Chapter 22

The "tipper" of inside information can be convicted of a crime, but the "tippee" cannot. True False

False

Premier Enterprises sold Watson unregistered stock which was not exempt. The 1933 Act imposes liability on Premier, and Watson can demand rescission if he still owns the stock. True False

True The 1933 Act imposes liability on anyone who sells a security that is neither registered nor exempt; makes a material misrepresentation during an offer or sale of securities; or signs a registration statement that contains a material error.

Pursuant to a public offering, a CPA firm audited the financial statements. After the offering, omissions and misstatements were found. The CPA firm is now being sued by the purchasers of the stock. The purchasers are alleging that the erroneous financial statements in the registration statement caused them to suffer a monetary loss. The CPA firm can avoid liability if it can prove a) that it used due diligence in auditing the financial statements. b) the corporation was the party who made misstatements and omissions. c) the firm believed that the statements were accurate. d) None of these will avoid liability.

a) that it used due diligence in auditing the financial statements. The importance of due diligence cannot be overstated. The SEC does not conduct its own investigation of registration statements, so if an issuer chooses to lie, the SEC has no way of knowing. It is the job of the underwriters, and other signatories, to check the accuracy of the filing.

When securities are being offered by a company only to residents of the state in which the company has its principal place of business, the securities may be exempted from registration under: a. SEC Rule 147. b. Regulation A. c. Regulation D, Rule 504. d. Regulation D, Rule 506.

a. SEC Rule 147.

When a common stock offering requires registration under the Securities Act of 1933,.___. a. the registration statement is automatically effective when filed with the SEC b. the issuer would act unlawfully if it were to sell the common stock without providing the investor with a prospectus c. the SEC will determine the investment value of the common stock before approving the offering d. the issuer may make sales ten days after filing the registration statement

b. the issuer would act unlawfully if it were to sell the common stock without providing the investor with a prospectus

When the underwriter buys stock from the issuer and sells it to the public it is referred to as a a) public underwriting. b) best efforts underwriting. c) firm commitment underwriting. d) secondary underwriting.

c) firm commitment underwriting.

Section 16 of the 1934 Act prohibits short-swing trading on the part of officers, directors, and controlling shareholders who a) own more than 25% of the company. b) trade their shares in order to invest in another company. c) own more than 10% of the company. d) are also on the board of directors of the company.

c) own more than 10% of the company. Section 16 is a strict liability provision for those that own more than 10% of the company. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she made a profit by buying and selling or selling and buying stock in a six-month period, she is liable.

State securities statutes are known as a) big country laws. b) going dark laws. c) sunshine laws. d) blue sky laws.

d) blue sky laws. They are named after the blue sky of Kansas, the first state to regulate the sale of securities.

Section 16 of the 1934 Act addresses what type of insider trading? a) takeovers b) tipping c) classic insider trading d) short-swing trading

d) short-swing trading

Which of the following is one of the elements of liability under Section 10(b) of the Securities Exchange Act of 1934? a. Use of the mail or facilities of interstate commerce b. Oral communication of a deceptive statement c. Failure to certify a financial document d. Falsification of a registration statement

a. Use of the mail or facilities of interstate commerce

Which of the following securities are exempt from registration under the Securities Act of 1933? Choose 3 answers. a. a corporate promissory note with a term of 9 months or less b. tax-exempt bonds issued by a charitable organization c. federal government bonds d. securities issued by a corporation when the company has issued less than $70 million in securities in the past 12 months

a. a corporate promissory note with a term of 9 months or less b. tax-exempt bonds issued by a charitable organization c. federal government bonds

Which of the following are among the five periods identified by the Securities and Exchange Commission (SEC) rules in the registration process? Choose 2 answers. a. a pre-filing period b. a prospectus period c. a waiting period d. a selling period

a. a pre-filing period c. a waiting period

Noncompliance with federal securities laws may subject an individual or a company to which of the following penalties? Choose 3 answers. a. civil fines per act or omission b. imprisonment c. "blue sky law" fines d. disgorgement of profits

a. civil fines per act or omission b. imprisonment d. disgorgement of profits

During the registration waiting period, an issuer may: (Choose 2 answer choices) a. distribute a preliminary prospectus. b. sell securities. c. distribute a final prospectus. d. offer to sell securities.

a. distribute a preliminary prospectus. d. offer to sell securities.

A corporate officer who buys or sells his or her company's stock based on non-public information may be committing which type of securities fraud? a. insider trading b. Ponzi scheme c. embezzlement d. misappropriation

a. insider trading

The Securities and Exchange Commission (SEC) was established to perform which of the following functions? Choose 3 answers. a. regulating the securities market b. regulating efforts to raise capital by public companies, but not private companies c. enforcing securities laws d. protecting investors from fraud and misrepresentation in securities transactions

a. regulating the securities market b. regulating efforts to raise capital by public companies, but not private companies d. protecting investors from fraud and misrepresentation in securities transactions

Pace Corp. previously issued 300,000 shares of its common stock. The shares are now actively traded on a national securities exchange. The original offering was exempt from registration under the Securities Act of 1933. Pace has $2.5 million in assets and 425 unaccredited shareholders. With regard to the Securities Exchange Act of 1934, Pace is . a. required to file a registration statement because its assets exceed $2 million in value b. required to file a registration statement even though it has fewer than 500 unaccredited shareholders c. not required to file a registration statement because the original offering of its stock was exempt from registration d. not required to file a registration statement unless insiders own at least 5 percent of its outstanding shares of stock

a. required to file a registration statement because its assets exceed $2 million in value

A debt issued by a company as a negotiable instrument with a term of 9 months or less is a security that is exempt from registration and is called: a. short-term commercial paper. b. short-term private placement. c. a short-term offering. d. a short-swing trade.

a. short-term commercial paper.

Blue sky laws apply to what type of securities transaction? a. state-regulated securities offerings b. stocks traded on a national stock exchange c. stock offerings that exceed $1,000 per share d. sales of stocks from fictitious companies

a. state-regulated securities offerings

Any security must be registered before it can be sold, unless: (Choose 2 answer choices) a. the security qualifies for an exemption. b. the transaction qualifies for an exemption. c. the security is unlikely to result in financial harm. d. the issuer selling the security maintains certain transaction records.

a. the security qualifies for an exemption. b. the transaction qualifies for an exemption.

Which of the following is reported on Form 8-K? a) audited financial statements b) the resignation of a director over a policy dispute c) unaudited financial statements d) All of these are correct.

b) the resignation of a director over a policy dispute Other significant developments, such as a change in control or auditing firms, are also reported on this form.

Which of the following securities are exempt from registration because of their type? Choose 2 answer choices. a. Public offerings in the initial public offering of a company b. Government securities c. Short-term commercial paper d. Private offerings under SEC Rule 147

b. Government securities c. Short-term commercial paper

In addition to describing the securities being offered for sale, a registration statement must meet which of the following requirements? Choose 3 answers. a. It must be mailed to all investors. b. It must be filed with the Security and Exchange Commission (SEC) online. c. It must contain specific information about the company's management, assets, liabilities, and risk factors. d. It must state how the corporation intends to use the proceeds from the sale of its securities.

b. It must be filed with the Security and Exchange Commission (SEC) online. c. It must contain specific information about the company's management, assets, liabilities, and risk factors. d. It must state how the corporation intends to use the proceeds from the sale of its securities.

Any person who knowingly fails to include a material fact on a registration statement can be held liable under: a. no section of the Securities Act of 1933. b. Section 11 of the Securities Act of 1933. c. Section 20A of the Securities Exchange Act of 1934. d. Section 12(a)(2) of the Securities Act of 1933.

b. Section 11 of the Securities Act of 1933.

Which of the following does the SEC evaluate in a registration statement? a. The likelihood of financial return for investors b. Whether appropriate disclosures have been made c. The quality of the security d. The level of financial risk to investors

b. Whether appropriate disclosures have been made

Which of the following is included in the definition of a security under the Securities Act of 1933? Choose 3 answers. a. an interest in real estate b. an investment contract that meets the Howey test c. stock options, puts, and calls d. publicly traded stocks and bonds

b. an investment contract that meets the Howey test c. stock options, puts, and calls d. publicly traded stocks and bonds

The Securities Exchange Act of 1934 controls the public trading of stocks in which of the following ways? Choose 2 answers. a by requiring public companies to file one initial disclosure of financial information b. by creating the Securities and Exchange Commission (SEC) c. by requiring private companies with over 200 employees to register their stock d. by requiring annual disclosures of financial information

b. by creating the Securities and Exchange Commission (SEC) d. by requiring annual disclosures of financial information

Which of the following issuers must register with the SEC under the Securities Exchange Act of 1934? Choose 2 answer choices. a. Companies with no shareholders b. Privately held companies with less than 10 shareholders c. Companies who complete a public offering d. Companies who trade on a national exchange

c. Companies who complete a public offering d. Companies who trade on a national exchange

Three months ago, Noah bought stock under Rule 506 in TreesNFlowers, Inc. He has lost interest in the company and would like to sell the stock. Which of the following statements is true? a. He can sell the stock now, so long as he sells it to an accredited investor. b. He can sell the stock now, so long as the company grants permission. c. He must hold on to the stock for at least nine more months. d. He could sell the stock now, but only if the company has gone public in the meantime.

d. He could sell the stock now, but only if the company has gone public in the meantime.

Lily would like to raise money for her video game start-up by selling shares. If she decides to raise money through crowdfunding, she___ . a. can only sell to accredited investors b. can sell up to $5 million in stock during each 12-month period c. can sell through any website d. must file a report with the SEC

d. must file a report with the SEC