1. The Securities and Exchange Commission creates regulations governing
the purchase and sale of securities.
1. The Securities and Exchange Commission can seek sanctions against
those who violate foreign securities laws.
1. A prospectus is a contract in which a person (1) invests (2) in a
common enterprise (3) reasonably expecting profits.
1. Once the registration statement has been filed, there is no waiting
period—the issuer can offer and sell the securities without restrictions.
1. Noninvestment companies are firms that are not engaged primarily in
the business of investing or trading in securities.
1. Securities offerings in unlimited amounts can be exempt from the
registration requirements in certain circumstances.
1. Most securities can not be resold without registration.
1. Selling securities under an exemption for which the securities do not
qualify results in liability.
1. Securities must be registered under the Securities Act of 1933 for the
Securities Exchange Act of 1934 to apply.
1. To be considered material, a fact must be significant enough that it
would likely affect an investor’s decision to buy or sell a company’s
securities.
1. Liability under Section 10(b) of the Securities Exchange Act of 1934
has been extended to include certain “outsiders.”
1. It is always wrong to disclose material, nonpublic information about a
company to a person who would not otherwise be privy to it.
1. For civil 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. Violations of Section 16(b) of the Securities Exchange Act of 1934
include the sale by insiders of stock acquired less than six months
before the time of sale.
1. For a defendant to be convicted in a criminal prosecution under the
securities laws, a jury is allowed to speculate that the defendant may
have acted wrongfully.
1. Private parties can sue violators of Section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5.
1. Typically, state laws have disclosure requirements and antifraud pro–
visions patterned after Section 10(b) of the Securities Exchange Act of
1934 and SEC Rule 10b-5.
1. Corporate accountability can be increased by imposing strict disclosure
requirements for securities transactions.
1. Under the Sarbanes-Oxley Act of 2002, chief financial officers must
certify the accuracy of information in corporate financial statements.
1. The Securities and Exchange Commission rarely issues interpretive
releases to explain how securities laws apply in the online environment.
1. Readmore Bookstore Corporation files a registration statement and
delivers a prospectus to the appropriate parties. These items are
intended to enable the evaluation of certain financial risks by
a. market professionals to explain to all investors.
b. government regulators to disclose to the general public.
c. sophisticated investors only.
d. unsophisticated investors.
1. Bild-It-Rite Corporation is a public company that is poised to issue
securities that do not qualify for an exemption from registration. This
means that Bild-It-Rite must
a. file a registration statement with the SEC.
b. issue the securities through an online registration site.
c. refrain from issuing the securities to unregistered investors.
d. register the securities with a national stock exchange.
1. Squeaky Clean Corporation wants to make an offering of securities to
the public. This offering is not exempt from registration under the Se–
curities Act of 1933. Before Squeaky sells its securities, it must provide
investors with
a. a forward-looking financial forecast.
b. an investment contract.
c. a prospectus.
d. samples of is products.
1. Begin Anew Enterprise, Inc., completes its registration process and issues a
free-writing prospectus. This tells prospective investors
a. about investing freely.
b. how to write their own prospectus.
c. that they can “freely write their own ticket” to buy Begin’s securities.
d. that they may obtain the prospectus at the SEC’s Web site.
1. Mountain View Corporation is a noninvestment company that wants to
issue stock of $3 million in a twelve-month period. Mountain View, with
less than $20 million in annual sales, qualifies as a small business
issuer. Before Mountain View sells the stock, it must provide investors
with
a. an offering circular.
b. a notice of the issue.
c. a red herring prospectus.
d. a tombstone ad.
1. Flite Airline Corporation is poised to issue securities in a transaction
that, under the Securities Act of 1933, is “exempt.” This enables Flite
to
a. avoid the costs and complications of registration.
b. buy and sell the securities without liability for “recaptures.”
c. make forward-looking financial forecasts without liability.
d. withhold inside information from accredited investors.
1. As part of a stock offering for Equine Corporation, Flem, Equine’s
accountant, intentionally misrepresents material facts in the prospectus.
Gigi buys the stock unaware of the misrepresentation and suffers a
loss. Flem may be subject to
a. a fine and damages only.
b. a fine and imprisonment only.
c. a fine, imprisonment, and damages.
d. damages only.
1. GR8 Stuf Company files a registration statement with the SEC before
making an offering to the general public. The registration contains false,
immaterial statements of which the investors are unaware. GR8 Stuf is
charged with violating the Securities Act of 1933. GR8 Stuf’s best
defense is
a. the investors were not aware of the misrepresentations.
b. the issuer reasonably believed the misstatements were true.
c. the offering was made available to the general public.
d. the untrue statements were not material.
1. Hometown Shops Retail Company has assets of less than $10 million
and fewer than five hundred shareholders. Interstate Outlets, Inc., has
assets of more than $10 million and more than five hundred
shareholders. The Securities Exchange Act of 1934 applies to
a. Hometown Shops and Interstate Outlets.
b. Hometown Shops only.
c. Interstate Outlets only.
d. neither Hometown Shops nor Interstate Outlets.
1. Nouveau Riche Corporation, and its officers, directors, and sharehold–
ers, buy and sell securities. SEC Rule 10b-5 applies to
a. only the purchase or sale of a security by a financial corporation.
b. only the purchase or sale of a security involving an officer or
director.
c. only the purchase or sale of a security involving a shareholder.
d. the purchase or sale of any security.
1. To raise capital to form Plasticity Corporation with Quinn, Rona sells
bonds and stock in other companies, and plans to register an initial
public offering under the Securities Act of 1933. SEC Rule l0b-5 covers
a. most forms of securities.
b. only bonds.
c. only securities registered under the Securities Act of 1933.
d. only stock.
1. Sid, a director of Tech Software Company, learns that a Tech engineer
has developed “Ur Call,” a new, exciting video game. Sid buys Tech
stock and tells his friend Velma, who also buys Tech stock. When the
new game is released three weeks later, Sid and Velma sell their stock
for a big profit. Refer to Fact Pattern 29-1B. Under SEC Rule l0b-5,
Sid would not be liable if he had waited to buy Tech stock until
a. after Sid told Velma of the new game.
b. after Velma bought Tech stock.
c. after the public release of the game.
d. just before the game was released.
1. Sid, a director of Tech Software Company, learns that a Tech engineer
has developed “Ur Call,” a new, exciting video game. Sid buys Tech
stock and tells his friend Velma, who also buys Tech stock. When the
new game is released three weeks later, Sid and Velma sell their stock
for a big profitSid, a director of Tech Software Company, learns that a
Tech engineer has developed “Ur Call,” a new, exciting video game.
Sid buys Tech stock and tells his friend Velma, who also buys Tech
stock. When the new game is released three weeks later, Sid and
Velma sell their stock for a big profit. Refer to Fact Pattern 29–1B.
Regarding Sid’s profits on the purchase and sale of Tech stock, under
Section 16(b) of the Securities Exchange Act of 1934 Tech may
recapture
a. all of Sid’s profits.
b. half of Sid’s profits.
c. 10 percent of Sid’s profits.
d. none of Sid’s profits.
1. Dave, an accountant, does not work for Emergent Company, but wrong–
fully obtains inside information concerning Emergent. Based on the in–
formation, Dave buys and sells Emergent stock for personal gain. The
Securities and Exchange Commission prosecutes Dave, arguing that he
is liable because he stole information rightfully belonging to another.
This argument is
a. the blue-sky theory.
b. the misappropriation theory.
c. the red-herring theory.
d. the tipper/tippee theory.
1. Excel Aviation Corporation is required to register its securities under
Section 12 of the Securities Exchange Act of 1934. Section 14(a) of
the act regulates
a. the declaration of dividends by Excel’s board of directors.
b. the later re-registration of Excel’s securities.
c. the short-swing activities of Excel’s insiders.
d. the solicitation of proxies from Excel’s shareholders.
1. Ernie contracts to buy securities from Freda. Later, believing that Freda
committed fraud in the deal, Ernie files a suit against her. If Freda is
found liable, Ernie may obtain
a. an apology only.
b. damages to the extent of Freda’s illegal profits only.
c. damages to the extent of Freda’s illegal profits or rescission of
Ernie’s contract to buy securities from Freda.
d. rescission of Ernie’s contract to buy securities from Freda only.
1. Corner Café Company offers its stock for sale only in a single state.
The law in Corner’s state is like the law in most states. Corner’s offer
is subject to state securities statutes that include
a. antifraud and disclosure provisions.
b. antifraud provisions only.
c. disclosure provisions only.
d. neither antifraud nor disclosure provisions.
1. Maple Products Corporation is a public company, which New
Hampshire regulates and in which Orin invests. The Sarbanes-Oxley Act of
2002 introduced direct federal corporate governance requirements to
a. public companies.
b. private investors.
c. state regulators.
d. none of these choices.
1. Heavy Hauling, Inc., is a public company whose shares are traded in
the public securities markets. Under the Sarbanes-Oxley Act of 2002, to
ensure that Heavy Hauling’s financial results are accurate and timely,
the firm’s senior officers must set up and maintain
a. internal “disclosure controls and procedures.”
b. external “release and reveal timetables.”
c. personal “peruse and review liability policies.”
d. public “information and discussion forums.”
1. Lara is the chief executive officer of Micro, Inc., which is required to
file certain financial reports with the Securities and Exchange
Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Lara must
a. certify that the reports are complete and accurate.
b. designate a corporate official to assume liability for inaccuracies.
c. do nothing.
d. read the reports and be prepared to answer questions about
them.
1. Drew is an officer of Energy Fuel, Inc. Drew knows that an Energy
engineer recently developed a new, inexpensive method for converting
hydrogen into fuel. Drew takes advantage of this information to buy
Energy stock from Gert and, after the discovery is announced, to sell
the stock to Holly at a profit. Gert claims that this is a violation of
federal law. Is Gert correct? If so, what federal law has Drew violated,
and what are its possible penalties?
1. When Looking Glass Corporation wishes to issue certain securities, it
must provide sufficient information for Alice, and other unsophisticated
investors, to evaluate the financial risk involved. Specifically, the law
imposes liability for making a false statement or omission that is
“material.” What sort of information would Alice consider material?
