Deck 45: Securities Regulation

Question 1

Prior to the filing of a 1933 Act registration statement, the issuer may use a Rule 134 tombstone advertisement to make investors aware of the upcoming offering of securities.

Answer 1

False

Question 2

Rule 10b-5 relating to liability to false statements in filed documents applies to only those transactions in all securities, which are registered under the 1933 Act or the 1934 Act.

Answer 2

False

Question 3

Which of the following instruments is NOT considered as security?

A) Mortgage notes
B) Treasury stock
C) Certificate of interest
D) Investment contract

Answer 3

A

Question 4

The maximum penalty for any person who willfully violates the Securities Act of 1933 or its rules and regulations is a $20,000 fine and 10 years' imprisonment.

Question 5

The most important elements for violation of Rule 10b-5 are misstatement or omission of material fact and negligence.

Question 6

The judicial branch of the SEC:

A) promulgates rules and regulations.
B) decides whether a person has violated the securities laws.
C) makes new laws regulating securities.
D) brings enforcement actions against alleged violators.

Question 7

The Securities and Exchange Commission (SEC) was created by the:

A) Securities Exchange Act of 1934.
B) Securities Investor Protection Act of 1970.
C) Investment Company Act of 1940.
D) Securities Act of 1933.

Question 8

The state of Delaware has adopted business combination moratorium statutes to deter tender offers from being made.

Question 9

As per the 1934 Act, Section 16(a) prohibits statutory insiders from disclosing their ownership of their company's securities for the first 10 days of ownership.

Question 10

Under the Securities Act of 1933, the definition of a security excludes a promissory note that matures not more than nine months from the date of issuance.

Question 11

Securities Act Rule 506 requires an issuer to sell to no more than 35 accredited investors.

Question 12

Section 5 of the 1933 Act provides an exemption from registration for transactions of securities by any person other than an issuer, underwriter, or dealer.

Question 13

The SEC does NOT have the power to:

A) direct a defendant to stop violating the securities laws.
B) impose fines for violation of securities laws.
C) desist a defendant from future violations of securities laws.
D) issue injunctions against alleged violators of securities laws.

Question 14

One of the two principal regulatory components of the 1933 Act is:

A) distribution provisions.
B) restricted provisions.
C) registration provisions.
D) disclosure provisions.

Question 15

Securities Exchange Act Rule 10b-5 liability attaches to anyone who trades in securities for personal profit using confidential information misappropriated in a breach of fiduciary duty owed to the source of the information.

Question 16

As per the test laid down by the Supreme Court (in United States v. Chiarella), the definition of insiders includes not only officers and directors of the company but also anyone who has been entrusted with corporate information for a corporate purpose.

Question 17

The Sarbanes-Oxley Act of 2002 extends the statute of limitations to three years after discovery of facts constituting a violation of Section 11 of the 1933 Act and seven years after the violation.

Question 18

Section 11 of the 1933 Act provides civil liabilities for damages when a 1933 Act registration statement on its effective date misstates or omits a material fact.

Question 19

An insurance policy is exempt from registration under the 1933 Act.

Question 20

The ultimate purpose of the 1934 Act is to keep investors fully informed to allow them to make investment decisions when securities are sold by an issuer to investors.

Question 21

Carmen Company wants to make an offering of securities exempt from registration under Rule 505 of the Securities Act of 1933. In order to do this, Carmen:

A) may sell to 50 unaccredited purchasers.
B) may sell to any number of accredited purchasers.
C) may only sell to purchasers sophisticated in investment matters.
D) cannot restrict resale of securities for one year.

Question 22

Section 5 of the 1933 Act permits the securities to be offered but not sold during the _____ period.

A) pre-filing
B) quiet
C) waiting
D) post-effective

Question 23

Under the Securities Act of 1933, the registration of securities which are offered to the public in interstate commerce is:

A) directed toward minimizing investor exposure to financially risky securities.
B) not required unless the issuer is a corporation.
C) mandatory unless the cost to the issuer is "prohibitive" as defined in the SEC regulations.
D) required unless the offering or the securities are exempt from registration.

Question 24

Northern Company is a small issuer who wishes to solicit investors to buy its securities during the pre-filing period. As the advertising budget of the company is not large, Northern has decided to advertise during the pre-filing period by using a Website. This solicitation of shares is:

A) in violation of the Prohibition of Solicitation Act.
B) permitted as the Internet has strong potential for attracting investors.
C) in violation of Rule 505 and Rule 506 of Regulation
D)
D) allowed provided SEC gives written permission.

Question 25

A plaintiff wishes to recover damages from the issuer for losses resulting from material misstatements in a securities registration statement. In order to be successful under Section 11 of the 1933 Act, one of the elements the plaintiff must prove is that the:

A) plaintiff was in privity of contract with the issuer.
B) plaintiff relied on the misstatement or omission in the registration statement.
C) issuer acted negligently.
D) issuer is in one of the classes of persons liable under Section 11.

Question 26

The _____ underwriting is used when an issuer is not well established and the underwriter is unwilling to risk being unable to sell the securities.

A) standby
B) sponsorship
C) best efforts
D) firm commitment

Question 27

Eastern Company wants to make an offering of securities exempt from registration under Rule 504 of the Securities Act of 1933. Which of the following is a requirement of Rule 504?

A) Eastern may sell to no more than 35 unaccredited purchasers.
B) Eastern must sell only to investors who are able to protect themselves by making informed investment decisions.
C) Eastern must be a nonpublic issuer under the Securities Exchange Act.
D) Eastern may not make any general solicitations of investors.

Question 28

Jargons Company is a well-known and seasoned public issuer of securities. It is going to file a registration statement with the SEC on February 1, 2012 for a new security offering. Rule 163 of the 1933 Act will allow it to use a _____ in January 2012.

A) final prospectus
B) Communications Not Deemed a Prospectus
C) free-writing prospectus
D) preliminary prospectus

Question 29

An offering circular is a disclosure document required under Regulation A of the SEC for a(n) _____ offering exemption from the registration provisions of the 1933 Act.

A) intrastate
B) interstate
C) private
D) small

Question 30

Baronial Company plans to make a registered offering of its preferred shares pursuant to the Securities Act of 1933. After filing a registration statement with the Securities and Exchange Commission but prior to its effective date, which of the following will violate Section 5 of the Securities Act of 1933?

A) Sending letters to 50 prospective investors noting that projected earnings are up 15 percent.
B) An oral offer at a sales meeting attended by 50 prospective investors.
C) An oral offer to sell the shares made by telephone to 50 prospective investors.
D) In-person oral offers to sell the shares to 50 prospective investors.

Question 31

As per Section 4(2) of the 1993 Act, registration is not required for:

A) transactions which are done by non-charitable organizations.
B) transactions by agricultural corporations.
C) interstate securities transactions.
D) transactions by an issuer which does not involve a public offering.

Question 32

Which of the following is an example of a transaction exemption from the registration requirements of the 1933 Act?

A) Securities issued by municipal governments in the United States and offered solely to banks.
B) Securities issued by nonprofit charitable organizations and offered solely to institutional investors.
C) Securities issued by banks and offered solely to investors sophisticated in investment matters.
D) Securities issued by for-profit corporations and offered solely to intrastate investors.

Question 33

A(n) _____ is the basic selling document of a security offering registered under the 1933 Act.

A) prospectus
B) investment letter
C) registration statement
D) suitability letter

Question 34

Section 4(2) of the 1933 Act covers the _____ offering exemption from the registration provisions.

A) intrastate
B) interstate
C) private
D) small

Question 35

Under the 1933 Act, which of the following is allowed to state the price at which the securities will be offered?

A) A notice about a prospective offering published during the pre-filing period
B) A tombstone ad
C) A free-writing prospectus
D) A preliminary prospectus

Question 36

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove which of the following?

A) Defendant's intent to deceive: yes; Plaintiff's reliance on the registration statement: yes.
B) Defendant's intent to deceive: yes; Plaintiff's reliance on the registration statement: no.
C) Defendant's intent to deceive: no; Plaintiff's reliance on the registration statement: yes.
D) Defendant's intent to deceive: no; Plaintiff's reliance on the registration statement: no.

Question 37

_____ creates three important periods of time in the life of a securities offering: (1) the pre-filing period, (2) the waiting period, and (3) the post-effective period.

A) Section 3 of the 1934 Act
B) Section 17 of the 1933 Act
C) Section 12 of the 1934 Act
D) Section 5 of the 1933 Act

Question 38

The SEC has defined the intrastate offering exemption more precisely in Rule 147. According to this rule:

A) intrastate resale of such securities is permitted for nine months.
B) interstate resale of such securities is permitted for nine months.
C) intrastate resale of such securities is permitted for twelve months.
D) interstate resale of such securities is permitted for twelve months.

Question 39

The _____ underwriting is typically used only to sell common shares to existing shareholders pursuant to a preemptive rights offering.

A) standby
B) sponsorship
C) best efforts
D) firm commitment

Question 40

The classic underwriting arrangement is a _____ underwriting.

A) standby
B) sponsorship
C) best efforts
D) firm commitment

Question 41

Section 404 of the Sarbanes-Oxley Act of 2002 is considered controversial because:

A) sensitive corporate information has to be published which may be detrimental to a company.
B) a company has to significantly increase its budget to comply with Section 404.
C) the procedure for complying with Section 404 is lengthy, complicated, and time consuming.
D) Section 404 results in diminished corporate responsibility of the officers of a company.

Question 42

Under Section 11 of the Securities Act of 1933, a defendant (other than the issuer) may establish a defense to liability if the defendant can prove that he/she acted:

A) with due diligence.
B) with scienter.
C) without scienter.
D) without due diligence.

Question 43

Baronet Company is a publicly owned company whose shares are traded on the NYSE. Baronet acquired a small manufacturing plant in Nevada as part of its strategic growth plan. Under the 1934 Act, which of the following reports must Baronet file with the SEC within four business days of this event?

A) The 10-K
B) The 8-Q
C) The 10-Q
D) The 8-K

Question 44

Icarus Company is considering making an offering of its common shares under the Securities Exchange Act of 1933 Regulation
A. What are the requirements it must meet?
Icarus must be a nonpublic company and may sell no more than $5,000,000 of securities in a one-year period. It must file an offering circular (a disclosure document) with the SEC. The offering circular is required to contain a balance sheet dated within 90 days before the filing date of the offering circular. It must also contain two years' income statements, cash flow statements, and statements of shareholder equity. Icarus must file the offering circular with the SEC and wait 20 days before it may sell the securities. Icarus may sell to an unlimited number of purchasers of any type and may make general solicitations. Resale of the securities is not restricted.

Question 45

Harmer Company has filed a registration statement under the 1933 Act for purposes of issuing $5,000,000 of debentures. The registration statement has not been declared effective. Harmer wants to issue a press release concerning its plans to expand its operations. It also wants to telephone several large investors and tell them why they should buy the debentures. Will these activities cause Harmer to violate Section 5 of the Securities Act?

Question 46

The "fraud-on-the-market-theory" used in some cases to establish liability under Rule 10b-5 of the Securities Act of 1934 is an indirect way of establishing which of the following elements of proof?

A) The defendant acted with negligence.
B) The defendant acted with scienter.
C) The plaintiff's reliance.
D) The plaintiff's due diligence.

Question 47

Which of the following is true about the Williams Act?

A) It regulates tender offers only when the bidder intends to hold at least 2 percent of the subject company's shares.
B) It requires bidders to solicit shares from at least 100 shareholders.
C) It does not permit tendering shareholders to withdraw their tendered shares.
D) It protects investors and gives the bidder and the subject company equal opportunities to present their cases to the shareholder.

Question 48

Kirrah Company makes a registered offering of its common shares under the Securities Act of 1933. A year after the offering, the federal government cancels a contract with Kirrah in compliance with the contract. The contract had provided and was expected to continue to provide 30 percent of Kirrah's business. The material risks section of the registration statement failed to state that the federal government provided 30 percent of Kirrah's business and that the federal government had the right to terminate the contract at any time. Among others, Amy Arston, the president and chief executive officer of Kirrah, is sued by purchasers of the shares under Section 11 of the Securities Act. What is Amy's due diligence defense under Section 11? Is Amy likely to be able to prove she met that defense?

Question 49

While auditing the financial statements of Merlyn Company, Arturo Artinez discovers nonpublic, confidential information that Merlyn's earnings will be larger than earlier projected. Arturo informs his sister Selena about this, telling her, "You can make a lot of money using this information because it isn't public yet. Be discreet, however, because I'm not supposed to give you this information." Selena uses the information to purchase 20,000 shares of Merlyn. Three weeks later when, Merlyn releases the financial statements showing its actual earnings, the price of its shares rises and Selena earns a $120,000 profit. Has Selena violated Rule 10b-5 of the Securities Exchange Act?

Question 50

Jereboah Company is a nonpublic company that wants to sell $2.7 million of preferred shares under Rule 506 of Regulation D of the Securities Act of 1933. Jereboah plans to sell to 42 investors, including 10 mutual funds. The other 32 investors are individual investors with various levels of experience in making securities investment decisions. Jereboah also hopes to attract additional investors using an advertisement in The Wall Street Journal. May Jereboah use Rule 506? Assuming it can, what disclosure must Jereboah make to the investors?

Question 51

Mel is a securities broker who holds shares in Beanbag Inc. Mel does not disclose this to his customer Kim, whom he advises to buy Beanbag shares. Mel hopes that by not disclosing his conflict of interest, he will influence Kim to buy the shares. Kim, believing the information on Beanbag shares is given from Mel's disinterested point of view, declares that buying Beanbag shares "sounds like an excellent idea" and purchases the shares. Which of the following statements is most accurate?

A) Kim cannot hold Mel liable because Mel did not make a misstatement of material fact.
B) Kim will have to prove that Mel acted negligently in order to prove a Rule 10b-5 violation.
C) Kim will most likely be able to make a successful claim against Mel under Rule 10b-5.
D) Mel did not have a duty to disclose his conflict of interest to Kim.

Question 52

In a due diligence meeting, officers and experts confer with each other for the purpose of:

A) increasing corporate transparency and responsibility.
B) ascertaining that the registration statement contains no misstatements or omissions of material fact.
C) creating strategies for maximizing capital raised from public issue of securities.
D) issuing a proxy solicitation document for issuance of securities.

Question 53

To prove his/her due diligence defense under Securities Act Section 11 with regard to audited financial statements, an officer of the issuer must prove which of the following?

A) The officer made a reasonable investigation into the accuracy of the audited financial statements.
B) The officer believed the financial statements did not omit or misstate a material fact.
C) The officer had no intent to misstate or omit a material fact in the audited financial statements.
D) The officer had no reason to believe the financial statements omitted or misstated a material fact.

Question 54

Barchrome Company issued debentures in November 1996 to raise capital to finance a new manufacturing plant. John was one of the small investors who bought those debentures. In December 2000, John discovered that Barchrome's registration statement contained material misstatements (it had overstated current assets by 11 percent and sales by 8 percent). John sued Barchrome in January 2001. Is Barchrome liable?

A) Yes, Barchrome is liable under Section 12(a)(2) of the 1933 Act.
B) No, Barchrome is not liable because the statute of limitations under Section 12(a)(2) has run out.
C) No, Barchrome is not liable because the statute of limitations under Section 11 has run out.
D) Yes, Barchrome is liable under Section 11 of the 1933 Act.

Question 55

Which of the following issuers must register securities with the SEC under the 1934 Act?

A) An issuer with total assets of $12 million, whose debentures are traded in interstate commerce and are held by 600 holders.
B) An issuer with total assets of $9 million, whose stocks are traded in intrastate commerce and are held by 700 holders.
C) An issuer with total assets of $14 million, whose debentures are traded in interstate commerce and are held by 300 holders.
D) An issuer with total assets of $8 million, whose stocks are traded in intrastate commerce and are held by 400 holders.

Question 56

Which of the following is correct concerning the Foreign Corrupt Practices Act (FCPA)?

A) Under the FCPA, a company may be fined up to $5 million.
B) Under the FCPA, directors participating in violations are liable for prison terms up to 10 years.
C) The FCPA bribery provisions apply only to American firms with equity securities registered under the 1934 Act.
D) Facilitating or grease payments are not prohibited by the FCPA.

Question 57

Rule _____ of the SEC prohibits insider trading on nonpublic corporate information.

A) 10b-5
B) 14e-3
C) 14a-8
D) 10c-7

Question 58

Under Rule 10b-5 of the Securities Act of 1934, a plaintiff has the burden of proof to establish that the defendant acted:

A) with negligence.
B) with scienter.
C) with malice.
D) in concert with others.

Question 59

The Uniform Securities Act permits an issuer to register by coordination, which means the issuer:

A) can file the 1933 Act registration statement with the state securities administrator.
B) becomes exempt from registration under state securities registration law.
C) needs to file under the state securities registration law only and not the 1933 Act.
D) need not register the securities statement once he/she has registered under the 1933 Act.

Question 60

Which of the following is true about shareholder proposals and eligibility of shareholders to get their proposals included by a corporation in its proxy statement?

A) A shareholder must own at least 0.5 percent of the securities to be voted at the shareholders' meeting.
B) An eligible shareholder may submit only one proposal per shareholder meeting.
C) The shareholder proposal and its supporting statement may not exceed 1500 words.
D) A shareholder must own at least $1,000 of the securities to be voted at the shareholders' meeting.