SEC issues interesting report on performance of Regulation A and Regulation D

In August 2020 the SEC released a report comparing the performance of Regulation A, Regulation D and registered offerings. Congress requested the Continue reading

In August 2020 the SEC released a report comparing the performance of Regulation A, Regulation D and registered offerings. Congress requested the report due to its concern that enormous growth in private securities issuance meant that investors may not be getting the liquidity, transparency, price-efficiency, accountability, pricing accuracy and low trading costs that are hallmarks of securities that are registered and publicly traded.

Solomon Exam Prep students know that when companies want to raise money they can issue equity or debt securities in the public markets, but in accordance with the requirements of the Securities Act of 1933, these issuing companies must register their securities with the SEC. Securities registration is considered to be a time-consuming and expensive process. However, companies may side-step registration by issuing securities that are exempt from registration. Two common types of exempt offerings are Regulation A offerings and Regulation D offerings. Regulation A offerings are for U.S. and Canadian issuers who wish to raise funds under $50 million. Regulation A offerings are open to all investors but issuers of Regulation A offerings must file an offering statement with the SEC. Securities offered under Regulation D require much less paperwork, but they are often available only to accredited investors and resales are restricted. Both Reg A and Reg D offerings allow companies to speed up the capital raising process, while reducing compliance costs and disclosure requirements.

The SEC report covered the years 2009-2019 and it showed some interesting findings:

  • In 2019, registered offerings accounted for $1.2 trillion (31 percent) of new capital, compared to approximately $2.7 trillion (69 percent) that the SEC estimates was raised through exempt offerings. Of this, the estimated amount of capital reported as being raised in offerings under Rule 506(b) and 506(c) of Regulation D was approximately $1.6 trillion.
  • There has been a steady increase in the number of offerings and the amounts raised in Regulation D offerings.  
  • While Regulation A offerings also increased in popularity, significantly less money was raised under Regulation A. In fact, 1,000 times more money was raised through Regulation D offerings than Regulation A offerings. 
  • Among Regulation D issuers that were not funds, most issuers were in the banking/financial, technology and the real estate industries. 
  • Reporting companies that raised money through Regulation D offerings grew faster, but had lower profitability and lower stock price returns than companies that raised money through registered offerings. The SEC adds a caveat that these reporting companies are not representative of the larger set of private companies that raise money under Regulation D.
  • Most issuers of Regulation D offerings were headquartered in California, New York, Texas, Florida, and Massachusetts
  • The majority of Regulation A issuers lacked a liquid secondary market for their securities. But this may change because the SEC now permits reporting companies to raise money under Regulation A, where previously it was limited to non-reporting companies
  • Between 2009 – 2019, 36% of IPOs had previously filed a Regulation D offering.
  • One year after a Regulation A offering, 81% of the issuers continued to make reports to the SEC. Three years after the offering, 46% of the issuers continued to make reports to the SEC. This can serve as a rough proxy for the survival of the company and therefore the risk to an investor. But a company that does not make SEC reports does not necessarily mean it has gone out of business. 

To read the “Report to Congress on Regulation A / Regulation D Performance” yourself, go to: https://www.sec.gov/files/report-congress-regulation-a-d.pdf.



SEC Overhauls Marketing Rules for Investment Advisers

On December 22, the SEC announced a major rule change that it hopes will clarify what investment advisers can and can’t do when it comes to marketing their services. Continue reading

On December 22, the SEC announced a major rule change that it hopes will clarify what investment advisers are permitted to do when it comes to marketing their services.

The SEC cited the need to adapt its rules to changing communications technology. “The marketing rule reflects important updates to the traditional advertising and solicitation regimes, which have not been amended for decades, despite our evolving financial markets and technology,” said SEC Chairman Jay Clayton in announcing the overhaul.

The SEC’s current rules about advertisements and paying for client referrals will be consolidated into a single rule. Paying a third party to solicit new clients will now be considered a form of advertising, as will paid testimonials and endorsements and some one-on-one communications with clients.

Currently, each of these activities is subject to a separate set of requirements. By bringing them under the definition of advertising, the new rule replaces this complex system with a set of six broad principles that all forms of IA advertising must adhere to:

  1. No untrue statements or omissions of material facts
  2. No unsubstantiated statements
  3. No statements that imply something untrue or misleading
  4. When the benefits of the IA’s services are discussed, there must be a fair and balanced discussion of material risks
  5. “Anti-cherry picking”: the IA must present its track record in a fair and balanced way
  6. No advertisements that are otherwise materially misleading (intended as a “catch-all provision” for misleading advertising not covered above)

The rule change is expected to take effect sometime in the spring of 2021 and will affect the Series 65 and Series 66 exams.

January Study Question of the Month

This month’s study question from the Solomon Online Exam Simulator question database is now available. Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available.

***Comment below or submit your answer to info@solomonexamprep.com to be entered to win a $20 Starbucks gift card.***

This question is relevant to the SIE, Series 6, 7, 22, 24, and 82 exams.

Question:

Which of the following people would be considered a specified adult?

Answer Choices:

A. A 16 year old with autism

B. A 30 year old

C. A 60 year old with a heart condition

D. An 18 year old in a coma

December Study Question of the Month

This month’s study question from the Solomon Online Exam Simulator question database is now available. Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available.

***Comment below or submit your answer to info@solomonexamprep.com to be entered to win a $20 Starbucks gift card.***

This question is relevant to the Series 6, 7, 14 and 79 exams.

Question: 
 
Which of the following is not typically part of an underwriting agreement?
 
Answer Choices:
 
A. Description of the per-share underwriting spread
 
B. Description of a Greenshoe option
 
C. Terms between syndicate members and selling group dealers
 
D. Terms under which the underwriter can terminate the contract
 
 

Correct Answer: C

Explanation: The underwriting agreement, which is typically signed the evening before or the morning of the effective date of a securities issue typically includes the per-share underwriting spread, an over-allotment (Greenshoe) option if granted, and the underwriter’s termination rights. It also is the document that contains the public offering price or a formula to derive it.

 

SEC Announces Major Revisions to Registration Exemptions Aimed at “Harmonizing” Regulation A Offerings, Regulation D Private Placements, and Crowdfunding

On November 2, the SEC announced a collection of rule changes meant to, in the announcement’s words, “harmonize, simplify, and improve” its “overly complex exempt offering framework.” Continue reading

On November 2, the SEC announced a collection of rule changes meant to, in the announcement’s words, “harmonize, simplify, and improve” its “overly complex exempt offering framework.” The changes affect Regulation A, which governs small public offerings; Regulation D, which governs private placements; and Regulation CF, which governs crowdfunding. This system of exemptions allows various small offerings to avoid the normal registration process required by the Securities Act.  
 
The rule changes should provide a clearer choice as to which exemption is most appropriate to an issuer, based on how much the issuer needs to raise and other factors.
 
The changes also seek to clarify how issuers can avoid “integration” of exempt offerings. Integration is the risk that exempt offerings will be considered a single offering by the SEC, because the offerings are too similar.
 
Highlights of the changes include:
 
  • If two exempt offerings are conducted more than 30 days apart, they are almost always protected from integration.
  • An issuer can “test the waters” with potential investors before deciding which exemption it will use for an offering. Test-the-waters communications solicit interest in a potential offering before the issuer has filed anything with the SEC. Previously, an issuer could only test the waters after deciding that its potential offering would take place under Regulation A.
  • Caps on the amount that may be raised through these exemptions have been increased:
    • Crowdfunding: from $1.07 million to $5 million
    • Regulation A, Tier 2: from $50 million to $75 million 
    • Regulation D, Rule 504: from $5 million to $10 million
  • Make “bad actor” exclusions more consistent across different exemptions.
The rule changes will take effect early next year. Until the changes take effect, securities exam questions will continue to be based on the old rules. FINRA Exams affected by these rule changes include the SIE, Series 6, Series 7, Series 14, Series 22, Series 24, Series 65, Series 66, Series 79, and Series 82.

New Solomon Exam Prep feature offers Accommodations for Securities Exam Test Takers

Solomon Exam Prep is excited to announce a new feature available to those who require special accommodations from FINRA. Learning disabilities and impairments should never stand in the way of achieving goals Continue reading

Solomon Exam Prep is excited to announce a new feature available to those who require special accommodations from FINRA. Learning disabilities and impairments should never stand in the way of achieving goals, such as passing securities licensing exams. FINRA, in compliance with provisions of the Americans with Disabilities Act (ADA), provide accommodations to support individuals who require certain aids to take their exam.

Accommodations are testing modifications made to exams for individuals with disabilities or learning impairments, which limit one’s ability to take the exam. Where possible, FINRA will make arrangements to facilitate the individual’s needs. These modifications might include additional administration time, a reader or recorder, large print exam booklet, or a private testing room.

In an effort to acknowledge these learning challenges faced by many students, Solomon Exam Prep has introduced an option to allow extra exam time. This will allow Solomon students time and a half while taking timed practice exams in the Solomon Exam Simulator, thereby mirroring what the student’s actual exam will be like with these accommodations.

Solomon Exam Prep is invested in best preparing students for their securities licensing exams. If you think that this feature would be helpful to you in your studies, or if you already have FINRA accommodation approval, please contact Solomon Exam Prep to have this new accommodations feature enabled for your Exam Simulator.

Extra exam administration time is provided by FINRA on a case-by-case basis. Test candidates who wish to request accommodations must submit the appropriate forms to FINRA. For more information, visit the FINRA website here.

Solomon Exam Prep is committed to helping all students pass their securities licensing exams.  

November Study Question of the Month

This month’s study question from the Solomon Online Exam Simulator question database is now available. Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available.

***Comment below or submit your answer to info@solomonexamprep.com to be entered to win a $20 Starbucks gift card.***

This question is relevant for the SIE and Series 7, 14, 24, 26, 27, 28, 51, 53, 65, 66, and 99 exams.

Question:

Which situation would a CTR need to be filed?

Answer Choices:

A. When a customer regularly, but on different days, deposits $9,900 into their account in cash.

B. When a person deposits checks for $11,000 every week.

C. A customer withdraws $10,500 from their account in cash.

D. A customer makes a $20,000 Venmo transaction.

Correct Answer: C

Explanation: A currency transaction report (CTR) is filed with FinCEN on cash transactions that exceed $10,000 in a single day, whether conducted in one transaction or several smaller ones. The transactions can be either deposits or withdrawals and they must be in cold, hard cash.

Solomon partners with Claflin University & Lincoln Financial Advisors to offer SIE class

Solomon Exam Prep is delighted to announce a partnership with Claflin University and Lincoln Financial Advisors. Continue reading

Solomon Exam Prep is delighted to announce a partnership with Claflin University and Lincoln Financial Advisors. With sponsorship from Lincoln Financial, Claflin University students taking a new Claflin investment course will receive the Solomon study materials they need to pass the FINRA Securities Industry Essentials (SIE) exam.
 
To read the official press release, please click on the download link below.

October Study Question of the Month

This month’s study question from the Solomon Online Exam Simulator question database is now available. Continue reading

This month’s study question from the Solomon Online Exam Simulator question database is now available.

***Submit your answer to info@solomonexamprep.com or comment below to be entered to win a Solomon temporary tattoo.***

Question:

Frank and Wilma Fertig are snowbirds. They spend periods of time in Arizona each winter and then return to their home in Wisconsin. They have been doing business with their broker-dealer and their agent, Michael, for almost 10 years. The broker-dealer is registered in Wisconsin but not in Arizona. This year Frank and Wilma left early for Arizona, in early October rather than their usual late October. On October 12, the broker-dealer contacted the Fertigs to ask them about using some of their current cash position to purchase shares of QRS Company. The Fertigs agreed. What happened next?

Answer choices:

  1. The Fertigs went back to their golf game.
  2. The Wisconsin state securities Administrator issued a cease and desist order against the Fertigs’ broker-dealer for conducting a securities transaction outside Wisconsin, where the broker-dealer is registered.
  3. The Arizona state securities Administrator issued a cease and desist order against the Fertigs’ broker-dealer for conducting a securities transaction for Arizona residents without the broker-dealer being registered in Arizona.
  4. Michael realized he misled the Fertigs about being able to complete the transaction in a state where neither he nor the broker-dealer is registered and had to call them to apologize and tell them the deal could not be completed.

Correct Answer: A. The Fertigs went back to their golf game.

Explanation: After agreeing to the transaction Michael proposed, the Fertigs went back to their golf game and the transaction was completed without negative consequences. The Uniform Securities Act allows broker-dealers to complete transactions for existing customers who are out of their state of residence temporarily, as the Fertigs are. That is, the broker-dealer is excluded from the requirement to register in a state if he/she has no place of business in the state, they are registered in another state, and they have an existing client who is in that state temporarily.  In this case, they can continue to make trades for their vacationing client for up to 30 days.  Hence, Michael can make this trade.  Once a month has passed, however, he will not be able to make similar transactions for the Fertigs until they return to Wisconsin.