4 elements of a security
- An investment of money
- In a common enterprise
- Expectation of profit
- Solely from the efforts of others
Common items that ARE NOT securities:
- Insurance endowments
- IRAs
- Forward/futures contracts
- Commodities
- Currencies
- Collectibles
- Condos (as primary residence or business)
True or false: Options on commodities are securities?
True
Whiskey warehouse receipts
A share in a quantity of whiskey being aged for future
sale—perhaps 10 or 12 years before bottling. If investors did not want to wait for the product to be sold before cashing out, they might sell their warehouse receipts to other investors. Under state law, the
transfer of a whiskey warehouse receipt is equivalent to the delivery of the property it represents and, therefore, it constitutes a security.
True or false: Condos can be a type of security?
True, for example, condos that are part of a REIT are part of a security.
Ponzi scheme
A pyramid scam where returns received by earlier investors are derived from the capital contributed by subsequent investors. Eventually, this scheme bottoms out when the flood of new investors dries up and there isn’t enough money to go around.
Viatical investments/life settlements
A type of security that is the purchase of the rights to the death benefits from individual life insurance policies. Typically, a policyholder who is ill or in need of cash will sells the right to the death benefit from his life insurance policy to a viatical company. The company then resells these interests to investors. An investor may purchase a whole interest in an individual death benefit or a fractional interest. Investors may also purchase interests in pools of viatical settlements that have been put together by the company. The securities must be registered in the states they’re sold and the agents and BDs who sell them must also be registered by the state.
Suitable investors for viaticals
Since death is unpredictable, the rate of return that the investor will receive is hard to predict, and thus this type of investment is not suitable for every investor. This security is illiquid. According to NASAA, viaticals are suitable for:
- Investors w/ a minimum net worth of $150M and an annual income of more than $100M, or a minimum net worth of $250M. The net worth calculations cannot include the investor’s home. No more than 10% of the investor’s net worth should be invested in viaticals.
- Accredited investors. Recall, accredited investors are generally financial institutions and individuals w/ an annual income of at least $200M, or a minimum net worth of $1MM.
General requirements of registering a security w/ states
Registrants must provide:
- The amount of securities to be offered in the state
- Any adverse ruling entered in connection w/ the offering by a state regulatory authority
- Other states in which a registration statement has or will be filled
True or false: Each state’s administrator will want the registrant to disclose the # of shares being offered in each state?
False, just the names of the other states
Filing fees
Issuers are required to pay these fees at both the time of initial registration and at annual renewal. If either of these are not paid, the administrator may issue a stop order to suspend the sale of the security. Fee amounts vary state to state.
Effective date
The date where the regulator releases the security for public distribution. The effective date is determined by the Administrator. Once securities are outstanding, registration statements may not be withdrawn for one year after its effective date, unless the Administrator deems otherwise. The Adminstrator may also require quartlery reports by the same person who filed the registration statmement.
Amendments to a registration statement
Issuers may amend registration statements after the effective data to increase the # of shares sold. As long as the POP, underwriter’s discount (spread), and commission schedule are not change, a new registration statement is not required. Amendments may also be required for incorrect or incomplete statements.
Expiration dates
A security’s registration expires one year after its effective date. To continue to offer/sell the security, it must either be re-registered (rare) or sold through an exemption (common).
Three methods that state securities can be registered:
- Notification/filing
- Coordination
- Qualification
Notification/filing
This method is used by large, well-established firms that issue large securities that trade on a national exchange and have previously registered securities w/ the SEC under Act of ‘33. Not all states allow this method. This method IS NOT common.
Conditions for notification/filing:
- A registration statement must’ve been filed under Securities Act of 1933.
- The issuer is organized under U.S. laws or American territories. Or, if not, the issuer has appointed an authorized agent in the U.S. for Service of Process.
- The issuer has registered w the SEC a class of equity securities that are held by >= 500 persons.
- The issuer has a total net worth of at least $4MM OR a total net worth of $2MM and net pre-tax income for at least two of the previous three years.
- The issuer has no less that 400,000 are secondary traded securities that are held by the public, excluding those held by key personnel.
- Outstanding warrants & options held by the underwriters and key personnel in an amount <= 10% of total shares outstanding.
- The issuer has been in business for at least 3 years preceding registration.
- For the issuer’s securities registered pursuant to the ’34 Act, there must have been at least four market makers for a period of at least 30 days during the three months preceding filing.
- The aggregate commissions or discounts received by underwriters CANNOT exceed 10% of the aggregate offering price.
- The issuer or any sub. cannot have failed to pay a preferred dividend or defaulted on any bond or long-term lease since the end of the last fiscal year before it filed the registration statement.
- If registering an equity security, it must be >= $5 per share
What info must the application for registration by filing contain?
- Statement of eligibility
- The issuer’s name, address, and form of business
- A statement describing the offering
- A copy of the prospectus that has been filed w/ the SEC
- The name, address, and amt of securities held by the non-issuer*only applicable if the offering is for the benefit of someone other than the issuer.
True or false: The required documentation must be filed three days prior to the effective date and the filing fee must paid in order for the security to be registered?
False, five days in advance
Registration by coordination
Common for firms doing an IPO. Allowed if the same offering is being registered under the Securities Act of 1933. The two DO NOT need to be filed at the same time. Under this method, a registration statement must be filed w/ the state, along w/ 3 copies of the latest prospectus. The Administrator may also request a copy of the articles of incorporation, any underwriting agreement or indenture related to the security, or other
information or documents the Administrator deems appropriate. Any amendments to the federal prospectus must also be forwarded to the Administrator promptly.
The registration statement must be on file for at least 10 days w/ the Administrator before the security becomes effective. Furthermore, a statement of the minimum and maximum offering
prices, maximum underwriting discounts, and commissions must have been on file with the Administrator for at least two business days. If the federal registration becomes effective prior to the
satisfaction of all the requirements of previous paragraph, the state registration will become effective once the requirements have been met, unless otherwise waived by the Administrator.
Registration by qualification
Typically done by small companies that only want to register their securities in one state. This method is used when either a security’s federal registration has already become effective OR when no federal registration is filed. This method is more stringent than the other methods.
Disclosures required under registration by qualification:
- Info about the issuer and any significant sub.
- Info on all officers or directors of the issuer, including names, addresses, occupations within the last 5 years, and the amts of securities they’re holding within 30 days of filing the registration statement.
- Info on any person(s) who owns 10% or more of any class of the issuer’s stock
- For any non-issuer distributions, the name & address of the person, the amt of securities owned, and a reason for making the offering.
- A description of the issuer’s capitalization and long-term debt
- The type and amt of securities to be offered, the price of securities, estimated selling fees and underwriting agreements.
- Estimated cash proceeds to be received and the what they’ll be used for
- A copy of every prospectus and form of advertisement to be user in connection w/ the offering and a legal opinion if it’s a debt offering.
- A recent IS and b/s for each of the last three years
- Any additional info required by the Administrator.
True or false: Intrastate offerings are exempt from FEDERAL registration?
True
True or false: One of the unique characteristics of registration by qualification is that the registration becomes effective
only when determined by the Administrator?
True
