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Flashcards in Chapter 2 - CPA's and the Law Deck (62):

The purpose of the 1933 act is to:

Regulate the initial offering of securities by requiring the filing of a registration statement with the SEC prior to sale or an offer to sell. State securities laws also apply


Each state has adopted its own securities laws (called)

Blue-sky laws


What are the objectives of the 1933 act?

1) Disclosure to potential investors of all material information
2) Prevention of fraud


The goal of the 1933 act?

To provide investors with adequate information so they can make informed investment decisions.


Registration insures investors against loss.



Registration does not insure investors against loss


The 1933 act defines the term "security" to include almost any offering that constitutes an investment.




The test of whether something is a security requires analysis of whether:

a) A person invests in a common enterprise
b) With a reasonable expectation of profits
c) To be derived solely from the efforts of a thrid party, such as management.


Securities may have a physical location or non-physical location. Give examples

Physical location - NYSE
Non physical location - Over the counter markets


The individual or the business organization initially offering a security for sale to the public (generally, to raise money)

An Issuer


Any person who participated in the original offering of securities from the issuer with the intention of distributing them.



Any person who is engaged in the business of offering, selling buying, dealing, or otherwise trading in securities issued by another.

A dealer

A dealer also may be a broker, a person who executes securities transactions for others.


Categories of Issuers (4)

1) Nonreporting issuer
2) Unseasoned Issuer
3) Seasoned Issuer
4) Well-known seasoned issuer


One who need not file reports under the 1934 act. Must use detailed Form S-1

Nonreporting issuer


Has reported for at least 3 consecutive years under the 1934 act. It must use Form S-1 but provides less detailed information and may include some information by reference to other 1934 act reports.

Unseasoned issuer


Has filed for at least 1 year and has a market capitalization of at least $75 million. It may use Form S-3 to report even less detail and may include even more information by reference

Seasoned issuer


Has filed for at least 1 year and (a) has a worldwide market capitalization of at least $700 million or (b) has issued for cash in a registered offering at least $1 billion of debt or preferred stock in the past 3 years. Such an issuer also may use Form S-3

Well-known seasoned issuer


____________ is a complete disclosure to the SEC of all material information with respect to the issuance of the specific securities. It includes the prospectus that will be provided to each potential investor.

A registration statement


The purpose of a registration statement is?

To provide adequate and accurate public disclosure of financial and other pertinent information that potential investors may use to evaluate the merits of the securities.


The registration statement includes?

A description of:
a) The registrant's business, property, and competition
b) The significant provisions of the security to be offered for sale
c) Management, compensation of directors and officers, their holdings of the registrant's securities, and material transactions with these individuals
Compensation paid to the CEO, CFO, and other tree highest paid officer and directors.
d) Material legal proceedings
e) The principal purpose for which the proceeds will be used.


______ must be furnished to any interested investor.

A prospectus


Purpose of the prospectus?

To supply sufficient facts to make an informed investment decision. However, access is equated with delivery. Actual delivery of a hard copy is not required if the prospectus was timely filed with the SEC.


When is the registration statement effective?

20th day after filing unless the SEC accelerates the effective date or requires an amendment. A new 20 period will begin.


___________ sets forth the form and content of and requirements for the financial statements required to be filed under the Securities Act of 1933 and other registration statements and reports under the Securities and Exchange Act of 1934.

Regulation S-X


Generally, the entire allotment of securities is made available for purchase on the effective date of the registration statement. An exception is a __________

Shelf Registration


How long can a securities be put on the shelf?

3 years


Who is the shelf registration available to?

Only seasoned issuers and well-known seasoned issuers


The securities are exempt under the 1933 act.

Domestic government if used for gov't registration
Not-for-profit organizations
Domestic banks and savings and loan associations
Issuers that are federally regulated common carriers
A receiver or trustee in BK with prior court approval
State-requested insurers
A corporation in reorganization if approved by a court or other governmental body
An issuer that exchanges them with the issuer's existing security holder if no commission or other consideration is paid
Stock dividends and stock splits are usually exempt


Any note, draft, or banker's acceptance issued to acquire working capital is exempt from registration if it has a maturity of not more than _________ when issued.

9 months


An investment vehicle (money market fund) that holds short term commercial paper is__________

not exempt


Under the safe harbor provisions of Rule 147 an issue qualifies as intrastate if

The issuer is organized or incorporated in the state in which the issue is made
80% of the proceeds are to used in that state
80% of its assets are located there, and the issuer does at least 80% of its business (gross revenues) within that state
All the purchasers and offerees are residents of the state
No resales to nonresidents occur for at least 9 months after the initial sale by the issuer is completed
Steps are taken to prevent interstate distribution


Rule 147 (Intrastate offerings)

Max Price - No maximum
Investors - Purchasers and offerees must be state residents
Method of offer - General solicitation and advertising, but interstate distribution not permitted
Resale - No resales to nonresidents for at least 9 months


Regulation A

Max Price - $5 million in 12-month period
Investors - No limit
Method of offer - Testing the waters; sales after approval of offering statement
Resale - Not restricted


Regulation D - Rule 504

Max Price - $1 million in 12-month period
Investors - No limit
Method of offer - General solicitation allowed if compliant with state law
Resale - Not restricted if compliant with state law


Regulation D - Rule 505

Max Price - $5 million in 12-month period
Investors - No more than 35 unaccredited purchasers
Method of offer - No general solicitation or advertising
Resale - restricted


Regulation D - Rule 506

Max Price - No max
Investors - No more than 35 unaccredited purchasers - must have the knowledge and experience to evaluate the risks and merits
Method of offer - No general solicitation and advertising unless all sales are to accredited investors
Resale - Restricted


Rule 4(6)

Max price - $5 million
Investors - Only accredited but number unlimited
Method of offer - No general solicitation or advertising
Resale - restricted


The 1934 act primarily addresses secondary distribution (resale) of securities.




The SEC is an administrative agency created by the 1934 act to enforce the federal securities laws. It has the power to?

1. Issue rules
2. Investigate violations
3. Conduct hearings to decide whether violations have occurred (adjudication)
4. Impose penalties


What can the SEC do?

Deny, suspend, or revoke registration, or it may order a suspension of trading of the securities.


What can the SEC prohibit?

An individual who has committed securities fraud from serving as an officer or director of a public company. It also may freeze extraordinary payments during an investigation of securities law violations.


Who does the SEC oversee?

Public Company Oversight Board


All regulated, publicly held companies must register with the SEC? True or false



Registration is required of all companies that

1. List securities on a national securities exchange (section 12 of the 1934 act)
2. Have at least 500 shareholders of equity securities and total gross assets exceeding $10 million
3. An issuer that has registered securities under the 1933 act.
4. National securities exchanges


In addition to disclosing financial statements audited by a firm registered with the PCAOB, registration requires disclosure of the following:

1. Corporate organization
2. Financial structure
3. A description of all securities
4. Names of officers, directors, underwriters, and holders of more than 10% of a nonexempt equity security
5. A description of the nature of the business
6. Financial statements
7. A description of bonus and profit-sharing arrangements.


Annual (certified by CEO and CFO)

Form 10-K Audited financial statements and many other matters
60, 75 or 90 days after fiscal year end


Quarterly (certified by CEO and CFO)

Form 10-Q Reviewed quarterly financial information and changes during quarter
40 or 45 days after end of first 4 quarters



Form 8-K
Material events
Within 4 calendar days of event


__________ of the 1934 act makes it unlawful for any person to solicit any proxy with respect to any registered suecurity in violation of SEC rules and regulations.

Section 14(a)


_____ is a power of attorney given by a shareholder to a thrid party authorizing the party to exercise the voting rights of the shares. Solicitation includes any request for a proxy or any request to revoke a proxy.

A proxy


____________ is the purchase or sale of any security by an individual who (1) has access to material, nonpublic information; (2) has not disclosed it before trading; and (3) has a fiduciary obligation to the issuer, the shareholders, or any other source of the information.

Insider trading under Rule 10b-5


The following are examples of insiders for Rule 10b-5 purposes

1. Corporate officers
2. Lawyers
3. Auditors
4. Other parties, such as tippees and employees of government agencies entrusted with confidential corporate information.


An accountant who prepares or audits and certifies the financial statements included in a registration statement or prospectus is

Section 11

civilly liable without proof of fault


Any person who acquires a security issued under a registration statement or prospectus that contains a misstatement or omission of a material fact may sue the following:

Section 11

1. The issuer
2. Every person who signed the registration statement
3. Every director of the corporation or partner in the partnership issuing the security
4. Experts who participated in preparation of the registration statement (accountants, engineers, and lawyers)
5. Every underwriter


To recover under Section 11, a plaintiff must prove the following

1. The plaintiff acquired a security subject to registration
2. The plaintiff incurred a loss (damages)
3. The registration statement contained a material misstatement or omission
(accountant is liable only for a material misstatement or omission in a part of the statement for which (s)he was responsible.


A defendant's liability extends to acquirers of a security described in the registration statement or the prospectus

1. The acquirer need not have given value
2. Privity of contract is not required
3. The acquirer need not prove reliance, negligence, or fraud.


If the plaintiff proves the basic elements of its case, any defendant except the issuer avoids liability by proof of

due diligence


___________ of the 1934 act imposes liability for making or causing a false or misleading statement (or omission) of a material fact in any filing with the SEC under the act.

Section 18(a)


Under section 18(a) a plaintiff must prove the following:

1. A false statement about or omission of a material fact
2. Reliance on the misstatement in buying or selling the security
proof that the price of the security was affected by the miss statement may substitute for proof of reliance
3. damages (loss)


A defense to a suit based on Section 18(a) is to prove that the defendant acted in good faith and had no knowledge that the statement was false or misleading.

Good faith is an absence of an intent to deceive


________ states that it is illegal for any person, directly or indirectly to use interstate commerce or a national securities exchange to defraud anyone in connection with the purchase or sale of any security, whether or not required to be registered.

Rule 10b-5


For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred

Is limited to $100,000 on a joint income tax return.


The alternative minimum tax (AMT) is computed as the

Excess of the tentative AMT over the regular tax.