Deck 41: Investor Protection and Online Securities Transactions

Question 1

A prospectus is used as a selling tool by the issuer.

Answer 1

True

Question 2

The Securities Act of 1933 primarily regulates the issuance of securities.

Answer 2

True

Question 3

Misrepresentations about an offer or sale are considered to be a violation of the Securities Act of 1933.

Answer 3

True

Question 4

A prospectus has no real purpose other than to file a registration with the SEC.

Question 5

The Securities and Exchange Commission was created as part of the Securities Exchange Act of 1934.

Question 6

The SEC issues ratings on the estimated risk of investing in a particular security.

Question 7

Generally,unless the SEC objects,a registration statement does not become effective until 20 days after it is filed.

Question 8

Securities transactions not made by an issuer are exempt from registration.

Question 9

The Howey test is used to determine whether investment contracts are classified as securities for purposes of the federal securities laws.

Question 10

Under the small offering exemption of the Securities Act of 1933,the securities can be sold to only a limited number of unaccredited investors.

Question 11

An issuer may be a new company selling securities through an initial public offering.

Question 12

Pyramid sales schemes are not securities for purposes of federal securities law.

Question 13

The SEC is composed of five members who are appointed by the President.

Question 14

Anyone who willfully violates the Securities Act of 1933 may be fined as well as imprisoned.

Question 15

The omission of a material fact on a registration statement may be a violation of Section 11 of the Securities Act of 1933 unless the defendant utilizes the due diligence defense.

Question 16

Regulation A allows issuers to sell up to $100,000 of securities to the public during a 12-month period.

Question 17

Investors who purchase unregistered securities have no recourse against the sellers.

Question 18

The private placement exception to registration of securities allows raising an unlimited amount of capital from an unlimited number of accredited investors.

Question 19

An issuer can qualify for an intrastate offerings exemption in only one state.

Question 20

A covered issuer need not file a written registration statement,as the SEC does not require any written formalities.

Question 21

Employees may not violate insider-trading rules.

Question 22

Which of the following statements is true about activities allowed in connection with a public offering?

A) Generally,the waiting period is 20 days.
B) During the pre-filing period,the issuer may "condition the market."
C) During the waiting period,the issuer may sell and deliver securities,as long as a prospectus is provided to the investor.
D) After the registration statement is effective,the issuer may sell and deliver securities without giving the investor a prospectus.
E) A prospectus only need be delivered when the sale is closed.

Question 23

Which of the following items is not required to be included in a registration statement?

A) description of the securities
B) the price at which the securities will sell
C) description of the issuer's business
D) description of how the proceeds are to be used
E) audited (certified) financial statements

Question 24

Which of the following is not one of the functions of the Securities and Exchange Commission?

A) adopting rules to further the functions of the securities laws
B) providing government-backed insurance to purchasers of securities
C) investigating securities violations
D) bringing enforcement actions against suspected violators of securities laws
E) regulating securities brokers and advisors

Question 25

Under Section 16 of the Securities Act of 1934,a statutory insider includes any shareholder owning 5 percent or more of an equity security of a corporation.

Question 26

Which of the following is true about the 1933 and 1934 securities acts?

A) The 1934 Act superseded the 1933 Act and covers all aspects of securities issuance and trading.
B) The 1933 Act covers securities listed on stock exchanges,and the 1934 Act covers non-listed securities.
C) The 1933 Act covers the initial issuance of securities,and the 1934 Act covers the subsequent trading of securities.
D) The 1933 Act covers the initial issuance and subsequent trading of stocks,and the 1934 Act covers the initial issuance and subsequent trading of bonds.

Question 27

The Insider Trading Sanctions Act passed in 1984 allows the SEC to impose a fine of up to three times the amount of illegal profits gained from insider trading.

Question 28

An insider is liable for so-called short-swing profits only if she has used inside information.

Question 29

Negligence causing a material misstatement will subject a party to liability under Rule 10b-5 of the Securities Exchange Act of 1934.

Question 30

Companies that are covered under the Securities Exchange Act of 1934 are subject to ongoing filing requirements even if they are not making new offerings of securities.

Question 31

Which of the following is true about the relationship between the registration statement and the prospectus?

A) Only the registration statement is required to be filed with the SEC,and only the prospectus must be provided to purchasers of securities.
B) Both the registration statement and the prospectus must be submitted to the SEC,and both are required to be provided to prospective purchasers of securities.
C) Both the registration statement and the prospectus must be submitted to the SEC,but only the Prospectus is required to be provided to prospective purchasers of securities.
D) Both the registration statement and the prospectus must be submitted to the SEC,but only the Registration Statement is required to be provided to prospective purchasers of securities.
E) Both the registration statement and the prospectus must be submitted to the SEC,but either may be submitted to prospective investors,so long as one is.

Question 32

In order for an investment contract to be classified as a security,which of the following is required?

A) an investment of money
B) a common enterprise
C) the expectation that profit form the enterprise will result from the efforts of others
D) A,B,and C
E) A and C only

Question 33

The Insider Trading Sanctions Act provides for probation for illegal benefits received from insider trading.

Question 34

No more than 35 non-accredited investors may purchase securities pursuant to a private placement exemption.

Question 35

Rule 10b-5,which prohibits securities fraud,applies only to the securities of companies listed on the major stock exchanges.

Question 36

An insider may be a representative hired by a company on a temporary and nonemployee-type status.

Question 37

A tippee is liable for acting on information that he or she should have known was not public.

Question 38

What is the significance of the Howey test under federal securities law?

A) It determines a security's type.
B) It determines whether stocks and bonds are securities.
C) It determines whether investment contracts are securities.
D) B and C only
E) A,B,and C

Question 39

The general purpose of the Securities Act of 1933 is:

A) to allow the issuance of only those securities whose level of risk has been approved by the SEC
B) to provide that all securities issued have adequate insurance coverage
C) to provide that all relevant information is disclosed to potential purchasers of new issues of securities
D) to provide potential purchasers of securities with a safety rating system
E) to provide that relevant information about publicly traded securities is provided to investors at least quarterly

Question 40

Which of the following are securities?

A) investment contracts,stocks,and bonds,but not warrants
B) stocks,bonds,and pre-organization subscription agreements,but not investment contracts
C) bonds and common stocks,but not preferred stocks
D) common and preferred stocks,but not bonds
E) stocks,bonds,pre-organization subscription agreements,and investment contracts

Question 41

Under Rule 10b-5,an insider with material nonpublic information:

A) may sue the corporation to make a profit by buying or selling that company's stock
B) must disclose the information
C) must either abstain from trading in that company's stock or disclose the information to the person he is trading with
D) must abstain from trading in any and all stock

Question 42

The common defense available in a Section 11 action of the Securities Act of 1933 is:

A) the reasonable person defense
B) the due diligence defense
C) the no injury to plaintiff defense
D) the private placement defense
E) the de facto compliance defense

Question 43

Who is classified as a statutory insider under Section 16(a)of the Securities Exchange Act of 1934?

A) officers and directors,but only if they own at least 10 percent of the outstanding shares
B) all officers and directors
C) anyone,such as accountants or lawyers,who has provided services to the corporation
D) anyone,whether or not an officer or director,who owns at least 10 percent of the outstanding shares of a corporation
E) B and D

Question 44

Under Rule 10b-5,if a non-insider (the tippee)receives material nonpublic information from an insider (the tipper),the tippee:

A) may use it to make a profit by buying or selling that company's stock
B) may use it to make a profit by buying or selling that company's stock,only if the tipper voluntarily disclosed the nonpublic information
C) must disclose that information
D) must either abstain from trading in that company's stock or disclose the information to the person with whom he is trading
E) must abstain from trading in any and all stock

Question 45

What does Regulation A under the Securities Act of 1933 provide?

A) exemption of certain types of securities from registration
B) exemption of certain securities transactions from registration
C) a simplified registration for some securities offerings under a certain dollar amount
D) state regulation in place of federal regulation for certain small offerings
E) that tombstone ads can be placed during the waiting period

Question 46

Under Section 24 of the Securities Act of 1933,the maximum penalty is imprisonment for:

A) 1 year
B) 2 years
C) 5 years
D) 10 years
E) 20 years

Question 47

Under the Securities Act of 1933,which of the following is true about activities of the issuer during the waiting period?

A) The issuer cannot condition the market during the waiting period.
B) The issuer can make preliminary sales to accredited investors during the waiting period.
C) The issuer cannot place tombstone ads during the waiting period.
D) The issuer may not make any offers to sell the securities during the waiting period.

Question 48

Rule 10b-5 of the Securities Exchange Act of 1934 applies to:

A) issuances of securities if they are covered by a registration statement
B) trading of securities if the trading is done on a national exchange
C) only transactions connected with a merger of consolidation
D) any transfer of securities
E) only transfers made in violation of a transfer restriction

Question 49

Is there a private right of action under Section 10b-5 of the Securities Exchange Act of 1934?

A) Yes; the Act expressly provides one.
B) No; there is not such a right under the Act.
C) There is a private cause of action,but only if consent to sue is received from the SEC.
D) There is no express private right of action,but courts have implied one.

Question 50

Which of the following is not an accredited investor for purposes of the private placement exemption under the Securities Act of 1933?

A) a person with a net worth of at least $1,000,000
B) a corporation or partnership with total assets in excess of $5,000,000
C) a director of a corporation that is the issuer
D) a person who had an income of at least $200,000 in the most recent year

Question 51

Under Rule 10b-5,which is true about insiders?

A) Officers and directors are insiders,but employees who are not officers are not insiders.
B) Officers and directors are insiders,but lawyers or accountants that are hired only on a temporary basis are not insiders.
C) Employees at all levels in a company are insiders,as well as lawyers,accountants,and consultants even when hired only on a temporary basis.
D) Agents hired on a temporary nonemployee basis to provide services to the company are not insiders.

Question 52

Which of the following is not correct about the intrastate offering exception under the Securities Act of 1933?

A) The issuer must be a resident of the state for which the exemption is claimed.
B) The issuer can qualify for the exemption in only one state.
C) The issuer must do business only in the state for which the exemption is claimed.
D) The purchasers must all be residents of the state for which the exemption is claimed.

Question 53

When selling securities under Regulation A,which of the following is true?

A) Issuers must limit the sales of the securities to accredited investors.
B) Issuers cannot sell more than $5,000,000 of securities in 1 year under Regulation A.
C) All issuers must provide an offering statement.
D) Sales are limited to 25 unaccredited investors.
E) There are restrictions on the resale of the securities.

Question 54

What is the general reason for restrictions against insider trading under the Securities Exchange Act of 1934?

A) Corporate insiders should not own stock in the corporation because it is a conflict of interest.
B) Use of inside information is unfair to the other party to the transaction and goes against the philosophy of allowing all participants in the market having the same information.
C) Insider trading generally leads to lower stock prices.
D) Insider trading results in an imbalance of buyers and sellers in the market.
E) The value of a prospectus is compromised when insider trading is conducted.

Question 55

When an insider discloses material insider information to a non-insider tippee,the tipper is liable for:

A) the tipper's own trading only
B) the tippee's profits,but not the profits made by any remote tippees
C) the profits of both the immediate tippee and the profits of any remote tippees
D) the profits of all traders during the period before the information became public

Question 56

Under the 1933 Securities Act,a person responsible may be held liable for:

A) intentional fraud
B) a material omission or misstatement
C) failure to file a registration statement or deliver a prospectus as required by law
D) A,B,and C
E) B and C only

Question 57

What actions can the SEC take against a violator of the Securities Exchange Act of 1934?

A) It may enter into consent orders with defendants.
B) It may seek injunctions in Federal District Court.
C) It may seek a court order requiring defendants to disgorge illegal profits.
D) It may seek civil penalties up to three times the illegal profits from insider trading.
E) All of the above.

Question 58

Section 11 of the Securities Act of 1933 provides:

A) criminal liability for intentional misstatements only
B) civil liability for intentional misstatements only
C) civil liability for intentional misstatements or for misstatements where negligence led to the false statement
D) criminal liability for selling securities without a prospectus

Question 59

The Securities Exchange Act of 1934 covers the following except:

A) trading of certain securities following their initial issuance
B) regulation of securities exchanges
C) initial issuances of securities that are exempt under the 1933 Act
D) ongoing periodic financial reporting by companies listed on national exchanges

Question 60

Under the due diligence defense to a Section 11 action under the Securities Act of 1933,which of the following is true?

A) Only the issuer can assert a due diligence defense.
B) Any defendant can assert a due diligence defense.
C) Any defendant except the issuer can assert a due diligence defense.
D) The due diligence defense must be asserted together by all defendants,or not at all.
E) Existence of the defense will replace criminal liability with a lesser civil liability.

Question 61

Why were the Securities Acts passed,given that ordinary contract law provides many remedies for persons who have been the victim of fraud,and other such crimes?

Question 62

The CPA firm of Peterson and Peterson was hired by Hickory Street Corporation to audit its financial statements in connection with its initial public offering in 1998.Since then Peterson and Peterson has been retained to audit the financial statements in connection with the filings required under the Securities Exchange Act of 1934.In 2006,Peterson and Peterson discovered that all the financial statements audited in 2003,2004,and 2005 contained material misstatements.Peterson and Peterson negligently performed all of these audits,but did not know of the misstatements.Which is true about Peterson and Peterson's liability under Section 11 of the Securities Act of 1933 and under Rule 10b-5 of the Securities Exchange of 1934?

A) The firm is liable under both Section 11 and Rule 10b-5.
B) The firm is liable under Section 11,but not under Rule 10b-5.
C) The firm is liable under Rule 10b-5,but not under Section 11.
D) The firm is liable under neither Section 11,nor under Rule 10b-5.

Question 63

Wondercures,Inc.is a drug research and manufacturing firm.Wondercures is currently a privately held corporation.The owners of Wondercures believe that they could greatly increase the company's profitability with an infusion of new capital.This would have to come by issuing stock to additional investors.The owners of Wondercures believe that they would need about $20 million in order to carry out their expansion plans.Discuss the options available to Wondercures,and the advantages and disadvantages of each.

Question 64

A corporate employee is deemed to be an insider,and buys shares of company stock on May 1,2008.He leaves his employment on June 1,2008.When can he sell his stock without violating SEC Section 16?

A) November 1,2008
B) December 1,2008
C) May 1,2009
D) June 1,2009

Question 65

Harmon,Inc.is a manufacturer of auto parts and wishes to issue new stock to raise capital.Harmon is incorporated and does all of its business in Indiana.Harmon would like to offer its stock regionally,but is flexible depending on the circumstances.There are also several wealthy,sophisticated individuals who would like to purchase Harmon stock.Discuss the methods available to issue Harmon stock exempt from SEC registration.

Question 66

Mary wants to invest in some rental property near a major university.Mary approaches Sally and proposes that Sally invest half the down payment in an apartment complex.Mary would devote the majority of the efforts in managing the apartments.Sally would devote some time to managing the complex and would receive 30 percent of the profits.They plan to operate the complex as a partnership.Is Sally's investment in the apartment complex a security under the 1933 and 1934 Securities Acts?

Question 67

Spruce,Inc.wishes to issue new stock to raise capital.Spruce is incorporated,and does all its business in Indiana.Spruce intends to offer and sell its new stock only to residents of Indiana,and to restrict sales to individuals from other states for the proper time.Which of the following best describes the status of Spruce's new stock?

A) This transaction is exempt as an intrastate offering.
B) This transaction is exempt as an intrastate offering,but only if Spruce sells only to accredited investors.
C) This transaction is exempt as an intrastate offering,but only if Spruce issues less than $1.5 million in securities.
D) This transaction is exempt as a private placement.
E) Since the securities are traded only in intrastate commerce,the securities themselves are exempt.

Question 68

Caroline is riding the elevator when she overhears two men talking about a proposed merger.It seems that Strawberry Corporation is going to acquire all the stock of Maple Co.Caroline asks the two men what they are talking about,and they say that when this news becomes public,Maple Co.'s stock will increase dramatically in price.They tell Caroline that this is private information and that she is not to tell anyone.Caroline buys some Maple Co.stock.Several months later,after the merger is announced,Caroline sells her stock for a large profit.Assuming all the information Caroline had was material,nonpublic information,which of the following best describes Caroline's situation?

A) Caroline has violated no law,because she is not an insider.
B) Caroline has violated no law,because she did not know the men she overheard.
C) Caroline has violated no law,because she had already heard the main points of the information before asking about it.
D) Caroline has probably violated the 1934 Securities and Exchange Act.
E) Caroline has probably violated the 1933 Securities Act.

Question 69

John operates a sailboat charter service in the U.S.Virgin Islands.He currently has a fleet of 10 boats and would like to have a larger fleet,but would have to obtain additional investors,which he does not want to do.He is considering having investors buy sailboats,which he would maintain and operate as part of his charter fleet.He would enter into a contract that would sell the boat to the investor and provide for the investor to pay John a monthly fee for the maintenance of the boat,and would provide for the sharing of profits between John and the investor.Discuss whether this investment is a security under the 1933 and 1934 Securities Acts.

Question 70

Bluegrass Inc.is incorporated and does all of its business in the state of Kentucky.Bluegrass has planned to issue $5,000,000 in new stock.Bluegrass has 10 potential investors,nine of whom live in Kentucky,and one who lives in Ohio.Only one of these potential investors is accredited.Can Bluegrass qualify for any of the registration exemptions under the Securities Act of 1933?

Question 71

Which of the following is true about Section 16(a)of the Securities Exchange Act of 1934 relating to short-swing profits?

A) It applies only to officers and directors of the corporation.
B) It provides for recovery from a statutory insider by the other party to the transaction.
C) It covers any trades occurring within 1 year of each other.
D) It provides that any profits on trades occurring within 6 months of each other made by a statutory insider belong to the corporation.

Question 72

A company is planning a security offering.To drum up public demand,the corporate officers go on a publicity campaign to tout the prospectus of the company and to publicize the securities issue.Additionally,annual reports are sent to all shareholders.Are these actions permitted?

A) Yes; both actions are permissible.
B) The public relations campaign is permissible,but the mailing of annual reports is prohibited.
C) The public relations campaign is illegal,but the mailing of the annual reports is permissible.
D) No; neither action is permissible.

Question 73

David has put together a limited partnership to invest in oil exploration.He wants to sell limited partnership interests to investors.David plans to sell these interests to both accredited and non-accredited investors.Which of the following best describes the status of David's partnership interests as to the 1933 Securities Act?

A) Limited partnership interests are not securities under the 1933 Act,so David is exempt.
B) This transaction is exempt as a private placement.
C) This transaction is exempt as a private placement only if David sells to no more than 35 accredited investors.
D) This transaction is exempt as a private placement only if David sells to no more than 35 non-accredited investors.
E) This transaction is exempt as a private placement only if David sells no more than $1.5 million worth of securities.

Question 74

Jill is president of Starship Enterprises,Inc.She bought stock in Starship on January 1,2002,and sold it for a profit on March 1,2002.Jill used no nonpublic information when she bought or sold the stock.Which of the following best describes Jill's situation?

A) Jill has not violated any law.
B) Jill has violated the insider trading rules,and the profit belongs to the corporation.
C) Jill has violated the short-swing profits rule,and the profit belongs to the corporation.
D) Jill has violated the securities registration law.
E) both B and C

Question 75

Is liability under Section 11 of the Securities Act of 1933 too broad? Should parties be liable even without scienter? Does the due diligence defense put too much of the burden of proof on defendants?

Question 76

Walter was the president of JKL,Inc.JKL intended to purchase Target Co.JKL's intent was not public information,and when it became public,Target's stock would increase significantly in value.Walter bought no stock himself,but told his best friend of JKL's plan,and his friend bought 1,000 shares of Target Co.Ten months later,when the merger was publicly announced,the friend sold Target's stock and made a large profit.Several stockholders of Target sue Walter and his friend under the provisions of the Securities Acts.What results?

A) Walter has violated no law,because Walter did not purchase any stock.
B) The friend has violated no law because this nonpublic information is not considered material.
C) The friend has violated no law,because the friend is not an insider.
D) Both Walter and his friend have violated Rule 10b-5.
E) Both Walter and his friend have violated the Securities Act of 1933.

Question 77

Robert was the president of JKL,Inc.JKL intended to purchase Target Co.JKL's intent was not public information,and when it became public,Target's stock would increase significantly in value.Robert individually bought 1,000 shares of Target Co.Ten months later,when the merger was publicly announced,Robert sold Target's stock and made a large profit.Assuming that Robert is guilty of a violation under the 1934 Securities and Exchange Act,what are the possible consequences?

A) The persons who sold Robert the stock could rescind the sale and recover their stock.
B) The persons who sold Robert the stock could sue Robert for damages.
C) The government could charge Robert with criminal violations,leading to fines and/or imprisonment.
D) A,B,and C
E) B and C only

Question 78

Robert is the vice president of a medium-size corporation that operates retail sporting goods stores in seven states.Robert has considerable stock that he purchased and received over the years while working there.Robert has purchased no stock for the last 3 years because all his excess funds have gone toward college expenses for his oldest son.Robert's daughter will begin college in the fall,and Robert needs to sell some stock.Robert knows that one of the retail locations where the corporation owns the real estate was once used as a toxic dump.The corporation is legally obligated to clean up this site,and the costs will have a material effect on the corporation's net income for several years.This information is not yet public.Robert can:

A) freely sell his stock without any liability because it has been more than 6 months since he purchased any stock
B) sell his stock only if he tells the purchaser about the liability for cleaning up the toxic waste
C) sell his stock only if he gets prior clearance from the Securities and Exchange Commission
D) sell his stock only to an accredited investor
E) not sell his stock under any circumstances until the information about the toxic waste becomes public

Question 79

Are the rules on short-swing profits under Section 16(b)of the Securities Exchange Act of 1934 too restrictive or not restrictive enough? Merely because one is a statutory insider,is it proper to limit his or her ability to make a profit on the company's stock? Alternatively,should the 6-month period be longer? What is the theory behind making the profits belong to the corporation?

Question 80

For an investment contract,why is one of the requirements for the contract to be classified as a security that the arrangement be one where the profits are made through the efforts of others?