CSLB General Building (B) — All Questions

An issuer is conducting an interstate public offering and has filed a registration statement with the SEC under the Securities Act of 1933. To register the same offering in a state, the issuer would most appropriately use:

• a.Registration by qualification
• b.Registration by coordination✓
• c.Registration by notification
• d.No state registration, because a federal filing always preempts state law

Registration by coordination is designed for offerings registered federally under the Securities Act of 1933; the state filing rides alongside the federal one and becomes effective at the same moment as the federal registration, provided the state's timing and pricing conditions are satisfied. Qualification is the fallback for offerings with no federal filing. Notification is a streamlined route reserved for established issuers. Federal preemption applies only to federal covered securities, which is a separate concept from simply having filed with the SEC.Uniform Securities Act

Which statement about registration by qualification is correct?

• a.It is available to any issuer, requires the most detailed disclosure, and becomes effective when the Administrator so orders✓
• b.It is available only to issuers listed on a national exchange
• c.It becomes effective automatically two business days after filing
• d.It may be used only when a federal registration statement has also been filed

Qualification is the most demanding method, requiring extensive information about the issuer, its officers, its capitalization, and the use of proceeds, and effectiveness comes only when the Administrator orders it. It is the universal method, available to any issuer, and is typical for purely intrastate offerings with no federal filing. Automatic effectiveness on a short clock describes notification, not qualification.Uniform Securities Act

Registration by notification, sometimes called registration by filing, is generally available to:

• a.Any issuer regardless of operating history
• b.Only issuers making their very first public offering
• c.Only issuers of exempt securities
• d.Established issuers that meet stated requirements such as a minimum operating history and no default on senior securities✓

Notification is the abbreviated method reserved for seasoned issuers that satisfy conditions on operating history, earnings, and the absence of defaults on debt or preferred dividends. A first-time issuer with no track record cannot use it and would turn to coordination or qualification. Exempt securities need no registration at all, so the method would be irrelevant to them.Uniform Securities Act

A mutual fund registered under the Investment Company Act of 1940 offers shares to residents of State G. With respect to State G, the fund's shares are:

• a.Required to be registered by coordination in the state
• b.Required to be registered by qualification in the state
• c.A federal covered security, so the state may require only a notice filing, fees, and a consent to service of process, while retaining antifraud authority✓
• d.Completely outside the state Administrator's reach for any purpose

Investment company shares registered under the Investment Company Act of 1940 are federal covered securities, and federal law bars states from requiring their registration. States may still require notice filings, collect fees, and demand a consent to service of process. Antifraud jurisdiction is never preempted, so the last choice overstates the preemption.Uniform Securities Act

A privately held manufacturer sells its unregistered notes to eight insurance companies and two banks. No general advertising is used. This offering is best described as:

• a.A sale of exempt securities, because institutional buyers were involved
• b.An exempt transaction, because sales to institutional investors are exempted from the registration requirement✓
• c.Both an exempt security and an exempt transaction
• d.Neither exempt nor permissible without state registration

This is the classic exempt-security versus exempt-transaction trap. The notes themselves are ordinary corporate securities with no special status, so nothing about the instrument is exempt; what is exempt is the manner of sale, namely a transaction with institutional buyers. Change the buyers to retail investors and the very same notes would require registration, which is exactly what distinguishes a transactional exemption from a security-level one.Uniform Securities Act

Which statement about United States Treasury bonds under the Uniform Securities Act is correct?

• a.They are exempt only when sold to institutional investors
• b.They are exempt securities, so the exemption follows the instrument in every transaction✓
• c.They are exempt transactions rather than exempt securities
• d.They must be registered by coordination in each state

Federal government obligations are listed as exempt securities, meaning the exemption attaches to the instrument itself and holds regardless of who buys or how the sale is arranged. An exempt transaction, by contrast, depends entirely on the circumstances of the particular sale. Because the security is exempt, no method of state registration is needed.Uniform Securities Act

An individual investor sells 200 shares of an unregistered local company directly to her neighbor in a one-time private arrangement, with no broker involved and no pattern of similar sales. This is best characterized as:

• a.An isolated non-issuer transaction, which is an exempt transaction✓
• b.A sale of an exempt security
• c.A public offering requiring registration by qualification
• d.A prohibited transaction under the act

An isolated non-issuer transaction, meaning a one-off resale by someone other than the issuer, is one of the enumerated exempt transactions. The shares themselves are ordinary corporate stock and are not exempt securities, so the exemption is transactional only. The antifraud provisions still apply, so the seller may not misrepresent the company even in an exempt transaction.Uniform Securities Act

A customer telephones her broker-dealer and asks to buy shares of a specific company that is not registered in the state. The firm made no recommendation and no solicitation. The trade is:

• a.Prohibited, because the security is not registered in the state
• b.Permitted only if the customer is an institution
• c.Permitted only after the firm registers the security by qualification
• d.Permitted as an unsolicited non-issuer transaction, an exempt transaction the firm may be required to document with a signed customer acknowledgment✓

Unsolicited non-issuer transactions are exempt transactions, which is why an unregistered security may still be purchased when the order originates entirely with the customer. Administrators frequently require the firm to obtain a written customer acknowledgment that the order was unsolicited so the exemption can be verified later. The exemption is not limited to institutions, and no registration of the security is needed.Uniform Securities Act

Under the private placement exemption in the Uniform Securities Act, an issuer may make offers to no more than a limited number of non-institutional persons in any twelve-month period. Which additional condition applies?

• a.The buyers must all be residents of the same state
• b.The issuer must file a registration statement by notification
• c.The buyers must purchase for investment rather than for resale, and no commission may be paid for soliciting non-institutional buyers✓
• d.The offering must raise at least one million dollars

The state private placement exemption limits the number of non-institutional offerees in a twelve-month period, requires that buyers purchase for investment and not with a view to distribution, and forbids paying commissions for soliciting those non-institutional buyers. Institutional buyers are not counted against the limit. Residency and minimum offering size are not conditions, and filing a registration statement would defeat the purpose of an exemption.Uniform Securities Act

Which of the following is NOT an exempt security under the Uniform Securities Act?

• a.A general obligation bond issued by a school district
• b.Common stock issued by a commercial bank
• c.Bonds issued by a nonprofit religious organization
• d.A variable annuity contract issued by a licensed insurance company✓

The insurance company exemption covers traditional insurance and fixed annuity products, but a variable annuity is a security whose value depends on a separate investment account and it is not exempt on that basis. Municipal obligations, securities issued by banks, and securities of nonprofit religious and charitable organizations all appear on the exempt security list. The identity or nature of the issuer is what drives most of these exemptions.Uniform Securities Act

A church issues bonds to finance construction of a new fellowship hall and sells them to members of the congregation. Under the Uniform Securities Act, these bonds are:

• a.Exempt securities, because they are issued by a nonprofit religious organization✓
• b.Exempt transactions, because sales were limited to members
• c.Required to be registered by coordination
• d.Not securities at all

Securities issued by nonprofit religious, educational, charitable, and fraternal organizations are enumerated exempt securities, so the exemption travels with the instrument. The buyers' membership status is not what creates the exemption, which is why this is a security-level exemption rather than a transactional one. Debt instruments sold to raise money from investors are clearly securities, and the Administrator keeps antifraud authority over the sale.Uniform Securities Act

Which of the following is an exempt transaction under the Uniform Securities Act?

• a.A registered agent recommending a growth stock to a retail client
• b.A sale of securities by a court-appointed executor settling a decedent's estate✓
• c.An issuer's advertised public offering of common stock
• d.A mutual fund's continuous offering to the general public

Transactions executed by fiduciaries such as executors, administrators, sheriffs, marshals, receivers, trustees in bankruptcy, guardians, and conservators are enumerated exempt transactions because they arise from a legal duty rather than a sales effort. A recommended retail trade is ordinary solicited business. Advertised public offerings and continuous mutual fund offerings are the opposite of isolated or private transactions, though fund shares may escape state registration as federal covered securities, which is a different exemption entirely.Uniform Securities Act

In an administrative proceeding, a party claims that an offering qualified for an exemption from registration. Which statement is correct?

• a.The Administrator must prove that the exemption does not apply
• b.An exemption once claimed cannot be revoked
• c.The burden of proving an exemption rests on the person claiming it, and the Administrator may by order deny or revoke a specific exemption✓
• d.Exemptions may be revoked only by a court

The act places the burden of proving an exemption or an exception on the person who claims it, so a firm relying on an exemption should document the supporting facts at the time of the sale. The Administrator also has authority to deny or revoke an exemption for a particular security or transaction by order, subject to notice and hearing rights. No court order is needed for the Administrator to act.Uniform Securities Act

A seller relies on a valid exempt transaction and therefore does not register the securities. Which statement is correct?

• a.The antifraud provisions of the act still apply to the offer and the sale✓
• b.The antifraud provisions do not apply because the transaction is exempt
• c.The Administrator has no jurisdiction over the sale
• d.The seller may make optimistic projections without qualification

An exemption relieves the parties of the registration requirement only; it never suspends the antifraud provisions, which reach any offer or sale of any security. The Administrator therefore retains full jurisdiction to investigate misstatements in an exempt offering. Unfounded projections presented as fact would be actionable regardless of the exemption.Uniform Securities Act

Which statement about a state securities registration statement is correct?

• a.It may be filed only by the issuer itself
• b.Once declared effective it remains effective indefinitely
• c.It may not be amended after the effective date under any circumstances
• d.It may be filed by the issuer, by any other person on whose behalf the offering is made, or by a registered broker-dealer, and it is generally effective for one year✓

The act allows the issuer, a selling shareholder or other person on whose behalf the offering is being made, or a registered broker-dealer to file the registration statement. Effectiveness generally runs for one year from the effective date, so a continuing offering must be renewed. Post-effective amendments are permitted, most commonly to increase the number of shares registered.Uniform Securities Act

A small issuer registers a stock offering by qualification. The Administrator is concerned that the business plan cannot be carried out unless a substantial portion of the offering is sold. The Administrator may:

• a.Prohibit the offering outright without a hearing
• b.Guarantee the offering by state funds
• c.Require as a condition of registration that the proceeds be impounded in escrow until a specified amount is received✓
• d.Require the underwriter to purchase any unsold shares

The act lets the Administrator condition an effective registration on impounding the proceeds until the issuer receives a specified minimum amount, protecting investors in an undersubscribed deal. Escrow of proceeds is a condition, not an outright prohibition, and a denial would require notice and an opportunity for hearing. No state guarantees offerings, and the Administrator cannot force an underwriter into a firm commitment.Uniform Securities Act

After a securities registration statement becomes effective in a state, the Administrator may require the person who filed it to:

• a.Repurchase shares from any dissatisfied investor
• b.File reports, no more often than quarterly, showing the progress of the offering and the sale of the registered securities✓
• c.Guarantee a minimum rate of return to purchasers
• d.Register the securities again in every other state

The act authorizes the Administrator to require periodic reports, but not more frequently than quarterly, to keep the record of the offering current. Repurchase obligations arise only as a remedy for a violation, not as a routine condition. No securities registration ever carries a guaranteed return, and each state's registration requirement stands on its own.Uniform Securities Act

A corporation issues short-term notes to raise working capital. For the notes to fall within the commercial paper exemption, they must generally:

• a.Be convertible into common stock
• b.Be sold only to individual investors
• c.Mature within nine months, be rated in one of the top categories by a nationally recognized rating agency, and be issued in large denominations✓
• d.Be guaranteed by a commercial bank

The commercial paper exemption is limited to high-quality, short-term paper: a maturity of nine months or less, a top-tier rating, and denominations large enough that the instruments are bought by institutions rather than small retail investors. Convertibility would give the note an equity feature and take it outside the exemption. Neither a bank guarantee nor a retail-only distribution is part of the test.Uniform Securities Act

An investor is offered shares of a bank holding company that owns a single commercial bank. Regarding state registration, these shares are:

• a.Exempt securities, because the underlying subsidiary is a bank
• b.Not automatically exempt, because the exemption covers securities issued by a bank itself, not by a separate holding company✓
• c.Exempt transactions in every case
• d.Federal covered securities regardless of where they trade

The exemption is drafted around securities issued or guaranteed by a bank, savings institution, or trust company; a holding company is a separate corporate issuer and does not inherit its subsidiary's status. Such shares may still qualify as federal covered securities if they are listed on a national exchange, but that depends on listing, not on the banking business. Nothing about the sale makes it an exempt transaction by default.Uniform Securities Act

Organizers of a proposed corporation solicit subscriptions from a handful of prospective shareholders before the company exists. For this preorganization certificate exemption to apply:

• a.The subscribers must each invest at least $10,000
• b.A registration statement must be filed by qualification
• c.At least twenty-five subscribers are required
• d.The number of subscribers must be limited, no commission may be paid for soliciting them, and no payment may be made by any subscriber✓

The preorganization certificate or subscription exemption is conditioned on a small, capped number of subscribers, the absence of any commission for soliciting them, and the fact that no subscriber actually pays money at that stage. A minimum investment is not part of the test, and requiring a large number of subscribers would contradict the exemption's private character. Because it is an exemption, no registration statement is filed.Uniform Securities Act