Registering Securities

Question 1

What is required on a registration form

Answer 1

A balance sheet dated within 90 days of the filing of the registration statement.
Profit and loss statements for the last 3 years.
The company’s capitalization.
The use of proceeds.
Shareholders owning more than 10% of the company’s securities. Biographical information on the officers and directors.

Question 2

What is in the preliminary prospectus

Answer 2

During the cooling-off period, the only thing that a registered representative may do is obtain indications of interest from clients by providing them with a preliminary prospectus, which is also known as a red herring. The term red herring originated from the fact that all preliminary prospectuses must have a statement printed in red ink on the front cover stating: “These securities have not yet become registered with the SEC and therefore may not be sold.” An indication of interest is an investor’s or broker dealer’s statement that it might be interested in purchasing the securities being offered.

The preliminary prospectus will usually contain a price range for the security to be offered. All information contained in a preliminary prospectus is subject to change or revision. The preliminary prospectus must be given in hard copy to expected purchasers at least 48 hours before the sale is confirmed if the company has not been a reporting company under the Securities Exchange Act of 1934. This is done to ensure that the final prospectus is not the first piece of information forwarded to the purchaser.

Question 3

What is in the final prospectus

Answer 3

Type and description of the securities 
Price of the security 
Use of the proceeds 
Underwriter's discount 
Date of offering 
Type and description of underwriting 
Business history of issuer 
Biographical data for company officers and directors 
Information regarding large stockholders 
Company financial data 
Risks to purchaser
Legal matters concerning the company 
SEC disclaimer

Question 4

When are aftermarket buyers due a prospectus

Answer 4

For IPOs: 90 days after being issued for nonreporting companies with securities to be quoted on the OTCBB or in the pink sheets; 25 days for companies to be listed or Nasdaq securities.
Additional offerings: 40 days for securities quoted on the OTCBB or in the pink sheets. No aftermarket requirement for listed or Nasdaq securities.

Question 5

What is in the SEC DISCLAIMER

Answer 5

The SEC reviews the issuer’s registration statement and the prospectus, but does not guarantee the accuracy or adequacy of the information. The SEC disclaimer must appear on the cover of all prospectuses and states: “These securities have not been approved or disapproved by the SEC nor have any representations been made about the accuracy of the adequacy of the information.”

Question 6

Who can buyers go after for misrepresentations in the Prospectus

Answer 6

Purchasers of the security may be entitled to seek financial relief from any or all of the following:
The issuer
The underwriters Officers and directors
All parties who signed the registration statement
Accountants and attorneys who helped prepare the registration statement

Question 7

What is a tombstone ad

Answer 7

Tombstone ads are the only form of advertising that is allowed during the cooling-off period. A tombstone ad is an announcement and description of the securities to be offered. A tombstone ad lists the names of the underwriters, where a prospectus may be obtained, and a statement that the tombstone ad does not constitute an offer to sell the securities and that the offer may only be made by a prospectus. Tombstone ads are traditionally run to announce the new issue, but they are not required and do not need to be filed with the SEC. Tombstone ads may also include: The amount of the security to be offered and The date of sale and A general description of the issuer’s business and The price of the security

Question 8

Free Riding and Withholding/ FINRA Rule 5130

Answer 8

A broker dealer underwriting a new issue must make a complete and bona fide offering of all securities being issued to the public and may not withhold any of the securities for:
The account of underwriters.
The account of another broker dealer.
The account of a firm employee or the account of those who are financially dependent on the employee.
The account of employees of other FINRA members.

Question 9

What is an exception to FINRA 5130

Answer 9

An exception to FINRA Rule 5130 applies to employees of limited broker dealers who engage solely in the purchase and sale of investment company products or direct participation programs (DPPs). Employees of limited broker dealers may purchase new issues. This exemption applies only to the employees of the limited broker dealer, not to the firm itself.

Question 10

Who at the brokerage can buy hot issues

Answer 10

Officers and employees of financial institutions. Nonsupported family members. Accountants, attorneys, and finders associated with the underwriting. Accounts where restricted persons, whose interest is limited to 10% or less or where a maximum of 10% of the allocation of new issue is for the benefit of such persons. This is known as the carve out procedure.

Question 11

Role of underwriter and issuer in corporate securities

Answer 11

The underwriter will:
Market the issue to investors.
Assist in the determination of the terms of the offering.
Purchase the securities directly from the issuer to resell to investors.
The issuer is responsible for:
Filing a registration statement with the SEC.
Registering the securities in the states in which it will be sold, also known as blue-skying the issue.
Negotiating the underwriter’s compensation and obligations to the issuer.

Question 12

What are the types of underwriting commitments

Answer 12

Firm commitment In a firm commitment underwriting, the underwriter guarantees to purchase all of the securities being offered for sale by the issuer regardless of whether it can sell them to investors. A firm commitment underwriting agreement is the most desirable for the issuer because it guarantees the issuer all of the money right away.

An underwriter offering securities for an issuer on a firm commitment basis is assuming a substantial amount of risk. As a result, the underwriter will insist on having a market-out clause in the underwriting agreement. A market-out clause would free the underwriter from its obligation to purchase all of the securities in the event of a development that impairs the quality of the securities or that adversely affects the issuer.
Best efforts In a best efforts underwriting, the underwriter will do its best to sell all of the securities that are being offered by the issuer, but in no way is the underwriter obligated to purchase the securities for its own account. The lower the demand for an issue, the greater likelihood that it will be done on a best efforts basis. Any shares or bonds in a best efforts underwriting that have not been sold will be returned to the issuer.

Mini-maxi A mini-maxi is a type of best efforts underwriting that does not become effective until a minimum amount of the securities have been sold. Once the minimum has been met, the underwriter may then sell the securities up to the maximum amount specified under the terms of the offering. All funds collected from investors will be held in escrow until the underwriting is completed. If the minimum amount of securities specified by the offering cannot be reached, the offering will be canceled and the investors’ funds that were collected will be returned to them.

All or none With an all-or-none underwriting, the issuer has determined that it must receive the proceeds from the sale of all of the securities. Investors’ funds are held in escrow until all of the securities are sold. If all of the securities are sold, the proceeds will be released to the
Standby

Question 13

What is Underwriters Compensation

Answer 13

The largest percentage of the underwriter’s compensation will come in the form of the underwriter’s discount. Other items received by the syndicate will also be considered compensation, such as: Reimbursement of costs usually not borne by the issuer.
Options, rights, or warrants.
Shares of the issuer.
Finders’ fees reimbursed by the issuer.

Question 14

What securities are exempted from the filing of the underwriting agreement with the Corporate Finance Department:

Answer 14

U.S. government securities 
Municipal securities 
Redeemable investment company shares 
Variable contracts 
Private placements

Question 15

Which securities are exempt from the registration provisions of the Securities Act of 1933

Answer 15

Examples of exempt securities are:
Debt securities with maturities of less than 270 days and sold in denominations of $ 50,000 or more.
Employee benefit plans.
Option contracts, both puts and calls on stocks and indexes.

Examples of exempt issuers are:
U.S. government State and municipal governments
Foreign national governments
Canadian federal and municipal governments
Insurance companies Banks and trusts
Credit unions and savings and loans
Religious and charitable organizations

Question 16

What are exempt transactions

Answer 16

Private placements/ 
Regulation D offerings 
Rule 144 Regulation S offerings 
Regulation A offerings 
Rule 145 
Rule 147 intrastate offerings

Question 17

What is a purchasers representative

Answer 17

A purchaser’s representative is an individual designated in writing by the prospective purchaser to represent the buyer when evaluating the suitability of a private placement.

Question 18

What are the limit’s of a purchaser’s representative

Answer 18

Receive a blanket appointment to represent the investor for all private placements.
Own more than 10% of the issuer’s stock.
Be an officer, director, employee, or affiliate of the issuer, unless he or she is a close relative of the prospective purchaser.

Question 19

What is rule 144

Answer 19

Rule 144 regulates how control or restricted securities may be sold. Rule 144 designates: The holding period for the security. The amount of the security that may be sold. Filing procedures. Method of sale.

Question 20

What are control securities

Answer 20

Control securities are owned by officers, directors, and owners of 10% or more of the company’s outstanding stock. Control stock may be obtained by insiders through open-market purchases or though the exercise of company stock options. There is no holding period for control securities. However, insiders are not allowed to earn a short swing profit through the purchase and sale of control stock in the open market. If the securities were held for less than 6 months, the insider must return any profit to the company

Question 21

What are restricted securities

Answer 21

Restricted securities may be purchased by both insiders and investors through a private placement or be obtained through an offering other than a public sale. Securities obtained through a private placement or other nonpublic means need to be sold under Rule 144 in order to allow the transfer of ownership. Restricted stock must be held fully paid for for 6 months. After 6 months, the securities may be sold freely by noninsiders so long as the seller has not been affiliated with the issuer in the last 3 months.

Question 22

What are the volume limits under Rule 144

Answer 22

Securities may be sold under Rule 144 four times per year. The seller must file Form 144 at the time the order is entered, and the order is limited to the greater of: The average weekly trading volume for the preceding 4 weeks. Or 1% of the issuer’s total outstanding stock.

Question 23

What is Rule 144A

Answer 23

Rule 144A permits the resale of restricted stock to qualified institutional buyers (QIBs). A QIB is defined as a company that owns investments worth at least $ 100 million and includes: Corporations Partnerships Insurance companies Investment companies Banks Trust funds Pension plans Registered investment advisers Small business development companies

Question 24

What is a QIB

Answer 24

The purchaser’s most recent, publicly available financial statements
The purchaser’s most recent publicly available information appearing in documents filed an SRO
The most recent publicly available information appearing in a recognized securities manual or filed with a foreign regulator
A certification by the purchaser’s chief financial officer or other executive

Question 25

What transactions are not eligible under QIB

Answer 25

``` Securities of registered investment companies Securities of the same class as those listed on an exchange or Nasdaq Certain warrants and convertible securities ```

Question 26

Private Investment in a Public Equity (PIPE)

Answer 26

Public companies that wish to obtain additional financing without selling securities to the general public may sell securities to a group of accredited investors through a private placement. The accredited investors in most cases will be institutional investors who wish to invest a large amount of capital. Common stock, convertible or nonconvertible debt, rights, and warrants may all be sold to the investors through a PIPE transaction.

Question 27

Benefits of PIPE

Answer 27

Reduced transaction cost Term disclosure only upon completion of the transaction Increased institutional ownership Quick closing

Question 28

What are Regulation S Offering

Answer 28

Domestic issuers who make a distribution of securities exclusively to offshore investors do not have to file a registration statement for the securities under the Securities Act of 1933. In order to qualify for exemption offered under Regulation S, the issuer cannot make offerings of the securities within the United States and cannot announce or distribute literature relating to the securities within the United States. Securities distributed under Regulation S are subject to a distribution compliance period during which the securities may not be resold to domestic investors. The distribution compliance period is 6 months for equities if the issuer is a reporting company and files 10-Qs, 10-Ks, and 8-Ks, and 1 year for nonreporting companies. The distribution compliance period is 40 days for debt.

Question 29

What are Regulation A offerings

Answer 29

A Regulation A offering allows the issuer to raise up to $ 5 million in any 12-month period. Of the $ 5 million, no more than $ 1.5 million may be offered or sold by selling shareholders. This exemption from full registration allows smaller companies access to the capital markets without having to go through the expense of filing a full registration statement with the SEC. The issuer will instead file an abbreviated notice of sale or offering circular known as a 1-A with the SEC, and purchasers of the issue will be given a copy of the offering circular rather than a final prospectus. Purchasers of the issue must have the preliminary or final offering circular mailed to them 48 hours before mailing the confirmation.

Question 30

What is Rule 145

Answer 30

Rule 145 requires that shareholders approve any merger or reorganization of the company's ownership. Any merger or acquisition will be reported to the SEC on Form S-4. Stockholders must be given full disclosure of the proposed transaction or reclassification and must be sent proxies to vote on the proposal. Rule 145 covers: Mergers involving a stock swap or offer of another company's securities in exchange for its current stock. Reclassification involving the exchange of one class of the company's securities for another. Asset transfers involving the dissolution of the company or the distribution or sale of a major portion of the company's assets. Rule 145 does not cover: Stock splits. Reverse splits. Changes in par value.

Question 31

What is Rule 147

Answer 31

Rule 147 pertains to offerings of securities that are limited to one state. Because the offering is being made only in one state, it is exempt from registration with the SEC and is subject to the jurisdiction of the state securities administrator. In order to qualify for an exemption from SEC registration, the issue must meet the following criteria: The issuer must have its headquarters in that state. 80% of the issuer's income must be received in that state. 80% of the offering's proceeds must be used in that state. 80% of the issuer's assets must be located in that state. 100% of purchasers must be located in that state. Purchasers must agree not to resell the securities to an out-of-state resident for 9 months. If the issuer is using an underwriter, the broker dealer must have an office in that state.

Question 32

What is Rule 137

Answer 32

Firms that are not participating in a distribution of securities may issue recommendations, information, or opinions relating to the securities that are in registration, if the issuer is a reporting company, as required by the Securities and Exchange Act of 1934. So long as the broker dealer did not receive compensation from the issuer, a selling shareholder, or a participant in the distribution for issuing the report, it will not constitute an offer of the securities.

Question 33

What is Rule 138

Answer 33

If a registration statement has been filed for a nonconvertible bond or a nonconvertible preferred stock, a broker dealer who is a participant in a distribution of the securities may in the normal course of business issue recommendations, information, or opinions relating to the issuer's common stock or convertible securities. If the registration statement covers common stock or a convertible security of the issuer, a broker dealer may only issue recommendations, information, or opinions relating to the issuer's nonconvertible debt or preferred stock.

Question 34

What is Rule 139

Answer 34

A broker dealer who is participating in a distribution may continue to issue research reports relating to the issuer if the issuer is a large reporting company under the Securities and Exchange of 1934 and: The company is followed by analysts. The information, opinion, or recommendation appears in a regularly published report. Information, opinions, or recommendations that are at least as favorable as the current report must have been contained in the previous report.

Question 35

Rule 139 Part 2

Answer 35

If the broker dealer is not currently covering the company, the report is not considered to be issued with sufficient regularity. Any projections relating to the company's earnings may not extend past the current fiscal year. Broker dealers may issue reports for smaller issuers if the report contains information relating to a substantial number of issuers in the same industry as the issuer, or a list of securities currently recommended by the broker dealer, so long as the information relating to the registrant is not displayed more prominently than other information in the same report. If the conditions for continuing to publish research reports are not met, the quiet period for managers and co-managers begins at the time when the issuer files the registration statement and continues until the expiration of the prospectus delivery requirement, 40 days for IPOs and 10 days for additional offerings. If the company is classified as an emerging growth company with annual review of less than $ 1 billion, reports may be distributed anytime after the IPO. One additional exception to the quiet period occurs in the event of a material development at the company. Should a material change take place, such as the approval of a new drug, research reports may be published and analyst appearances may take place with the approval of the firm's legal or compliance department.

Question 36

What is SEC Rule 405

Answer 36

SEC Rule 405 defines certain classes of issuers who may be entitled to use a streamlined registration process depending on how the issuer is classified. Well-known seasoned issuers and seasoned issuers may take advantage of automatically effective shelf registration of securities by filing Form S-3 or F-3. The registration of the securities covered under the filing of Form S-3 or F-3 is effective immediately upon filing.

Question 37

What is a WSKI

Answer 37

A well-known seasoned issuer is an issuer that within 60 days of its eligibility determination has at least $ 700 million worth of voting and nonvoting common equity held by nonaffiliates or has issued within the last 3 years at least $ 1 billion in nonconvert-ible securities for cash (excluding common equity). A WKSI also includes a company that is a majority-owned subsidiary of a WKSI. If during the course of an offering the WKSI sees the value of its securities fall below the required levels to be considered a WKSI, the issuer may continue to sell the securities until it files its next 10-K.

Question 38

What is a seasoned issuer

Answer 38

A seasoned issuer is an issuer that has a public float of $ 75 million meets the requirements of Form S-3 to register a primary offering of securities.

Question 39

What is an unseasoned reporting issuer

Answer 39

An unseasoned reporting issuer is an issuer that is required to report under the Exchange Act but that does not qualify with the requirements of Form S-3 or F-3 to file a primary offering of securities.

Question 40

What is an ineligible issuer

Answer 40

An ineligible issuer is a reporting issuer that is not current with the filing of reports required under the Securities Exchange Act. Ineligible issuers also include: g Companies who have filed for bankruptcy within the last 3 years Blank check companies Shell companies Issuers of penny stock Issuers that are limited partnerships that don't have a firm commitment underwriting agreement to sell securities Issuers that have been subject to a stop order or have been convicted of a felony or misdemeanor under the Exchange Act directly or indirectly through a subsidiary within the last 3 years

Question 41

What are additional communication rules

Answer 41

An issuer who is a reporting company may continue to release regular business communications with forward-looking statements prior to the effective date of an additional offering of securities. A forward-looking statement is one that contains information about what may possibly happen in the future, such as projected sales or new products. If the securities being offered are the subject of an IPO for a nonreporting issuer, only standard factual business communications may be released by the company. Standard factual information contains information relating to products or services and is not intended to be used by potential investors to make an investment decision.

Question 42

What is a road show

Answer 42

Road shows are designed to help the company communicate the details of the offering to broker dealers and representatives. Road shows have been traditionally held at large hotels in financial centers across the country. More and more these road shows are being conducted over the internet via webinars and are known as electronic road shows. These road shows may be broad-cast live and recorded for playback and may be available on demand. If the recorded road show is for an IPO of equity securities, the recorded road show must be filed with the SEC unless at least one version is made available to the public in addition to the financial community. Recorded road shows for additional issues do not have to be filed with the SEC.

Question 43

What is crowdfunding

Answer 43

Crowdfunding has become a popular way for issuers to raise capital from small investors. Issuers may offer securities to investors for purchase through a broker dealer or through a registered crowdfunding portal. The portal must be registered with the SEC and must also be a FINRA member firm. Issuers who raise capital through crowdfunding may not engage directly in crowdfunding as a way to sell shares to investors. Issuers who sell shares through crowdfunding must register. the securities with the SEC by filing form C. Because most of the securities are speculative in nature, broker dealers and crowdfunding portals must offer educational material to investors who are considering purchasing securities offered through crowdfunding. The material must detail the risks involved in making investments in companies through the crowdfunding process as well as the fact that the securities have a limited amount of liquidity. Investors who purchase shares through crowdfunding may not sell the shares for 12 months. Shares however may be transferred earlier to a relative or to a trust controlled by the investor or as a result of death or divorce. Early transfer will also be allowed if the purchaser is an accredited investor or if the securities are part of an SEC registered offering. Investors who purchase shares are limited to the amount of securities they may purchase through the crowdfunding process in any 12 month period. Investors who have annual income or a net worth of less than $ 100,000 are limited to purchasing the greater of $ 2,000 worth of securities or 5% of their annual income or net worth. If the investor uses the 5% calculation to determine their purchase limit the amount the person may purchase will be the lesser of the two amounts. Investors who have an annual income or a net worth greater than $ 100,000 may invest the lesser of 10% of their annual income or net worth up to a maximum of $ 100,000.