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Flashcards in Federal Securities Deck (88):
1

Which of the following is least likely to be considered a security under the Securities Act of 1933?

  • Stock options.
  • Warrants.
  • General partnership interests.
  • Limited-partnership interests.

General partnership interests.

When a person invests in an enterprise that is primarily managed by another, the investment will probably qualify as a security. In a general partnership, the partners themselves are in charge of management. Investments in such a venture are likely made only by the partner/managers themselves, and are unlikely to be classified as securities.

2

Which of the following transactions is subject to registration requirements of the Securities Act of 1933?

  • The public sale of stock of a trucking company regulated by the Interstate Commerce Commission.
  • A public sale of municipal bonds issued by a city government.
  • The issuance of stock by a publicly traded corporation to its existing shareholders because of a stock split.
  • The public sale by a corporation of its negotiable ten-year notes.

The public sale by a corporation of its negotiable ten-year notes. The 1933 Act applies to sales of securities, including stocks, bonds and notes that are issued for periods over nine months.

3

Which of the following is a "security" for federal securities law purposes?

  • Shares of corporate stock.
  • Limited-partnership interests.
  • Fractional undivided interests in oil.
  • All of the above.

All of the above.  

4

A tombstone advertisement

  • May be substituted for the prospectus under certain circumstances.
  • May contain an offer to sell securities.
  • Notifies prospective investors that a previously offered security has been withdrawn from the market and is therefore effectively "dead."
  • Makes known the availability of a prospectus.

Makes known the availability of a prospectus.

During the waiting period of 20 days immediately after registering with the SEC, tombstone ads may be placed. Tombstone ads are heavily restricted and may contain only limited information, such as the type of security and where a potential investor would acquire a now-available prospectus.

5

A preliminary prospectus, permitted under SEC regulations, is known as the

  • Unaudited prospectus.
  • Qualified prospectus.
  • "Blue-sky" prospectus.
  • "Red herring" prospectus.

"Red herring" prospectus.

After a prospectus and registration statement have been filed with the SEC, there is a 20-day waiting period before stocks may be issued. During this time, a preliminary, or "red herring," prospectus may be issued to investors.

6

Which of the following statements concerning the prospectus required by the Securities Act of 1933 is correct?

  • The prospectus is a part of the registration statement.
  • The prospectus should enable the SEC to pass on the merits of the securities.
  • The prospectus must be filed after an offer to sell.
  • The prospectus is prohibited from being distributed to the public until the SEC approves the accuracy of the facts embodied therein.

The prospectus is a part of the registration statement.

Under the 1933 Act, information about the issuance of stocks must be made publicly available. All non-exempt securities must file a registration statement with the SEC, of which a prospectus is a part. The prospectus describes the issuing corporation, risks, and type of security being sold.

7

Which of the following disclosures must be contained in a non-WKSI issuer's securities-registration statement filed under the Securities Act of 1933?

  • A list of all existing stockholders.
  • The principal purposes for which the offering proceeds will be used.
  • A copy of the corporation's latest proxy solicitation statement.
  • The names of all prospective accredited investors.

The principal purposes for which the offering proceeds will be used. The registration statement required for all non-exempt securities must contain the following: a description of the security, how the corporation will use the proceeds from the sale, a description of the registrant's business and management, and a financial statement. These disclosures are meant to assist investors in evaluating risk.

8

Non-WKSI issuer World Corp. wanted to make a public offering of its common stock. On May 10, World prepares and files a registration statement with the SEC.
On May 20, World places a "tombstone ad," announcing that it was making a public offering. On May 25, World issues a preliminary prospectus and the registration statement became effective on May 30.

On what date may World first sell the shares?

  • May 10.
  • May 20.
  • May 25.
  • May 30.

May 30.

As soon as a registration statement is filed, ORAL offers may be made, as well as limited written advertising. The 20-day waiting period that exists applies to when the securities may actually be SOLD. 
Unless the SEC speeds up the approval process, no sale can take place for 20 days after the filing. The AICPA's answer assumes that the waiting period is 20 calendar days, when it is actually 20 business days, but this is still the best answer of the four.

9

Non-WKSI issuer World Corp. wants to make a public offering of its common stock. On May 10, World prepares and files a registration statement with the SEC. 
On May 20, World places a "tombstone ad," announcing that it was making a public offering. 
On May 25, World issues a preliminary prospectus and the registration statement becomes effective on May 30.

On what date may World first make oral offers to sell the shares?

  • May 10.
  • May 20.
  • May 25.
  • May 30.

May 10. As soon as a registration statement is filed, ORAL offers may be made, as well as limited written advertising. The 20-day waiting period that exists applies to when the securities may actually be SOLD. Unless the SEC speeds up the approval process, no sale can take place for 20 days after the filing.

10

When a common stock offering requires registration under the Securities Act of 1933,

  • The registration statement is automatically effective when filed with the SEC.
  • The issuer would be acting unlawfully if it were to sell the common stock without providing the investor with a prospectus
  • The SEC will determine the investment value of the common stock before approving the offering.
  • The issuer may make sales ten days after filing the registration statement.

.

The issuer would be acting unlawfully if it were to sell the common stock without providing the investor with a prospectus.

If a security is non-exempt and must register, then all investors must be given a prospectus. This is true even if the investor is accredited. If anyone is entitled to a prospectus, then everyone is entitled to a prospectus.

11

Under the Securities Act of 1933, which of the following statements is (are) correct regarding the purpose of registration? 

  • I. The purpose of registration is to allow the detection of management fraud and prevent a public offering of securities when management fraud is suspected. 
  • II. The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities.

II ONLY. II is the best answer, because the primary purpose of registration is to enable investors to make an informed decision as to whether to invest in a public offering.

12

Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:

  • Rule 504 of Regulation D
  • Rule 505 of Regulation D
  • Rule 506 of Regulation D
  • Regulation A
  • Rule 147 Intrastate Offering

  • Rule 504 can be used mostly by small companies, not by 1934 Act reporting companies or investment companies.
  • Limitation on amount  --  Rule 504 can be used to raise only $1 million in any 12-month period.
  • Manner of offering  --  General solicitation and advertising are not allowed unless either (a) the securities are registered under a state law requiring public filing and delivery of a substantive disclosure document to investors before sale, or (b) the securities are issued under a state law exemption that permits general solicitation, as long as sales are made only to accredited investors.
  • Purchaser requirements  --  There are no such requirements; Rule 504 securities may be sold to anyone.
  • Information requirements  --  There are none.
  • Filing requirements  --  The issuer need only file a Form D with the SEC within 15 days of the first sale of securities under the exemption. Even failure to comply with this requirement will not disqualify the offering from the exemption, but the SEC may prevent the issuer from using Reg D again in the future.
  • Resale restrictions  --  Resale is restricted unless the conditions mentioned for the manner of offering are met.

13

Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:

  • Rule 504 of Regulation D
  • Rule 505 of Regulation D
  • Rule 506 of Regulation D
  • Regulation A
  • Rule 147 Intrastate Offering

  • Can't be used by investment companies or companies that have recently been in trouble with the SEC ("bad boys").
  • Can be used to raise only $5 million in any 12-month period.
  • Manner of offering  --  Cannot use general solicitation or advertising, unless sell only to AIs.
  • Purchaser requirements  --  Can sell to an unlimited amount of accredited investors but no more than 35 unaccredited investors.
  • Information requirements  --  Same as Rule 506.
  • Filing requirements  --  Form D within 15 days.
  • To prevent easy circumvention of the rule's restrictions, the shares' resale is restricted for a year and the issuer must take steps to ensure that buyers know that they are restricted, such as by printing a legend on the securities.

14

Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:

  • Rule 504 of Regulation D
  • Rule 505 of Regulation D
  • Rule 506 of Regulation D
  • Regulation A
  • Rule 147 Intrastate Offering

  • Nature of issuer  --  Cannot be used by companies that have recently been in trouble with the SEC ("bad boys").
  • Limit on amount  --  None.
  • Manner of offering  --  Cannot use general advertising or solicitation, unless sell only to AIs.
  • Purchaser requirements  --  Can sell to an unlimited number of accredited investors but no more than 35 unaccredited investors. Furthermore, all of the unaccredited investors must either be "sophisticated" in their own right or act through "purchaser representatives" who have the skill to evaluate the investments for them.
  • Information requirements  --  No particular information must be disclosed if sales are exclusively to accredited investors, but if some sales are made to unaccredited investors, there are certain minimal disclosure requirements. The more funds are raised, the higher the disclosure requirements.
  • Filing requirements  --  Form D within 15 days.
  • Resale restrictions  --  To prevent easy circumvention of the rule's restrictions, the shares' resale is restricted for a year and the issuer must take steps to ensure that buyers know that they are restricted, such as by printing a legend on the securities.

15

Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:

  • Rule 504 of Regulation D
  • Rule 505 of Regulation D
  • Rule 506 of Regulation D
  • Regulation A
  • Rule 147 Intrastate Offering

  • Nature of issuer  --  Cannot be used by companies that have recently been in trouble with the SEC ("bad boys.").
  • Limit on amount  --  Can raise $50 million in any 12-month period, pursuant to the JOBS Act of 2012.
  • Manner of offering  --  Unique "testing the waters" provision allows offeror to make some preliminary offers to determine whether there is sufficient interest in the securities and to cancel the deal completely without violation if there is not.
  • Offeree and purchaser requirements  --  None.
  • Information requirements  --  Simplified disclosure includes current balance sheet and 2 years unaudited financial statements.
  • Filing requirements  --  Must file simplified Form 1-A, any sales materials used, and Form 2-A report to the SEC of sales and use of proceeds.
  • Resale restrictions  --  None.

16

Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:

  • Rule 504 of Regulation D
  • Rule 505 of Regulation D
  • Rule 506 of Regulation D
  • Regulation A
  • Rule 147 Intrastate Offering

  • Nature of issuer  --  Issuer must be organized and doing business in the state in which it plans to do the offering. To be safe, should meet "80%" test, including having at least 80% of its assets in-state, making 80% of its revenue in-state, and using 80% of the proceeds of the offering in-state.
  • Limit on amount  --  No limit.
  • Manner of offering  --  No limitation, except that the offering must stay intrastate.
  • Offeree and purchaser requirements  --  All offerees and purchasers must be in-state residents; offer to even one out-of-state resident can disqualify the exemption.
  • Information requirements  --  None.
  • Filing requirements  --  None.
  • Resale restrictions  --  For 9 months can resell only to other residents of the state.

17

Blue Sky Laws

Much of state securities regulation has been preempted by federal law...however:

  • States can enforce anti-fraud rules
  • States can require a "notice" filing
  • States can no longer engage in "merit regulation."
  • States can no longer register "covered securities"

18

Pix, Corp. is making a $6mn stock offering. Pix wants the offering exempt from registration under the Securities Act of 1933.

With which of the following requirements would Pix have to comply when selling the securities?

  • No more than 35 investors.
  • No more than 35 non-accredited investors.
  • Accredited investors only.
  • Non-accredited investors only.

No more than 35 non-accredited investors.

To be exempt from registration, Pix will have to comply with Rule 506. This Rule allows the exemption, because most investors will be accredited. Accredited investors, such as banks, are sophisticated and need less protection from the SEC. So long as there are no more than 35 non-accredited investors, an issue may qualify for an exemption from registration under Rule 506.

19

Data, Inc., intends to make a $375,000 common-stock offering under Rule 504 of Regulation D of the Securities Act of 1933. Data

  • May sell the stock to an unlimited number of investors.
  • May make the offering through a general advertising.
  • Must offer the stock for a period longer than 12 months.
  • Must provide all investors with a prospectus.

May sell the stock to an unlimited number of investors.

Rule 504 of Regulation D applies to small issues. If a company will issue $1mn or less in a one-year period, it qualifies for this exemption. 
So long as Data is not an investment company, there are no further restrictions on offerings this small, except that they cannot be offered through general advertising, unless certain requirements are met. Data may make the offering to any number of any kind of investors.

20

Winslow, Inc. intends to make a $450,000 common-stock offering under Rule 504 of Regulation D of the Securities Act of 1933. Winslow

  • Must make the offering through a general advertising.
  • Must provide all investors with a prospectus.
  • May sell the stock to an unlimited number of investors.
  • Must offer the stock for a period of 24 months.

May sell the stock to an unlimited number of investors.

Rule 504 does not set a limit on the overall number of investors. So long as a company's total offerings for a year are under $1mn, and the company is not an investment company, Rule 504 may be used.

21

If securities are exempt from the registration provisions of the Securities Act of 1933, any fraud committed in the course of selling such securities can be challenged by

  • SEC    
  • The person defrauded  

BOTH...The SEC has broad powers if there is a violation of the Act. They may seek subpoenas, injunctions, and even criminal penalties. The person defrauded may also bring a claim under Section 11 of the Act.

22

Hamilton Corp. is making a $4.5mn securities offering under Rule 505 of Regulation D of the Securities Act of 1933.

Under this regulation, Hamilton is

  • Required to provide full financial information to accredited investors only.
  • Allowed to make the offering through a general solicitation.
  • Limited to selling to no more than 35 non-accredited investors.
  • Allowed to sell to an unlimited number of investors, both accredited and non-accredited.

Limited to selling to no more than 35 non-accredited investors.

To qualify for this exemption, no more than 35 non-accredited investors may be involved. 

There is no limit on the number of accredited investors who may be involved.

23

Which of the following securities is exempt from the registration requirements of the Securities Act of 1933?

  • Common stock with no par value.
  • Warrants to purchase preferred stock.
  • Bonds issued by a charitable foundation.
  • Convertible debentures issued by a corporation.

Bonds issued by a charitable foundation.

Any security issued by a charity, railroad company, farmers' co-operative, or bank is exempt from registering under the 1933 Act.

24

Imperial Corp. is offering $450,000 of its securities under Rule 504 of Regulation D of the Securities Act of 1933.

Under Rule 504, Imperial is required to

  • Provide full financial information to all non-accredited purchasers.
  • Make the offering through general solicitation.
  • Register the offering under the provisions of the Securities Exchange Act of 1934.
  • Notify the SEC within 15 days after the first sale of the securities.

Notify the SEC within 15 days after the first sale of the securities. 

Rule 504 is a very broad exemption. 
There is no limit placed on the total number of any class of investors, and there is no requirement that anyone receive financial information.

The restrictions are that the offering cannot be made through general advertising and must not put the issuer over $1mn in offerings in the past year. Also, the SEC must be notified within 15 days of the first sale to qualify for this exemption.

25

Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933?

  • The securities are non-voting preferred stock.
  • The issuing corporation was closely held prior to the offering.
  • The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.
  • 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.

The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.

So that investors may sell their shares on the secondary market without having to register (unless the shares are restricted-resale shares or the investors are affiliated shareholders), Section 4(1) of the 1933 Act exempts from registration all "transactions by any person other than an issuer, underwriter, or dealer."

26

Under the JOBS Act, a foreign company cannot

  • Be an EGC.
  • Use the crowdfunding exemption.
  • A and B
  • None of the above

Use the crowdfunding exemption. Foreign firms cannot use the crowdfunding exemption.

27

A qualifying firm that declares itself to be an EGC enjoys the following benefits during its IPO:

  • Confidential review of its registration statement by the SEC.
  • Reduced requirement for audited financial statements.
  • A and B.
  • None of the above

Both A and B are true. While most benefits accruing to EGCs have to do with reduced regulatory burdens in the five years after going public, these two benefits accrue during the IPO process. Another benefit is more publicity, such as analyst research published by an investment bank that is part of the underwriting syndicate.

28

A qualifying firm that declares itself to be an EGC enjoys all the following benefits for up to five years after its IPO, except:

  • Need not comply with SOX 404(b) requirement of audit for internal controls.
  • Need not comply with new PCAOB rules.
  • Reduced disclosure regarding executive compensation.
  • Immunity from fraud liability.

Immunity from fraud liability.

Obviously even EGCs are not going to be allowed to commit fraud with impunity.

29

The maximum amount that a firm can raise through crowdfunding in a single year is:

  • $1 million.
  • $5 million.
  • $10 million.
  • Unlimited, so long as they sell only to accredited investors.

$1 million is the ceiling for the crowdfunding exemption.

30

Sam is a multimillionaire. He invested $100,000 in Company A's crowdfunded venture. Later that year, he wanted to invest in Company B's crowdfunded venture. What is the largest amount Sam can invest in B's offering?

  • $0
  • $10,000
  • $100,000
  • $1,000

$0

$100,000 is the most someone can invest in crowdfunded ventures during the course of a single year.

31

The JOBS Act allows general solicitation in a Reg D Rule 506 offering if the issuer takes "reasonable steps" to insure what?

  • That it files a registration statement with the SEC within 15 days of its first sale.
  • That it raises no more than $50 million in a single year.
  • That it sells only to accredited investors.
  • All of the above.

That it sells only to accredited investors.

General solicitation will be allowed under Rule 506 (and 505) Reg D offerings only if the issuer takes reasonable steps to insure that it sells only to accredited investors. If it does not engage in general solicitation, the issuer can sell to up to 35 unaccredited investors under Reg. D.

32

Jay Associates, CPAs, gives an unqualified opinion on Nast Power Co.'s financial statements. Larkin bought Nast bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC includes Nast's financial statements. 
Larkin sues Jay for misstatements contained in the financial statements under the provisions of Section 11 of the Securities Act of 1933.

To prevail, Larkin must prove?

  • Scienter
  • Reliance

NEITHER...The 1933 Act makes a plaintiff's job relatively easy. Plaintiffs need not establish either reliance or negligence to win a Section 11 case. The burden in both of these issues is on the defendants to prove that the plaintiff did not rely and that they acted with due diligence. Indeed, an issuing company cannot escape liability, even by showing due diligence - it is strictly liable for material misstatements in the registration statement that caused the plaintiff's losses.

Under Section 11, P must prove:

  1. False statement or ommission occurred
  2. Materiality
  3. Tracing
  4. Damages 

33

Quincy buys Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, give an unqualified opinion on Teal's financial statements, which were included in the registration statement filed with the SEC. 
Quincy sued Worth under the provisions of the 1933 Act that deals with omission of facts required to be in the registration statement.

Quincy must prove that

  • There was fraudulent activity by Worth.
  • There was a material misstatement in the financial statements.
  • Quincy relied on Worth's opinion.
  • Quincy was in privity with Worth.

There was a material misstatement in the financial statements.

The 1933 Act requires only a showing of material misstatement. If the CPAs made a significant misstatement, they may be held liable.

34

In which of the following types of action, brought against a CPA who issues an audit report containing an unqualified opinion on materially misstated financial statements, may a plaintiff prevail without proving reliance on the audit report?

  • An action for common-law fraud.
  • An action for common-law breach of contract.
  • An action brought under Section 11 of the Securities Act of 1933.
  • An action brought under Rule 10b-5 of the Securities Exchange Act of 1934.

An action brought under Section 11 of the Securities Act of 1933.

With minor exceptions, a plaintiff in a Section 11 suit need not provide reliance in order to prevail.

35

Holly Corp. engage Yost & Co., CPAs, to audit the financial statements to be included in a registration statement Holly is required to file under the provisions of the Securities Act of 1933. Yost failed to exercise due diligence and did not discover the omission of a fact material to the statements.
A purchaser of Holly's securities may recover from Yost under Section 11 of the Securities Act of 1933 only if the purchaser

  • Brings a civil action within one year of the discovery of the omission and within three years of the offering date.
  • Proves that the registration statement was relied on to make the purchase.
  • Proves that Yost was negligent.
  • Establishes privity of contract with Yost.

Brings a civil action within one year of the discovery of the omission and within three years of the offering date.
These are the relevant time limits. A plaintiff may not bring a claim forever, but must act within these time restraints.

36

Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement.

Under Section 11, which of the following must be proven by a purchaser of the security?

  • Reliance on the financial statements    
  • Fraud by the CPA  

NEITHER...Under Section 11 of the 1933 Act, a plaintiff need not show either reliance or fraud (or even negligence) by the defendants. However, defendants can win the day if they can disprove reliance. And the defendants other than the issuer can win if they can establish that they acted with due diligence. The primary things that plaintiffs must show to win their Section 11 claim are that there was a material misstatement in the registration statement on the effective date; that they can trace their shares to that registration statement; and that they suffered damages.

37

To be successful in a civil action under Section 11 of the Securities Act of 1933, concerning liability for a misleading registration statement, the plaintiff must prove the

  • Defendant's intent to deceive.    
  • Plaintiff's reliance on the registration statement. 

NEITHER...Section 11 states that if "any part of the registration statement...contained an untrue statement of material fact...any person acquiring such security...(may bring a civil lawsuit)." Showing an intent to deceive is unnecessary to win a civil lawsuit, as is a plaintiff's reliance on the false statement.

38

Which of the following might prevent a plaintiff investor from recovering from a defendant accountant in a Section 18(a) lawsuit?

  • The document containing the false statement was not filed with the SEC.
  • The plaintiff did not read the false document.
  • The defendant established that it acted in good faith and did not know of the error in the document.
  • All of the above.

All of the above

39

Dart Corp. engages Jay Associates, CPAs, to assist in a public stock offering. Jay audits Dart's financial statements and gives an unqualified opinion, despite knowing that the financial statements contain misstatements. 
Jay's opinion is included in Dart's registration statement. Larson purchases shares in the offering and suffers a loss when the stock declines in value after the misstatements became known.

In a suit against Jay, under the anti-fraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Larson must prove all of the following, except

  • Larson was an intended user of the false registration statement.
  • Larson relied on the false registration statement.
  • The transaction involved some form of interstate commerce.
  • Jay acted with intentional disregard of the truth.

Larson was an intended user of the false registration statement. A private action under the 1934 Act is similar to a common-law fraud action in that the plaintiff must show that he relied on the misstatement and that the defendant intended to deceive in making the misstatement.
But, unlike a common-law fraud action, there is no requirement of privity, or even that the plaintiff was an intended user of the false statement.

40

Ted buys Synchotic Corporation shares based on Synchotic's announcement of record earnings. But just a few days later, on July 1, 2010, Synchotic admits that its earnings had been artificially inflated via fraudulent earnings management. Its stock price drops dramatically that day, and Ted makes a significant loss. Ted wishes to bring a 1934 Act securities-fraud lawsuit against Synchotic. In terms of the statute of limitations, when must Ted bring his lawsuit?

  • Within one year of when he should have discovered the fraud or within three years of the fraud.
  • Within one year of when he should have discovered the fraud and within three years of the fraud.
  • Within two years of when he should have discovered the fraud or within five years of the fraud.
  • Within two years of when he should have discovered the fraud and within five years of the fraud.

Within two years of when he should have discovered the fraud and within five years of the fraud.

This answer is correct because it uses the correct statute of limitations (2yr/5yr, rather than 1yr/3yr), and notes properly that the plaintiff must meet both deadlines.

41

A CPA firm issues an unqualified opinion on financial statements not prepared in accordance with GAAP. 
The CPA firm will have acted with scienter in all the following circumstances, except where the firm

  • Intentionally disregards the truth.
  • Has actual knowledge of fraud.
  • Negligently performs auditing procedures.
  • Intends to make monetary gain by concealing fraud.

Negligently performs auditing procedures. 

Scienter, very loosely defined, is a "guilty mind." If a person intentionally does something incorrectly, then (s)he acts with scienter. Scienter may also be found in a person intentionally disregarding the truth. The key is intent of some kind, as opposed to simple carelessness. 
When negligence is found, a person is found liable for failing to use due care, and not for intentional wrongdoing.

42

Which defense must an accountant establish to be absolved from civil liability under Section 18 of the Securities Exchange Act of 1934 for false or misleading statements made in reports or documents filed under the Act?

  • Lack of gross negligence.
  • Exercise of due care.
  • Good faith and lack of knowledge of the statement's falsity.
  • Lack of privity with an injured party.

Good faith and lack of knowledge of the statement's falsity.

Section 18(a) establishes a presumption of liability for false statements in filed documents, but allows defendants to escape liability if they prove that they "acted in good faith and had no knowledge that such statement was false or misleading."

43

What is the standard that must be established to prove a violation of the anti-fraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?

  • Negligence.
  • Intentional misconduct.
  • Criminal intent.
  • Strict liability.

Intentional misconduct.

To be liable under Rule 10b-5 of the 1934 Act, a defendant must act intentionally. Courts hold that a defendant must act with scienter (intent) or "extreme recklessness" (which is similar to scienter) to be liable under 10b-5.

44

Jay and Co., CPAs, audit the financial statements of Maco Corp. Jay intentionally gives an unqualified opinion regarding the financial statements, even though material misstatements were discovered. The financial statements and Jay's unqualified opinion are included in a registration statement and prospectus for an original public offering of Maco stock.

Which of the following statements is correct regarding Jay's liability to a purchaser of the offering under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934?

  • Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial statements.
  • Jay will be liable if it was negligent in conducting the audit.
  • Jay will not be liable if the purchaser's loss was under $500.
  • Jay will not be liable if the misstatement resulted from an omission of a material fact by Jay.

Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial statements.

The 1934 Act sanctions intentional acts that manipulate or deceive. If a purchaser wishes to recover, (s)he must also prove reliance on the false statements; (s)he must have suffered a loss BECAU.S.E OF THE FALSE STATEMENT.

45

Dart Corp. is engaged by Jay Associates, CPAs, to assist in a public-stock offering. Jay audits Dart's financial statements and gives an unqualified opinion, despite knowing that the financial statements contain misstatements. 
Jay's opinion is included in Dart's registration statement. 
Larson purchases shares in the offering and suffers a loss when the stock declines in value after the misstatements become known.

If Larson succeeds in the Section 10(b) and Rule 10b-5 suit, Larson would be entitled to

  • Only recover the original public-offering price.
  • Only rescind the transaction.
  • The amount of any loss caused by the fraud.
  • Punitive damages.

The amount of any loss caused by the fraud.

Victims of fraudulent misstatements are entitled to rescind the transaction OR recover their losses caused by their reliance on the false statements.

46

Under the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acts

  • Negligently.
  • With independence.
  • Without due diligence.
  • Without good faith.

Without good faith.

This provision requires an untrue statement and an intent to defraud. Defenses include lack of knowledge that the statement was false and acting in good faith.

47

An accountant will be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that

  • The accountant was negligent.
  • There was a material omission.
  • The security involved was registered.
  • The security was part of an original issuance.

There was a material omission.

A plaintiff must generally show several things to win a Section 10(b) case. A CPA must have (1) intentionally or recklessly (2) made a misstatement of material fact or omitted a material fact (3) that was relied upon by the defendant.

48

CPA Sobel engages in insider trading of the shares of an audit client. She is caught. The SEC brings a civil action and forces Sobel to give up her insider-trading profits and pay a civil fine of three times the amount of the profits. Sobel thought she had been punished sufficiently, but then the DOJ began an investigation. Which of the following is true?

  • A.  DOJ cannot bring criminal charges because Sobel has been punished enough.
  • B.  The DOJ can choose to bring criminal charges to supplement the SEC's civil action.
  • It is common for the SEC to bring civil charges and then the DOJ to bring criminal charges in insider-trading cases.
  • C.  To bring criminal charges would amount to double jeopardy.
  • D.  A and C.

The DOJ can choose to bring criminal charges to supplement the SEC's civil action.

It is common for the SEC to bring civil charges and then the DOJ to bring criminal charges in insider-trading cases.

49

Willful violations of which of the following acts can create the basis for federal criminal liability?

  • The 1933 Securities Act.
  • The 1934 Securities Exchange Act.
  • A and B.
  • Because both A and B are accurate, this is the best answer.
  • None of the above.

A and B.

Because both A and B are accurate, this is the best answer.

50

Turtle was audit partner on ABC Accounting's audit of Jemison Corporation. Turtle knew that the audit was ineptly performed, although he hoped (without much reason) that the financial statements were accurate. He certified them as such. Which of the following is true?

  • If a court decided that Turtle had acted willfully, he could be held criminally liable under the federal securities laws.
  • If a court decided that Turtle had acted negligently, he could be held criminally liable under the federal securities laws.
  • Both A and B.
  • None of the above

If a court decided that Turtle had acted willfully, he could be held criminally liable under the federal securities laws.

The federal securities laws' criminal provisions punish "willful" violations of the 1933 and 1934 securities acts.

51

Seimone, an auditor for the ABC accounting firm, learns that her audit client, Bupkis Co., is about to announce a record profit. She buys Bupkis shares in a fake name and profits upon the public announcement. Which of the following is true?

  • The SEC may bring civil charges against Seimone.
  • The SEC may bring criminal charges against Seimone.
  • A and B.
  • None of the above.

The SEC may bring civil charges against Seimone.

SEC does not handle criminal casework.  Only civil.  

52

Dodd Frank created?

  • The Financial Stability Oversight Council (FSOC).
  • The Consumer Financial Protection Bureau (CFPB).

DF did NOT create the PCAOB, SOX 2002 did that.  

53

Which of the following is accurate regarding the Dodd-Frank whistleblower provisions?

  • They exclude accountants from recovering whistleblower rewards, because they are supposed to be looking out for fraud anyway.
  • They require whistleblowers to report suspected violations internally to their employers as an initial measure.
  • They require whistleblowers to report to the SEC before reporting to their employers.
  • None of the above.

None of the above.

54

Which of the following does the Dodd-Frank Act attempt to do?

  • Limit risk posed by existing financial institutions.
  • Limit proprietary trading by financial institutions.
  • Increase transparency in the OTC market for derivative securities.
  • All of the above.

All of the above.  

55

Which of the following is a security which is exempt from the registration requirements of the Securities Act of 1933?

  1. Warrants to purchase preferred stock.
  2. Convertible, subordinated debentures issued by a manufacturing company.
  3. Common stock with a par value of less than $1.00.
  4. Bonds issued by a charitable foundation.

Bonds issued by a charitable foundation.

56

The provisions of the Securities Exchange Act of 1934

  1. Do not require distribution of an annual report unless proxies are solicited.
  2. Require the distribution of financial statements prior to or concurrent with a proxy solicitation.
  3. Apply only to those corporations engaged in interstate commerce where there is a significant dispute between management and dissenting shareholders.
  4. Apply only to those corporations that have securities traded on a national securities exchange.

Require the distribution of financial statements prior to or concurrent with a proxy solicitation. Any person requested to sign a proxy must be furnished with a proxy statement disclosing material financial information as well as other material information.

57

After the filing of the registration statement with the SEC but prior to the effective date, the underwriter is allowed to do which of the following?

  1. Make oral offers to sell the security
  2. Issue a preliminary prospectus ("red herring")

Both.

While the Securities Act prohibits any offers to sell or to buy securities before the registration statement is filed, the Act permits offers, but not sales, during the period between filing and effectiveness. There are no restrictions on oral offers made during this period, and written offers may be made through a preliminary prospectus ("red herring").

58

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove?

  1. Defendant's intent to deceive
  2. Plaintiff's reliance on the registration statement

NO and NO.

To recover under a civil action under Section 11 of the Securities Act of 1933, the plaintiff must prove:

  1. that s/he was a purchaser of a security issued under a registration statement that contains a misleading statement or an omission of a material fact.
  2. S/he also must prove that s/he suffered an economic loss.

The plaintiff need not prove that the defendant intended to deceive or even that negligence existed. The plaintiff also need not prove that s/he relied on the registration statement.

59

Acme Corp. intends to make a public offering in several states of 250,000 shares of its common stock. Under the Securities Act of 1933,

  1. Acme must sell the common stock through licensed securities dealers.
  2. Acme must, in all events, file a registration statement with the SEC because the offering will be made in several states.
  3. Acme’s use of any prospectus delivered to an unsophisticated investor must be accompanied by a simplified explanation of the offering.
  4. Acme may make an oral offer to sell the common stock to a prospective investor after a registration statement has been filed but before it becomes effective.

Acme may make an oral offer to sell the common stock to a prospective investor after a registration statement has been filed but before it becomes effective.

After the registration statement has been filed but before it becomes effective, the issuer is allowed to make certain oral offers and written offers that are preliminary prospectuses.

Prospectus—any notice, circular, advertisement, letter, or communication offering any security for sale (or merger)

60

The Securities Act of 1933 imposes the requirement that issuers of securities are required to file with the SEC a registration statement before securities are offered or sold to the public. Which of the following statements is correct?

  1. If the issuer files Form S-1 with the SEC, it must also file either Form S-2 or Form S-3.
  2. If the issuer has a choice to file any one of Forms S-1, S-2, or S-3 with the SEC, it will prefer Form S-1 if it is a small business.
  3. If the issuer files Form S-1 with the SEC, it must seek an exemption from registration.
  4. The issuer would prefer to file Forms S-2 or S-3 over Form S-1.

The issuer would prefer to file Forms S-2 or S-3 over Form S-1. The SEC adopted Forms S-2 and S-3 to reduce the burden of disclosure over Form S-1 which is the standard long form.

  • Form S-1 = This is basic long-form registration statement
  • Forms S-2 and S-3 = These forms adopted by SEC to ease much of burden of disclosures required under federal securities regulation. 
    • Require less detailed disclosures than Form S-1
    • Integrate information required under 1933 and 1934 Acts
  • Forms SB-1 and SB-2 = These forms permitted for small businesses under Regulation S-B

61

Securities available under a private placement made pursuant to Regulation D of the Securities Act of 1933

  1. Must be sold to accredited institutional investors.
  2. Must be sold to fewer than 25 nonaccredited investors.
  3. Cannot be the subject of an immediate reoffering to the public.
  4. Cannot be subject to the payment of commissions.

Cannot be the subject of an immediate reoffering to the public.

Pursuant to Rule 506 under Regulation D of the Securities Act of 1933, the issuer must restrict the initial purchasers’ right to resell the securities. In general, the securities must be held for 2 years to avoid losing the exemption from the full registration requirements of the 1933 Act.

62

Which of the following statements concerning the scope of Section 10(b) of the Securities Exchange Act of 1934 is correct?

  1. In order to come within its scope, a transaction must have taken place on a national stock exchange.
  2. It applies exclusively to securities of corporations registered under the Securities Exchange Act of 1934.
  3. There is an exemption from its application for securities registered under the Securities Act of 1933.
  4. It applies to purchases as well as sales of securities in interstate commerce.

It applies to purchases as well as sales of securities in interstate commerce.

Under Rule 10b-5 it is unlawful to use any manipulative or deceptive devices in the purchase or sale of securities if the mail, interstate commerce, or a national stock exchange is used.

63

Which of the following is least likely to be considered a security under the Securities Act of 1933?

  1. General partnership interests.
  2. Limited partnership interests.
  3. Stock options.
  4. Warrants.

Under the Securities Act of 1933, securities are defined broadly to include limited partnership interests, stock options, and warrants in addition to stocks, bonds, and investment contracts. A general partnership interest is not generally a security because this interest is not normally just an investment but involves efforts and decisions of the general partner.

64

A $10,000,000 offering of corporate stock intended to be made pursuant to the provisions of Rule 506 of Regulation D of the Securities Act of 1933 would not be exempt under Rule 506 if

  1. The offering was made through a general solicitation or advertising.
  2. Some of the investors are nonaccredited.
  3. There are more than 35 accredited investors.
  4. The SEC was notified 14 days after the first sale of the securities.

The offering was made through a general solicitation or advertising.

Rule 506 permits the sale of an unlimited amount of securities to an unlimited number of accredited investors and to no more than 35 nonaccredited investors within 12 months that are also defined as sophisticated. No general offering or solicitation is permitted.

65

Under the Securities Act of 1933, an accountant may be held liable for any materially false or misleading financial statements, including an omission of a material fact therefrom, provided the purchaser

  1. Proves reliance on the registration statement or prospectus.
  2. Proves negligence or fraud on the part of the accountant.
  3. Brings suit within 4 years after the security is offered to the public.
  4. Proves a false statement or omission existed and the specific securities were the ones offered through the registration statement.

Proves a false statement or omission existed and the specific securities were the ones offered through the registration statement.

Under the Securities Act of 1933, an accountant is liable to a purchaser of securities if the purchaser proves a false financial statement (including statements with a material omission), and the specific securities were ones offered through a registration statement.

66

Which of the following are exempt from the registration requirements of the Securities Act of 1933?

  1. Bankers’ acceptances with maturities at the time of issue ranging from 1 to 2 years.
  2. Participation interests in money market funds that consist wholly of short-term commercial paper.
  3. Corporate stock offered and sold only to residents of the state in which the issuer was incorporated and is doing all of its business.
  4. All industrial development bonds issued by municipalities.

Corporate stock offered and sold only to residents of the state in which the issuer was incorporated and is doing all of its business.

 Intrastate issues are exempt from registration under the Securities Act of 1933. To meet this exemption, the issuer must be a resident of the state in which 80% of the business takes place using at least 80% of the sales proceeds within that state. All offerees and purchasers must be residents of that state. To avoid a loophole, resales can only be made to residents of that same state for 9 months.

67

The Securities Act of 1933 specifically exempts from registration, securities offered by any person

  1. Other than an issuer, underwriter, or dealer.
  2. Who is an issuer of a public offering.
  3. If the securities in question have previously been registered.
  4. In a small company.

Other than an issuer, underwriter, or dealer.

There is a broad specific exemption for securities offered by any person other than an issuer, underwriter, or dealer. Thus under the Act, public offerings of securities are regulated, but private offerings are exempted. This exemption permits most investors to sell their own securities without registration, prospectus, or other regulations except the antifraud provisions.

68

Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC’s continuous disclosure system?

  1. Companies with annual revenues in excess of $5 million and 300 or more shareholders.
  2. Companies with annual revenues in excess of $10 million and 500 or more shareholders.
  3. Companies with assets in excess of $5 million and 300 or more shareholders.
  4. Companies with assets in excess of $10 million and 500 or more shareholders.

Companies with assets in excess of $10 million and 500 or more shareholders.

Over-the-counter and other equity securities traded in interstate commerce must be registered if the company has assets of more than $10 million and 500 or more shareholders.

69

Securities Acts of 1933 and 1934

The 1933 Act covers original issues and is based upon a philosophy of disclosure, meaning that the goal of the law is to require issuers to fully disclose all material information that a reasonable shareholder would require in order to make up his or her mind about the potential investment.

The 1934 Act  regulates the secondary trading of those securities between persons often unrelated to the issuer, frequently through brokers or dealers.

  • As it developed, section 10(b) of the 1934 Act and corresponding SEC Rule 10b-5 have sweeping antifraud language.

 

70

Which of the following statements is(are) correct concerning issuers of securities registered under the Securities Exchange Act of 1934?

  • I. The issuers must have each Form 10-K audited by an independent public accountant.
  • II. The issuers must have each Form 10-Q audited by an independent public accountant.
  • III. The issuers must have each Form 10-Q audited by an independent public accountant except for the fourth fiscal quarter of each of its fiscal years.
  1. I only.
  2. II only.
  3. I and II only.
  4. I and III only.

I ONLY.

The Form 10-K must be audited by an independent public accountant, but the Form 10-Q need not be audited. The Form 10-Q is submitted to the SEC for the first 3 fiscal quarters of the issuer’s fiscal year.

71

If securities are registered under the Securities Exchange Act of 1934, which of the following disclosure provisions apply?

  • Notice of sales of the registered securities by the corporation's officers must be filed with the SEC
  • Proxy material for the registered securities must be filed with the SEC

BOTH.

Under the Securities Exchange Act of 1934, a corporation’s officers (and all other insiders) are required to report any changes in ownership of the corporation’s stock within 15 days. Also under the 1934 Act, the proxy statement, the proxy itself, and any proxy soliciting material concerning securities required to be registered under the 1934 Act must be filed with and approved by the SEC before it can be sent to shareholders.

72

Wane Corporation has issued securities that are traded on a national securities exchange. Wane just had a significant change in its assets due to a large acquisition of real property. Which of the following is true?

  1. Wane must file Form 10-K with the SEC within 4 days.
  2. Wane must file Form 8-K with the SEC within 4 days.
  3. Wane need not file any additional reports with the SEC if Wane consistently files with the SEC on a timely basis its annual report.
  4. Wane need not disclose this material event separately to the SEC if it is covered in sufficient detail in the quarterly financial statements.

Wane must file Form 8-K with the SEC within 4 days.

When a material event occurs, such as a significant acquisition of assets, Wane must file Form 8-K, a current report, with the SEC within 4 days after the material event occurs.

73

Wells Corp., an established manufacturer, has decided to make an offering of $4.5 million of its securities pursuant to Regulation D of the Securities Act of 1933. The sale will be made to accredited and nonaccredited investors. Which of the following is a correct statement with regard to such an offering?

  1. No more than 35 accredited investors may purchase securities.
  2. Since there are nonaccredited investors who are purchasing securities, at least an audited balance sheet must be provided.
  3. A general solicitation of potential investors is permitted.
  4. The offering limit is $10 million within a 2-year period.

Since there are nonaccredited investors who are purchasing securities, at least an audited balance sheet must be provided.

Regulation D, Rule 505 exempts issues of under $5,000,000 in securities over a 12-month period from the full registration requirements of the Securities Act of 1933. Pursuant to Rule 505, if nonaccredited investor purchasers are involved, then they must be furnished with at least an audited balance sheet. Other audited financial statements and information should also be provided if readily available.

74

Tulip Corp. is a registered and reporting corporation under the Securities Exchange Act of 1934. As such it

  1. Can offer and sell its securities to the public without the necessity of registering its securities pursuant to the Securities Act of 1933.
  2. Cannot make a tender offer for the equity securities of another registered and reporting corporation without the consent of the SEC.
  3. Must file annual reports (Form 10-K) with the SEC.
  4. Must distribute a copy of the annual report (Form 10-K) to each of its shareholders.

Must file annual reports (Form 10-K) with the SEC.

75

Winslow, Inc. intends to make a $450,000 common stock offering under Rule 504 of Regulation D of the Securities Act of 1933. Winslow

  1. May make the offering through a general advertising.
  2. Must provide all investors with a prospectus.
  3. May sell the stock to an unlimited number of investors.
  4. Must offer the stock for a period of 24 months.

May sell the stock to an unlimited number of investors.

Under Rule 504 of Regulation D of the Securities Act of 1933, the issuer may issue securities of up to $1,000,000 in a 12-month period to any number of investors.

76

The registration requirements of the Securities Act of 1933 apply to

  1. The issuance of a stock dividend without commissions or other consideration paid.
  2. The issuance of stock warrants.
  3. Securities issued by a federally chartered savings and loan association.
  4. Securities issued by a common carrier regulated by the Interstate Commerce Commission.

The issuance of stock warrants.

Issuance of stock warrants is considered to be the sale of securities and consequently is subject to the registration requirements of the Securities Act of 1933.

77

What is the standard that must be established to prove a violation of the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?

  1. Negligence.
  2. Intentional misconduct.
  3. Criminal intent.
  4. Strict liability.

Intentional misconduct.

It must be proven that a false statement or omission of material fact was made, and the individual knew it was false or acted with reckless disregard for the truth. This is equivalent to intentional misconduct.

78

Tweed Manufacturing, Inc. plans to issue $10 million of common stock to the public in interstate commerce after its registration statement with the SEC becomes effective. What, if anything, must Tweed do in respect to those states in which the securities are to be sold?

  1. Nothing, since approval by the SEC automatically constitutes satisfaction of any state requirements.
  2. Make a filing in those states which have laws governing such offerings and obtain their approval.
  3. Simultaneously apply to the SEC for permission to market the securities in the various states without further clearance.
  4. File in the appropriate state office of the state in which it maintains its principal office of business, obtain clearance, and forward a certified copy of that state’s clearance to all other states.

Make a filing in those states which have laws governing such offerings and obtain their approval.

Anyone planning to issue common stock must make a filing in those states that have laws governing such offerings and obtain their approval in addition to meeting the registration requirements.

79

Which of the following is(are) true of all three Rules 504, 505, and 506 of Regulation D under the Securities Act of 1933?

  • I.No general offerings or solicitation is permitted within a 12-month period.
  • II.The issuer must restrict the purchasers’ right to resell the securities.
  • III.The Securities Exchange Commission must be notified within 15 days of the first sale of the securities.
  1. I only.
  2. I and II only.
  3. I, II, and III.
  4. III only.

III.The Securities Exchange Commission must be notified within 15 days of the first sale of the securities

Under all of Rules 504, 505, and 506, the SEC must be notified within 15 days of the first sale of securities.

80

Regulation D of the Securities Act of 1933 is available to issuers without regard to the dollar amount of an offering only when the

  1. Purchasers are all accredited investors.
  2. Number of purchasers who are nonaccredited is 35 or less.
  3. Issuer is not a reporting company under the Securities Exchange Act of 1934.
  4. Issuer is not an investment company.

Number of purchasers who are nonaccredited is 35 or less.

An issuance of securities made pursuant to Regulation D of the Securities Act of 1933 may be for an unlimited dollar amount if the number of nonaccredited investors does not exceed 35. These nonaccredited investors must be sophisticated investors (i.e., have knowledge and experience in financial matters).

81

Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements?

  1. The president.
  2. A member of the board of directors.
  3. A shareholder who owns 8% of the outstanding common stock and whose wife owns 4% of the outstanding common stock.
  4. An owner of 15% of the total face value of the corporation’s outstanding debentures.

An owner of 15% of the total face value of the corporation’s outstanding debentures.

Under the Securities Exchange Act of 1934, insiders include officers, directors, and beneficial owners of more than 10% of any class of the issuer’s equity securities. An owner of 15% of the total face value of the corporation’s outstanding debentures therefore does not qualify as an insider.

82

Which of the following statements is correct with respect to the registration requirements of the Securities Exchange Act of 1934?

  1. They require issuers of nonexempt securities traded on a national securities exchange to register with the SEC.
  2. They permit issuers who comply with the Securities Act of 1933 to avoid the registration requirements of the Securities Exchange Act of 1934.
  3. They permit issuers who comply with those requirements to avoid state registration requirements.
  4. They permit issuers who comply with those requirements to avoid the registration requirements of the Securities Act of 1933.

They require issuers of nonexempt securities traded on a national securities exchange to register with the SEC.

Under the Securities Exchange Act of 1934 issuers of securities traded on a national securities exchange are required to register with the SEC unless specifically exempted.

Purposes of the Act    

  • To federally regulate securities exchanges and securities traded thereon
  • To require periodic disclosure by issuers of equity securities
  • To require adequate information be provided in various transactions
  • To prevent unfair use of information by insiders
  • To prevent fraud and deceptive practices

Securities that are traded on any national securities exchange must be registered

83

Under the Securities Act of 1933, subject to some exceptions and limitations, it is unlawful to use the mails or instruments of interstate commerce to sell or offer to sell a security to the public unless

  1. A surety bond sufficient to cover potential liability to investors is obtained and filed with the Securities and Exchange Commission.
  2. The offer is made through underwriters qualified to offer the securities on a nationwide basis.
  3. A registration statement has been properly filed with the Securities and Exchange Commission, has been found to be acceptable and is in effect.
  4. The Securities and Exchange Commission approves of the financial merit of the offering.

A registration statement has been properly filed with the Securities and Exchange Commission, has been found to be acceptable and is in effect.

Unless a registration statement has been filed with and accepted by the SEC, it is generally unlawful under the 1933 Act to offer or sell securities to the public using instruments of interstate commerce.

84

Bowman Corporation has decided to issue $8,000,000 in securities during the next year. Bowman wishes to be exempt from the registration requirements of the Securities Act of 1933. Which rule applies to this exemption?

  1. Rule 504 of Regulation D.
  2. Rule 505 of Regulation D.
  3. Rule 506 of Regulation D.
  4. None of the above.

Rule 506 of Regulation D.

  • 504 -  the dollar amount is limited to $1,000,000 sold in a 12-month period.
  • 505 - Rule 505 exempts issuances of up to $5,000,000 in a 12-month period.
  • 506 - allows private placement of an unlimited amount of securities with requirements not relevant to this question. Any amount over $5,000,000 must fall under Rule 506.

85

Exemption from registration under the Securities Act of 1933 would be available for

  1. Promissory notes maturing in 12 months.
  2. Securities of a bank.
  3. Limited partnership interests.
  4. Corporate bonds.

Securities of a bank.

Exempt securities (need not be registered but still subject to antifraud provisions under the Act)

  1. Commercial paper (e.g., note, draft, check, etc.) with a maturity of 9 months or less
  2. Intrastate issues—securities offered and sold only within one state
  3. Small issues (Regulation A)—issuances up to $5,000,000 by issuer in 12-month period may be exempt 
  4. Securities of governments, banks, quasi governmental authorities (e.g., local hospital authorities), savings and loan associations, farmers, co-ops, and common carriers regulated by ICC
    1. Public utilities are not exempt
  5. Generally, security exchanged by issuer exclusively with its existing shareholders 

86

The Securities Exchange Act of 1934 requires that certain persons register and that the securities of certain issuers be registered. In respect to such registration under the 1934 Act, which of the following statements is incorrect?

  1. All securities offered under the Securities Act of 1933 also must be registered under the 1934 Act.
  2. National securities exchanges must register.
  3. The equity securities of issuers, which are traded on a national securities exchange, must be registered.
  4. The equity securities of issuers having in excess of $10 million in assets and 500 or more stockholders which are traded in interstate commerce must be registered.

All securities offered under the Securities Act of 1933 also must be registered under the 1934 Act.

The Securities Act of 1933 applies to the initial issuance of securities and has the purpose of providing investors with full and fair disclosure concerning these securities. The Securities Exchange Act of 1934 applies to the subsequent trading of securities but not necessarily all securities required to register under the 1933 Act. Thus, a security may be issued under the 1933 Act without needing to be registered under the 1934 Act.

87

Harp Corp. is offering to issue $450,000 of its securities pursuant to Regulation D of the Securities Act of 1933. Harp is not required to deliver a disclosure document in the states where the offering is being conducted. The exemption for small issues of $1,000,000 or less (Rule 504) under Regulation D

  1. Requires that the issuer be subject to the reporting requirements of the Securities Exchange Act of 1934.
  2. Does not require that any specific information be furnished to investors.
  3. Permits the use of general solicitation.
  4. Requires that each investor be a sophisticated investor or be represented by a purchaser representative.

Does not require that any specific information be furnished to investors.

Rule 504 of Regulation D provides for the issuance of up to $1,000,000 of securities in a 12-month period to any number of investors without going through registration. It does not require that any specific information be furnished to investors.

Regulation D specifically does not permit the use of general solicitation.

88

An emerging growth company is a company with annual gross revenues of less than?

$1 billion during its most recent fiscal year.

A company retains emerging growth company status until the earliest of:

  • The end of the fiscal year in which its annual revenues exceed $1 billion.
  • The end of the fiscal year in which the fifth anniversary of its IPO occurred
  • The date on which the company has, during the previous three-year period, issued more than $1 billion in non-convertible debt.
  • The date on which the company qualifies as a large accelerated filer.