NASAA Series 63 — All Questions

An issuer offers new shares to its existing shareholders and pays a standby commission to an underwriter who agrees to purchase any shares the holders do not take. No other commission is paid for solicitation. What is the status of the transaction?

• a.It is exempt only for sales to the shareholders who are officers or directors of the issuer
• b.It is exempt, since a standby commission is permitted when the offer is made to existing security holders✓
• c.It is not exempt, since any commission paid in connection with the offer defeats the exemption
• d.It is exempt only if the shareholders each purchase at least 90 percent of their pro rata share

An offer to existing security holders is exempt if no commission or remuneration other than a standby commission is paid for soliciting, or if the issuer files a notice and the administrator does not disallow the exemption within five full business days. A standby commission is permitted, so the existence of that commission does not defeat the exemption. The exemption has no minimum take-up and is not limited to insiders.Uniform Securities Act (1956) §402(b)(11)

A shareholder in the state sells 100 shares of a small private company's stock to a neighbor in a single sale, not through a broker-dealer, and expects no further sales. The transaction is:

• a.Not exempt, since sales by shareholders of an unregistered private company must always be registered
• b.Not exempt, since the exemption applies only when a registered broker-dealer effects the sale
• c.Exempt as an isolated non-issuer transaction, whether or not it is made through a broker-dealer✓
• d.Exempt only if the neighbor is an accredited investor and signs an investment letter

Any isolated non-issuer transaction is exempt whether or not it is effected through a broker-dealer. A shareholder who is not the issuer is not selling for the issuer's benefit. Requiring a broker-dealer or accredited-investor status adds conditions the Act does not contain. A private company's shareholder is not barred from a single resale.Uniform Securities Act (1956) §402(b)(1)

A court-appointed bankruptcy trustee sells shares of a debtor's portfolio company to a buyer in the state. The sale is:

• a.An exempt transaction, since transactions by trustees in bankruptcy, executors, and guardians are exempted✓
• b.Not exempt, since a fiduciary acting under court order must always register the securities first
• c.Exempt only if the trustee files a notice with the administrator within thirty days after the sale
• d.Exempt only if the buyer is a registered broker-dealer buying for its own account as principal

Transactions by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator are exempt from the registration requirement. No registration, no broker-dealer buyer, and no notice filing are required for the exemption.Uniform Securities Act (1956) §402(b)(6)

Under federal law, which of these offerings could a state administrator NOT make the issuer register?

• a.A security sold only to residents of the issuer's state under the intrastate offering exemption
• b.A security listed on the New York Stock Exchange or another national securities exchange✓
• c.A security sold under Rule 504 of Regulation D in an offering of $400,000 to 25 investors
• d.A security of a company that has a federal registration statement pending but not yet effective

Under the National Securities Markets Improvement Act, securities listed on national exchanges, along with securities of the same issuer that are senior or equal, are covered, as are securities of registered investment companies and securities sold under SEC rules such as Rule 506. Rule 504 offerings and the intrastate exemption are not covered, so the states may still register them. A pending, ineffective federal registration statement does not make a security covered.NSMIA, 15 U.S.C. §77r(b); Uniform Securities Act (1956) §307

An issuer sells securities under Rule 506 in a state. The administrator requires a notice filing. What may the state require, and by when?

• a.A registration statement by coordination, filed before the first offer in the state
• b.A merit review of the offering and an annual report, whatever the date of the first sale
• c.A copy of the Form D and a fee, no later than 30 days before the first offer in the state
• d.A copy of Form D and a fee, due no later than 15 days after the first sale in the state✓

A Rule 506 security is a federal covered security, so the state may not register it, but the administrator may require a notice filing consisting of a copy of the Form D and a fee, no later than 15 days after the first sale in the state. A state registration, a pre-offer filing 30 days earlier, and a merit review all go beyond what is permitted for covered securities.Uniform Securities Act (1956) §307(b); 17 CFR 230.503

Which statement about Rule 506(b) and Rule 506(c) is correct?

• a.Under 506(b) general solicitation is permitted and unlimited non-accredited purchasers may buy
• b.Under 506(c) general solicitation is permitted and up to 35 non-accredited purchasers may buy
• c.Under 506(c) general solicitation is permitted but every purchaser must be accredited and verified✓
• d.Under 506(b) every purchaser must be accredited and the issuer must verify each one's status

Rule 506(b) bars general solicitation but allows up to 35 non-accredited purchasers in any 90-day period, who must be sophisticated alone or with a purchaser representative. Rule 506(c) allows general solicitation but all purchasers must be accredited and the issuer must take reasonable steps to verify. Each wrong option swaps features of the two paragraphs.17 CFR 230.506(b),(c)

An individual has a home worth $900,000 with a $400,000 mortgage, other assets of $700,000, and other liabilities of $100,000. Does the person meet the net worth test for an accredited investor, and why?

• a.Yes, since the mortgage is ignored but the home is counted, giving net worth of $1,500,000
• b.Yes, since the full value of the home counts, giving net worth of $1,100,000 against a $1,000,000 test
• c.No, since the test excludes the home and counts the mortgage as a liability, giving a net worth of $200,000
• d.No, since net worth excluding the primary residence is $600,000 and the test requires more than $1,000,000✓

The net worth test excludes the value of the primary residence and, as to its mortgage, excludes debt secured by it up to the home's fair market value. Here the assets other than the home are $700,000, less other liabilities of $100,000, giving $600,000, which falls short of the required more than $1,000,000. Counting the home, with or without the mortgage, produces $1,100,000 or $1,500,000, which the test does not allow, and $200,000 subtracts the mortgage even though debt secured by the home is excluded.17 CFR 230.501(a)

After a security becomes a federal covered security, what authority do the states retain over its offer and sale?

• a.They retain antifraud authority and may require notice filings and fees, but not registration✓
• b.They keep full registration authority, but must apply the same standards as the SEC
• c.They keep only the power to require registration of its agents, with no antifraud or notice powers
• d.They lose all authority over the security, including the power to investigate or take action for fraud

Preemption under NSMIA bars states from registering covered securities but leaves their authority to investigate and bring enforcement actions for fraud or deceit, and to require notice filings and fees. The states do not retain registration authority, do not lose antifraud authority, and are not limited to agent registration.NSMIA, 15 U.S.C. §77r(c); Uniform Securities Act (1956) §§307, 101

An issuer's securities are exempt under §402(a). May the administrator require it to file its sales and advertising literature under §403?

• a.No, because §403 reaches only securities and transactions that are neither exempt under §402 nor federally covered✓
• b.No, but only if the advertising reaches fewer than ten persons in the state in any twelve months
• c.Yes, because advertising is regulated separately from registration and exempt issuers must file all of it
• d.Yes, but only advertising that makes a statement about the issuer's earnings, dividends, or prospects

Section 403 lets the administrator require filing of sales and advertising literature, but not for a security or transaction that is exempt under §402 or a federal covered security. The ten-person figure comes from the limited offering exemption and plays no role in §403, and the limitation to earnings statements is not in the section.Uniform Securities Act (1956) §403

An agent tells a customer, "This stock is registered with the state, so the securities administrator has looked it over and endorsed it." The statement is:

• a.Unlawful only if the agent receives a commission on the sale of the stock to this customer
• b.Lawful if the agent adds that investors should read the whole prospectus before they buy
• c.Lawful, since registration means the administrator reviewed the offering and found it fair to buyers
• d.Unlawful, since the fact of registration does not mean the administrator approved the security✓

Neither the fact that a security is registered or exempt nor the fact that a filing was made means that the administrator has passed on its merits, and a contrary representation is unlawful. A prospectus reminder does not cure a misleading statement, and the violation does not depend on whether the agent is paid a commission.Uniform Securities Act (1956) §405

A registration statement by qualification must include which item relating to advertising?

• a.Copies of the prospectus, circulars, and advertisements intended for use in the offering✓
• b.Only the final printed prospectus, since advertisements are reviewed only when a complaint arises
• c.A certification from the underwriter that the advertising was cleared by the SEC in advance
• d.A schedule of the newspapers and broadcast stations in which the advertising will run each quarter

A registration statement by qualification must include a copy of any prospectus, pamphlet, circular, form letter, advertisement, or other sales literature intended for use in connection with the offering as of the effective date. The other options describe items that the section does not call for.Uniform Securities Act (1956) §304(b)(12)

No registration statement has been filed in this state for a new, non-exempt bond issue. A registered agent telephones a client and describes the bonds, but takes no order. How should the call be classified under the Act?

• a.A lawful offer, provided no order is taken and no payment is received before the registration becomes effective
• b.A lawful solicitation of interest, because the registration requirement reaches completed sales and a call is not a sale
• c.An unlawful offer, because offers are barred as well as sales until the security is registered, exempt or federal covered✓
• d.An unlawful offer only if the client later buys, because the violation arises at the time the sale is made

Section 301 makes it unlawful to offer or sell a non-exempt, unregistered security, so the call itself is a violation when no registration is on file. Whether an order is taken is irrelevant, and the violation does not wait for a later purchase. A narrow exception allows offers (not sales) only once registration statements are on file under both the federal and state acts.Uniform Securities Act (1956, as amended by NASAA) §301

Registration statements for an issue have been filed under both the Securities Act of 1933 and this state's act, but neither is yet effective. No stop order or proceeding is pending. What may a broker-dealer do in this state?

• a.Make offers to prospective customers, but no sales, until both registrations become effective✓
• b.Make offers and sales, provided the customer receives the preliminary prospectus before committing
• c.Make neither offers nor sales until both the federal and state registration statements are effective
• d.Accept orders from customers, provided delivery and payment are deferred until after the effective date

When filings are on file under both acts and no stop order or public proceeding is pending, offers (but not sales) are exempt during the waiting period. Taking an order creates a contract of sale even if settlement is later, and a preliminary prospectus does not authorize sales. The Act does not forbid all offers while the registrations are pending.Uniform Securities Act (1956, as amended by NASAA) §402(b)(12)

An issuer has filed a federal registration statement and has actively conducted business operations in the United States for 30 consecutive calendar months. Can its offering be registered in this state by filing?

• a.No, because registration by filing requires at least 36 consecutive calendar months of active U.S. operations before the federal filing✓
• b.No, because registration by filing is limited to issuers that have been public for at least 60 consecutive calendar months
• c.Yes, because 24 consecutive months of operations are enough when a class of the issuer's equity is registered under the Exchange Act
• d.Yes, because the operating-history requirement applies only to issuers organized under the laws of a foreign country

The issuer must have actively engaged in U.S. business for at least 36 consecutive calendar months before the federal filing, so 30 months falls short. The requirement is not relaxed by Exchange Act registration, applies to domestic and foreign issuers alike, and is 36 months, not 60.Uniform Securities Act (1956, as amended by NASAA) §302(a)(1)(B)

A qualifying issuer plans to offer its common stock to the public at $4.50 per share and meets every other condition for registration by filing. What is the result?

• a.The stock can be registered by filing, because the minimum price is $2 per share for an issuer with a $4,000,000 net worth
• b.The stock cannot be registered by filing, because an equity security's public offering price may not be below $5 per share✓
• c.The stock can be registered by filing, because the price test applies only to issuers that have no class listed on an exchange
• d.The stock can be registered by filing, provided the underwriters agree to take down the shares for their own principal account

For an equity security, registration by filing requires an offering price of at least $5 per share, so $4.50 fails even though the other conditions are met. The price floor does not depend on exchange listing or net worth, and a firm-commitment underwriting is a separate condition that does not cure it.Uniform Securities Act (1956, as amended by NASAA) §302(a)(1)(J)

Over the three months before an offering, a class of Exchange Act-registered equity had at least four market makers on each of 20 days, and fewer on the remaining days. Does it satisfy the market-maker condition for registration by filing?

• a.No, because at least four market makers must have existed for a period of at least 30 days in the three months before the offering✓
• b.No, because registration by filing requires at least 10 market makers for at least 30 days during the six months before the offering
• c.Yes, because the condition is met whenever at least two market makers have made a market in the class during the prior year
• d.Yes, because four market makers on each of 20 days exceeds the minimum of 15 trading days that the condition requires

The condition is at least 4 market makers for a period of at least 30 days during the 3 months preceding the offering. Twenty days is short of that, and the other figures (15 days, two market makers over a year, 10 makers over six months) are not the rule.Uniform Securities Act (1956, as amended by NASAA) §302(a)(1)(F)

An offering to the public is priced at an aggregate $40 million. The underwriters' combined commissions and discounts will total $4.4 million. Assuming every other condition is met, what follows for registration by filing?

• a.It is unavailable, because $4.4 million exceeds the 10% cap, which here would be $4 million✓
• b.It is available, because the cap is measured on the issuer's net proceeds, not the public price
• c.It is unavailable, because registration by filing permits no underwriter compensation at all on the offering
• d.It is available, because the cap is 12% of the aggregate public offering price, or $4.8 million here

Underwriters' aggregate commissions and discounts may not exceed 10% of the aggregate public offering price. Ten percent of $40 million is $4 million, so $4.4 million (11%) exceeds it. The cap is not 12%, is not measured on net proceeds, and does not bar underwriter compensation entirely.Uniform Securities Act (1956, as amended by NASAA) §302(a)(1)(H)

An issuer's only class of Exchange Act-registered equity is held of record by 420 persons. All other conditions for registration by filing are satisfied. Why can the offering not be registered by filing?

• a.Registration by filing requires the registered class to be held of record by at least 1,000 persons
• b.Registration by filing requires 300 or more record holders plus 400,000 units held by the public
• c.Registration by filing requires the registered class to be held of record by 500 or more persons✓
• d.Registration by filing requires at least 750 record holders, 100 of whom must be institutions

Registration by filing requires an Exchange Act-registered class held of record by 500 or more persons, so 420 is too few. The 400,000-unit public float is a separate condition, and there is no 1,000-holder or institutional-holder test.Uniform Securities Act (1956, as amended by NASAA) §302(a)(1)(C)

An open-end investment company wants to register additional shares by filing. What must be true about its earlier registration experience?

• a.It must have qualified its securities under §303 or §304 (or this paragraph) within the preceding 24 months✓
• b.It must have had a stop order lifted within the previous 24 months, showing that it regained compliance
• c.It must have been registered with the SEC for at least 12 months and had a prior fiscal year with net income
• d.It must have registered under §304 at least once during the previous 36 months and paid a late registration fee

An open-end company or unit investment trust may register by filing if, within the preceding 24 months, it previously qualified its securities under §303, §304 or this paragraph, and it complies with the material terms of those registrations. The 36-month figure belongs to ordinary issuers, and neither net income nor a lifted stop order is part of the test.Uniform Securities Act (1956, as amended by NASAA) §302(a)(2)

An issuer files a registration statement by coordination with the Administrator on April 1, and its federal registration statement becomes effective on April 8. The price information has been on file for more than two business days. Does the state registration become effective with the federal one?

• a.Yes, because the state statement becomes effective with the federal one regardless of how long it has been on file
• b.Yes, because only the price statement, and not the registration statement itself, must be on file for any minimum time
• c.No, because the statement must have been on file at least ten days, and only seven have passed✓
• d.No, because a registration statement must be on file thirty days before it can become effective with the federal one

Automatic effectiveness by coordination requires, among other things, that the registration statement have been on file at least ten days; April 1 to April 8 is only seven. If the federal statement becomes effective first, the state one becomes effective as soon as all conditions are satisfied. Thirty days applies to registrations of broker-dealers, not coordination.Uniform Securities Act (1956, as amended by NASAA) §303(c)

An issuer registering by coordination has had its registration statement on file for three weeks. The maximum and minimum proposed offering prices and the maximum underwriting discounts were filed with the Administrator yesterday. The federal registration becomes effective today. What is the state status?

• a.Not yet effective, since the price statement must have been on file for ten days before the federal registration becomes effective
• b.Effective today, since a registration statement that has been on file for ten days or more becomes effective with the federal statement
• c.Not yet effective, since the price statement must have been on file two full business days unless the Administrator shortens that period✓
• d.Effective today, since the price statement is required only when the Administrator specifically asks the registrant for it

A registration by coordination becomes effective automatically only if, among other conditions, the statement of maximum and minimum offering prices and maximum discounts has been on file two full business days (or a shorter period the Administrator allows). One day is not enough, but the requirement is two business days, not ten days.Uniform Securities Act (1956, as amended by NASAA) §303(c)(3)

A registrant using coordination must give the Administrator an undertaking about future federal prospectus amendments. What must the undertaking promise?

• a.To forward them promptly, and no later than the first business day after they are sent to or filed with the SEC✓
• b.To forward them in a quarterly package together with the issuer's periodic progress-of-offering report
• c.To forward only the amendments that delay the effective date, within five business days of their filing
• d.To forward each amendment to the Administrator within ten days after the SEC declares that amendment effective

The undertaking covers all future amendments to the federal prospectus other than an amendment that merely delays the effective date, and requires forwarding them promptly and no later than the first business day after they are sent to the SEC. Delay amendments are excluded rather than required, and a ten-day or quarterly schedule is not the rule.Uniform Securities Act (1956, as amended by NASAA) §303(b)(4)

A registrant using coordination fails to notify the Administrator of the price amendment and does not file the post-effective amendment. The Administrator promptly notifies it by telephone. What action may the Administrator take?

• a.Enter a stop order without notice or hearing, void if the registrant later proves compliance✓
• b.Cancel the registration permanently, without any means for the registrant to show compliance later
• c.Fine the registrant for each day of delay but leave the registration in effect until it is given a hearing
• d.Enter a stop order only after 15 days' notice and a hearing, because stop orders always require a prior hearing

For failure to give the price-amendment notice and file the post-effective amendment, the Administrator may enter a stop order without notice or hearing, provided he promptly notifies the registrant. It is void as of entry if the registrant proves compliance. The usual notice-and-hearing rule governs other stop orders, and nothing in the section provides daily fines or a permanent bar.Uniform Securities Act (1956, as amended by NASAA) §303(c)

An issuer is filing a registration statement by qualification on September 30. Which balance sheet satisfies the Act's timing requirement?

• a.One dated June 15, which is within four months before the filing date✓
• b.One dated December 31 of last year, since only annual balance sheets are required
• c.One dated March 31, which falls within the six months preceding the filing
• d.One dated February 28, because a fiscal year-end balance sheet always suffices

The balance sheet must be dated within four months before the filing date. For a September 30 filing, a balance sheet dated no earlier than May 30 qualifies, so June 15 does. The other dates are more than four months old, and the statute does not accept a year-end or six-month statement.Uniform Securities Act (1956, as amended by NASAA) §304(b)(16)

An issuer registering by qualification has been in business for 11 years. For how many fiscal years preceding the balance sheet date must it supply profit and loss statements and an analysis of surplus?

• a.Five fiscal years, to match the five-year disclosure required for officers and directors
• b.Ten fiscal years, since the issuer has more than a decade of operating history behind it
• c.Three fiscal years, plus any stub period between the last year-end and the balance sheet date✓
• d.Two fiscal years, because an audit is required only for the two most recent years

Section 304 requires profit and loss statements and analysis of surplus for each of the three fiscal years before the balance sheet date, plus any later interim period (or the issuer's whole life if shorter than three years). The five-year figure applies to director and officer occupations, not financial statements.Uniform Securities Act (1956, as amended by NASAA) §304(b)(16)

When does a registration statement filed by qualification become effective?

• a.Automatically on the thirtieth day after filing, if no stop order or proceeding is pending
• b.After it has been on file ten days and the price statement two full business days
• c.At the moment the issuer's federal registration statement becomes effective with the SEC
• d.Only when the Administrator enters an order declaring it effective after review✓

Qualification is the full-review route: the registration becomes effective only on the Administrator's order. The automatic 30-day period belongs to broker-dealer and agent registration, effectiveness with the federal statement belongs to coordination, and the ten-day and two-business-day periods are coordination conditions.Uniform Securities Act (1956, as amended by NASAA) §304(c)

A registration statement became effective on March 1 for an offering that was completed by May. Absent other facts, how long is the statement effective?

• a.One year from its effective date, or longer while a non-exempt distribution continues✓
• b.Until the federal registration statement is withdrawn, with no fixed state time limit
• c.Two years from its effective date, whether or not the distribution has ended yet
• d.Ninety days from its effective date, after which a new registration is required

Every registration statement is effective for one year from its effective date, or longer while the security is still being distributed in a non-exempt transaction. Ninety days is the seasoning period in the manual exemption, and two years is the look-back in the open-end fund rule. Nothing ties the state registration's life to the federal statement.Uniform Securities Act (1956, as amended by NASAA) §305(i)

Six months after its registration statement became effective, an issuer asks to withdraw it, though securities of the same class are outstanding. What does the Act provide?

• a.It may be withdrawn at any time on written request, since the issuer controls its own filing with the Administrator
• b.It may be withdrawn after 30 days from the effective date, if the Administrator is given prior written notice
• c.It may be withdrawn once the 90th day after the effective date has passed and all fees are paid
• d.It may not be withdrawn for one year from the effective date if securities of that class are outstanding✓

A registration statement may not be withdrawn for one year from its effective date if any securities of the same class are outstanding. Afterward it can be withdrawn only in the Administrator's discretion. Neither the issuer's wishes nor a 30-day or 90-day waiting period changes that.Uniform Securities Act (1956, as amended by NASAA) §305(i)

While a registration statement is effective, the Administrator wants periodic updates on the progress of the offering. What is the most frequent reporting the Act allows him to require?

• a.Reports required no more often than annually, until the offering has ended
• b.Reports required no more often than quarterly, to keep the registration current✓
• c.Reports required whenever the Administrator requests them in writing, with no stated limit
• d.Reports required no more often than monthly, with an annual audited summary

The Administrator may by rule or order require the registrant to file reports, but not more often than quarterly, to keep the registration current and show the offering's progress. A monthly schedule would be more frequent than permitted, while annual reporting and unlimited requests are not what the section says.Uniform Securities Act (1956, as amended by NASAA) §305(j)

As a condition of registration by qualification, the Administrator may require escrow of securities. Which securities may be placed in escrow?

• a.Securities issued to any officer or director within the past 12 months, regardless of the consideration paid
• b.All securities of the same class that were sold to members of the public within the previous five years
• c.Securities sold to institutional buyers in a private placement during the past ten years, regardless of price
• d.Securities issued to a promoter within three years for consideration substantially different from the public price✓

The Administrator may require escrow of securities issued within the past three years (or to be issued) to a promoter for consideration substantially different from the public offering price, or to anyone for non-cash consideration. Public purchasers' shares and shares sold to institutions are not subject to the escrow power.Uniform Securities Act (1956, as amended by NASAA) §305(g)

After a registration statement is effective, the issuer sells additional registered securities at the same price and discounts without first amending. By what deadline must it file the amendment and pay the late fee and filing fee for the amendment to relate back to the date of that sale?

• a.Within ninety days of the sale's closing date
• b.Within six months after the date of the sale✓
• c.Within one year after the sale occurred, in full
• d.Within thirty days following the date of that sale

An amendment increasing the amount of securities registered relates back to the sale date if it is filed, and the additional filing fee and late registration fee are paid, within six months of that sale. Thirty days, ninety days and one year are not the statutory period.Uniform Securities Act (1956, as amended by NASAA) §305(k)

The Administrator wants to issue a final stop order revoking a registration. The issuer has not been told of any concern. May the Administrator proceed?

• a.No, a stop order may be entered only after prior notice, an opportunity for a hearing, and written findings✓
• b.Yes, because a stop order may be issued on a finding of public interest alone, with the hearing offered afterward
• c.Yes, provided the Administrator notifies the SEC and the issuer's state of domicile within ten days afterward
• d.No, because only a court may enter an order revoking the effectiveness of a registration statement, not the Administrator

A stop order, other than the summary postponement or suspension allowed by the first sentence of §306(b), may be entered only after prior notice, an opportunity for hearing, and written findings of fact and conclusions of law. Revocation is an administrative power, and post-hoc notice is not enough.Uniform Securities Act (1956, as amended by NASAA) §306(c)

The Administrator summarily suspends a registration on March 1. The issuer receives notice on March 3 and mails a written hearing request the same day, received by the Administrator on March 5. By what date must the matter be set down for hearing?

• a.March 20, which is fifteen days after the written request was received✓
• b.March 12, which is seven days after the written request was received
• c.March 31, which is thirty days after the order was entered and notice was sent
• d.March 18, which is fifteen days after the Administrator entered the order

The notice of a summary order must say that, within fifteen days after receipt of a written request, the matter will be set down for hearing. Receipt on March 5 plus fifteen days gives March 20. The clock runs from the request, not from entry of the order, and the period is fifteen days, not seven or thirty.Uniform Securities Act (1956, as amended by NASAA) §306(b)

A registration statement became effective on a date when the Administrator already knew of a particular misstatement in it. By when must he institute a stop order proceeding based on that known fact?

• a.Within thirty days after the registration statement became effective✓
• b.Within ninety days after the date on which the registration became effective
• c.Within one year after the registration statement became effective
• d.At any time while the registration statement remains in effect

The Administrator may not institute a stop order proceeding against an effective registration on the basis of a fact or transaction known to him when it became effective unless he does so within the next thirty days. The one-year period applies to proceedings based on another jurisdiction's order. It is not open-ended.Uniform Securities Act (1956, as amended by NASAA) §306(a)

A registrant fails to pay the proper filing fee for a registration statement. What stop order action is available to the Administrator on that ground alone?

• a.A denial order together with a civil penalty for each day the fee is unpaid
• b.Only a denial order, to be vacated once the deficiency is corrected✓
• c.A suspension order lasting up to one year, whether or not the fee is paid
• d.A revocation order that cannot be vacated once it is entered

When the ground is failure to pay the proper filing fee, the Administrator may enter only a denial order and must vacate it when the deficiency is corrected. A permanent revocation or fixed-term suspension would go beyond what the section allows, and it provides no daily penalty.Uniform Securities Act (1956, as amended by NASAA) §306(a)(2)(I)

The Administrator finds that an offering would pay unreasonable amounts of underwriters' discounts and promoters' profits. Is this a ground for a stop order?

• a.Yes, unreasonable compensation, promoters' profits or options is an enumerated ground, if in the public interest✓
• b.No, the Act regulates disclosure only, so the Administrator cannot review the fairness of an offering's terms
• c.Yes, but only if the underwriters' compensation exceeds 10% of the aggregate public offering price
• d.No, unreasonable compensation can be addressed only by an injunction that the Administrator obtains from a court

Section 306(a)(2)(F) lists unreasonable underwriters' and sellers' discounts, commissions or other compensation, promoters' profits or participation, or unreasonable options as a stop-order ground, if the order is in the public interest. There is no fixed 10% trigger; that figure is a registration-by-filing condition. Administrative stop orders do not need a court.Uniform Securities Act (1956, as amended by NASAA) §306(a)(2)(F)

An effective registration statement covers a security that became the subject of another state's stop order eleven months ago. Within what time limit may the Administrator institute a proceeding against the registration based on that order?

• a.Within thirty days of the other state's order, so he has already lost the right to act
• b.Within one year from the date of the other order, so he has about one month remaining✓
• c.Within three years of the other state's order, so he has about two years remaining
• d.Within one year after its own effective date, whatever the date of the other order

A proceeding against an effective registration based on another stop order or injunction may not be instituted more than one year from the date of that order, so eleven months leaves about one month. The thirty-day limit applies to facts known when the statement became effective, and the one-year clock runs from the other order, not from effectiveness.Uniform Securities Act (1956, as amended by NASAA) §306(a)(2)(C)

A Rule 506 offering is a covered security. The issuer makes its first sale in this state on March 3. The Administrator requires the SEC Form D notice filing. By what date must it be made?

• a.March 18, fifteen days after the first sale in the state✓
• b.March 10, seven days after the first sale of the security in the state
• c.March 2, the day before the first sale takes place in the state
• d.April 2, thirty days after the first sale of the security in the state

For a Rule 506 covered security, the Administrator may require a Form D notice, with a consent to service of process, no later than fifteen days after the first sale in the state. March 3 plus fifteen days is March 18. It is a post-sale notice filing, not a pre-sale registration, and the period is neither seven nor thirty days.Uniform Securities Act (1956, as amended by NASAA) §307(b)

A corporation issues a promissory note maturing in 8 months, in a $100,000 denomination, rated in the second-highest category by a nationally recognized rating organization. Is the note exempt from registration?

• a.No, because only a note rated in the very highest category qualifies for the commercial paper exemption
• b.Yes, but only if the note is sold solely to institutional buyers in units of at least $250,000
• c.No, because exempt commercial paper must mature within 90 days of issuance, which this note does not do
• d.Yes, since it matures within 9 months, is at least $50,000 in denomination, and has a top-three rating✓

The exemption covers notes and similar paper payable within 9 months of issuance, in denominations of at least $50,000, rated in one of the 3 highest categories. This note meets all three tests. The 90-day figure and a top-rating-only rule are not in the Act, and it does not limit sales to institutions.Uniform Securities Act (1956, as amended by NASAA) §402(a)(10)

A company adopts a new employee stock purchase plan and wants to rely on the exemption for investment contracts issued in connection with employee benefit plans. What must it do?

• a.Register the plan's securities by qualification at least ten days before it begins
• b.Notify the Administrator in writing within thirty days after the plan has begun
• c.Notify the Administrator in writing thirty days before the plan begins✓
• d.Nothing, because the exemption for employee plans carries no notice requirement

Employee plan investment contracts are exempt if the Administrator is notified in writing thirty days before the inception of the plan. A registration filing is not needed, and notice after the plan starts would be late, though the Act allows 60 days for plans already in effect when the Act took effect.Uniform Securities Act (1956, as amended by NASAA) §402(a)(11)

During one twelve-month period an issuer directs offers to nine individuals and to three banks in the state, with no commissions paid. The sellers reasonably believe the individuals are buying for investment. Does the limited-offering exemption apply?

• a.Yes, because the number of offerees is unlimited whenever no commission is paid to anyone for soliciting
• b.Yes, since only the nine individuals count; institutional buyers are excluded from the ten-person limit✓
• c.No, because all twelve offerees count toward the ten-person limit, so the limit has been exceeded
• d.No, because the exemption requires a notice filing with the Administrator before any offer is made

The exemption permits offers to not more than ten persons in the state in twelve consecutive months, not counting the institutional buyers listed in the separate institutional exemption. Nine individuals qualify, assuming investment intent and no soliciting commissions. The unlimited-offerees and pre-filing theories are wrong.Uniform Securities Act (1956, as amended by NASAA) §402(b)(9)

May the Administrator revoke the exemption for securities issued by the United States government?

• a.Yes, the Administrator may revoke any exemption in §402 by order after notice and a hearing
• b.No, only certain listed exemptions may be revoked, and government securities are not among them✓
• c.No, because every exemption in the Act is permanent and cannot be reviewed by the Administrator
• d.Yes, but only by a summary order, and only if the order is also reported to the SEC

Section 402(c) lets the Administrator deny or revoke only the exemptions it lists, which include the exchange-listed, nonprofit and employee-plan securities and the transaction exemptions, but not government securities. Revocation otherwise needs notice, hearing and findings, and the idea that every exemption is permanent is mistaken.Uniform Securities Act (1956, as amended by NASAA) §402(c)

A broker-dealer sells unregistered securities and claims the transaction was exempt. In the administrator's proceeding, who bears the burden of proving the exemption?

• a.The Administrator, who must prove that no exemption applies before taking any action
• b.Neither side, since exemptions are presumed to apply once the seller has raised them
• c.The broker-dealer, because the person claiming an exemption must prove it applies✓
• d.The customer who bought the securities, who must show that the exemption failed

In any proceeding under the Act the burden of proving an exemption or an exception from a definition is on the person claiming it. The regulator need not disprove every possible exemption, and the customer has no burden. A bare claim does not create a presumption.Uniform Securities Act (1956, as amended by NASAA) §402(d)

An agent sells U.S. Treasury notes, an exempt security, and lies to a customer about the notes' maturity date to close the sale. How does the Act treat the lie?

• a.It is not a violation, because exempt securities fall outside every provision of the Act, including §101
• b.It is a violation only if the customer proves reliance on the statement and out-of-pocket damages
• c.It violates §101, because an exemption from registration is not an exemption from the antifraud provision✓
• d.It is not a violation, because §101 applies only to securities sold in unregistered offerings

The exemptions in §402 excuse a security or transaction from registration, not from the antifraud rule in §101, which applies to any offer or sale. The Act does not require proof of reliance for regulatory action, and §101 is not limited to unregistered offerings.Uniform Securities Act (1956, as amended by NASAA) §101; §402

A promoter sells one-acre vineyard parcels for $30,000 each, with a service agreement under which the promoter plants, tends, harvests and markets the grapes and pays each owner a share of pooled net proceeds. Which feature most directly satisfies the 'efforts of others' element of the Howey test?

• a.Net proceeds from all parcels are pooled and divided in proportion to acreage owned
• b.The promoter does all planting, harvesting and marketing; owners do no work✓
• c.Each buyer pays $30,000 in cash and receives a deeded one-acre parcel
• d.The promoter's brochure forecasts yearly returns of 8% to 10% for each owner

Howey asks whether a person invests money in a common enterprise expecting profits from the efforts of the promoter or a third party. The owners' reliance on the promoter to farm and sell the crop is the efforts-of-others element. The cash payment is the investment of money, the pooling supports a common enterprise, and the forecast shows an expectation of profits.SEC v. W.J. Howey Co., 328 U.S. 293 (1946)

A company sells vending-machine units to retail buyers and operates the units itself, promising each buyer a fixed 12% annual payment. A salesperson says the units cannot be securities because the payout is fixed rather than variable. How does the Howey test treat the fixed return?

• a.Only resale appreciation in the value of the units counts as profits
• b.Profits exist only if the payout varies with the operator's earnings
• c.A fixed payment is still profits, so the units may be securities✓
• d.A fixed payment is loan interest, so the profits element is missing

In SEC v. Edwards the Supreme Court held that the profits Howey refers to are the return investors seek on their money, which can include fixed payments, so a fixed rate does not take a scheme outside the investment-contract definition. Limiting profits to variable payouts or to resale appreciation is the narrower reading the Court rejected, and a promised fixed return is not automatically a loan.SEC v. Edwards, 540 U.S. 389 (2004)

A resident pays for shares in a nonprofit housing cooperative solely to obtain an apartment to live in; the shares cannot be sold at a gain. Applying Howey as the Supreme Court did in Forman, are the shares securities?

• a.No, because buyers take the shares to live in the apartment, not for profit✓
• b.Yes, because the interest is labeled stock in the cooperative housing corporation
• c.Yes, because residents share building costs, which makes a common enterprise
• d.No, because investment contracts are limited to sales of land and crops

In Forman the Court looked to economic reality rather than labels and held that shares bought to obtain a place to live, not for profit, are not securities. Calling the interest stock does not decide the question, and shared costs among residents do not supply an expectation of profit. Investment contracts are not limited to land sales; Howey itself involved citrus groves, and many schemes outside real estate qualify.United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975)

Before any registration statement has been filed, an issuer's CFO tells dinner guests in conversation that the company will soon sell two million shares at about $12 and invites them to call to be put down for some. What is the result?

• a.A Section 5(c) violation, because no offer may be made before the filing✓
• b.A Section 5(b)(1) violation, because the talk is a prospectus that fails Section 10
• c.No violation, because oral offers are allowed at every stage before effectiveness
• d.A Section 5(a) violation, because the CFO has already sold the shares

Section 5(c) prohibits any offer to sell or buy, in writing or orally, before a registration statement is filed. Oral offers become permissible only once the filing is made, in the waiting period. No sale occurred, so Section 5(a) is not the provision breached, and Section 5(b)(1) concerns written prospectuses, which a spoken pitch is not.Securities Act of 1933 Section 5(c)

A registration statement has been filed but the SEC has not declared it effective. Which action by a selling-group rep is permitted?

• a.Handing a prospect the preliminary prospectus and talking through the offering orally✓
• b.Collecting a customer's full payment and holding it until the effective date
• c.Accepting a customer's order now and confirming it once the statement takes effect
• d.Mailing a letter of projected returns that is not a Section 10 prospectus

In the waiting period oral offers are allowed, and written offers must come through a Section 10 prospectus, such as the preliminary prospectus, or a compliant free writing prospectus. Selling or confirming a sale before effectiveness violates Section 5(a), and accepting payment would be part of an unlawful sale. A projection letter outside those forms is an impermissible written offer under Section 5(b)(1).Securities Act of 1933 Section 5(a) and Section 5(b)(1)

A broker-dealer will recommend units in a Regulation D private placement to accredited clients. The PPM includes audited financials, but the issuer refuses to hand over customer contracts and bank records, saying its counsel's due diligence memo is enough. What should the firm do?

• a.Proceed on the audited financials, since audited numbers end the need for checks
• b.Proceed because every purchaser is an accredited investor who can judge the risks alone
• c.Treat the refusal as a possible red flag and decide whether other sources suffice✓
• d.Rely on counsel's due diligence memo rather than making the firm's own inquiry

Notice 10-22 says a broker-dealer must follow up on red flags and may not rely on the issuer or its counsel in place of its own reasonable investigation. An issuer's refusal to supply needed information can itself be a red flag, and audited statements do not excuse follow-up when red flags exist. The buyers' sophistication or accredited status does not relieve the firm of its duty to investigate.FINRA Regulatory Notice 10-22