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Flashcards in CPA Legal Liability/Securities Regulation Deck (20):

Legal liability can arise how?

Breach of contract
Tort (negligence, fraud, constructive fraud)
Violation of a statue


To make a case for negligence, plaintiff must show:

defendant owed a duty of care
defendant breached that duty
breach caused plaintiff's injury


What is the difference between a majority rule and minority?

Majority means to any person or limited foreseeable class of persons whom the CPA knows will be relying on the CPA's work

Minority follows Ultramares decision....privity of contract to clients and intended 3rd party


Elements of actual fraud

Misrep of material fact
Actual and justifiable reliance by plaintiff
Scienter (intent to deceive)


Elements of constructive fraud (gross negligence)

Same elements of actual fraud (MAIDS) except acts recklessly


What is a security?

Any investment contracts

Examples: stocks, bonds, debentures, oil well interests, stock options, collateral trust certificates, warrants and limited partnerships

COD and general partnerships ARE NOT securities


Purpose of Securities Act of 1933

provide investors with sufficient investment information

need to register new securities with SEC and provide prospectus (written offer to sell) to investors


What is in the registration statement for 1933 Act?

Audited BS and profit/loss statement
Names and addresses of directors and officers
Stock and debt outstanding and anything that might affect the value


What is a self registration?

Prepare just one registration statement for all securities that they will offer in the future

Have to make sure info is continually updated


1933 Act: How long until the securities are effective after filing?

20 days

Can make oral offers, tombstone ads, preliminary (red herring) and a summary prospectus between date of file and effective date


Who is except from registration for the 1933 act?

Banks & savings
Regulated common carriers (railroads)
Insurance policies
Not-for-profit orgs
Short-term commercial paper (less that 9 months)


What transactions are exempt from the 1933 Act?

Exchanges with existing holders and corp orgs.
INTRAstate sales
Regulation A (sales may not exceed $5 million)
Private offerings-Reg D (Rules 504, 505 & 506)


General conditions that apply to Regulation D Rules 504, 505 & 506?

No advertising
Immediate resale to public prohibited (wait 2 yrs)
SEC must be informed within 15 days


What are the requirements for Reg D Rule 504?

$1 million limit within a 12 month period

Doesn't require any specific disclosure to investors prior to the sale


What are the requirements for Reg D Rule 505?

$5 million limit within 12 month period
35 or fewer unaccredited investors (must give at least an annual report containing audited FS)

Accredited investor is $200k in annual income and $1 mil net worth (if only these-no disclosure required)


What are the requirements for Reg D Rule 506?

Unlimited $ amount
35 of fewer unaccredited investors


Elements of Section 11 liability under 1933 Act

Person wishing to sue must show that they acquired the stock, suffered a loss and the registration statement contained a material misrepresentation

Need to discover within 3 yrs from offering date and CPA is not liable if can prove due diligence (GAAP/GAAS)


Securities Exchange Act of 1934 requirements?

Traded on a national exchange
$10 mil in assets and at least 2,000 sh. holders or 500 sh. holders who are not accredited


1934 Act reporting requirements?

If report under 1933 act, must report 1934
Periodic business reports (10K, 10-Q and 8-K)
5% or more owners must report to SEC
Tender offers must be reported by one making offer
Insiders must report (officers, directors, >10% stockholders)
Proxy solicitations/statements


Antifraud provisions under 1934 Act (Rule 10b-5) applies to whom?

Applies to anyone who sells or buys securities even if registration is not required