Chapter recap

Ch 4-6 Exam Essentials — Regulation of Securities and Issuers

Definition (USA §401(m)). Broad enumerated list including stocks, bonds, notes, debentures, investment contracts, transferable shares, voting-trust certificates, oil & gas interests, and similar instruments. Non-exhaustive — substance over label.

Howey test for investment contracts. Four prongs: (1) investment of money, (2) common enterprise, (3) expectation of profits, (4) derived from the efforts of others. All four met → security.

NOT securities. Fixed annuities, fixed insurance, commodity futures, physical commodities held directly, bank CDs/savings accounts/demand deposits, direct real estate ownership. Variable annuities ARE securities (contract holder bears investment risk).

Exempt securities (USA §402(a)). U.S./Canadian/foreign government, municipal, bank (NOT bank holding company), insurance company (NOT variable products), federally-regulated public utility, railroad, nonprofit, commercial paper (9 months max, $50K+ denominations, top-3 NRSRO rated), ERISA plan securities.

Exempt transactions (USA §402(b)). Isolated non-issuer; publicly-quoted secondary market with 3+ market makers; institutional investor sales; private placement (10 max non-institutional offerees / 12 months, no general solicitation, no commissions to non-institutional); pre-organization (10 max subscribers, no payment, no commission); existing security-holder; unsolicited customer orders; fiduciary; manual exemption.

Federal covered securities (USA §401(c2) / NSMIA). Exchange-listed (NYSE/Nasdaq), registered investment companies, qualified-purchaser sales, Rule 506 placements. State: notice filing + fees + anti-fraud authority. State CANNOT require substantive registration.

Antifraud applies to ALL. No security, transaction, or person is ever exempt from antifraud provisions. The exemptions only relieve the duty to register.

Notice filing (USA §307). For federal covered securities. Issuer name + SEC documents reference + consent to service + filing fee. No substantive state review.

Coordination (USA §303). For securities also registered with SEC under 1933 Act. SEC documents + offering details + amendments. State effectiveness coincides with federal effectiveness automatically.

Qualification (USA §304). For non-federal-covered, non-SEC-registered securities. Full issuer disclosure + financials + legal opinion + use of proceeds. Effective at administrator's discretion. Surety bond / escrow possible.

1-year effective period. Once effective, registration remains in force for 1 year unless renewed or stopped.

Stop orders (USA §306). Material misrepresentation, violation of USA or order, statutory disqualification, unsound business or finances, unreasonable underwriter compensation. Notice + hearing required (except summary with prompt follow-up). Judicial review under §411.

Securities-and-issuers exam traps — consolidated

1. "A fixed annuity is a security." Wrong. Fixed annuity = insurance product. Variable annuity = security.
2. "An orange grove with a service contract isn't a security because it's real estate." Wrong. The Howey case held this exact structure is an investment contract — investment of money + common enterprise + profit expectation + efforts of others.
3. "Bank holding company stock is exempt as a bank security." Wrong. The exemption covers the bank itself, not the holding company. Bank holding company stock is registrable.
4. "Variable annuities are exempt because they're insurance company products." Wrong. Variable products are explicitly NOT covered by the insurance-company-securities exemption because the contract holder bears investment risk.
5. "A private placement to 11 non-institutional offerees in a state is exempt." Wrong. The limit is 10 in any 12-month period. The 11th offeree defeats the exemption.
6. "Institutional investors count against the 10-offeree limit." Wrong. Institutional investors fall under a separate exemption and don't count toward the 10-offeree cap.
7. "An exempt security is exempt from antifraud." Wrong — antifraud applies to everything. The exemption is from registration only.
8. "A federal covered security needs state coordination registration." Wrong. Federal covered securities go through notice filing under §307, not coordination. NSMIA preempts substantive state review.
9. "Rule 504 placements are federal covered securities." Wrong. Only Rule 506 placements are federal covered under NSMIA. Rule 504 placements require state-level registration or exemption.
10. "Coordination registration takes effect when the issuer files with the state." Wrong. State effectiveness is timed to SEC effectiveness — not the filing date.
11. "Registration by qualification takes effect automatically after 30 days." Wrong. Qualification becomes effective only when the administrator affirmatively declares it so — no automatic timing.
12. "A stop order can be issued without any hearing." Wrong. Notice and opportunity for hearing are required, except for summary postponements with prompt follow-up hearings.
13. "An exempt transaction means future transactions in the same security are also exempt." Wrong. The transaction exemption applies only to the specific transaction at issue. Future transactions stand on their own merits.