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Flashcards in Chap 5 - Securities Regulation Deck (12):
1

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 as part of another transaction exempt from registration.
b. Tork may not resell the securities if the certificates contain a legend indicating that they are unregistered securities.
c. Tork may resell the securities so long as the sale does involve interstate commerce.
d. Tork may not resell the securities unless Tork obtains a written SEC exemption.

Tork may resell the securities as part of another transaction exempt from registration.

Choice "a" 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 "c" is incorrect. Regulation D prohibits immediate reoffering to the public regardless of whether the reoffering is an interstate transaction or not.

Choices "b" and "d" are incorrect; there are no such rules.

2

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 only the issuer was negligent.
b. Yes, because the misrepresentations were material.
c. No, because the securities are exempt from registration.
d. Yes, because the securities are required to be registered.

Yes, because the misrepresentations were material.

Choice "b" is correct. While the securities of a not-for-profit corporation are indeed exempt from registration (making choice "c" a tempting choice), where a prospectus is issued and contains material misrepresentations, liability can be imposed under the 1933 Act.

Choice "d" is incorrect. Securities of not-for-profit corporations need not be registered.

Choice "c" is incorrect. See above explanation.

Choice "a" 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.

3

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. II only.
b. Neither I nor II.
c. I only.
d. Both I and II.

Both I and II.

Choice "d" 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 "c", "a", and "b" are incorrect. Each of these choices incorrectly addresses either I and/or II.

4

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. North American Free Trade Act.
b. Securities Exchange Act of 1934.
c. Securities Act of 1933.
d. Federal Trade Commission Act.

Securities Exchange Act of 1934.

Choice "b" 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.

5

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 The securities are
has fewer than listed on a national
300 shareholders securities exchange
a. Yes Yes
b. No No
c. No Yes
d. Yes No

Yes, No.

Choice "d" 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 "a", "c", and "b" are incorrect, per the above.

6

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. Neither I nor II.
b. Both I and II.
c. I only.
d. II only.

Both I and II.

Choice "b" 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.

7

Under the registration requirements of the Securities Act of 1933, which of the following items is (are) considered securities?

Investment Collateral-trust
contracts certificates
a. Yes No
b. No Yes
c. No No
d. Yes Yes

Yes, Yes.

Choice "d" 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.

8

Under the Securities Act of 1933, which of the following statements most accurately reflects how securities registration affects an investor?
a. The investor is assured by the SEC against loss resulting from purchasing the security.
b. The investor is provided with information on the principal purposes for which the offering's proceeds will be used.
c. The investor is provided with information on the stockholders of the offering corporation.
d. The investor is guaranteed by the SEC that the facts contained in the registration statement are accurate.

The investor is provided with information on the principal purposes for which the offering's proceeds will be used.

Choice "b" is correct. One piece of information required in a registration statement is a statement of how the funds received will be used.

Choice "c" is incorrect. Generally, the registration statement need not include a list of the issuer's current shareholders.

Choice "d" is incorrect. The SEC does not guarantee the accuracy of the facts contained in a registration statement.

Choice "a" is incorrect. The SEC does not assess the financial merit of registered securities.

9

Which of the following securities would be regulated by the provisions of the Securities Act of 1933?
a. Securities guaranteed by domestic governmental organizations.
b. Securities issued by insurance companies.
c. Securities issued by savings and loan associations.
d. Securities issued by not-for-profit, charitable organizations.

Securities issued by insurance companies.

Choice "b" 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 "d" is incorrect. Securities Act 3(a)(4) exempts securities of not-for-profit organizations.

Choice "a" is incorrect. Securities Act 3(a)(2) exempts securities guaranteed by domestic governmental organizations.

Choice "c" is incorrect. Securities Act 3(a)(5) exempts securities issued by a savings and loan association.

10

Which of the following requirements must be met by an issuer of securities who wants to make an offering by using shelf registration?

Original The offeror
registration must be a
statement must first-time issuer
be kept updated of securities
a. No No
b. No Yes
c. Yes Yes
d. Yes No

Yes, No.

Choice "d" 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.

11

Under the Securities Act of 1933, which of the following statements concerning an offering of securities sold under a transaction exemption is correct?
a. Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act.
b. The offering is exempt from the anti-fraud provisions 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.

Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act.

Choice "a" 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 "b" 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.

12

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 More than one
on a national class of stock
securities exchange
a. Yes No
b. No Yes
c. No No
d. Yes Yes

Yes, No.

Choice "a" 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.