511
Chapter 42
Securities Law and
Corporate Governance
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
A1. The Securities and Exchange Commission interprets federal securities laws, but does
not investigate violations.
A2. The Securities and Exchange Commission administrative law judges hear cases
involving alleged securities law violations.
A3. The definition of security in the Securities Act of 1933 does not include instruments
and interests commonly known as securities.
A4. Before filing the registration statement, an issuer cannot sell or offer to sell the
securities.
512 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A5. Most private, small-business, noninvestment company offers of securities are not
exempt from the registration requirements.
A6. Securities that are exempt from the registration requirement can not generally be
resold without being registered.
A7. Accredited investors include banks, but not investment companies.
A8. Selling securities after the effective date of the registration statement results in
liability.
A9. Insider trading occurs when persons buy or sell securities on the basis of information
that is not available to the pubic.
A10. The Securities Exchange Act of 1934 is a one-time disclosure law.
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A11. “Forward–looking” financial forecasts are protected against liability for securities
fraud.
A12. Anyone who wrongfully obtains inside information and trades on it for his or her
personal gain can be liable under SEC Rule 10b-5.
A13. The Securities and Exchange Commission does not regulate the content of proxy
statements.
A14. For criminal sanctions to be imposed under Section 10(b) of the Securities Exchange
Act of 1934 and SEC Rule 10b-5, scienter must not exist.
A15. For a defendant to be convicted in a criminal prosecution under the securities laws,
there can be no reasonable doubt that the defendant knew he or she was acting
wrongfully.
A16. The Securities and Exchange Commission can bring a civil action against anyone who
aids in a violation of the Securities Exchange Act of 1934.
A17. State securities laws apply mainly to intrastate transactions.
514 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A18. Exemptions from federal securities laws are exemptions from state laws.
A19. State corporation statues set up the legal framework for corporate governance.
A20. Under the Sarbanes-Oxley Act of 2002, chief executive officers no longer need to
certify the accuracy of information in corporate financial statements.
MULTIPLE CHOICE QUESTIONS
A1. Frothy Beverage Corporation is a public company whose shares are traded in the
public securities markets. Under the Securities Act of 1933, Frothy is required to
a. contribute to the operations of national stock exchanges.
b. disclose financial and other information about its securities.
c. engage in market surveillance to deter undesirable practices.
d. solicit proxies for voting.
A2. RingTone Corporation is a public company whose securities are traded among
investors. Under the Securities Act of 1933, a security is
a. almost any stake in the ownership or debt of a company.
b. an investment that is guaranteed to make a profit.
c. only such common forms of debt and equity as bonds and stocks.
d. whatever a company represents to the public as a security.
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A3. Start-Up Enterprises, Inc., completes its registration process and begins advertising
the availability of its new issue of securities. Start-Up places a tombstone ad in the
financial papers. This ad tells prospective investors
a. about investing.
b. about the company.
c. where to buy the securities.
d. where to obtain a prospectus.
A4. Celfone 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 sample of advertising to be used to attract investments in Celfone.
A5. Flo-Thru Plumbing Corporation is poised to issue securities that, under the Securities
Act of 1933, are “exempt.” This means that the securities can be sold
a. on the basis of a material omission or misrepresentation.
b. on the basis of nonpublic information.
c. within any six-month period by certain insiders.
d. without being registered.
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Fact Pattern 42–1A (Questions A6–A7 apply)
Fresh Fruits & Veggies, Inc., wants to make an initial public offering of securities. Fresh believes
that it qualifies for an exemption under Regulation A from the full registration requirement of the
federal Securities Act of 1933.
A6. Refer to Fact Pattern 42-1A. Fresh decides to sell its new securities via the Internet. This
offering
a. will avoid the payment of commissions to brokers or underwriters.
b. is an investment scam.
c. is a Ponzi scheme.
d. constitutes insider trading.
A7. Refer to Fact Pattern 42-1A. If Fresh is exempt from the federal registration requirement,
Fresh is
a. automatically exempt from any state registration requirement.
b. not subject to any state securities laws.
c. not necessarily exempt under a state registration requirement.
d. automatically subject to all state registration requirements.
A8. To raise $12 million to expand operations, Star Corporation makes a stock offering
directly to sixty accredited investors and twenty sophisticated, but unaccredited
investors. Star 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 certain material information.
c. if the offering is also made available to the general public.
d. under no circumstances.
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A9. Players Video Game Centers, Inc., wants to issue stock of $1 million in a single offer–
ing. Players must provide all investors with material information about itself, its
business, and its securities if
a. all investors are accredited.
b. under any circumstances.
c. any investors are accredited.
d. any investors are unaccredited.
A10. Hobie, the chief executive officer of Ideal Gamers, Inc. (IGI), intentionally understates
the amount of IGI’s debts in information provided to investors as part of an issue of
IGI stock. Jack buys the stock and suffers a loss. Hobie may be subject to
a. government prosecution and Jack’s suit.
b. neither government prosecution nor Jack’s suit.
c. only government prosecution.
d. only Jack’s suit.
A11. New Discoveries Corporation, and its officers, directors, and shareholders, buy and
sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to
a. only the purchase or sale of a security by an investment company.
b. only the purchase or sale of a security involving short-swing profits.
c. only the purchase or sale of a security involving a tipper and tippee.
d. the purchase or sale of any security.
518 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A12. Lex, a salesperson for Macro Corporation, learns that Macro will increase the dividend
it pays to shareholders. Lex buys 1,000 shares of Macro stock. When the price
increases, Lex sells his shares for a profit. Lex would not be liable for insider trading if
the information about the dividend was
a. material when he sold the stock.
b. public after he bought the stock.
c. public before he bought the stock.
d. too speculative when he bought the stock.
Fact Pattern 42–2A (Questions A13–A14 apply)
Dhani, an accountant for Eureka, Inc., learns of undisclosed company plans to market a new
laptop. Dhani buys 1,000 shares of Eureka stock. He reveals the company plans to Fay, who
buys 500 shares. Fay tells Geoff, who tells Hu, each of whom buy 100 shares. They knows that
Fay got her information from Dhani. When Eureka publicly announces its new laptop, Dhani,
Fay, Geoff, and Hu sell their stock for a profit.
A13. Refer to Fact Pattern 42-2A. If Dhani is liable under the Securities Exchange Act of
1934, it will be because the information on which he based his purchase of Eureka
stock was
a. a forward-looking forecast.
b. not material.
c. not yet public.
d. not yet true.
A14. Refer to Fact Pattern 42-2A. Under the Securities Exchange Act of 1934, Fay is most
likely
a. liable for insider trading.
b. not liable because Fay did not prevent others from profiting.
c. not liable because Fay did not solicit information from Dhani.
d. not liable because Fay does not work for Eureka.
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A15. Rico, an engineer for Shur-2-Gro Seed Corporation, learns that Shur-2-Gro has developed a
corn hybrid to triple the output of any farm. Rico buys 20,000 shares of Shur-2-Gro stock.
He tells Taylor, who buys 15,000 shares. After the new hybrid is announced publicly, the
price of Shur-2-Gro stock increases. Rico and Taylor sell their shares for a profit. Under the
Securities Exchange Act of 1934, liability may be imposed on
a. none of these parties.
b. Rico and Taylor only.
c. Rico only.
d. Rico, Shur-2-Gro, and Taylor.
A16. Della, an officer for Energy Petrol Corporation (EPC), buys 100 shares of EPC stock.
One week later, EPC announces that it will merge with a competitor, Fuel Oil
Company, and the price of EPC stock increases. One month later, Della sells her shares
for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Della would
not be liable if, after buying the stock, she 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.
A17. Ridgeline Sports Gear, Inc., is required to register its securities under Section 12 of the
Securities Exchange Act of 1934. Section 16(b) of the act covers
a. the declaration of dividends by Ridgeline’s board of directors.
b. the later re-registration of Ridgeline’s securities.
c. the short-swing activities of Ridgeline’s insiders.
d. the solicitation of proxies from Ridgeline’s shareholders.
A18. Kirk is the chief financial officer of Lemon Corporation, which is required to file certain
financial statements with the Securities and Exchange Commission (SEC). Under the
Sarbanes-Oxley Act of 2002, Kirk must personally
520 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
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.
A19. Flux Corporation is a public company whose shares are traded in the public securities
markets. Under the Sarbanes-Oxley Act of 2002, Flux is subject to the direct corporate
governance requirements of
a. any other public company with which Flux exchanges shares.
b. any state in which Flux does business.
c. the federal government.
d. the state in which Flux incorporated.
A20. Catalina promises high returns to Darby and other investors, who then agree to trust
their funds to Catalina. She uses these funds to pay previous investors. This is
a. a Ponzi scheme.
b. a stock option.
c. an accredited investor.
d. a tombstone ad.
ESSAY QUESTIONS
A1. In May, National Biotech Corporation generally advertises that it will make a $4
million offering of stock in June. National makes the offering as advertised and, ten
days after the first sale, notifies the Securities and Exchange Commission (SEC). All
buyers of the stock are given material information about the company, its business,
and the stock. Before the end of the year, the offering is completely sold out. The
buyers include forty unaccredited investors and fifty accredited investors. National
does not register the offering. The SEC files a suit against National, seeking civil
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sanctions on the ground that this offering was not exempt from registration. National
argues that the applicable exemption is Rule 505 of Regulation D of the Securities Act
of 1933 and that because of this exemption, any resale of the stock is also exempt.
Who is correct?
A2. Standard Corporation is a public company whose shares are traded in public securities
markets. Standard’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?
522 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS