REG · Business Law · 19 practice questions
Reg D 506(b)/(c), commercial paper, Form 8-K, Section 16(b)
Public securities offerings require registration unless an exemption applies. Below: one scenario, three versions, one fact switched each time.
Try one first
Hint
First decide whether the issuer is making a public distribution; if not, consider whether the facts point to a common exemption (accredited‑investor private placement, short‑term commercial paper, or ordinary secondary resale).
Answer C. An issuer's underwritten, broadly marketed sale of newly issued securities is a public distribution that triggers Section 5's registration requirement unless an exemption applies. Choice C describes a multi‑state public offering by the issuer with no exemption indicated, so registration would be required.
Why not A: This choice tempts because the issuer is selling newly issued securities. It fails because the facts describe a private placement limited to accredited investors with no general solicitation, a classic Reg D private offering (Rule 506) that typically does not require registration.
Why not B: Tempting since promissory notes can, in some circumstances, be securities. It fails because these are short‑term negotiable notes (180 days), which are characteristic of commercial paper and commonly fall within a short‑term exemption from registration, so a registration filing is generally unnecessary.
Why not D: This is tempting because it involves the issuer's stock, but it is a secondary‑market resale by a nonaffiliate through ordinary broker channels. That is not an issuer distribution and therefore generally does not require the issuer to register the sale.
Same scenario, one fact changes
Base case
Larch Corp plans to raise $10 million by selling newly issued common stock to 20 purchasers. It uses only preexisting, direct contacts and no public advertising. All 20 purchasers are accredited investors. Purchasers sign representation letters; Larch does not perform additional income or net worth verification. Larch provides a detailed private offering memorandum to all purchasers. No registration statement is filed.
Answer: Exempt under Rule 506(b).
There is no general solicitation and sales are limited to accredited investors. Rule 506(b) does not mandate third-party or documentary verification. This aligns with a classic private placement, consistent with the private-offering analyses in the bank questions.
Before you open each one, predict the answer.
Change 1Issuer uses public web ads and email blasts to solicit purchasers; all other facts unchanged (accredited-only; no additional verification).
Answer: Not exempt on these facts; registration or a different exemption would be required.
General solicitation bars Rule 506(b). Rule 506(c) allows solicitation only if all purchasers are accredited and the issuer takes reasonable steps to verify. Here the issuer relied only on self-certifications, which is insufficient under 506(c).
Change 2Two of the 20 purchasers are nonaccredited but financially sophisticated; no public solicitation. The offering memorandum described the issuer and the offering in detail.
Answer: Exempt under Rule 506(b).
Rule 506(b) permits up to 35 nonaccredited purchasers if they are financially sophisticated (or have a purchaser representative) and the issuer provides required disclosure. The facts satisfy those conditions.
Change 3The sale is structured as an underwritten distribution to the general public across several states.
Answer: Registration required.
An issuer’s broadly marketed, underwritten sale of newly issued securities is a public distribution that triggers Section 5 registration absent an applicable exemption.
Key points
- Rule 506(b): no general solicitation; up to 35 nonaccredited purchasers are allowed if they are financially sophisticated (or use a purchaser representative) and required disclosure is provided.
- Rule 506(c): general solicitation is allowed only if every purchaser is accredited and the issuer reasonably verifies that status using documentation or qualified third-party confirmation.
- Filing Form D is a notice filing. It does not cure using general solicitation under 506(b) or including nonaccredited purchasers under 506(c).
- Commercial paper: narrow exemption for prime-quality notes of 270 days or less, issued for current transactions, and not ordinarily offered to the general public.
- Section 16(b): for a more-than-10% beneficial owner, only purchases made after crossing 10% can be matched with sales within six months.
- CAN-SPAM: include a clear, conspicuous opt-out method and honor opt-outs within 10 business days in commercial emails.
How the exam traps you
- Thinking public ads are fine under Rule 506(b). 506(b) prohibits general solicitation. Use 506(c) with accredited-only purchasers and verification if you solicit publicly.
- Relying only on investor self-certification under Rule 506(c). Take reasonable steps to verify accredited status (review income or net worth documents or get qualified third-party written confirmation).
- Assuming any note under nine months is exempt. Commercial paper must be prime quality, for current transactions, and not sold to the general public.
- Matching pre-10% trades under Section 16(b). Only purchases while already above 10% are matchable with sales within six months.
Now the same facts as questions
Each question changes one fact from the one before. Watch which change flips the answer.
Question 1
Answer A. Correct. 506(b) bars general solicitation and does not mandate verification; unlimited accredited purchasers are permitted.
Why not B: Incorrect. 506(c) requires reasonable verification of accredited status; self-certifications alone are not enough.
Why not C: Incorrect. Section 5 registration is required unless an exemption applies; here 506(b) applies.
Why not D: Incorrect. Commercial paper is a note exemption, not an equity offering, and is narrowly limited.
Question 2
Answer B. Correct. 506(c) permits general solicitation only with accredited-only purchasers and reasonable verification. Self-certification alone is insufficient.
Why not A: Incorrect. 506(b) prohibits general solicitation.
Why not C: Incorrect. Form D is a notice and does not cure substantive failures.
Why not D: Incorrect. Online general solicitation is not an intrastate exemption.
Question 3
Answer A. Correct. 506(b) allows up to 35 nonaccredited purchasers if sophistication and disclosure requirements are met.
Why not B: Incorrect. 506(c) requires that all purchasers be accredited.
Why not C: Incorrect. Nonaccredited purchasers are permitted under 506(b) if conditions are met.
Why not D: Incorrect. Commercial paper is a narrow note exemption and does not apply to stock.
Question 4
Answer C. Correct. A broadly marketed, underwritten issuer sale triggers Section 5 registration.
Why not A: Incorrect. 506(b) is unavailable for public distributions.
Why not B: Incorrect. 506(c) addresses solicitation by the issuer, not underwriter involvement; public distributions by the issuer require registration absent an exemption.
Why not D: Incorrect. Commercial paper is an exemption for certain short-term notes, not equity.
Question 5
Answer C. Correct. A public, underwritten issuer sale is a public distribution that requires registration absent an exemption.
Why not A: Incorrect. Classic private placement under Reg D can be exempt.
Why not B: Incorrect. Short-term, prime-quality notes to institutions for current transactions are often exempt as commercial paper.
Why not D: Incorrect. Ordinary resales of registered shares by a nonaffiliate are not new issuer distributions.
Question 6
Answer D. Correct. 506(c) requires reasonable verification of accredited status.
Why not A: Incorrect. Self-certifications alone are insufficient under 506(c).
Why not B: Incorrect. This avoids solicitation but changes the exemption; question asks about the path that permits solicitation.
Why not C: Incorrect. Good disclosure does not replace the specific verification requirement.
Question 7
Answer B. Correct. After general solicitation, 506(c) is available only if all purchasers are accredited and the issuer reasonably verifies that status.
Why not A: Incorrect. 506(b) prohibits general solicitation; public posts and a public webinar are solicitation.
Why not C: Incorrect. 506(c) requires all purchasers to be accredited.
Why not D: Incorrect. Form D is a notice and does not cure substantive failures.
Question 8
Answer A. Correct. This aligns with a Reg D private placement exempt from registration.
Why not B: Incorrect. Using proceeds outside the state can defeat an intrastate exemption.
Why not C: Incorrect. Short-term notes broadly offered to the public for long-term use do not fit the commercial paper exemption.
Why not D: Incorrect. The described resale is not an issuer exemption under the 1933 Act context.
Question 9
Answer D. Correct. This fits Rule 506(c): solicitation allowed with accredited-only purchasers and verification.
Why not A: Incorrect. Use of proceeds for a long-term asset undermines the commercial paper exception.
Why not B: Incorrect. A prearranged out-of-state resale undercuts an intrastate exemption.
Why not C: Incorrect. 506(b) requires sophistication or a purchaser representative and disclosure for nonaccredited purchasers.
Question 10
Answer D. Correct. Short maturity, current-transaction use, and institutional buyers fit the exception.
Why not A: Incorrect. Maturity exceeds 270 days.
Why not B: Incorrect. Proceeds are for a long-term capital asset, not current transactions.
Why not C: Incorrect. Offered to the general public in small denominations, which cuts against the exception.
Question 11
Answer C. Correct. Departure of a principal officer is a specifically listed Form 8-K event.
Why not A: Incorrect. Internal forecasts not publicly issued are not an automatic 8-K item.
Why not B: Incorrect. A nonbinding LOI is not the same as entry into a material definitive agreement.
Why not D: Incorrect. An informal customer expectation is not an automatic 8-K trigger as stated.
Question 12
Answer B. Correct. Only trades while already above 10% are matchable under Section 16(b).
Why not A: Incorrect. The Jan 2 trade crossed the 10% threshold; it is not a purchase by a more-than-10% owner.
Why not C: Incorrect. The threshold-crossing purchase is not matchable; only the later purchase is.
Why not D: Incorrect. Section 16(b) is strict liability and does not require proof of insider trading.
Question 13
Answer A. Correct. CAN-SPAM requires a clear opt-out method and honoring opt-outs within 10 business days.
Why not B: Incorrect. Opt-in is not required by CAN-SPAM, but opt-out is.
Why not C: Incorrect. A physical address alone is not sufficient; opt-out is required.
Why not D: Incorrect. Form D is unrelated to CAN-SPAM compliance.
Question 2
Hint
First determine which Rule 506 path, if any, remains available after the public solicitation. Then ask whether that path permits any nonaccredited purchasers and what verification is required.
Answer B. Because the issuer engaged in general solicitation in connection with the offering, the issuer cannot rely on Rule 506(b). Rule 506(c) permits general solicitation but requires that all purchasers be accredited and that the issuer take reasonable, fact-specific steps to verify accredited status. Therefore the issuer must limit sales to accredited investors and take reasonable verification steps (examples include reviewing W-2s, tax returns, brokerage statements, or obtaining third-party written confirmation). Filing Form D is an administrative notice and does not cure a substantive failure to meet the exemption's purchaser or solicitation requirements.
Why not A: Tempting because 506(b) does allow up to 35 financially sophisticated nonaccredited purchasers; wrong because 506(b) prohibits general solicitation and the issuer used public social media and a public webinar to solicit investors, so 506(b) is unavailable here.
Why not C: Tempting because 506(c) permits general solicitation and disclosure seems remedial; wrong because 506(c) requires that all purchasers be accredited and that the issuer take reasonable steps to verify accreditation, providing registration-level disclosure does not permit nonaccredited purchasers under 506(c).
Why not D: Tempting because Form D is a required administrative filing for many Regulation D offerings; wrong because Form D is a notice filing and does not cure a substantive failure to satisfy the exemption's solicitation or purchaser requirements, it does not allow nonaccredited purchasers in a generally solicited 506(c) offering.
Question 3
Hint
Ask whether the event is an explicitly listed Form 8-K item (a listed 'trigger') rather than whether it could be important or material in ordinary business judgment.
Answer C. Form 8-K requires prompt reporting of certain specifically enumerated events, and the departure (or appointment) of a principal officer such as the principal financial officer is one of those listed events; such filings are typically required within four business days. The other items as stated may be material in context but are not the explicit, automatic 8-K trigger described here without additional facts.
Why not A: This is tempting because changes in expectations can be material and, if previously issued public guidance must be corrected, may require prompt disclosure. But as stated the forecast is only an internal estimate not previously released, so it is not itself an explicitly listed Form 8-K item without further qualifying facts.
Why not B: A proposed transaction can be important, but a nonbinding letter of intent is not the same as entry into a material definitive agreement that typically triggers Item 1.01; an LOI alone (where expressly nonbinding) is not the clearest immediate 8-K trigger.
Why not D: Loss of a major customer's business could be material, but an informal expectation of reduced orders, without a contract change or other material facts, is not a specifically enumerated Form 8-K event; disclosure would be required only if it rose to material nonpublic information under the registrant's disclosure obligations.
Question 4
Hint
For >10% owners, determine whether each purchase was entered into while the person already exceeded 10%, the holder's status at the time of the purchase controls, not only the six‑month window.
Answer B. Section 16(b) of the Securities Exchange Act permits recovery of profits realized from purchases and sales within a six‑month period by directors, officers, or beneficial owners of more than 10%. For a >10% beneficial owner, a purchase is matchable only if it was entered into while the person already qualified as a >10% owner; a purchase that merely causes a holder to cross the 10% threshold is generally not treated as a purchase by a >10% owner. Rowan's Jan 2 purchase was made while Rowan held only 9.6% (it caused the position to exceed 10%) and therefore is not matchable; the Feb 20 purchase occurred while Rowan already exceeded 10% and may be paired with the Apr 15 sale.
Why not A: Tempting because the Jan 2 trade pushed Rowan past 10% and both trades fall within six months; however, the critical question is the holder's status at the time of the purchase. Jan 2 was executed while Rowan held 9.6%, so that purchase is generally not matchable for a >10% owner.
Why not C: This error focuses only on the six‑month pairing rule and ignores the threshold rule: the Jan 2 purchase was made before Rowan became a >10% beneficial owner and therefore generally cannot be matched under Section 16(b).
Why not D: This confuses Section 16(b) with insider‑trading liability. Section 16(b) is a short‑swing recovery provision that does not require proof that the defendant traded on material nonpublic information or proof of scienter.
Question 5
Hint
For this exception, do not stop at the note's maturity. Check the purpose of the financing and who the note is being sold to.
Answer D. The commercial paper exception is limited to prime-quality, short-term notes with a maturity of no more than 270 days (9 months) that are issued for current transactions and are not ordinarily offered to the general public. Option D meets the maturity limit, is used for a current operational need (seasonal inventory), and is sold in large denominations to institutional investors rather than retail purchasers. Taken together, these features make Option D the best-supported exempt transaction.
Why not A: Attractive because the use (financing receivables) and distribution (institutional, large denominations) fit the exception, but the stated maturity exceeds the 270-day limit, so it does not qualify.
Why not B: Tempting because the note is short-term and sold to institutions, but the proceeds are for a long-term capital asset (a production facility). The commercial paper exception requires issuance for current transactions, so this use of proceeds disqualifies it.
Why not C: Tempting because the maturity and working-capital purpose fit, but the exemption generally excludes notes that are broadly offered to retail investors in small denominations. The public, small-denomination distribution cuts against the commercial paper exception.
Question 6
Hint
Evaluate each potential exemption by testing its limiting conditions: who may buy, how the offer was solicited, and whether the use of proceeds or seller status is consistent with the exemption.
Answer A. This fact pattern aligns with a private placement under Regulation D: negotiated sales to accredited investors, absence of general solicitation, and transfer restrictions support treatment as a nonregistered private offering. Given the stated assumptions (no integration, no antifraud issues, no bad actors), nothing in the facts negates that private-offering exemption, so (A) is the most clearly exempt transaction.
Why not B: Tempting because the offer is limited to in-state residents, but the intrastate exemption depends on substantial in-state ties and restrictions on solicitation and how proceeds are used; directing a significant portion of proceeds out of state can defeat that exemption.
Why not C: This choice evokes a short-term-note or commercial-paper exception, but those narrow exemptions generally cover short-term, high-quality paper issued in the ordinary course of business, not widely advertised public fundraisings for capital expansion.
Why not D: Ordinary secondary-market resales can be exempt, but sales by an underwriter are treated as part of the original distribution; resales by an underwriter are not routine nonissuer transactions eligible for the ordinary resale exemption.
Common questions
What counts as reasonable verification of accredited status under Rule 506(c)?
Review objective documents (for example, tax returns, W-2s, brokerage or bank statements) or obtain written confirmation from a registered broker-dealer, investment adviser, attorney, or CPA.
Does filing Form D make a general solicitation under 506(b) acceptable?
No. Form D is a notice. It does not permit general solicitation under 506(b) or fix a failure to meet purchaser or verification requirements.
Does a principal financial officer’s resignation trigger Form 8-K?
Yes. Departure or appointment of a principal officer is a specifically listed Form 8-K event. Items like internal forecast changes or nonbinding letters of intent are not automatic 8-K triggers on these facts.
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