R5-5 Flashcards
Tork purchased restricted securities that were issued pursuant to Regulation D of the Securities Act of 1933. Which of the following statements is correct regarding Tork’s ability to resell the securities?
a.
Tork may resell the securities so long as the sale does involve interstate commerce.
b.
Tork may resell the securities as part of another transaction exempt from registration.
c.
Tork may not resell the securities unless Tork obtains a written SEC exemption.
d.
Tork may not resell the securities if the certificates contain a legend indicating that they are unregistered securities.
Choice “b” is correct. Under Regulation D of the Securities Act of 1933, Tork may only resell if the resale transaction continues to fall under the registration exemptions found in Section 3 of the 1933 Act.
Choice “a” is incorrect. Regulation D prohibits immediate reoffering to the public regardless of whether the reoffering is an interstate transaction or not.
Choices “d” and “c” are incorrect; there are no such rules.
The prospectus for the sale of securities of a not-for-profit corporation contained material misrepresentations due to the negligence of the person who prepared the financial statements. As a result of the misrepresentations, purchasers of the shares lost their investment. Do the anti-fraud provisions of the Securities Act of 1933 apply in this situation?
a.
No, because the securities are exempt from registration.
b.
Yes, because the securities are required to be registered.
c.
Yes, because the misrepresentations were material.
d.
No, because only the issuer was negligent.
Choice “c” is correct. While the securities of a not-for-profit corporation are indeed exempt from registration (making choice “a” a tempting choice), where a prospectus is issued and contains material misrepresentations, liability can be imposed under the 1933 Act.
Choice “b” is incorrect. Securities of not-for-profit corporations need not be registered.
Choice “a” is incorrect. See above explanation.
Choice “d” is incorrect. The 1933 Act imposes liability on the negligent issuer for making material misrepresentations in any written offer, and a prospectus is considered to be a written offer under the 1933 Act.
An original issue of transaction exempt securities was sold to the public based on a prospectus containing intentional omissions of material facts. Under which of the following federal securities laws would the issuer be liable to a purchaser of the securities?
I.
The anti-fraud provisions of the Securities Act of 1933.
II.
The anti-fraud provisions of the Securities Exchange Act of 1934.
a.
I only.
b.
Both I and II.
c.
Neither I nor II.
d.
II only.
Choice “b” is correct. The issuer could be liable for issuing securities by means of a false statement under the 1933 Act and can be liable for making false statements under the 1934 Act.
Choices “a”, “d”, and “c” are incorrect. Each of these choices incorrectly addresses either I and/or II.
Dean, Inc., a publicly traded corporation, paid a $10,000 bribe to a local zoning official. The bribe was recorded in Dean’s financial statements as a consulting fee. Dean’s unaudited financial statements were submitted to the SEC as part of a quarterly filing. Which of the following federal statutes did Dean violate?
a.
Securities Exchange Act of 1934.
b.
Securities Act of 1933.
c.
Federal Trade Commission Act.
d.
North American Free Trade Act.
Choice “a” is correct. Publicly traded corporations must register with the SEC and make certain periodic reports under the 1934 Act. These reports include business reports (10K, 10Q & 8K), insider trading tender offers & proxy solicitations. The unaudited financials, which are part of the company’s 10Q filing, fraudulently described the bribe.
Under the Securities Exchange Act of 1934, which of the following conditions generally will allow an issuer of securities to terminate the registration of a class of securities and suspend the duty to file periodic reports?
~~The corporation has fewer than 300 shareholders
~~The securities are listed on a national securities exchange
a.
No
No
b.
Yes
Yes
c.
Yes
No
d.
No
Yes
Choice “c” is correct. The reporting requirements of the 1934 Act apply to any company:
Whose shares are traded on a national exchange, or
Which has at least 500 shareholders in any one class who are not accredited and more than $10 million in assets.
Choices “b”, “d”, and “a” are incorrect, per the above.
Under the liability provisions of Section 11 of the Securities Act of 1933, an auditor may help to establish the defense of due diligence if:
I.
The auditor performed an additional review of the audited statements to ensure that the statements were accurate as of the effective date of a registration statement.
II.
The auditor complied with GAAS.
a.
Both I and II.
b.
II only.
c.
Neither I nor II.
d.
I only.
Choice “a” is correct. Due diligence is an affirmative defense that requires the CPA to prove that the CPA made a reasonable investigation and had reasonable grounds to believe that the financial statements were true and that no material facts were omitted. In essence, the CPA must prove that he or she followed GAAS.
Under the registration requirements of the Securities Act of 1933, which of the following items is (are) considered securities?
~~Investment contracts
~~Collateral-trust certificates
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
Choice “a” is correct. A collateral trust certificate is a bond secured by collateral and deposited with a trustee. Like other bonds, it is considered a security. Under the securities laws, “investment contracts” are specifically deemed to be securities. While not defined in the securities laws, an investment contract generally is defined as any financial contract, investment, or scheme in which the investor expects to make a profit solely through the management by others.
Under the Securities Act of 1933, which of the following statements most accurately reflects how securities registration affects an investor?
a.
The investor is guaranteed by the SEC that the facts contained in the registration statement are accurate.
b.
The investor is provided with information on the stockholders of the offering corporation.
c.
The investor is assured by the SEC against loss resulting from purchasing the security.
d.
The investor is provided with information on the principal purposes for which the offering’s proceeds will be used.
Choice “d” is correct. One piece of information required in a registration statement is a statement of how the funds received will be used.
Choice “b” is incorrect. Generally, the registration statement need not include a list of the issuer’s current shareholders.
Choice “a” is incorrect. The SEC does not guarantee the accuracy of the facts contained in a registration statement.
Choice “c” is incorrect. The SEC does not assess the financial merit of registered securities.
Which of the following securities would be regulated by the provisions of the Securities Act of 1933?
a.
Securities issued by not-for-profit, charitable organizations.
b.
Securities issued by savings and loan associations.
c.
Securities guaranteed by domestic governmental organizations.
d.
Securities issued by insurance companies.
Choice “d” is correct. There is an exemption for insurance policies [Securities Act 3(a)(8)], but other securities issued by insurance companies must generally be registered.
Choice “a” is incorrect. Securities Act 3(a)(4) exempts securities of not-for-profit organizations.
Choice “c” is incorrect. Securities Act 3(a)(2) exempts securities guaranteed by domestic governmental organizations.
Choice “b” is incorrect. Securities Act 3(a)(5) exempts securities issued by a savings and loan association.
Which of the following requirements must be met by an issuer of securities who wants to make an offering by using shelf registration?
~~Original registration statement must be kept updated
~~The offeror must be a first-time issuer of securities
a.
No
Yes
b.
Yes
No
c.
No
No
d.
Yes
Yes
Choice “b” is correct. Shelf registrations are permitted when the issuer, for example, a well-known seasoned issuer (WKSI), is frequently issuing securities on a national exchange. The original registration statement must be kept current in order to provide accurate information to investors, and the SEC will not allow an issuer to use shelf registrations unless the issuer has a history of issuing securities. SA Rule 415.
Under the Securities Act of 1933, which of the following statements concerning an offering of securities sold under a transaction exemption is correct?
a.
The offering is exempt from the anti-fraud provisions of the 1933 Act.
b.
Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act.
c.
The offering is subject to the registration requirements of the 1933 Act.
d.
Resales of the offering are exempt from the provisions of the 1933 Act.
Choice “b” is correct. A transaction exemption applies only to the particular transaction. Subsequent sales must qualify for their own exemption, or they must be registered.
Choice “a” is incorrect. Exemption from the registration requirements does not exempt a security from the anti-fraud provisions.
Choice “c” is incorrect. If a security is exempt, it is not subject to registration.
Choice “d” is incorrect. A transaction exemption applies only to the transaction at hand. Subsequent sales must qualify for their own exemption, or they must be registered.
Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following situations would require Link to be subject to the reporting provisions of the 1934 Act?
~~Shares listed on a national securities exchange ~~More than one class of stock a.
No
Yes
b.
No
No
c.
Yes
No
d.
Yes
Yes
Choice “c” is correct. A company must register under the 1934 Act if the company is registered on a national exchange, but having more than one class of stock does not require registration.
Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following documents must Link file with the SEC?
~~Quarterly reports (Form 10-Q)
~~Proxy statements
a.
Yes
Yes
b.
Yes
No
c.
No
No
d.
No
Yes
Choice “a” is correct. A corporation registered under the 1934 Act must file quarterly reports (Form 10-Q) and proxy solicitations by management.
Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following reports must be submitted to the SEC?
~~Report by any party making a tender offer to purchase Link’s stock
~~Report of proxy solicitations by Link stockholders
a.
No
Yes
b.
Yes
Yes
c.
Yes
No
d.
No
No
Choice “b” is correct. The 1934 Act (section 13) requires persons making a tender offer to shareholders of a registered corporation to file a report with the SEC, and the 1934 Act (section 14) prohibits anyone from soliciting proxies in a registered company without filing a report with the SEC.
Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933?
a.
The securities are nonvoting preferred stock.
b.
The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.
c.
The securities are AAA-rated debentures that are collateralized by first mortgages on property that has a market value of 200% of the offering price.
d.
The issuing corporation was closely held prior to the offering.
Choice “b” is correct. The 1933 Act generally is concerned with sales by issuers, underwriters, or dealers. Sales by other persons are exempt.
Choice “a” is incorrect. There is no exemption from registration for issuances of nonvoting stock.
Choice “d” is incorrect. The fact that the issuer was closely held prior to the public offering does not qualify the offering for an exemption.
Choice “c” is incorrect. The fact that securities appear to be relatively safe does not provide an exemption from the registration requirements.
Which of the following statements concerning an initial intrastate securities offering made by an issuer residing in and doing business in that state is correct?
a.
The offering would be regulated by the SEC.
b.
The offering would be subject to the registration requirements of the Securities Exchange Act of 1934.
c.
The offering would be exempt from the registration requirements of the Securities Act of 1933.
d.
The shares of the offering could not be resold to investors outside the state for at least one year.
Choice “c” is correct. Intrastate securities offerings are exempt from the registration requirements of the Securities Act of 1933.
Choice “b” is incorrect. The 1934 Act does not apply to initial offerings. It controls exchanges once the securities are in the market.
Choice “a” is incorrect. Intrastate offerings are exempt from the Securities Act.
Choice “d” is incorrect. Shares exempt under the intrastate offering exemption may not be resold for nine months.
Which of the following statements concerning the prospectus required by the Securities Act of 1933 is correct?
a.
The prospectus is a part of the registration statement.
b.
The prospectus is prohibited from being distributed to the public until the SEC approves the accuracy of the facts embodied therein.
c.
The prospectus must be filed after an offer to sell.
d.
The prospectus should enable the SEC to pass on the merits of the securities.
Choice “a” is correct. The registration statement is divided into two parts. Part I is the prospectus; Part II contains other information about the securities being issued.
Choice “d” is incorrect. The SEC never passes on the merits of a security. The prospectus merely gives an investor information on which to make an investment decision.
Choice “c” is incorrect. The registration statement, including the prospectus, must be filed before any offer to sell may be made.
Choice “b” is incorrect. The SEC does not review the accuracy of the prospectus, but merely assures that it contains the required information.
A preliminary prospectus, permitted under SEC Regulations, is known as the:
a.
“Blue-sky” prospectus.
b.
“Red-herring” prospectus.
c.
Unaudited prospectus.
d.
Qualified prospectus.
Choice “b” is correct. The regulations allow the use of a “red herring” prospectus in certain circumstances. A “red herring” prospectus may be missing certain information that is not yet available.
Choice “c” is incorrect. There is no provision for an unaudited prospectus.
Choice “d” is incorrect. There is no provision for a qualified prospectus.
Choice “a” is incorrect. “Blue sky” is the general name given to state securities laws, derived from the idea that without the laws, people could be lured into investing in the “blue sky.”
A tombstone advertisement:
a.
May be substituted for the prospectus under certain circumstances.
b.
May contain an offer to sell securities.
c.
Notifies prospective investors that a previously offered security has been withdrawn from the market and is therefore effectively “dead.”
d.
Makes known the availability of a prospectus.
Explanation
Choice “d” is correct. A tombstone ad can be placed before a registration statement is effective. Only certain information, such as the nature of the security, the price, and the availability of a prospectus, may be included in the ad.
Choice “a” is incorrect. A tombstone ad is merely a brief advertisement. It cannot replace the prospectus.
Choice “b” is incorrect. A tombstone ad may indicate the nature of the securities to be issued, the price, and the availability of a prospectus; the ad may not make an offer to sell.
Choice “c” is incorrect. A tombstone ad is used before a registration statement for newly issued securities is effective; the ad does not announce the death of an old offering.
Which of the following factors, by itself, requires a corporation to comply with the reporting requirements of the Securities Exchange Act of 1934?
a.
Total assets of $2 million.
b.
Six hundred employees.
c.
Four hundred holders of equity securities.
d.
Shares listed on a national securities exchange.
Choice “d” is correct. A corporation must register under the 1934 Act if either: (i) the corporation’s securities are traded on a national exchange or (ii) the corporation has more than 2,000 shareholders (or 500 unaccredited shareholders) in any outstanding class and more than $10 million in assets.
Choice “b” is incorrect. The number of employees is irrelevant to whether a corporation must register under the 1934 Act.
Choice “a” is incorrect. The fact that a corporation has $2 million in assets does not invoke the registration requirement.
Choice “c” is incorrect. The fact that a corporation has 400 shareholders does not invoke the registration requirement.
Which of the following events must be reported to the SEC under the reporting provisions of the Securities Exchange Act of 1934?
~~Tender offers
~~Insider trading
~~Soliciting proxies
a.
Yes
Yes
Yes
b.
Yes
No
Yes
c.
Yes
Yes
No
d.
No
Yes
Yes
Choice “a” is correct. Tender offers, insider trading, and proxy solicitations all must be reported under the 1934 Act.
Which of the following transactions will be exempt from the full registration requirements of the Securities Act of 1933?
a.
All intrastate offerings.
b.
Any stockbroker transaction.
c.
All offerings made under Regulation A.
d.
Any resale of a security purchased under Regulation D offering.
Choice “c” is correct. Regulation A provides an exception from the full registration requirements. It provides a more simplified form of registration.
Choice “a” is incorrect. Not all intrastate offerings are exempt from registration. Only intrastate offerings made by issuer’s doing 80% or more of their business in that state are exempt from registration.
Choice “d” is incorrect. Resales must qualify for their own exemption. The fact that the securities were purchased pursuant to a Regulation D offering does not mean that a resale would necessarily be exempt from the registration requirements.
Choice “b” is incorrect. Stockbroker transactions are exempt only if the transaction (i) is on a customer’s order, (ii) is through an exchange or over-the-counter market, and (iii) constitutes a usual brokerage function.
