Deck 22: Public and Private Offerings of Securities

Question 1

The Securities Act of 1933 imposes liability on anyone who controls any person liable under Section 11 or 12 of the Act.

Answer 1

True

Question 2

The Securities Act of 1934 requires continuous disclosure of certain information regarding publicly traded securities.

Answer 2

True

Question 3

The defense of no causation under the Securities Act of 1933 means that although the plaintiff lost money on a trade,that loss was not due to the defendant's conduct.

Answer 3

True

Question 4

Under the Securities Act of 1933,an investor may bring a private suit for damages.

Question 5

A secondary offering is the subsequent offering of securities by the original issuer.

Question 6

Section 11 of Securities Act of 1933,which provides a remedy for a person who purchases a security pursuant to a misleading registration statement,allows class action suits.

Question 7

A best-efforts underwriting of securities leaves the risks of the offering with the issuer.

Question 8

The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board.

Question 9

A "red herring" is the popular name given to the final prospectus under the 1933 Act.

Question 10

The term "security," for purposes of the Securities Act of 1933,is narrowly interpreted to include only such traditional investments as a stock or a bond.

Question 11

Shelf registration under the Securities Act of 1933 allows registration of a number of securities at one time for issuance later.

Question 12

The SEC has the statutory authority to approve or disapprove an offering on its merits.

Question 13

Investors are prohibited under federal securities law from making highly speculative investments.

Question 14

The Securities Act of 1933 is also referred to as the "blue sky" law.

Question 15

The bespeaks caution doctrine has been adopted by all courts.

Question 16

The Securities Act of 1933 requires promoters of securities offerings to register them with the Treasury Department.

Question 17

The SEC now requires that all documents filed under the Securities Act of 1933 be written in plain English.

Question 18

Proxies give the proxy holder the right to vote the shares owned by the person who signs the proxy card.

Question 19

The Sarbanes-Oxley Act does not address the provision of nonaudit services to audit clients of an accounting firm.

Question 20

The defenses of due diligence under Section 11 of the Securities Act of 1933 is not available to the issuing company.

Question 21

Which of the following is false regarding the Sarbanes-Oxley Act?

A)The Act mandates the composition and authority of audit committees at public companies.
B)The Act prohibits personal loans to executives.
C)The Act requires corporations to disclose whether they have a code of ethics applicable to senior financial officers and,if not to disclose why not.
D)The Act gives the SEC the authority to prohibit unfit persons from serving as officers or directors of a public company for a period of five years.

Question 22

Which of the following is not considered a traditional shelf offering?

A)securities offered pursuant to employee benefit plans
B)securities offered pursuant to dividend reinvestment plans
C)securities issued to alter voting rights for shareholders
D)securities issued in connection with business combination transactions

Question 23

Under the ___________ provision of Regulation A,the exemption is unavailable if the directors of the issuer have been subject to SEC disciplinary orders for securities fraud within the applicable time limit.

A)bad boy
B)sit out
C)wait and see
D)testing the waters

Question 24

The ________ is the disclosure document that an issuer of securities provides to each prospective purchaser under the 1933 Act.

A)registration statement
B)prospectus
C)investment contract
D)placement memorandum

Question 25

Section 12(a)(1)of the Securities Act of 1933 imposes liability on

A)anyone who trades on inside information.
B)persons who offer or sell any security.
C)persons who offer or sell a covered security without an effective registration statement.
D)persons who buy a security without an effective registration statement.

Question 26

Which of the following is not an accredited investor under Rule 501?

A)any state entity
B)any director of the issuer
C)any corporation with total assets in excess of $5 million
D)any natural person with a net worth in excess of $1 million

Question 27

Rule 144A permits the resale of unregistered securities to qualified

A)issuers.
B)underwriters.
C)institutional buyers.
D)federal banks.

Question 28

A ________ offering of securities is a subsequent offering by a person other than the issuer.

A)secondary
B)restricted
C)blank check
D)shelf

Question 29

A key step in preparing the registration statement is the process of ________,whereby the company,the underwriters,and their respective counsel assemble and review the information about the company in the registration statement.

A)due diligence
B)reasonable review
C)strict scrutiny
D)proofing

Question 30

Securities issued in a private placement are called ________ securities.

A)qualified
B)private
C)restricted
D)shelf

Question 31

Section 16 of the 1934 Securities and Exchange Act requires that ________ file ownership reports initially,when they acquire or dispose of securities,and on an annual basis.

A)executive officers
B)directors
C)persons holding more than 10 percent of the equity securities of a public company
D)all of the responses are correct

Question 32

________,under certain conditions,may be able to avoid joint and several liability for a misleading registration statement under Section 11 of the Securities Act of 1933.

A)Inside directors
B)Outside directors
C)Officers
D)Underwriters

Question 33

Which of the following is not true regarding The Private Securities Litigation Reform Act?

A)The Act includes procedural provisions designed to correct perceived abuses private securities litigation.
B)To prevent "fishing expedition" lawsuits,the Act provides that,except in extraordinary circumstances,courts must stay discovery pending a ruling on a motion to dismiss the
Complaint.
C)The Act also introduced the idea that the "most adequate plaintiff" should be the lead plaintiff and select counsel to represent the class.
D)The Act creates joint and several liability for all violations under Section 10(b)of the 1934 Act.

Question 34

Under the Sarbanes-Oxley Act discriminating against or discharging an informant

A)is punishable by a fine only.
B)is punishable by a substantial fine or imprisonment for as long as ten years,but not both.
C)is punishable by a substantial fine or imprisonment for as long as ten years,or both.
D)none of the responses are correct.

Question 35

Which of the following securities is not listed as exempt securities under Section 3 of the 1933 Act?

A)Any security issued by the United States or any state of the United States.
B)Any security issued or guaranteed by any national bank.
C)Any security issued by a charitable organization.
D)Any security issued by any person other than an issuer,underwriter or dealer.

Question 36

If an issuer makes successive sales within a limited period of time,the SEC may ________ the successive sales,resulting in the loss of a private-offering exemption.

A)restrict
B)register
C)integrate
D)qualify

Question 37

Any transaction that involves an investment of money in a common enterprise with profits to come solely from the efforts of others is deemed to be a(n)________ and thus a security.

A)stock issuance
B)investment contract
C)secured sale
D)committed sale

Question 38

Which of the following is not part of the Howey test?

A)scienter
B)an investment of money
C)common enterprise
D)profits obtained solely through the efforts of others

Question 39

Which of the following is not required in a registration statement?

A)description of the securities being offered
B)description of the business of the issuer
C)five-year earnings forecast
D)risk factors of the offering

Question 40

The ________ is the private offering counterpart to the prospectus.

A)private registration prospectus
B)red-herring prospectus
C)private-placement memorandum
D)restricted sale

Question 41

A company that is registered with the SEC under Section 12 the 1934 Act is commonly referred to as a ________ company.

A)listed
B)reporting
C)registered
D)trading

Question 42

Which of the following is not an enumerated defense for a violation of Section 11 of the Securities Act of 1933?

A)no reliance
B)no causation
C)due diligence
D)no reasonable belief

Question 43

Fact pattern 22-2
Alice,along with her general partner Greg,owns several businesses.She is very interested in salt water aquariums and decides that a good venture for the partnership is the development of a business to raise tropical fish for that environment.She plans to issue stock to start a business raising fish for that environment with the idea that she and Greg will purchase a majority of the stock.She has a friend,Tony,who is a plastic surgeon with a good practice who has expressed interest in the venture because he believes that the presence of fish in waiting rooms reduces anxiety and encourages patients to spend more money.She does not want to go to the expense and trouble of a formal registration under the 1933 Act and seeks advice on how to avoid that process.
Refer to fact pattern 22-2.As far as Greg is concerned,which of the following is true?

A)Selling to Greg would not trigger registration requirements because his status as Alice's general partner results in him being considered an accredited investor.
B)Selling to Greg would not trigger registration requirements so long as he purchases at least 10% of outstanding stock.
C)Selling stock to Greg would not trigger registration requirements because he is a tombstone investor.
D)Selling stock to Greg would trigger registration requirements.

Question 44

Which of the following activities are not regulated by the 1934 Act?

A)primary securities sales
B)proxy solicitations
C)insider trading
D)tender offers

Question 45

Which of the following may be sued under Section 11 of the Securities Act of 1933 which provides a remedy for a person who purchases a security pursuant to a misleading registration statement?

A)The underwriters.
B)Persons who gave their consent to be named in the registration statement as future directors.
C)Both underwriters and persons who gave their consent to be named in the registration statement as future directors.
D)Any officer.

Question 46

Which of the following is true under the 1933 Act regarding the rights of a purchaser of unregistered securities sold illegally?

A)The purchaser must determine within ten days after learning of the illegal sale whether to seek rescission.
B)Only the SEC,not the purchaser,has rights because the purchaser should have been more careful.
C)If the investment proves successful,the investor can keep the shares; but if,within one year from the date of purchase,the investment proves unprofitable,the investor can get his or her
Money back.
D)The purchaser has no option to keep the shares and must return them for a refund of the purchase price.

Question 47

Explain the meaning and scope of the term "security" under the Securities Act of 1933.Include in your answer a discussion of the Howey test,the family resemblance test,and the sale of business test.Discuss fully.

Question 48

Fact pattern 22-3
Yolanda has filed the registration statement,in connection with a public offering of stock in Corgi Rocks Company,a company dedicated to the production of clothing and toys highlighting the highly prized Welsh Corgi breed of dog.The registration statement is not yet effective.Yolanda would like to move forward with promoting the company as much as possible.She asks for advice regarding activities in which she could legally participate.She is particularly interested in making presentations to large institutional investors.
Refer to fact pattern 22-3.Which of the following is true regarding Yolanda's situation?

A)Because she is in the active period,no sales of securities are allowed.
B)During this quiet period,offers to buy may be accepted.
C)During this waiting period,she may solicit offers to buy securities but may not accept them yet.
D)During this quiet period,no sales of securities are allowed,and the red herring may not be distributed

Question 49

According to the ________ doctrine,a court may determine that the inclusion of sufficient cautionary statements in a prospectus renders immaterial any misrepresentations and omissions contained therein.

A)actual cause
B)bespeaks caution
C)common sense
D)trap door

Question 50

Explain the scope and purpose of Section 11 of the Securities Act of 1933 regarding misleading registration statements.What is the basis for liability regarding the state of mind required?

Question 51

Wynette plans to take steps to take her business public and raise funds through a public offering of stock.Her attorney tells her that there are some state laws that she should consider as well as the Securities Act of 1933.Which of the following is the proper term for state laws regulating the issuance of securities?

A)red line laws
B)blue sky laws
C)purple hue laws
D)none of the responses are correct because federal law has preempted all state regulation in the area of transactions involving securities.

Question 52

Fact pattern 22-1
Rodney is unhappy because stock he recently purchased pursuant to an initial public offering has lost value.He would like to get his money back.While he has not real basis for believing that the issuance of stock was illegal,he believes that if he sues,his money will be returned because that would be less expensive than litigation.He decides that his best bet is to sue the issuer in federal court under Section 12 of the 1933 Act alleging that the securities he purchased were offered without an effective registration statement and by mean dos a noncomplying prospectus.He consults,Benny,a recent law school graduate who just passed the bar,regarding his plan.Benny really needs to make some money and is considering filing a lawsuit for Rodney.Benny figures that if the plan does not work,he can always just drop the lawsuit.
Refer to fact pattern 22-1.What concerns should Rodney have regarding expenses of the litigation?

A)His only expense should be hiring Benny which should be fairly low since Benny is a recent graduate.
B)In addition to the expense of hiring Benny,he would have to pay a nonrefundable fee of $500 that is charged by federal law for instituting securities litigation.
C)In addition to the expense of hiring Benny,he would have to pay a nonrefundable fee of $1,000 that is charged by federal law for instituting securities litigation.
D)If the judge rules that the action was brought for an improper purpose,he could be charged with paying the defendant's attorneys fees and costs incurred in the case.

Question 53

Underwriters play an important role in the public sale of securities.Describe the function of the underwriter and explain the two different types of underwriting.

Question 54

Fact pattern 22-1
Rodney is unhappy because stock he recently purchased pursuant to an initial public offering has lost value.He would like to get his money back.While he has not real basis for believing that the issuance of stock was illegal,he believes that if he sues,his money will be returned because that would be less expensive than litigation.He decides that his best bet is to sue the issuer in federal court under Section 12 of the 1933 Act alleging that the securities he purchased were offered without an effective registration statement and by mean dos a noncomplying prospectus.He consults,Benny,a recent law school graduate who just passed the bar,regarding his plan.Benny really needs to make some money and is considering filing a lawsuit for Rodney.Benny figures that if the plan does not work,he can always just drop the lawsuit.
Refer to fact pattern 22-1.Should Benny have any concerns personally regarding institution of the litigation?

A)No,since he is only acting as Rodney's attorney,Rodney would be responsible for any inaccurate court filings.
B)Yes,he could be sanctioned under Rule 11 of the Federal Rules of Civil Procedure.
C)There are no federal rules under which Benny could be sanctioned,but he could receive a reprimand pursuant to his state board of professional responsibility.
D)No,because as a recent law school graduate,he has a learning curve period of one year before any rules pertaining to sanctions for court filings would take effect.

Question 55

A reference to ________ addresses a practice whereby underwriters would distribute initial pubic offering shares to a corporate executive in exchange for the investment banking business of the executive's corporation.

A)churning
B)laddering
C)spinning
D)flipping

Question 56

When have courts found a general partnership interest to be a security?

Question 57

Do you believe that the securities rules that are in place are sufficient to protect investors? Why or why not? Discuss fully.

Question 58

A(n)________ is defined under the 1933 Act as any person who has purchased from an issuer with a view to,or offers or sells for an issuer in connection with,the distribution of any security.

A)investment banker
B)underwriter
C)dealer
D)secondary seller

Question 59

Fact pattern 22-3
Yolanda has filed the registration statement,in connection with a public offering of stock in Corgi Rocks Company,a company dedicated to the production of clothing and toys highlighting the highly prized Welsh Corgi breed of dog.The registration statement is not yet effective.Yolanda would like to move forward with promoting the company as much as possible.She asks for advice regarding activities in which she could legally participate.She is particularly interested in making presentations to large institutional investors.
Refer to fact pattern 22-3.Which of the following are true regarding selling efforts to institutional investors during this period.

A)Such efforts are called roadshows and are legal so long as SEC requirements are followed.
B)Such efforts are an illegal type of promotion referenced as selling promotions.
C)Such efforts are called concerted sales and are legal so long as the SEC gives prior approval.
D)Such efforts are simply called felonies and can result in fines as well as jail time.

Question 60

Fact pattern 22-2
Alice,along with her general partner Greg,owns several businesses.She is very interested in salt water aquariums and decides that a good venture for the partnership is the development of a business to raise tropical fish for that environment.She plans to issue stock to start a business raising fish for that environment with the idea that she and Greg will purchase a majority of the stock.She has a friend,Tony,who is a plastic surgeon with a good practice who has expressed interest in the venture because he believes that the presence of fish in waiting rooms reduces anxiety and encourages patients to spend more money.She does not want to go to the expense and trouble of a formal registration under the 1933 Act and seeks advice on how to avoid that process.
Refer to fact pattern 22-2.As far as Tony is concerned,which of the following is true?

A)Selling to Tony would not trigger registration requirements because of the professional exemption.
B)Selling to Tony would not trigger registration requirements if it can be established that his income or net worth meets amounts required to qualify him as an accredited investor.
C)Selling to Tony would not trigger registration requirements so long as he purchases under 5% of the stock.
D)Selling to Tony would trigger registration requirements.