a.
3%
b.
5%
c.
25%
d.
51%
42. In CASE 21.1 Lawson v. FMR, LLC (2014), the question before the U.S. Supreme Court was whether the __________
Act whistleblower protections extended to __________ of __________ contractors of __________ corporations.
a.
Sarbanes-Oxley, employees, private, public
b.
SEC 1934, employers, public, private
c.
Private Securities Litigation Reform Act, employees, private, public
d.
SEC 1933, employers, private, public
a
Challenging
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
21–1e Sarbanes-Oxley Act of 2003
Blooms: Analysis
43. Which of the following is NOT an accredited investor under Rule 501?
a.
Any national bank
b.
Any director of the issuer
c.
Any corporation with total assets in excess of $1 million
d.
Any natural person with a net worth in excess of $1 million
44. If an issuer makes successive sales within a limited period of time, the SEC may __________ the successive sales,
resulting in the loss of a private-offering exemption.
a.
restrict
b.
register
c.
integrate
d.
qualify
c
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21–12c Other Sections of the 1934 Act
Blooms: Comprehension
45. Assuming no exemption applies, what is the penalty for a violation of section 5 of the 1933 Act through offering a
security for sale without an effective registration statement or by means of a noncomplying prospectus?
a.
The purchaser may keep the shares if the investment proves successful; or if within one year from the date of
purchase the investment proves unprofitable, the investor can get his or her money back.
b.
The purchaser must keep the shares if the investment proves successful; or if within one year from the date of
purchase the investment proves unprofitable, the investor will be refunded his or her money.
c.
The investor has no option to keep the shares but will be refunded his or her money.
d.
The investor must hold the shares for at least two years but will be refunded his or her money if the investment
has failed to show a profit within that amount of time.
a
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21-5 Registration of Securities Offerings
Blooms: Comprehension
46. Securities issued in a private placement are called __________ securities.
a.
qualified
b.
private
c.
restricted
d.
shelf
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21–11 Exemptions for Secondary Offerings
Blooms: Comprehension
47. A(n) __________ is defined under the 1933 Act as any person who has purchased from an issuer with a view to, or
offers or sells for an issuer in connection with, the distribution of any security.
a.
investment banker
b.
underwriter
c.
dealer
d.
secondary seller
Moderate
United States – BUSBROG: – Analytic
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21–9c Integration of Offerings
Blooms: Comprehension
48. CASE 21.3 In re Lehman Bros. Mortgage-Backed Securities Litigation (2011) involved a question of whether rating
agencies that helped select a pool of mortgages for a mortgage-backed security were “underwriters” under the 1933 Act or
“controlling persons” under section 15 of the 1933 Act. How did the court rule?
a.
The court ruled that the proof established that the rating agencies were both underwriters and controlling
persons under the 1933 Act.
b.
The court ruled that the proof failed to establish that the rating agencies were either underwriters or controlling
persons under the 1933 Act.
c.
The court ruled that the proof established that the rating agencies were underwriters under the 1933 Act but
that the proof failed to establish that the rating agencies were controlling persons under the 1933 Act.
d.
The court ruled that the proof established that the rating agencies were controlling persons under the 1933 Act
but that the proof failed to establish that the rating agencies were underwriters under the 1933 Act.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21-14b Who May Be Sued
Blooms: Analysis
49. Which of the following activities are NOT regulated by the 1934 Act?
a.
Primary securities sales
b.
Proxy solicitations
c.
Insider trading
d.
Tender offers
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
Exhibit 21.1 Sections of the 1933 and 1934 Acts
Blooms: Comprehension
50. If an issuer wanted to raise $100 million, and offer her company’s securities to no more than 35 unaccredited investors
and an unlimited number of accredited investors, she would choose to exempt her offering under the __________
exemption.
a.
Rule 506
b.
Rule 504
c.
Rule 505
d.
Private Placement
United States – BUSPROG: – ANALYTIC
DISC: – AICPA: BB-Legal
221–5a Role of the Underwriters
Blooms: Comprehension
51. To which of the following is an entrepreneur likely referring when using the term “angel” in reference to an
investment plan?
a.
An investment banker
b.
A venture capitalist
c.
Lenders of last resort who provide needed funds once it appears that an entrepreneur who has started a
company is in financial trouble
d.
Family, friends, and wealthy individual investors to whom the entrepreneur first turns to seek funds
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
Introduction: Raising Capital
Blooms: Knowledge
52. Which of the following may be sued under Section 11 of the Securities Act of 1933, which provides a remedy for a
person who purchases a security pursuant to a misleading registration statement?
a.
The underwriters.
b.
Persons who gave their consent to be named in the registration statement as future directors.
c.
Both underwriters and persons who gave their consent to be named in the registration statement as future
directors.
d.
Any officer as well as underwriters and persons who gave their consent to be named in the registration
statement as future directors..
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21–14 Section 11 of the 1933 Act
Blooms: Comprehension
53. Which of the following was passed in 2010 and represents the most sweeping reform of U.S. financial markets since
the Great Depression?
a.
The Laughlin-Glover Investor and Financial Reconciliation Act
b.
The Mallicoat-Whaley Consumer and Investor Securities Protection Act
c.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
d.
The Barnhill-Obama Wall Street Investors Reconciliation Act
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21–1f Dodd-Frank Wall Street Reform Act and Consumer Protection Act of 2010
DISC: – AICPA: BB-Legal
21–9b Regulation D Safe-Harbor Exemption
Blooms: Comprehension
54. According to the __________ doctrine, a court may determine that the inclusion of sufficient cautionary statements in
a prospectus renders immaterial any misrepresentations and omissions contained therein.
a.
actual cause
b.
bespeaks caution
c.
common sense
d.
trap door
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21-14d Defenses
Blooms: Comprehension
55. A(n) __________ company is a development-stage company that has no specific business plan or has a business plan
to acquire a currently unknown business.
a.
illegal
b.
bespeaks caution
c.
blank check
d.
best-efforts
c
Moderate
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21–5d Registration Procedure
Blooms: Comprehension
56. Tina, in-house counsel for a start-up company, is asked what the company must do if it plans to offer securities for
sale only outside the U.S. What advice should she give in relation to the application of Section 5/Regulation S registration
requirements?
a.
According to SEC Regulation S, so long as the company is incorporated in the U.S., all aspects of Section 5
apply, and that any offer or sale outside the U.S. is subject to the federal registration requirements.
b.
According to SEC Regulation S,offers or sales outside the U.S. are not subject to federal registration
requirements so long as only accredited investors are involved but that, otherwise, any offer or sale is subject
to the federal registration requirements.
c.
According to SEC Regulation S, offers or sales outside the U.S. are not subject to federal registration
requirements so long as only accredited investors are involved and no more than $5 million in sales are made
but that, otherwise, any offer or sale is subject to the federal registration requirements.
d.
According to SEC Regulation S, offers and sales outside the U.S. are not subject to Section 5 registration
requirements.
Challenging
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
Blooms: Knowledge
Fact Pattern 21-1
Joan enjoys cross stitching, and her husband, John, makes items using a woodworking process. They would like to make
more items and open a small shop selling their handiwork, but they need additional capital with which to purchase raw
materials, rent space, and advertise. Joan and John discuss the idea with their neighbors during the annual neighborhood
picnic. A number of the neighbors say that they would like to invest in the project. This was entirely the initial idea of the
neighbors, and Joan and John did not coerce them in any way. Joan and John, however, quickly draw up contracts that the
neighbors signed providing that each investor would receive a certain interest in the shop. An attorney who lived in the
neighborhood and specialized in family law asked if there were some laws that John and Joan needed to satisfy in order to
seek investors. The neighborhood consensus, however, was that, so long as no one was misled and acted voluntarily, no
problem existed. John and Joan proceeded with the shop and made a significant amount of profit. Disagreements arose
among the neighbors, however, regarding exactly who was entitled to what.
57. Refer to Fact Pattern 21–1. Which of the following is true regarding the application of federal securities laws to John
and Joan’s situation?
a.
The arrangement with the neighbors was at the suggestion of the neighbors; and federal security law would,
therefore, not apply.
b.
Contracts such as those involved with the neighbors would not be considered securities and, therefore, federal
securities law would not apply.
c.
Contracts such as those involved with the neighbors appear to be securities; but state law, not federal law,
would apply.
d.
Contracts such as those involved with the neighbors would be considered securities; and, therefore, federal
securities law would apply.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21-4 Definition of Terms
Blooms: Analysis
58. Refer to Fact Pattern 21–1. Which of the following is true regarding the application of state securities laws to John and
Joan’s situation?
a.
There are no state securities laws because these have been entirely preempted by federal law.
b.
Although state securities laws, called blue sky laws, have been preempted in some respects, they remain viable
in other respects; and state law should be consulted to ensure compliance.
c.
State securities laws have not been preempted in any respect; and state securities laws, called yellow dog laws,
should be consulted to ensure compliance.
d.
John and Joan may elect whether they want state securities laws rather than federal securities laws to apply.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21-3 State Blue Sky Laws
21–11e Offerings Offshore and Regulation S
Blooms: Analysis
Fact Pattern 21-2
Alice and her general partner, Greg, own several businesses. Alice is very interested in salt water aquariums and decides
that a good venture for the partnership would be the development of a business to raise tropical fish. She plans to issue
stock to start the fish business with the idea that she and Greg will purchase a majority of the stock. She has a friend,
Tony, a plastic surgeon with a good practice, who has expressed interest in the venture because he believes that the
presence of fish in waiting rooms reduces anxiety and encourages patients to spend more money. Alice does not want to
go to the expense and trouble of a formal registration under the 1933 Act and seeks advice on how to avoid that process
should the partnership issue securities.
59. Refer to Fact Pattern 21–2. As far as Greg is concerned, which of the following is true?
a.
Selling to Greg would not trigger registration requirements because his status as a general partner results in
him being considered an accredited investor.
b.
Selling to Greg would not trigger registration requirements so long as he purchases at least 10% of outstanding
stock.
c.
Selling stock to Greg would not trigger registration requirements because he is a tombstone investor.
d.
Selling stock to Greg would trigger registration requirements.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
Blooms: Analysis
60. Refer to Fact Pattern 21–2. As far as Tony is concerned, which of the following is true?
a.
Selling to Tony would not trigger registration requirements because of the professional exemption.
b.
Selling to Tony would not trigger registration requirements if it can be established that his income or net worth
meets amounts required to qualify him as an accredited investor.
c.
Selling to Tony would not trigger registration requirements so long as he purchases under 5% of the stock.
d.
Selling to Tony would trigger registration requirements.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21-9 Exemptions for Offerings by the Issuer
Blooms: Analysis
Fact Pattern 21-3
Yolanda has filed the registration statement, in connection with a public offering of stock in ABC Corgi, a company
dedicated to the production of clothing and toys highlighting the highly prized Welsh Corgi breed of dog. The registration
statement is not yet effective. Yolanda would like to move forward with promoting the company as much as possible. She
Blooms: Comprehension
asks for advice regarding activities in which she could legally participate. She is particularly interested in making
presentations to large institutional investors.
61. Refer to Fact Pattern 21–3. Which of the following is true regarding Yolanda’s situation?
a.
Because she is in the active period, no sales of securities are allowed.
b.
During this quiet period, offers to buy may be accepted.
c.
During this waiting period, so long as requirements are met, she may solicit offers to buy securities but may
not accept them yet.
d.
During this quiet period, no sales of securities are allowed; and the red herring may not be distributed
62. Refer to Fact Pattern 21–3. Which of the following are true regarding selling efforts to institutional investors during
this period.
a.
Such efforts are called roadshows and are legal so long as SEC requirements are followed.
b.
Such efforts are an illegal type of promotion referenced as selling promotions.
c.
Such efforts are called concerted sales and are legal so long as the SEC gives prior approval.
d.
Such efforts are simply called felonies and can result in fines as well as jail time.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21–5d Registration Procedure
Blooms: Comprehension
63. Discuss when a promissory note will be considered a security including a detailed discussion of the family
resemblance test.
1.
2.
United States – BUSBROG: – Analytic
DISC: – AICPA: BB-Legal
21–5d Registration Procedure
Blooms: Analysis
64. Set forth the three tests under which a general partnership may be found to be a security?
65. Explain the scope and purpose of Section 11 of the Securities Act of 1933 regarding misleading registration
statements. What is the state of mind required in order to establish a violation of Section 11?
66. Set forth the difference between firm commitment underwriting and best-efforts underwriting.
67. Set forth the two principal federal acts that regulate securities transactions and issuers. Additionally, list the three
beliefs federal securities laws embody as set forth in the text. Do you believe that the securities rules that are in place are
sufficient to protect investors? Why or why not? Discuss fully.