CHAPTER 21 – SECURITIES REGULATION
TRUE/FALSE
1. The Securities Act of 1933 established the Securities and Exchange Commission.
2. A control security is stock which gives the owner a controlling interest in the company.
3. After the SEC completes its review of a preliminary registration statement, it sends the issuer a
comment letter setting forth changes that must be made.
4. The Sarbanes-Oxley Act makes it a crime to retaliate against someone who blows the whistle on any
federal offense.
5. Any securities offerings covered by the NSMIA must comply with state securities laws.
6. Premier Enterprises sold Watson unregistered stock which was not exempt. The 1933 Act imposes
liability on Premier, and Watson can demand rescission if he still owns the stock.
7. The 1933 Act prohibits fraud only in transactions involving registered securities.
8. The 1934 Act requires companies with a class of stock that is publicly traded to make regular filings
with the SEC.
9. The SEC has enforcement powers, including the power to issue cease and desist orders, to levy fines,
and to confiscate profits from illegal transactions.
10. To recover for an alleged violation of SEC Rule 10(b)-5, a plaintiff is required to prove reliance on a
misstatement or omission relative to the purchase of the security.
11. The “tipper” of inside information can be convicted of a crime, the “tippee” cannot.
12. Typically, exemptions under the 1933 Act are based on either the type of security or the type of
transaction.
13. Offerings under Regulation A of the Securities Act of 1933, although called private offerings, are
really small public offerings.
14. Securities offered and sold entirely within one state by a corporation of that state are exempt from
registration.
15. Securities issued by banks are exempt from SEC registration.
MULTIPLE CHOICE
1. The 1933 Act exempts all but which of the following from its registration requirements?
a.
Short-term notes.
b.
Treasury stock.
c.
Government securities.
d.
Annuity contracts.
2. Techno is planning a security offering under Regulation D, Rule 506. Under this rule, Techno can:
a.
offer up to $5 million in securities over 12 months.
b.
offer up to $1 million in securities over 12 months.
c.
can offer an unlimited amount of securities.
d.
can only offer an amount equal to twice its initial capitalization.
3. With regard to a corporation’s delivery of securities documents to investors and to the SEC:
a.
the SEC does not permit issuers of securities to deliver documents to investors
electronically since the issuer cannot assume that all investors have computers and want to
receive data this way.
b.
almost all filings with the SEC must be made electronically using the EDGAR system.
c.
companies have the option of communicating with investors by simply posting
information on their Web sites.
d.
filing with the SEC can be done electronically only if the standards of consent, notice, and
access are met.
4. Under what type of securities offering must the issuer determine if the investor is an accredited,
sophisticated, or unaccredited investor?
a.
Regulation A offering.
b.
Regulation D offering.
c.
Public offering.
d.
An interstate offering.
5. When a stock underwriter acts as the company’s agent in selling stock, it is called a:
a.
company underwriting.
b.
express underwriting.
c.
firm commitment underwriting.
d.
best efforts underwriting.
6. Under which of the following exemptions is there no dollar limitation?
a.
Rule 504.
b.
Rule 505.
c.
Rule 506.
d.
Regulation A.
7. Pursuant to a public offering, a CPA firm prepared an unqualified opinion as to the financial
statements. After the offering, omissions and misstatements were found. The CPA firm is now being
sued by the purchasers of the stock. The purchasers are alleging that the erroneous financial statements
in the registration statement caused them to suffer a monetary loss. The CPA firm can avoid liability if
it can prove:
a.
that it used due diligence in preparing the financial statements.
b.
the corporation was the party who made misstatements and omissions.
c.
the firm believed that the statements were accurate.
d.
None of the above will avoid liability.
8. A defense to a civil action brought under Section 10(b) and Rule 10b-5 of the 1934 Act would be:
a.
that the statute of frauds was not observed.
b.
that the seller of the securities was not in privity of contract with the plaintiffs.
c.
that the sellers did not intentionally or recklessly make a false representation.
d.
All of the above.
9. The guiding principal of federal securities law is:
a.
to keep investors from making bad investments.
b.
to insure investors have full and accurate information.
c.
to avoid another stock market crash.
d.
to promote the issuance of securities.
10. Felicity brought a lawsuit under Section 11 of the 1933 Act against Mojo Corp. She will have to prove
that:
a.
she relied on the registration statement.
b.
Mojo was negligent in preparing the registration statement.
c.
there was a material misstatement or omission in the registration statement and she lost
money.
d.
All of the above.
11. The SEC creates law in all but which of the following ways?
a.
Bringing cease and desist orders.
b.
Issuing releases.
c.
Promulgating rules.
d.
Writing no-action letters.
12. Which of the following statements is correct?
a.
Investors generally receive a copy of the registration statement.
b.
Investors generally do not receive the company’s prospectus.
c.
A prospectus provides disclosure about the offering but does not include as much
information as the registration statement, such as information that would be of interest to
the SEC but not the typical investor.
d.
All the above.
13. Under the 1934 Act, an issuer must register with the SEC if:
a.
it completes a public offering under the 1933 Act.
b.
its securities are traded on a national exchange.
c.
it has at least 500 shareholders and total assets that exceed $10 million.
d.
All of the above are factors that necessitate registration.
14. An individual engaged in illegal insider trading could be:
a.
fined.
b.
given a prison sentence.
c.
required to pay the SEC three times the profit made.
d.
All the above are correct.
15. If the final registration statement contains a material misstatement or omission, the purchaser of the
security can recover damages from:
a.
everyone who signed the registration statement..
b.
the company’s directors, but not the chief officers.
c.
the experts who signed the registration statement, but not any other parties.
d.
the issuer of the security, but not the company’s directors or chief officers.
16. If a registration statement contains a material misstatement or omission:
a.
the company is liable and has no defense.
b.
anyone other than the company who signed the statement is liable and has no defense.
c.
all experts are liable and have no defense.
d.
the company is liable unless it can show due diligence.
17. Larry was working at his job at the landfill when he got off his tractor to take a break. He noticed some
papers on the ground and went to throw them on a trashpile. As he held the papers he saw a
confidential report from MegaCorp stating it would be announcing the development of a new super
computer in two weeks. Larry has no relationship with MegaCorp. Larry mortgaged his house and
borrowed all the money he could to purchase $200,000 worth of MegaCorp stock. Larry bought the
stock for $32 a share. When the announcement was made public, MegaCorp’s stock skyrocketed. Larry
sold his stock a few weeks later and made a huge profit. Larry has:
a.
committed a criminal act.
b.
violated SEC regulations but not the criminal law.
c.
committed an act of improper insider trading.
d.
done nothing legally wrong.
18. MegaCorp wishes to sell $25 million of securities. The only investors will be 20 institutional buyers.
Which of the following applies to this offering?
a.
Rule 504 of Regulation D of the 1933 Act.
b.
Rule 505 of Regulation D of the 1933 Act.
c.
Rule 506 of Regulation D of the 1933 Act.
d.
None of the above apply to this $25 million offering.
19. Ed, a vice-president of Palmette Products, Inc., buys 1,000 shares of his company’s stock on June 15.
His son has medical problems in September, and Ed sells the stock at a profit. Ed:
a.
must turn over to Palmette any profits he made on the sale.
b.
may keep any profits on the sale since he had a good reason to sell and was not selling in
order to manipulate the market.
c.
may keep the profits from the sale as long as he reported his sale to the SEC within two
business days.
d.
may keep any profits from the sale if he did not act on secret information when he sold the
shares.
20. A criminal case under the Securities Act of 1933 is prosecuted by:
a.
the SEC.
b.
the Justice Department.
c.
the Department of the Treasury.
d.
the FTC.
21. Section 16 of the 1934 Act prohibits short-swing trading on the part of any person who is:
a.
an officer of a corporation.
b.
a director of a corporation.
c.
any shareholder who owns ten percent or more of the corporate stock.
d.
All the above.
22. Which of the following requires companies to file annual reports containing audited financial
statements?
a.
The 1933 Act.
b.
The 1934 Act.
c.
Regulation A.
d.
Regulation B.
23. The 1934 Act is primarily intended to:
a.
maintain the integrity of the secondary market for securities.
b.
make sure companies who wish to raise money by the sale of securities comply with
disclosure requirements for the initial offering.
c.
coordinate federal and state laws with a primary emphasis on allowing the individual
states to maintain primary control over securities law.
d.
All the above are correct.
24. The Small Company Offering Registration applies to:
a.
offerings of up to $500,000 in a 6-month period.
b.
offerings of up to $1,000,000 in a 12-month period.
c.
offerings of up to $1,500,000 in a 12-month period..
d.
offerings of up to $2,000,000 in a 2-year period.
25. The Dodd-Frank Wall Street Reform and Consumer Protection Act:
a.
is an amendment to the 1934 Act.
b.
provides rewards for whistleblowers.
c.
requires companies to report the use of “conflict minerals.”
d.
All the above are correct.
ESSAY
1. What are the three primary ways the SEC creates law?
2. Countywide Metals is a small company that incorporates in the state in which it is doing business and
plans to offer and sell $100,000 worth of stock only to residents of the county in which it is doing
business. Discuss the requirements Countywide must meet for registering its securities.
3. What information must be contained in a registration statement?
4. The Fallwater Partnership wants to incorporate and is considering using a DPO. Explain what a DPO
is and discuss the advantages and disadvantages of this course of action.
ANS:
5. Jackie learned of insider trading information while talking to Mark, a director of a large corporation.
She took advantage of the information to buy stock and make a huge financial gain. If she is accused
of violating securities law, what must the government prove in order to gain a conviction against
Jackie?