- A state-registered investment adviser is offering interests in a private fund to a group of its existing clients. The adviser has identified 12 prospective purchasers in the state: 9 are natural persons (all accredited investors with a net worth over $1 million excluding their primary residence) and 3 are entities that qualify as institutional buyers. The adviser has a reasonable basis to believe each purchaser is buying for investment, and no commission is paid to anyone for soliciting the natural-person purchasers. Under the Uniform Securities Act, which of the following is TRUE regarding the state-law private placement exemption?
Answer: The exemption is available because the offer was directed to no more than 10 non-institutional offerees, and the institutional buyers are not counted toward that limit.
Under Uniform Securities Act § 402(b)(9), the private placement exemption is available when offers are directed to no more than 10 offerees in the state (excluding institutional buyers) during any 12 consecutive months, the seller reasonably believes each buyer purchases for investment, and no commission is paid for soliciting non-institutional buyers. The exemption counts OFFEREES, not purchasers, and institutional buyers are excluded from the 10-offeree count. Here, only the 9 natural persons are counted, so the offer is within the 10-offeree limit. The statement that the exemption is unavailable because the offer was directed to 12 offerees is wrong because it counts institutional buyers; the state exemption explicitly excludes them. The statement that the exemption is available because the offer was directed to no more than 12 purchasers is wrong because it applies a 12-purchaser test; the exemption counts offerees, not purchasers, and does not permit 12 non-institutional offerees. The statement that the exemption is unavailable because there are 9 natural-person purchasers exceeding a 5-client de minimis limit is wrong because that de minimis concerns state adviser registration under USA § 201(c), not the securities offering exemption.
- An individual has a net worth of $1.2 million. In calculating that net worth, a $400,000 primary residence was included as an asset and a $200,000 mortgage on the residence was included as a liability. The individual's annual income is $140,000, and the spouse's annual income is $100,000; these income amounts have been the same for the last two years and are expected to remain the same this year. The individual is considering investing in a Rule 506(b) private placement. Which of the following statements is TRUE regarding the individual's status as an accredited investor?
Answer: The individual does not qualify as an accredited investor because the primary residence is excluded from net worth and the couple's $240,000 combined income is below the $300,000 joint-income threshold.
Under SEC Rule 501(a), a natural person is an accredited investor if net worth exceeds $1 million, excluding the primary residence and home-secured debt up to its fair market value, or if income exceeds $200,000 individually ($300,000 jointly with a spouse) in each of the last two years with a reasonable expectation of the same. Because the $1.2 million net worth included a $400,000 home and a $200,000 mortgage, excluding both leaves $1.0 million, which does not exceed the $1 million threshold. The individual's own $140,000 income and the couple's $240,000 joint income are also below the applicable thresholds, so the individual is not an accredited investor. The net-worth statement that would count the home is wrong because the home and the related mortgage are disregarded. The income statement that the couple's combined income satisfies the $200,000 threshold is wrong: the $200,000 test applies to the individual's own income, while joint income with a spouse must exceed $300,000. The statement that a Rule 506(b) purchaser must satisfy both tests is wrong: the accredited-investor tests are alternative, and Rule 506(b) also permits up to 35 non-accredited sophisticated purchasers.
- An investment adviser has a place of business in the state. During the preceding 12 months, its only clients have been 3 natural persons and 2 trusts, all in this state. Which of the following statements is TRUE regarding the adviser's eligibility for the de minimis exemption from state investment adviser registration?
Answer: The adviser does not qualify for the de minimis exemption because the exemption requires the adviser to have no in-state office.
Under Uniform Securities Act § 201(c), the de minimis exemption from state investment adviser registration requires that the adviser have no place of business in the state and have had no more than 5 clients (other than institutional clients) during the preceding 12 months. Because the adviser has a place of business in the state, it does not qualify. The statement that the adviser qualifies because it has no more than 5 non-institutional clients is wrong because it ignores the no-place-of-business requirement. The statement that the exemption is limited to 3 clients is wrong: the limit is 5 clients, and the 2 trusts count as clients. The statement that broker-dealer registration is required is wrong: the exemption does not depend on broker-dealer registration.
- In a state that has adopted the NASAA private fund adviser model rule, the adviser to a 3(c)(1) fund that is not a venture capital fund relies on the federal private fund adviser exemption and claims the state's private fund adviser exemption. Which of the following statements is TRUE regarding investors in the fund?
Answer: The fund may admit only qualified clients, and the adviser must provide audited financial statements annually.
Under the NASAA private fund adviser model rule, which this state has adopted, an adviser to a 3(c)(1) fund that is not a venture capital fund may use the state exemption only if every beneficial owner of the fund is a qualified client (Rule 205-3: $1,400,000 under management with the adviser or a net worth of more than $2,700,000), and the adviser must give each owner written disclosure and annual audited financial statements. The federal exemption itself, IAA § 203(m) and Rule 203(m)-1, requires only that the adviser act solely for private funds with less than $150 million in regulatory AUM. The statement that any number of accredited investors may be admitted is wrong because the NASAA rule limits this kind of fund to qualified clients, and being accredited does not make an investor a qualified client. The statement that 35 non-accredited sophisticated investors may be admitted imports Rule 506(b) purchaser limits, which do not govern the private fund adviser exemption. The statement that the adviser must register with the SEC is wrong: an adviser relying on § 203(m) is an exempt reporting adviser, not SEC-registered.
- Which of the following statements is TRUE regarding a private securities offering that permits general solicitation and requires every purchaser to be an accredited investor?
Answer: The issuer may sell to any number of accredited investors, provided it takes reasonable steps to verify their accredited status.
SEC Rule 506(c) and Rule 501(a). Under Rule 506(c), an issuer may use general solicitation and sell to any number of accredited investors, but every purchaser must be accredited and the issuer must take reasonable steps to verify accredited status. The statement that there is a 35-accredited-investor limit is wrong: the 35-purchaser limit in Rule 506(b) applies to non-accredited purchasers and is not a cap on accredited purchasers. The statement permitting up to 35 non-accredited sophisticated purchasers is wrong because Rule 506(c) requires all purchasers to be accredited. The statement that a Series 65 license holder must also meet a net worth or income test is wrong because Rule 501(a) treats holders of the Series 7, 65, or 82 licenses in good standing as accredited investors; the Series 66 license is not on that list.
A company whose principal office is in the state is raising $3 million through a private placement directed only to state residents. During the past 12 months, the company offered the securities to 9 individuals, 4 banks, 2 insurance companies, and an employee benefit plan with $4 million in assets. All 9 individuals purchased the securities and signed investment letters stating the shares were bought for investment. After those sales closed, the company paid a $5,000 fee to a consultant who had introduced two of the individual purchasers. No other commissions were paid.
Under the Uniform Securities Act, which statement is correct? Answer: The sales to the individual purchasers are not exempt because the fee paid to the consultant was remuneration for soliciting non-institutional buyers.
Uniform Securities Act § 402(b) governs. The private-placement exemption requires offers directed to no more than 10 offerees in the state (excluding institutions) in any 12 consecutive months, a reasonable belief that each buyer purchases for investment, and no commission or other remuneration paid for soliciting non-institutional buyers. The company met the 9-individual offeree cap and the investment-intent condition, but the $5,000 consultant's fee was remuneration for soliciting two non-institutional purchasers, so the exemption is unavailable for the individual sales. The banks, insurance companies, and $4 million employee benefit plan are institutions, and sales to them are separately exempt as sales to institutional buyers. The answer that treats the entire placement as exempt ignores the remuneration condition; the answer relying on fewer than 35 purchasers imports Rule 506(b)'s purchaser-based limit into a state exemption that counts offerees and still forbids solicitation commissions; and the answer counting the institutions toward the 10-offeree limit ignores their exclusion.
A company is conducting a private placement and has advertised the securities through a general solicitation. Three prospective purchasers have submitted subscription agreements and supporting documentation: Purchaser 1 has a net worth of $1,150,000, none of which is attributable to a primary residence. Purchaser 2's primary residence is valued at $1,300,000 and is subject to a $250,000 mortgage; Purchaser 2's only other assets total $200,000, the purchaser has no other liabilities, and Purchaser 2, who is unmarried, earned less than $200,000 in each of the past two years. Purchaser 3 earned $210,000 in each of the past two years, reasonably expects the same income this year, and has a net worth of $450,000.
Which statement is correct regarding the issuer's acceptance of these purchasers? Answer: The issuer may accept purchasers 1 and 3, but not purchaser 2, and must take reasonable steps to verify that each accepted purchaser is accredited.
SEC Rules 501(a) and 506(c) govern. In a Rule 506(c) offering, general solicitation is permitted only if every purchaser is accredited and the issuer takes reasonable steps to verify that status. Purchaser 1 qualifies through the $1,000,000 net-worth test. Purchaser 3 qualifies through the income test - more than $200,000 in each of the last two years with a reasonable expectation of the same this year - and does not also need $1,000,000 of net worth. Purchaser 2 is not accredited because the primary residence and the mortgage debt secured by it are excluded from net worth, leaving only $200,000, and Purchaser 2's income was below $200,000 in each of the past two years, so neither test is met. The answer accepting purchasers 1 and 2 counts home equity toward net worth and applies the $300,000 joint-income threshold to a purchaser whose own income satisfies the $200,000 test; the answer accepting only purchaser 1 treats income as unable to establish accredited status; and the answer accepting all three purchasers counts home equity toward net worth.
Under the Uniform Securities Act, an organizer is soliciting subscriptions for preorganization certificates of a corporation to be formed. The offering will be directed to 9 subscribers, no commissions will be paid to anyone, and there will be no public advertising.
Which additional fact alone would make the preorganization certificate exemption unavailable? Answer: Each subscriber will wire the subscription price to the organizer before the corporation is formed.
Uniform Securities Act § 402 (preorganization certificate exemption). The exemption has three conditions: no more than 10 subscribers, no commission or other remuneration for soliciting any subscriber, and no payment by any subscriber. A subscription payment made before formation violates the no-payment condition. A subscriber who is not accredited or sophisticated is not disqualifying, an attorney subscriber who receives no compensation for the subscriptions does not trigger the prohibited-remuneration condition, and reimbursement of actual filing fees is not a commission for soliciting subscribers.
An issuer is conducting a private placement under Rule 506(b), using no general solicitation. In January, the issuer sold to 30 accredited investors and 25 non-accredited investors. In April, more than 90 days after the January sales, the issuer sold to 12 accredited investors and 15 non-accredited investors. Each non-accredited purchaser is sophisticated, either alone or with a purchaser representative.
Under Regulation D, which statement is correct? Answer: The offering complies with Rule 506(b) because no 90-calendar-day period included more than 35 non-accredited purchasers and each such purchaser satisfied the sophistication test.
SEC Rule 506(b) governs. The offering must involve no general solicitation, each non-accredited purchaser must be sophisticated alone or with a purchaser representative, and the issuer may not sell to more than 35 non-accredited purchasers in any 90-calendar-day period — a rolling window, not an offering-wide or 12-month cap; accredited investors are not counted. January produced 25 non-accredited purchasers and April produced 15, more than 90 days later, with every non-accredited purchaser satisfying the sophistication test, so each 90-day period stayed within the limit. The statement that 82 total purchasers violates the rule counts accredited investors against the 35 limit; the statement that no cap applies to non-accredited purchasers drops a condition of the exemption; and the statement that 40 non-accredited purchasers in 12 months exceeds the limit measures the period incorrectly.
An issuer is conducting a Rule 506(b) offering. During the 30 days immediately before today, it sold securities to 30 accredited investors and 33 non-accredited investors, and no other sales have been made in the offering. Each non-accredited purchaser is sophisticated, no general solicitation was used, and all sales are part of the same offering. In the next 30 days, the issuer expects subscriptions from 4 additional accredited investors and 3 additional non-accredited investors.
Assuming all other Rule 506(b) conditions are met, which statement is correct about the proposed additional subscriptions? Answer: The issuer may accept the four accredited subscriptions, but only two of the three non-accredited subscriptions without exceeding the limit.
SEC Rule 506(b). Accredited purchasers are not counted toward the 35-purchaser limit, but non-accredited purchasers are counted regardless of sophistication. Because the 33 existing non-accredited purchases and the proposed new non-accredited purchases all fall within the same 90-calendar-day period, accepting all three new non-accredited investors would produce 36 non-accredited purchasers in that period. Accepting only two keeps the count at 35. The statements that the limit is measured on a single day, that sophistication avoids counting, or that the limit applies to total purchasers are wrong.
- Which of the following statements is TRUE regarding a Rule 506(b) offering?
Answer: An issuer may sell to an unlimited number of accredited investors and to no more than 35 non-accredited purchasers in any 90-calendar-day period, provided each non-accredited purchaser is sophisticated either alone or with a purchaser representative.
Under SEC Rule 506(b), an issuer may sell to an unlimited number of accredited investors and to no more than 35 non-accredited purchasers in any 90-calendar-day period, provided each non-accredited purchaser is sophisticated either alone or with a purchaser representative. The statement that Rule 506(b) limits total purchasers to 35 and requires a purchaser representative for every non-accredited purchaser is wrong: the 35-purchaser limit applies only to non-accredited purchasers, and a purchaser representative is required only when the non-accredited purchaser is not sophisticated alone. The statement that an issuer may sell to any number of accredited and non-accredited purchasers is wrong because the 35 non-accredited purchaser limit still applies. The statement that Form D must be filed at least 15 days before the first sale is wrong: Form D must be filed no later than 15 days after the first sale.
Under Regulation D, a company is conducting a Rule 506(b) offering. It has directed offers to 22 accredited investors and 14 non-accredited investors in State X. The issuer has a reasonable basis to believe each accredited investor is accredited. All non-accredited investors are sophisticated, either alone or with a purchaser representative, and 8 of them purchase. No general solicitation was used. The company's first sale in State X occurred on March 3, and the company has not filed anything with the Administrator.
Which statement is correct? Answer: The company may rely on Rule 506(b), but it must file Form D and a consent to service with the Administrator within 15 days after the first sale on March 3.
SEC Rule 506(b) and state notice-filing rules. Rule 506(b) permits an unlimited number of accredited purchasers and no more than 35 non-accredited purchasers in any 90-calendar-day period. Here, only 8 non-accredited investors purchased, the non-accredited purchasers are sophisticated, and there was no general solicitation, so the federal conditions are met. Rule 506 securities are federal covered securities for state registration purposes, but a state may require a Form D filing and consent to service no later than 15 days after the first sale in the state. The statements applying a state 10-offeree cap or requiring state coordination are wrong because Rule 506(b) preempts state registration; the statement that no state filing is required is also wrong.
- An issuer is conducting a Rule 506(c) offering and has accepted investments from 40 natural persons and 5 entities. Of the natural persons, 35 have a net worth exceeding $1 million excluding their primary residence, and 5 are holders of a valid Series 65 license. The 5 entities each have $6 million in investments and were not formed for the purpose of purchasing the securities. The issuer has verified the accredited status of each investor using reasonable steps. Which of the following statements is TRUE?
Answer: The offering is compliant under Rule 506(c) because all purchasers are accredited investors and the issuer took reasonable steps to verify their status.
Under SEC Rule 506(c), an issuer may use general solicitation only if all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited status. Rule 506(c) has no limit on the number of accredited investors. The 35 individuals qualify by net worth; the 5 Series 65 license holders qualify under Rule 501(a), which treats the Series 65 (along with the Series 7 and Series 82) as an accredited-investor credential; and each entity qualifies because it has over $5 million in investments and was not formed for the purpose of acquiring the securities. The statement that Rule 506(c) permits up to 35 non-accredited purchasers is wrong: Rule 506(c) requires every purchaser to be accredited, and the 35-purchaser allowance for non-accredited purchasers applies only to Rule 506(b). The statement that a valid Series 65 license does not qualify an individual is wrong because the Series 65 is a designated qualifying credential. The statement that an entity qualifies only if it was formed for the purpose of purchasing the securities reverses the rule: an entity with over $5 million in investments qualifies only if it was NOT formed for that purpose.
Under the Uniform Securities Act, an issuer has been soliciting investors for an unregistered, non-Rule 506 offering. During the last 12 months it directed offers to 11 persons in the state: 10 individuals and one trust company. No commissions have been paid, and the issuer reasonably believes each buyer is purchasing for investment. The issuer has used no general solicitation.
Which statement is correct about the availability of the state private-placement exemption? Answer: The exemption is available because the trust company is excluded, leaving only 10 counted offerees.
Uniform Securities Act private-placement exemption. The state exemption is measured by offerees, not purchasers, and institutional investors such as trust companies are excluded from the count. With 10 counted offerees, the issuer is at the 10-offeree limit, and the other stated conditions are met. The statement that the trust company counts is wrong, as is the statement that more than 10 offerees were contacted. The state private-placement exemption does not require that offerees be accredited investors.
An issuer relying on Rule 506(c) has advertised the offering broadly. One prospective purchaser is a married individual whose household has $750,000 in investment assets, $150,000 in other personal assets, $80,000 of credit card and other debt, and $600,000 of equity in a primary residence. The individual and spouse together earned $190,000 last year and expect about the same this year. The issuer has verified these facts from bank statements and a credit report.
Which statement is correct about whether this individual is accredited for the offering? Answer: The individual is not accredited because net worth excluding the primary residence is $820,000 and the joint income test is not met.
SEC Rule 501(a) accredited-investor definition. An individual qualifies by net worth over $1 million, excluding the primary residence, or by income over $200,000 individually or $300,000 jointly. Here, net worth excluding the home is $750,000 plus $150,000 minus $80,000, or $820,000, and joint income is $190,000, so neither test is met. Counting the home equity is the common error. Rule 506(c) permits general solicitation, but every purchaser must be accredited; sophistication is not a substitute for accredited status.
