General Securities Sales Supervisor (Series10) Practice Exam

Why would an issuer sell securities under the terms of an "investment letter"?

1. It does not wish to go through the cost of registration

2. It is a well-known seasoned issuer exempt from registration

3. Purchasers reside in the same state

4. The offering is limited to $5,000,000 in a 12-month period

The correct answer is: It does not wish to go through the cost of registration

An issuer would sell securities under the terms of an "investment letter" primarily because it does not wish to incur the costs and regulatory obligations associated with registering the securities. Investment letters typically serve as a means of exemption from the formal registration process required by the Securities Act of 1933. This allows issuers to offer securities to investors without the more extensive disclosures and procedures that registration entails, provided certain conditions are met. By utilizing the investment letter process, the issuer can tap into potential investors who are deemed to have enough knowledge and experience to evaluate the investment's merits without the same level of regulatory oversight, thus streamlining the offering process and reducing costs associated with compliance and registration. This approach is often taken by smaller or less established companies that may not have the resources to manage a full registration process. The other options refer to specific situations that may involve exemption from registration but do not directly relate to the fundamental reason an issuer would choose to sell securities via an investment letter. These scenarios involve criteria such as the characteristics of the issuer or limitations on offering amounts, but the primary driving factor for using an investment letter remains the avoidance of registration costs.