Deck 39: Investor Protection Insider Trading and Corporate Governance

Question 1

While the Securities and Exchange Commission reviews a registration statement for completeness, most issuers can distribute a free-writing prospectus.

Answer 1

True

Question 2

Securities can be sold before the effective date of the registration statement without restrictions.

Answer 2

False

Question 3

An investment contract in a franchise does not qualify as a security.

Answer 3

False

Question 4

The definition of security in the Securities Act of 1933 includes interests that involve the right to buy a security on a national security exchange.

Question 5

Most securities cannot be resold without registration.

Question 6

Forward-looking forecasts that turn out to be wrong can be protected against liability for securities fraud if they include "meaningful cautionary statements."

Question 7

Misrepresenting facts in a registration statement or prospectus is known as puffery and does not violate the Securities Act of 1933.

Question 8

The Securities and Exchange Commission is the main independent regulatory agency that interprets the federal securities laws.

Question 9

Small-business issues can use a securities registration and reporting system that requires simpler forms than the full registration system.

Question 10

While the Securities and Exchange Commission reviews a registration statement for completeness, the securities can be offered for sale but not sold.

Question 11

Insider trading is prohibited because trading on the basis of inside information can give the trader an unfair advantage over the investing public.

Question 12

The Securities Exchange Act of 1934 provides for continuous periodic disclosures by certain publicly held companies.

Question 13

To avoid sanctions under the Securities Exchange Act of 1934, whoever solicits a proxy must accurately disclose all facts pertinent to the matter on which shareholders are to vote.

Question 14

Crowdfunding can be exempt from the registration requirements of the Securities Act of 1933 if shares are offered directly to investors.

Question 15

Providing investors with more information helps them make buying and selling decisions about securities.

Question 16

The purpose of the Securities Act of 1933 is to regulate a security's investment price.

Question 17

A well-known seasoned investor has less flexibility in filing registration statements and using free-writing prospectuses than other issuers.

Question 18

Most private, small-business, noninvestment company offers of securities are exempt from the registration requirements.

Question 19

Most private, midsize-business, noninvestment company offers of securities are exempt from the registration requirements.

Question 20

Anyone who has access to or receives inside information of a nonpublic nature and trades on it for personal gain can be liable under SEC Rule 10b-5.

Question 21

Exemptions from federal securities laws are also exemptions from state securities laws.

Question 22

The key to liability under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5 is whether information omitted or misrepresented in connection with the purchase or sale of a security is material .

Question 23

Under the Securities Act of 1933, securities include

A)any instrument representing corporate ownership or debt.
B)a common enterprise reasonably expected to make a profit.
C)an investment in one's own personal entrepreneurial effort.
D)whatever a corporation represents to the public as profitable.

Question 24

State securities laws apply mainly to intrastate transactions.

Question 25

The Sarbanes-Oxley Act of 2002 attempts to increase corporate accountability by imposing strict disclosure requirements and harsh penalties for securities laws.

Question 26

Issuers of securities offerings must comply with either federal or state securities laws, but not both concurrently.

Question 27

A Ponzi scheme is a fraudulent investment that pays returns from new capital invested with the fraudsters instead of from a legitimate investment.

Question 28

Only the Securities and Exchange Commission can sue violators of Section 10(b)and Rule 10b-5.

Question 29

The Securities Exchange Act of 1934 applies to all cases involving the trading of securities, except in private transactions.

Question 30

The goal of securities regulation is to

A)contribute to the operations of national security exchanges.
B)prohibit deceptive and manipulative practices in the securities markets.
C)prescribe ways and means for investors to fairly break the rules.
D)none of the choices.

Question 31

Industrial Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Industrial is required to

A)contribute to the operations of national security exchanges.
B)disclose all essential information about the issuance of its securities.
C)engage in market surveillance to deter undesirable practices.
D)meet investors' reasonable expectations to make a profit.

Question 32

To avoid sanctions under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5, scienter must exist.

Question 33

Under the Sarbanes-Oxley Act of 2002, chief financial officers must certify the accuracy of information in corporate financial statements.

Question 34

Under the Sarbanes-Oxley Act of 2002, all members of a publicly traded corporation's audit committee must be outside directors.

Question 35

Market Data Corporation is required to file a registration statement with the Securities and Exchange Commission. This statement must contain

A)a copy of prospectuses to be provided to investors.
B)a description of securities being offered for sale.
C)a record of pre-registration sales in securities.
D)a statement that securities being offered for sale are worth the price.

Question 36

To avoid a conviction in a criminal prosecution under the securities laws, there must be at least a reasonable doubt that the defendant knew he or she was acting wrongfully.

Question 37

Securities must be registered under the Securities Act of 1933 for the Securities Exchange Act of 1934 to apply.

Question 38

An insider must use inside information in connection with the purchase and sale of securities to violate Section 16(b)of the Securities Exchange Act of 1934.

Question 39

United Delivery Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, United Delivery is required to

A)buy or sell its securities only on a national security exchange.
B)register its securities transactions unless they qualify for an exemption.
C)invest its own managerial or entrepreneurial efforts.
D)issue instruments representing corporate ownership or debt.

Question 40

Corporate "outsiders" may be held liable for insider trading under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Question 41

Space Flight Inc. files a registration statement with the SEC before making an offering to the general public. The registration contains false, immaterial statements of which the investors are unaware. The firm is charged with violating the Securities Act of 1933. Its best defense is

A)the investors were not aware of the misrepresentations.
B)the issuer reasonably believed the misstatements were true.
C)the offering was made available to the general public.
D)the untrue statements were not material.

Question 42

Pharma Corporation is a public company whose shares are traded in the public securities markets. With respect to financial and other significant information concerning its securities, the Securities Act of 1933

A)imposes increased responsibility on corporate executives.
B)prevents insiders from trading among themselves.
C)requires disclosure.
D)creates a safe harbor for forward-looking statements.

Question 43

To raise $120 million to expand operations, Primo Inc. makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. The firm plans to notify the SEC of sales. Under the Securities Act of 1933, this issue may qualify as an exempt transaction

A)as is.
B)if all of the investors are also given material information about the firm.
C)if the offering is also made to the general public.
D)under no circumstances.

Question 44

Orbital Flights Inc. is required to register its securities under Section 12 of the Securities Exchange Act of 1934. This means that, with respect to Orbital, Section 16(b)of the act covers

A)the declaration of dividends by Orbital's board of directors.
B)the later re-registration of Orbital's securities.
C)the short-swing activities of Orbital's insiders.
D)the solicitation of proxies from Orbital's shareholders.

Question 45

Dairy Stores Inc. owns and operates convenience stores. The firm wants to make an initial public offering of securities. If Dairy qualifies for an exemption from the federal registration requirement, the firm is

A)exempt from any state registration requirement.
B)not subject to any state securities laws.
C)not necessarily exempt from a state registration requirement.
D)subject to all state registration requirements.

Question 46

Mars Mission Inc. is a regulated publicly held corporation. Under the Securities Act of 1934, Mars is required to

A)contribute to the operations of national stock exchanges.
B)disclose information about its organization and financial situation.
C)engage in market surveillance to deter undesirable practices.
D)all of the choices.

Question 47

Home Stuff Corporation is poised to issue securities that, under the Securities Act of 1933, are exempt. This means that the securities can be sold

A)only after being registered.
B)on the basis of nonpublic information.
C)within any six-month period by certain insiders.
D)without being registered.

Question 48

Chris, a coder for Drones Inc., learns of undisclosed company plans to market a new, smart drone. Chris buys 10,000 shares of the firm's stock. If Chris is liable under the Securities Exchange Act of 1934, it will be because the information on which he based his purchase of the stock was

A)a forward-looking forecast.
B)not material.
C)not yet public.
D)not yet true.

Question 49

Equity Corporation, and its officers, directors, employees, and shareholders, buy and sell securities. Section 10(b)of the Securities Exchange Act of 1934 applies to the trading of securities

A)only by investment companies on organized exchanges.
B)only involving short-swing profits obtained in over-the-counter markets.
C)only involving tippers and tippees in private transactions.
D)in almost any circumstances.

Question 50

Household Products Corporation wants to make an offering of securities to the public. The offering is not exempt from registration under the Securities Act of 1933. Before the firm sells its securities, it must provide investors with

A)a forward-looking financial forecast.
B)an investment contract.
C)a prospectus.
D)a statement that the securities for sale are worth the price.

Question 51

As part of a stock offering for Design Media Corporation, the firm's accountant Eve intentionally misrepresents material facts in the prospectus. Fred buys the stock unaware of the misrepresentation and suffers a loss. Eve may be subject to

A)none of the choices.
B)job termination but no other sanctions, penalties, or liability.
C)a fine, imprisonment, and damages.
D)professional censure but no criminal sanctions or civil liability.

Question 52

Ewan, the chief executive officer of Furniture Inc., intentionally understates the amount of the firm's debts in information provided to investors as part of an issue of stock. Gary buys the stock and suffers a loss. Ewan may be subject to

A)government prosecution and a private investor's suit.
B)negative publicity but no criminal prosecution or civil suit.
C)only government prosecution.
D)only a private investor's suit.

Question 53

Jazz Inc. makes and markets music. The company wants to make an initial public offering of securities via the Internet. Most likely, this offering

A)can avoid high costs and complicated procedures.
B)is an attempt to deceive and manipulate investors.
C)is a way for investors to fairly break the rules.
D)will result in higher expenses and extended oversight.

Question 54

Reno, an engineer for Shale Corporation, learns that the firm will increase the dividend it pays to shareholders. Reno buys 10,000 shares of company stock. When the dividend is announced to the public and the price of the stock increases, he sells the shares for a profit. He would not be liable for insider trading if the information about the dividend was

A)material when he sold the stock.
B)available to the public after he bought the stock.
C)available to the public before he bought the stock.
D)forward-looking when he bought the stock.

Question 55

Fleet Trucking Corporation is a public company with a market capitalization of less than $75 million. Fleet is poised to issue securities in a transaction that, under the Securities Act of 1933, is exempt. This enables Fleet to

A)reduce the compliance costs by not requiring an auditor report.
B)buy and sell the securities without liability for recaptured profit.
C)make forward-looking financial forecasts without liability.
D)withhold inside information from accredited investors.

Question 56

Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries Inc. has assets of more than $50 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to

A)Fresh Fruit and Gourmand Pastries.
B)Fresh Fruit only.
C)Gourmand Pastries only.
D)neither Fresh Fruit nor Gourmand Pastries.

Question 57

Movie Time Corporation files a registration statement and delivers a prospectus to the appropriate parties. These items are intended to enable the evaluation of certain financial risks by

A)market professionals to explain to all investors.
B)government regulators to disclose to the general public.
C)sophisticated investors only.
D)unsophisticated investors.

Question 58

Eli, an officer for Food Stores Inc., buys 10,000 shares of its stock. One week later, the company announces that it will merge with a competitor, Grocery Mart Corporation, and the price of Food Stores' stock increases. One month later, Eli sells his shares for a profit. Under Section 16(b)of the Securities Exchange Act of 1934, Eli would not be liable if, after buying the stock, he had waited

A)less than fourteen days to sell it.
B)more than six months to sell it.
C)ninety days to sell it.
D)two months to sell it.

Question 59

Luan, a programmer for Monetized Nation Inc., a business modeling service, learns of undisclosed company plans to distribute a new app. Luan reveals the company plans to a friend, Ono, who buys 5,000 shares of the firm's stock. Under the Securities Exchange Act of 1934, Ono is most likely

A)liable for insider trading.
B)not liable because Ono did not prevent others from profiting.
C)not liable because Ono did not solicit information from Luan.
D)not liable because Ono does not work for the firm.

Question 60

Components Assembly Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that the company must

A)file a registration statement with the SEC.
B)issue the securities through an online registration site.
C)refrain from issuing the securities to unregistered investors.
D)register the securities with a national securities exchange.

Question 61

Debt Equity Inc., and its officers, directors, and employees, buy and sell securities based on financial research and analysis. Section 16(b)of the Securities Exchange Act of 1934 covers purchases and sales of securities involving

A)corporate insiders, such as officers, directors, and employees.
B)misappropriation of material, nonpublic information.
C)short-swing profits.
D)tippers and tippees.

Question 62

Dez is the chief financial officer of Elements Corporation, which is required to file certain financial statements with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Dez must personally

A)certify that the statements are accurate.
B)delegate the responsibility for preparing the statements.
C)deliver the statements to the appropriate SEC officer.
D)prepare the statements.

Question 63

Ridley is an officer of Sun Watts, Inc. Ridley knows that a Sun Watts engineer recently developed a new, inexpensive method for collecting, storing, and converting solar power into fuel. Ridley takes advantage of this information to buy Sun Watts stock from Taylor and, after the discovery is announced, to sell the stock to Ulrich at a profit. Taylor claims that this is a violation of federal law. Is Taylor correct? If so, what federal law has Ridley violated, and what are its possible penalties?

Question 64

Medico Corporation is a public company whose shares are traded in public securities markets. Medico's officers want to set up and maintain a system of "good corporate governance." What is "corporate governance"? What is its practical significance? What, at a minimum, should a "good" system of corporate governance include?

Question 65

Meat Packers Inc. offers its securities for sale only in a single state. The law in this state is like the law in most states. Thus, the company's offer is subject to the state's securities statutes, which are likely to include

A)antifraud provisions.
B)registration provisions.
C)disclosure requirements.
D)all of the choices.

Question 66

Ross, a sales executive with Steel Mill Inc., learns of undisclosed company plans to produce a new type of steel. Ross tells Tim, who tells Uri, who buys 100 shares of Steel Mill stock. Uri knows that Tim got the information from Ross. When the firm publicly announces its new product, Uri sells the stock for a profit. Under the Securities Exchange Act of 1934, Uri is most likely

A)liable for insider trading.
B)not liable because Uri is only a tippee, not a tipper.
C)not liable because Uri is too far removed from the initial disclosure.
D)not liable because Uri traded on the basis of a material fact.

Question 67

Cam, an accountant for Discount Inc., learns that the company's soon-to-be-announced quarterly sales figures exceed analysts' expectations. Cam tells Ed, who tells Frye, who buys 100 shares of the company's stock. Frye knows that Ed got the information from Cam. When Discount publicly announces the figures, Frye sells the stock for a profit. Under the Securities Exchange Act of 1934, Ed is most likely

A)liable for insider trading.
B)not liable because Ed did not prevent others from profiting.
C)not liable because Ed did not misappropriate any information.
D)not liable because Ed does not work for Discount.

Question 68

Spectrum Paints Inc. is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, the firm is subject to the direct corporate governance requirements of

A)any other public company with which the firm exchanges shares.
B)any state in which the firm does business.
C)the federal government.
D)the state in which the firm incorporated.

Question 69

Bev is the chief executive officer of Chef Cafés Inc., which is required to file certain financial reports with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Bev must

A)certify that the reports are complete and accurate.
B)designate a corporate official to assume liability for inaccuracies.
C)do nothing.
D)read the reports and be prepared to answer questions about them.

Question 70

Corporate Financial Inc., and its officers, directors, employees, and shareholders, buy and sell securities on behalf of themselves and their clients. SEC Rule 10b-5 applies to the purchase or sale of

A)a security by the corporation only.
B)a security involving a corporate insider only.
C)a security involving short-swing profits only.
D)any security.

Question 71

Grain Mills Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 14(a)of the act regulates

A)the declaration of dividends by the firm's board of directors.
B)the later re-registration of the firm's securities.
C)the short-swing activities of the firm's insiders.
D)the solicitation of proxies from the firm's shareholders.

Question 72

Furnaces & Filters Inc. is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, to ensure that the firm's financial results are accurate and timely, its senior officers must set up and maintain

A)internal "disclosure controls and procedures."
B)external "release and reveal timetables."
C)personal "peruse and review liability policies."
D)public "information and discussion forums."