The Legal Environment of Business and Online Commerce, 7e (Cheeseman)
Chapter 17 Investor Protection, E-Securities, and Wall Street Reform
1) The Securities Act of 1933 is a federal statute that primarily regulates the issue of securities
by companies and other businesses.
2) Continuous reporting to investors and the SEC is a requirement imposed by the Securities Act
of 1933.
3) The Securities Act of 1933 regulates the purchase and sale of securities online.
4) A “whistleblower bounty program” allows a person who provides information that leads to a
successful SEC action to recover 10 percent to 30 percent of the monetary sanctions over $1
million recovered by the SEC.
5) The SEC is concerned with regulating issues and trading of securities alone and cannot
regulate the activities of securities brokers and advisors.
6) An investment contract is a flexible standard for defining a security.
7) The Howey test is used to determine if an arrangement is an investment contract.
8) Interests in oil, gas, and mineral rights are considered statutorily defined securities.
9) Section 5 of the Securities Act of 1933 requires an issuer to register its securities with the SEC
prior to selling them to the public.
10) The sale of securities by an issuer to the public is known as an initial public offering.
11) Only an established company is permitted to sell new securities to the public.
12) A registration statement need not contain details on how the proceeds from the offering will
be used.
13) During the review of a registration statement, the SEC does not pass judgment on the merits
of the securities offered.
14) A prospectus is a written disclosure provided with the registration statement that helps the
SEC to evaluate the financial risk of an investment.
15) An investor who has purchased an unregistered security can rescind their purchase, but not
recover damages.
16) According to Regulation A, securities of up to $5 million can only be sold to accredited
investors.
17) Regulation A offerings can be sold without registration with the SEC provided that an
offering statement is provided prior to the purchase of the securities.
18) An offering statement requires less disclosure compared to a registration statement.
19) An offering circular must be provided to the investors immediately after the purchase of a
Regulation A offering.
20) There are no resale restrictions on securities that come under Regulation A.
21) An issuer who plans on raising $1 million or less from the public must answer the questions
on Form U-7, which then becomes the offering circular that must be given to prospective
investors.
22) Liability under Section 11 is imposed on issuers who are negligent in not discovering fraud
in their security offerings.
23) The issuer is permitted to assert a due diligence defense against the imposition of Section 11
liability.
24) Defendants cannot assert a due diligence defense against liabilities arising from the violation
of Section 11 of the Securities Act of 1933.
25) Section 12 of the Securities Act of 1933 provides purchasers who have been injured by
securities pursuant to an unwarranted exemption to rescind the securities purchase.
26) EDGAR is the world’s largest electronic securities exchange.
27) Drafts that have a maturity date of six months are exempt from registration with the SEC.
28) The nonissuer exemption permits local businesses to raise capital from local investors to be
used in the local economy without the need to register with the SEC.
29) An accredited investor is defined as a person who does not understand the risks involved in
securities investment and will suffer considerable financial damage if the investment fails.
30) Section 10(b) of the Securities Exchange Act prohibits the use of manipulative and deceptive
devices in contravention of the rules and regulations prescribed by the SEC.
31) In order to be found guilty for violation of Rule 10b-5, intentional conduct (scienter) must be
proven.
32) It is legal for a company employee to make a profit by personally purchasing shares of the
corporation prior to public release of favorable information.
33) A tipper cannot be held liable for the profits made by the tippee.
34) A 10-percent shareholder of an equity security of a reporting company is considered a
statutory insider.
35) Blue-sky laws are state laws that regulate the issuance and trading of securities.
36) The ________ is a federal statute that primarily regulates the issue of securities by
companies and other businesses.
A) Securities Act of 1933
B) Securities Exchange Act of 1934
C) Sarbanes-Oxley Act of 2002
D) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
37) The ________ is a federal statute primarily designed to prevent fraud in the trading of
securities after they are issued.
A) Securities Act of 1933
B) Securities Exchange Act of 1934
C) Sarbanes-Oxley Act of 2002
D) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
38) Which of the following is regulated by the Securities Act of 1933?
A) fraud in the purchase and sale of securities
B) hedge funds and derivatives
C) reporting to the investors
D) the issue of securities online
39) Which of the following is classified under “common securities?”
A) real estate
B) bullion
C) debenture
D) bank deposit
40) Interests or instruments that are expressly mentioned in securities acts are known as
________.
A) common securities
B) implicit securities
C) investment contracts
D) statutorily defined securities
41) Interests in oil, gas, and mineral rights are classified as ________.
A) statutorily defined securities
B) implicit securities
C) investment contracts
D) common securities
42) A(n) ________ is a flexible standard for defining a security.
A) red herring prospectus
B) investment contract
C) certificate of interest
D) debenture
43) The courts apply the ________ in determining whether an arrangement is an investment
contract.
A) Howey test
B) misappropriation theory
C) strict scrutiny test
D) intermediate test
44) ________ requires securities offered to the public through the use of the mails or any facility
of interstate commerce to be registered with the SEC by means of a registration statement and an
accompanying prospectus.
A) Section 24 of the Securities Act of 1933
B) Section 12 of the Securities Act of 1933
C) Section 5 of the Securities Act of 1933
D) SEC Rule 506
45) Which of the following best defines an initial public offering?
A) the issuance of an offering statement to the public prior to purchase
B) the filing of a registration statement by an issuer
C) the disclosure document released for public scrutiny
D) the sale of securities by an issuer to the public
46) A(n) ________ refers to a document that an issuer of securities files with the SEC that
contains required information about the issuer, the securities to be issued, and other relevant
information.
A) articles of organization
B) operating statement
C) registration statement
D) certificate of interest
47) Which of the following must be included in the registration statement?
A) judgments passed by the SEC on the merits of the securities offered
B) how proceeds from the offering will be used
C) date of termination of the initial public offering
D) maximum number of times a share can be sold post issue
48) Utilities Ltd. decided to go public by an initial public offering. It sold securities, some of
which were bought by James Jefferson. Six months later, Mr. Jefferson sold the Utilities shares
he had purchased to Martha Graham and Mark Franco. Two years later, Mr. Jefferson bought
back the Utilities shares from Ms. Graham and Mr. Franco and made a profit out of both
transactions. Who is the issuer in this scenario?
A) Utilities Ltd.
B) James Jefferson
C) Martha Graham
D) Mark Franco
49) Which of the following is true of registration statements?
A) A registration statement must be accompanied by financial statements certified by certified
public accountants..
B) A registration statement once submitted, cannot be amended.
C) The SEC judges the merits of the securities based on the registration statement.
D) The registration statement need not reveal how a company plans on using the proceeds from
the offering.
50) A(n) ________ is submitted along with the registration statement to the SEC, and also used
as a selling tool to help prospective investors evaluate the financial risk of an investment.
A) organization document
B) certificate of interest
C) prospectus
D) operation agreement
51) Scissorwire Inc. sells shares of its stock to the public, with each share valued at $16. After a
year, the company incurs a loss and the price of the stock drops to $5. The company reveals that
it had deliberately not registered with the SEC before going public and that it has no money to
pay the investors. Which of the following holds well in this context?
A) Scissorwire Inc. can register with the SEC at any point after the dip in shares.
B) The U.S. government can file a criminal lawsuit against Scissorwire Inc. to seek criminal
penalties.
C) The investors have been negligent in not verifying registration before purchase of shares and
cannot rescind their purchase.
D) Scissorwire Inc. is liable for the violation of the Securities Exchange Act of 1934.
52) ________ permits issuers to sell up to $5 million of securities to the public during a 12-
month period, pursuant to a simplified registration process.
A) SEC Rule 506
B) Section 12 of the Securities Act of 1933
C) Section 5 of the Securities Act of 1934
D) Regulation A
53) Which of the following is true of a Regulation A offering?
A) It imposes resale restrictions on the securities it offers.
B) It necessitates the issuers to prepare a registration statement for offers exceeding $100,000.
C) It requires the most disclosure of information to investors at the time of the issuance of the
securities.
D) It mandates that an offering circular be provided to the investors prior to the purchase of
securities.
54) Small businesses can file ________ with the SEC if they plan on raising $1 million or less
from the public issue of securities.
A) Form U-7
B) a registration statement
C) an operation agreement
D) a certificate of interest
55) Which of the following is true of Small Company Offering Registration (SCOR) form?
A) SCOR forms can only be used for raising more than $1 million through sale of securities.
B) SCOR forms are available to both domestic and foreign companies.
C) SCOR forms that have been completed act as the offering circular for potential investors.
D) SCOR forms have to be completed by the issuee before purchasing securities.
56) ________ is a provision of the Securities Act of 1933 that imposes civil liability on persons
who intentionally defraud investors by making misrepresentations or omissions of material facts
in the registration statement.
A) Section 24 of the Securities Act of 1933
B) Section 12 of the Securities Act of 1933
C) Section 11 of the Securities Act of 1933
D) SEC Rule 506
57) Which of the following is true of Section 11 of the Securities Act of 1933?
A) It permits injured private parties to bring criminal action against fraudulent registration
statements filed by issuers.
B) It imposes liability on those who are negligent in not discovering the fraud.
C) It allows an issuer to assert a due diligence defense against the imposition of Section 11
liability.
D) It cannot be imposed on cases involving negligent omission of a material fact in a registration
statement.