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1. The Securities and Exchange Commission interprets federal securities
laws, but does not investigate violations.
1. The Securities and Exchange Commission administrative law judges
hear cases involving alleged securities law violations.
1. The definition of security in the Securities Act of 1933 does not
include instruments and interests commonly known as securities.
1. Before filing the registration statement, an issuer cannot sell or offer to
sell the securities.
1. Most private, small-business, noninvestment company offers of securities
are not exempt from the registration requirements.
1. Securities that are exempt from the registration requirement can not
generally be resold without being registered.
1. Accredited investors include banks, but not investment companies.
1. Selling securities after the effective date of the registration statement
results in liability.
1. Insider trading occurs when persons buy or sell securities on the basis
of information that is not available to the pubic.
1. The Securities Exchange Act of 1934 is a one-time disclosure law.
1. “Forward-looking” financial forecasts are protected against liability for
securities fraud.
1. Anyone who wrongfully obtains inside information and trades on it for
his or her personal gain can be liable under SEC Rule 10b-5.
1. The Securities and Exchange Commission does not regulate the
content of proxy statements.
1. 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.
1. 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.
1. The Securities and Exchange Commission can bring a civil action
against anyone who aids in a violation of the Securities Exchange Act
of 1934.
1. State securities laws apply mainly to intrastate transactions.
1. Exemptions from federal securities laws are exemptions from state laws.
1. State corporation statues set up the legal framework for corporate
governance.
1. Under the Sarbanes-Oxley Act of 2002, chief executive officers no
longer need to certify the accuracy of information in corporate financial
statements.
1. 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.
1. 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.
1. 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.
1. 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.
1. 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.
1. 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.Refer to Fact Pattern 29-1A. 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.
1. 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.Refer to Fact Pattern 29-1A. 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.
1. 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.
1. Players Video Game Centers, Inc., wants to issue stock of $1 million in
a single offering. Players must provide all investors with material in-
formation 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.
1. Hobie, the chief executive officer of Ideal Gamers, Inc. (IGI), inten-
tionally 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.
1. New Discoveries Corporation, and its officers, directors, and share-
holders, buy and sell securities. Section 10(b) of the Securities Ex-
change 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.
1. Lex, a salesperson for Macro Corporation, learns that Macro will in-
crease 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.
1. 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.Refer to Fact Pattern 29-2A. 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.
1. 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.Refer to Fact Pattern 29-2A. 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.
1. 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.
1. 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.
1. 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.
1. Kirk is the chief financial officer of Lemon Corporation, which is re-
quired to file certain financial statements with the Securities and
Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002,
Kirk 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.
1. 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.
1. 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.
1. 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 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?
1. Standard Corporation is a public company whose shares are traded in
public securities markets. Standard’s officers want to set up and main-
tain 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?
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