REG 5 BUS LAW BK

Question 1

Eye of the Tiger

Another name for constructive fraud?

Answer 1

Gross negligence

Question 2

Eye of the Tiger

What are the elements of negligence?

Answer 2

Duty, breach of that duty, causation and damages.

Question 3

Eye of the Tiger

Who is the CPA liable to for negligence under the majority rule?

Answer 3

To any limited foreseeable class of persons whom the CPA knows will be relying on the CPA’s work.

Question 4

Eye of the Tiger

What is the Ultramares decision?

Answer 4

Limits CPA liability for negligence to persons in privity of contract with the CPA and named 3rd party beneficiaries.

Question 5

Eye of the Tiger

Defense for CPA under breach of duty?

Answer 5

The person is neither a client nor a person that the CPA knows will be relying on the audit.

Question 6

Eye of the Tiger

Best evidence that a CPA acted like a reasonably prudent CPA?

Answer 6

Followed GAAP/GAAS

Question 7

Eye of the Tiger

Elements of actual fraud

Answer 7

1. Material misrepresentation 2. Actual reliance 3. Intent to deceive 4. Damages 5. Scienter

Question 8

Eye of the Tiger

Difference between actual and constructive fraud?

Answer 8

Constructive fraud— same elements except no intent to deceive, rather the defendant acts recklessly

Question 9

Eye of the Tiger

To whom is a CPA liable for fraud?

Answer 9

Anyone who can prove the elements of fraud.

Question 10

Eye of the Tiger

What must be proven for a CPA to be liable under Section 11 of the 1933 Act?

Answer 10

“LAM”– loss occurred, acquired stock, material misrepresentation

Question 11

Eye of the Tiger

What must be proven for a CPA to be liable under Section 10b-5 of the 1934 ACT?

Answer 11

“LAM”, scienter, and reliance (fraud). Also, interstate commerce must be involved.

Question 12

Eye of the Tiger

Who may accountant show workpapers to without client’s permission?

Answer 12

If the papers are subpoena’s in a court case, a prospective purchaser of the CPA’s practice, a state CPA society voluntary quality control review panel, and official investigation by the AICPA/state trial board, and where GAAP/GAAS require disclosure.

Question 13

Eye of the Tiger

Major difference between Securities Act of 1933 and Securities Exchange Act of 1934?

Answer 13

1933 Act regulates original issuance of securities, 1934 Act regulates purchases and sales after initial issuance.

Question 14

Eye of the Tiger

Rule of thumb for determining if something is a security?

Answer 14

Someone else manages it, ie investor is passive.

Question 15

Eye of the Tiger

Purpose of SEC?

Answer 15

To provide enough information for investors to make decisions. The SEC does not evaluate the information for accuracy, the offering’s financial merits, etc.

Question 16

Eye of the Tiger

What types of people must register under the 1933 Act?

Answer 16

Dealers, underwriters, issuers—- Don’t get a “DUI” after you register your securities :)

Question 17

Eye of the Tiger

When are prospectuses required?

Answer 17

Unless a issuance is exempt, each investor must receive a copy of the prospectus before or contemporaneous with every sale of the security.

Question 18

Eye of the Tiger

Who must certify the financial statements of a registrant under the 1933 Act?

Answer 18

A public accounting firm registered with PCAOB.

Question 19

Eye of the Tiger

When is shelf registration permitted?

Answer 19

If issuer has continuosly filed under 1934 Act for one year and the info is continuously updated.

Question 20

Eye of the Tiger

What sales activities are allowed during the 20 day period between registration and filing?

Answer 20

Oral offers to sell, tombstone ads, red herring prospectus

Question 21

Eye of the Tiger

What securities are exempted from registration

Answer 21

Bank-issued securities, regulated common carrier securities, insurance policies, not-for-profit securities, Gov’t-issued securities, short-term commercial paper (“BRINGS” mnemonic)

Question 22

Eye of the Tiger

Are exchanges with existing stockholders exempt from registration?

Answer 22

Yes, because there is no creation of new stock, so no need to register.

Question 23

Eye of the Tiger

What kind of sales that states make are exempt from registration?

Answer 23

Intrastate sales. Interstate sales are not exempt.

Question 24

Eye of the Tiger

What is Regulation A?

Answer 24

Permits a simplified form of registration. Unaudited financial statements are ok. Regulation A offerings, therefore, do not need to be registered per the requirements of the Security Act of 1933.

Question 25

# Eye of the Tiger Describe Regulation D general conditions.

Answer 25

Reg D exempts private offerings. Thus, no advertising is allowed. Purchasers may not resell securities that are issued under Reg D to the public for 2 years after purchase. SEC must be notified of the issuance of securities under Reg D within 15 days.

Question 26

# Eye of the Tiger Disclosure requirements under Rule 505 and Rule 506?

Answer 26

If there are any unaccredited investors, then all investors must be given at least an annual report containing audited financial statements.

Question 27

# Eye of the Tiger What is Section 11 of the 1933 Act?

Answer 27

Makes anyone who signs a registration statement liable for all damages caused by any material misstatement of fact.

Question 28

# Eye of the Tiger What must be shown to prevail in a Section 11 suit?

Answer 28

LAM only. NO need for scienter, reliance, negligence.

Question 29

# Eye of the Tiger What types of companies must register their securities under the 1934 Act?

Answer 29

Companies whose shares are traded on a national exchange and companies that have a) more than $10 million in assets and b) at least 2000 shareholders or 500 unaccredited shareholders

Question 30

# Eye of the Tiger When is form 10K required to be filed? How about form 10Q? And form 8K?

Answer 30

10K--within 60 days of year end for large corp. and 90 days for small business 10Q---within 40 days of quarter end 8K---within 4 days of a major change in the company

Question 31

# Eye of the Tiger What are the other required reports other than the 10K, 10Q and 8K?

Answer 31

5% + owners must report, tender offers must be reported, insider trading must be reported, and proxy solicitations and proxy statements must be reported ("5% TIP")

Question 32

# Eye of the Tiger What constitutes an insider?

Answer 32

officers, directors, and > 10% owners

Question 33

# Eye of the Tiger Preparer penalty for understatement of tax liability?

Answer 33

$1,000

Question 34

# Eye of the Tiger Out of 10K, 10Q and 8K, which report must be certified by independent accountants?

Answer 34

10K

Question 35

# Eye of the Tiger Section 11 of 1933 Act statute of limitations?

Answer 35

One year after discovery of untrue statement/omission and within 3 years of offering date.

Question 36

# Eye of the Tiger Are insurance policies regulated by the Sec. Exchange Act of 1933? How about other securities issued by insurance companies?

Answer 36

insurance policies--no. other securities issued by insurance companies---yes.

Question 37

When is a tax preparer penalized for understatement of tax liability?

Answer 37

When understatement is due to an unreasonable position, the preparer should have known about the unreasonable position, and the position lacks reasonable basis.