investors Nonexempt