Before taking the Series 7 exam, you will need to know about the role of the issuer as defined in the federal laws that govern the financial markets.
A lot of things need to happen before securities hit the market. Not only do the securities have to be registered, but the issuer has to find a broker-dealer to sell the securities to the public. The Series 7 exam tests your expertise in answering questions about this process.
What the issuer does
For an entity to become a corporation, the founders must file a document called a corporate charter in the home state of their business. Included in the corporate charter are the names of the founders, the type of business, the place of business, the number of shares that can be issued, and so on.
If a corporation wants to sell securities to the public, it has to register with states and the Securities and Exchange Commission (SEC). Read on for info on how the registration process works.
The securities acts
Registration helps ensure that securities issued to the public adhere to certain regulations (though antifraud rules also apply to exempt securities). The following acts are designed to protect investors from unscrupulous issuers, firms, and salespeople.
The Securities Act of 1933: This act — also called the Truth in Securities Act, the Paper Act, the Full Disclosure Act, the Prospectus Act, and the New Issues Act — regulates new issues of corporate securities. An issuer of corporate securities must provide full and fair disclosure about itself and the offering. Included in this act are rules to prevent fraud and deception.
The Securities Exchange Act of 1934: The Act of 1934, which established the SEC, was enacted to protect investors by regulating the over-the-counter (OTC) market and exchanges, such as the New York Stock Exchange (NYSE). In addition, the Act of 1934 regulates
The extension of credit in margin accounts
Transactions by insiders
Customer accounts
Trading activities
The Trust Indenture Act of 1939: This act prohibits bond issues valued at over $5 million from being offered to investors without an indenture. The trust indenture is a written agreement that protects investors by disclosing the particulars of the issue. As part of the Trust Indenture Act of 1939, all companies must hire a trustee who’s responsible for protecting the rights of bondholders.
Registering securities with the SEC
When a company wants to go public (sell stock to public investors), it has to file a registration statement and a prospectus with the SEC.
The registration statement includes
The issuer’s name and a description of its business
The names and addresses of all of the company’s control persons, such as officers, directors, and anyone owning more than 10 percent of the corporation’s securities
What the proceeds of the sale will be used for
The company’s capitalization
Complete financial statements
Any legal proceedings against the corporation that may have an impact on it
Registering with the states
All blue sky laws, or state laws that apply to security offerings and sales, say that in order to sell a security to a customer, the broker-dealer, the registered representative, and the security must be registered in the customer’s home state. The issuer is responsible for registering the security with the U.S. Securities and Exchange Commission AND in each state in which the securities are to be sold.
Here are the methods of state security registration:
Notification (registration by filing): Notification is the simplest form of registration for established companies. Companies who have previously sold securities in a state can renew their previous application.
Coordination: This method involves registering with the SEC and states at the same time. The SEC helps companies meet the blue sky laws by notifying all states in which the securities are to be sold.
Qualification: Companies use this registration method for securities that are exempt from registration with the SEC but require registration with the state.