Business Law: ch 39
The 1933 Securities Act defines the term "security." The Supreme Court of the United States has adopted a two-tier analysis of what constitutes a security. Within this analysis the Court has used a three-part test to determine whether a non-traditional financial transaction constitutes an investment contract and thus a security. Explain (a) the 1933 Act's statutory definition of security, (b) the courts' general interpretation of the 1933 Act's definition and (c) the Supreme Court's two-tier test. Use case law to illustrate your explanation, if appropriate. Also, why do you think the Supreme Court had to devise such an analysis?
(a) Any note; stock; bond; debenture; evidence of indebtedness; preorganization certificate or subscription; investment contract; voting trust certificate; fractional undivided interest in oil, gas, or other mineral rights; or, in general, any interest or instrument commonly known as a security. (b) The courts generally have interpreted the statutory definition to include nontraditional forms of investments. (c) The first tier of the Supreme Court's test is whether a financial instrument is designated as a note, stock, bond, or other instrument specifically named in the statute. The Court presumes such instruments are securities and treats them as such. If a financial transaction is not so designated, and is otherwise non-traditional, the Court has used a three-part test (Securities and Exchange Commission v. W.J. Howey Co.). The Court determines whether the transaction involved (1) an investment in a common venture (2) premised on a reasonable expectation of profit (3) to be derived from the entrepreneurial or managerial efforts of others. The Court did use this analysis to systematically interpret the statute and to further the spirit and basic objectives of the 1933 Act.
Discuss how the Dodd-Frank Act affects: (a) the SEC's authority regarding aiders and abettors of securities law violators, (b) whistleblowing, and (c) disclosure requirements in annual proxy statements regarding executive compensation
(a) The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law in July 2010. It extended the authority of the SEC by empowering the SEC to bring enforcement actions under the Securities Act of 1933 against aiders and abettors. It also amends the 1933 and 1934 Acts to allow "recklessness" as well as "knowledge" to satisfy the mental state required for the SEC to bring aiding and abetting cases. (b) Regarding whistleblowing, the Dodd-Frank Act requires the SEC to make an award to whistleblowers who voluntarily provide original information that leads to a successful enforcement action in which the SEC imposes monetary sanctions of over $1million. The Act also prohibits retaliation by employers against individuals who provide the SEC with information about possible securities violations. (c) The Dodd-Frank Act requires the SEC to issue rules requiring proxy issuers to describe clearly in annual proxy statements information that shows the relationship between executive compensation actually paid and the financial performance of the issuer. The Act also requires the SEC to issue rules requiring the disclosure of the median of the annual total compensation of all the issuer's employees except the CEO, the annual total compensation of the CEO, and the ratio of these two figures.
A solicitation of proxies from holders of stock: a. is comprehensively regulated by the SEC. b. includes a request for a proxy, but not a request to revoke a proxy. c. gives any security holder entitled to vote the opportunity to communicate with other security holders. Upon written request, the corporation must mail the communication at the corporation's expense along with the solicitation. d. All of these are correct.
A
Marge wishes to raise some money to begin mass producing her prize-winning jellies and jams. She offers her neighbors a portion of her profits if they will put up $2,000 each towards her endeavor. Is their investment a "security"? a. Yes, since Marge will do all the work. b. Yes, because her neighbors will have a security interest in the jelly. c. No, since the neighbors are putting no effort into it. d. No, because Marge is not issuing stock certificates.
A
SEC Rule 10b5-2 adopts what theory of liability? a. Misappropriation. b. Strict. c. Negligence. d. Criminal.
A
SEC regulations concerning fraud in securities transactions apply to: a. all securities transactions involving interstate commerce. b. only securities registered under the 1934 Act. c. only securities registered under the 1933 Act. d. securities registered under both the 1933 and 1934 Acts.
A
The 1934 Securities Exchange Act requires registration of: a. all regulated publicly held companies. b. securities being issued initially. c. statutory outsiders. d. tippees.
A
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 granted the SEC power to: a. issue cease-and-desist orders. b. impose civil penalties up to $850,000. c. bring civil actions for specified violations of the 1934 Act against aiders and abettors. d. All of the above.
A
The antifraud provisions of the 1934 Act would prohibit which of the following? a. Lying about the value of the firm's assets to sell stock. b. Disclosing that the firm has discovered oil on its property in order to sell stock. c. Telling about the bad health of the CEO in a transaction to purchase stock. d. Not disclosing the salaries of secretaries of a large firm whose stock is being sold.
A
The civil penalty for a person who trades on inside information: a. is payable into the U.S. Treasury. b. must be imposed as a result of an action brought within three years after the date of the purchase or sale. c. is, for a controlling person, up to the greater of $1 million or two times the profit gained or loss avoided as a result of the controlled person's violation. d. All of the above.
A
Which of the following is NOT a purpose of federal securities regulation? a. To ensure that only worthwhile securities are sold in interstate commerce. b. To ensure adequate disclosure by issuers of securities. c. To ensure that inside information is not abused. d. To prevent the use of fraud in the marketing of securities.
A
A defense to an action based on material omissions and untrue statements contained in a registration statement is: a. innocent mistake. b. due diligence. c. constructive disclosure. d. reasonable diligence.
B
All of the following are exempt from registration under the 1933 Act except: a. government bonds. b. securities issued by for-profit medical facilities. c. notes with a maturity of not more than nine months when issued for working capital. d. state-regulated insurance company annuities.
B
All of the following are types of illegal insider trading EXCEPT: a. officers or directors who pass valuable information to someone who trades in the company's stock and then is repaid in some way. b. an officer or director who makes a direct profit on an investment just after the public announcement of a major development related to that investment. c. a director who buys through overseas financial institutions stocks and options in his own company prior to a public announcement of information which greatly enhances the value of the stock. d. an officer of a company who, for a fee, related to investment bankers information about companies her company is planning to target for takeover.
B
If a company has assets of over $10 million but trades its stock over the counter, it is nevertheless required to comply with the 1934 Act if it has: a. 500 or more shareholders. b. one class of stock with 500 or more shareholders. c. 500 or more shares of stock outstanding. d. 500 different investors.
B
Prohibited bribery can result in fines and imprisonment under the antibribery provision of : a. the Private Securities Litigation Reform Act. b. the Foreign Corrupt Practices Act. c. the Securities and Exchange Commission. d. None of the above.
B
The Reform Act's safe harbor under the 1933 Act eliminates civil liability based on an untrue statement or omission if a forward-looking statement is: a. material. b. made without actual knowledge that it was false or misleading. c. unidentified as a forward-looking statement d. All of the above.
B
The SEC established a computer system that performs automated collection, validation, indexing, acceptance, and dissemination of reports required to be filed with the SEC. It is known as: a. EVRAD. b. Electronic Data Gathering, Analysis, and Retrieval. c. electronic delivery. d. SEC-ELS.
B
Willful violations of the Securities Act of 1933 are subject to a fine of not more than __________ and/or imprisonment of not more than __________ or both. a. $5,000, one year. b. $10,000, five years. c. $100,000, five years. d. $250,000, ten years.
B
A signed writing by a shareholder authorizing a named person to vote his stock at a specified meeting of shareholders is a(n): a. control. b. affiliate. c. proxy. d. registration statement.
C
If Terry makes a tender offer to the owners of Pizza Village's registered stock, he must file a statement with the SEC if he: a. owns 1% of Pizza Village stock. b. will, after the acquisition, own 5% of all Pizza Village stock. c. will, after the acquisition, own 5% of one class of Pizza Village stock. d. will own more than 3% of the stock in all classes.
C
Section 16(b) of the 1934 Act differs from Rule 10b-5 in that the latter: a. applies to transfers within 6 months of each other. b. only applies to officers, directors, and 10% shareholders. c. requires material inside information. d. All of the above.
C
The 1933 Act imposes liability for material misstatements and omissions in a registration statement on: a. only the directors and certain officers. b. only the issuers. c. experts and underwriters as well as directors, officers, and issuers. d. the CEO only.
C
The Sarbanes-Oxley Act: a. allows the SEC to add criminal penalties to a disgorgement fund for the benefit of victims of violations of the 1933 and 1934 securities acts. b. requires an outside CPA and the corporate treasurer to certify the financial and other information contained in the issuer's annual and quarterly reports. c. requires that issuers of securities disclose in plain English to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer as the SEC determines is necessary or useful. d. All of the above.
C
The provisions of Section 17(a) of the 1933 Act: a. primarily allow for a private right of action for persons injured by the act. b. make it unlawful to engage in any transaction, practice, or course of business that operates as deceit upon the issuer. c. make it unlawful in the offer or sale of any securities to obtain property by any statement that omits a material fact without which the information is misleading. d. None of the above.
C
The rule that prohibits schemes and devices to defraud investors is Rule: a. 504 b. 144 c. 10b-5 d. 16(b)
C
Under the 1934 Act, willful violations may result in: a. a fine of up to $10 million for an individual. b. imprisonment of up to no more than ten years. c. a fine of up to $25 million for a corporation. d. All of the above.
C
Under the Securities Exchange Act of 1934 and the Williams Act, a tender offer: a. must be disclosed if the offeror's acquisition would give him 3 percent of the target's stock. b. must be disclosed only to the shareholders of the target corporation. c. disclosure is informational to ensure that investors may make an informed decision. d. None of these are correct.
C
Which of the following is a basic objective of the 1933 Securities Act? a. To provide investors with material information concerning securities offered for sale to the public. b. To prohibit misrepresentation, deceit, and other fraudulent acts and unfair practices in the sale of securities generally, whether or not they are required to be registered. c. Both (a) and (b). d. None of the above.
C
Which of the following is not one of the situations in which the 1934 Securities Exchange Act requires disclosure during a "tender offer"? a. When a person or group acquires more than 5 percent of a class of voting securities registered under the 1934 Act. b. When a person makes a tender offer for more than 5 percent of a class of registered equity securities. c. When a company makes a tender offer for any voting stock in another company. d. When the issuer makes an offer to repurchase its own registered shares.
C
Which of the following would NOT be exempt from registration under the 1933 Securities Act? a. An offering restricted to the residents of the state in which the issuing company is a resident and doing business. b. An offering by a noninvestment company issuer for $4 million in securities over 12 months without general advertising or general solicitation. c. An offering of limited partnership tax shelters. d. A private offering to sophisticated investors who will not redistribute them.
C
__________, promulgated by the SEC, provides a nonexclusive safe harbor for securing the intrastate exemption. a. Rule 506. b. Rule 505. c. Rule 147. d. Rule 504.
C
A registration statement generally includes all of the following EXCEPT a: a. financial statement certified by an independent public accountant. b. description of the business. c. description of the management. d. projection of future growth potential.
D
For purposes of Section 16(b) of the 1934 Securities Exchange Act, which of the following are not "insiders"? a. Shareholders owning more than 10 percent of the stock of a corporation listed on a national stock exchange or registered with the SEC. b. Directors. c. Officers. d. All of the above may be considered insiders.
D
Rule 10b-5 applies to any: a. buyer of a registered security. b. seller of a registered security. c. person who buys or sells a registered security. d. person who buys or sells any security.
D
Section 11 of the Securities Act of 1933 imposes liability on: a. the issuer. b. all persons who signed the registration statement. c. every director or partner, and all underwriters. d. All of the above.
D
Section 14(e) of the Securities Act of 1934 makes it unlawful for any person to: a. make any untrue statement of material fact in connection with any tender offer, even if the target company is not subject to the 1934 Act's reporting requirements. b. omit to state any material fact in connection with a tender offer. c. engage in any fraudulent, deceptive, or manipulative practices in connection with any tender offer. d. All of the above.
D
Securities that are exempt from registration under the federal securities laws include: a. securities of domestic banks. b. annuity contracts issued by state-regulated insurance companies. c. bonds issued by a city. d. All of the above are exempt.
D
Solicitation includes any request: a. for a proxy. b. not to execute a proxy. c. to revoke a proxy. d. All of the above.
D
The SEC defined electronic media to include: a. audiotapes. b. facsimiles. c. videotapes. d. All of the above. e. None of the above.
D
The Securities Act of 1933 has two basic objectives, one of which is to: a. extend protection to investors trading in outstanding, issued securities. b. grant the SEC power to impose administrative, civil penalties up to $600,000. c. regulate disclosure requirements on publicly held corporations. d. prohibit misrepresentation, deceit, and other fraudulent acts and unfair practices in the sale of securities generally, whether or not they are required to be registered.
D
The Securities Act of 1934 imposes sanctions for noncompliance with its disclosure and antifraud requirements. These sanctions include: a. civil liability to injured investors and issuers. b. civil penalties. c. criminal penalties. d. All of the above.
D
Which of the following would ordinarily NOT be considered a security under the federal securities laws? a. Bonds. b. Stocks. c. Investments in limited partnerships. d. An investment in a nonprofit venture based on one's own entrepreneurial efforts.
D
"Insider trading" rules pertain to: a. tippees. b. officers. c. directors. d. underwriters. e. All of the above.
E
If Caroline, a lawyer, was being held liable for a misstatement in a registration statement, her defense(s) would be: a. she was only following directions. b. she had reasonable grounds to believe her information was true. c. she was not responsible for the portion that contained the misstatement. d. All of the above. e. Both (b) and (c) above are correct.
E
Recovery of damages under Rule 10b-5 requires proof of: a. reliance on a misstatement or omission. b. materiality. c. scienter. d. connection with the purchase or sale of a security. e. All of the above.
E
Registration under the 1933 Act calls for disclosure of which of the following? a. A description of the registrant's properties and business. b. A description of the significant provisions of the security to be offered for sale and its relationship to the registrant's other capital securities. c. Compensation paid to directors, the CEO, CFO, and the three other highest paid executive officers. d. Financial statements certified by independent public accountants. e. All of the above.
E
A registration statement becomes public immediately on filing with the SEC, but a prospectus only becomes public upon signature of the chief financial officer.
F
As amended in 2008, SEC Rule 144 imposes stricter requirements on securities resales of issuers subject to 1934 Act reporting requirements than on securities resales of non-reporting issuers.
F
As amended in 2008, SEC rules define a small business issuer as a noninvestment company with less than $10 million in public float.
F
Effective in 2010, the SEC adopted new requirements to improve the disclosure shareholders of public companies receive regarding compensation and corporate governance. These new rules require disclosure of any directorships held by each nominee at any time during the past seven years at any public company.
F
Every registration filed with the SEC is held in confidence until the business permits disclosure.
F
In 2006, the SEC abolished the requirement that a registration statement disclose compensation paid to senior executives and directors.
F
Marshall, an agent of the North Carolina Pinery Corporation, in offering a cash payment to an official of Mexico to convince the official to use his influence to assist Pinery in obtaining a contract in Mexico, may have violated the laws of Mexico, but not the laws of the United States.
F
Only civil liability may be imposed for violations of the Securities Act of 1933.
F
Registration of securities with the SEC guarantees to a potential investor the financial soundness of the business represented by the stock.
F
Rule 505, as promulgated by the SEC, provides a nonexclusive safe harbor for securing the intrastate exemption.
F
Securities sold under Regulation A must be registered if they are resold.
F
The 1933 Securities Act differs from the 1934 Act in that the former deals with trading in stock that has already been issued and the latter has to do with the issuance of securities.
F
The Dodd-Frank Act amends the 1933 and 1934 Acts to require knowledge as the mental state required for the SEC to bring aiding and abetting cases.
F
The SEC may not advance the effective date of a registration statement.
F
The Sarbanes-Oxley Act requires either the chief executive officer or the chief financial officer of a company issuing securities to certify information in the issuer's annual and quarterly reports.
F
The Securities Act of 1933 regulates tender offers and proxy solicitations.
F
The antifraud provisions of the 1933 Act pertain to only registered securities.
F
The tender offer is open to select holders of the class of shares subject to the tender offer.
F
There are rigorously enforced restrictions regarding both number and qualification of investors who purchase securities under Regulation A.
F
Hugo wishes to raise money for his restaurant. He offers to sell stock to his brothers, sisters, aunts, uncles, and cousins. The offering is made by telephone to each of the investors and amounts to a stock offering in the total dollar amount of $1.5 million. The offering is made to a total of 38 family members and no notice is given to the SEC. Is this a permissible exempt offering under the federal securities laws? Explain.
Hugo would probably be able to qualify for a "private placement" exemption under the 1933 Act. Rule 506 provides a safe harbor under which Hugo would only be required to notify the SEC of sales made pursuant to the exemption. He would not be required to file a full registration statement. The dollar amount of the offering is not important. Sales do not have to be made only to family members, but only 35 nonaccredited investors are allowed under the safe harbor rules. If investors have net worth exceeding $1 million or have had income in excess of $200,000 in each of the two preceeding years and reasonably expect at least $200,000 in income in the current year, they are "accredited investors." Hugo must furnish all of the nonaccreditors investors with disclosure materials. Hugo might be able to qualify this offering under Rule 505 as a limited offer not exceeding $5 million. As under Rule 506, he would be required to notify the SEC of sales made under the exemption and would have to take precautions against nonexempt, unregistered resales. He would be limited to selling to no more than 35 nonaccredited investors under this exemption, too.
Dryler Corporation sold unregistered securities that were required under the 1933 Act to be registered. Howlett-Midland Corporation used an outdated prospectus in the sale of its securities. Discuss the civil liability of the companies for these acts.
Section 12(a)(1) of the 1933 Act imposes express civil liability for the sale of an unregistered security that is required to be registered, the sale of a registered security without delivery of a prospectus, the sale of a security by use of an outdated prospectus, or the offer of a sale before the filing of the registration statement. Liability is strict or absolute, because there are no defenses. The person who purchases a security sold in violation of this provision has the right to tender it back to the seller and recover the purchase price. If the purchaser no longer owns the security, he may recover monetary damages from the seller.
"Restricted securities" are exempted from registration.
T
"Shelf registrations" allow delayed sales of stock.
T
A "private placement" involves no public offering and is exempt from registration.
T
A registration statement must be signed by the issuer, its CEO, CFO, CAO, and majority of its board of directors.
T
Bonds are included in the definition of the term "security."
T
EDGAR is the computer system established by the SEC to perform automated collection, validation, and dissemination of required reports.
T
Effective in 2000, a plain English term sheet is required in all tender offers and mergers.
T
If the SEC requires an amendment to a registration, the 20-day waiting period begins again.
T
In 1992, the SEC issued new rules establishing an integrated registration and reporting system for small business issuers.
T
Insiders would violate the short-swing profits rule (16b) of the 1934 Act by buying stock on January 1 and selling on May 1.
T
Most states require the registration of securities and regulate brokers and dealers.
T
Shelf registrations allow issuers to register securities that are to be offered and sold on a delayed or continuous basis in the future, but the provision allowing it does not apply to all companies.
T
The 1934 Act rules governing proxy solicitations would require a proxy statement describing the material facts relating to items to be voted upon.
T
The 1995 Private Securities Litigation Reform Act grants authority to the SEC to bring civil actions against aiders and abettors for certain violations of the 1934 Act.
T
The Private Securities Litigation Reform Act sought to prevent abuses in private securities fraud lawsuits.
T
The Securities Act of 1933 identifies a number of securities exemptions that are, in effect, transaction exemptions.
T
The Securities Act of 1933 is also called the "Truth in Securities Act."
T
The Securities Act of 1934 imposes significant disclosure requirements upon reporting companies.
T
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 granted the SEC the power to impose administrative, civil penalties up to the current inflation-adjusted amount of $725,000.
T
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 granted the SEC the power to issue cease and desist orders and to impose civil penalties.
T
The Securities and Exchange Commission (SEC) is an independent, quasi-judicial agency consisting of five commissioners.
T
The due diligence defense generally requires the defendant to show that he had reasonable grounds to believe and did believe that there were no untrue statements or material omissions.
T
The issuer of a registration statement has strict liability for its accuracy
T
The registration requirement of the 1934 Act pertains to the entire class of securities rather than to a specific offering.
T
Under the Dodd-Frank Act, the SEC must issue rules requiring issuers to disclose in annual proxy statements the reasons the issuer has chosen to combine or separate the positions of CEO and chairman of the board of directors.
T
With few exceptions, an issuer must file preliminary proxy statements and forms with the SEC at least 10 days before they are sent to investors.
T
The Klodhoffer Corporation has assets amounting to $2 million and needs additional capital to finance expansion of its operation. The board of directors decides to promote an issue of $1.5 million of common stock in order to raise capital. At the time the stock is issued, Klodhoffer has 250 shareholders owning common stock. If Klodhoffer is to trade the stock over the counter, does it need to register with the SEC?
The issue is exempt from registration under Rule 505 as long as the Klodhoffer issue does not exceed $5 million over 12 months. The issue may be purchased by an unlimited number of accredited investors and by no more than 35 other purchasers. If the sale involves any nonaccredited investors, the issuer must, before the sale, give them specified material information about the issuer, its business, and the securities being offered. An exemption under Rule 505 requires the issuer to file online a Form D with the SEC within 15 days after the first sale of securities in the offering. Also, Regulation A would permit Klodhoffer to issue up to $5 million of securities in a 12-month period without registering them if Klodhoffer files an offering statement with the SEC prior to selling the securities. An offering circular would have to be provided to offerees and purchasers. Regulation A does not restrict the number or qualifications of investors, and the securities may be resold freely.
