Business Law - All

Question 1

What does the 1933 Act regulate? What does the 1934 Act regulate?

Answer 1

1933: original issuances of securities; 1934: purchases and sales after initial issuance

Question 2

What is a good rule of thumb to determine whether something is a security?

Answer 2

Ask whether the investor expects to take part in the management of the business. If investor is passive, the investment is most likely a security.

Question 3

How does the 1933 Act accomplish the goal to assure that investors have sufficient information on which to make an informed investment decision?

Answer 3

Requiring most issuers to register new issues with the SEC and provide prospectuses containing material information regarding the securities to prospective investors.

Question 4

What is the SEC’s role with regards to the 1933 Act?

Answer 4

Assures the presence of information necessary for investors to make informed decisions; does not assure the accuracy of the information filed or evaluate the financial merits of the securities being offered

Question 5

What is included in the registration statement?

Answer 5

1. Prospectus: summarizes important information

2. Audited balance sheet and P&L statement; other material facts requiring disclosure

Question 6

What is “shelf registration?”

Answer 6

One registration statement for all securities that they will offer in the future; permitted if the issuer has continuously filed under the 1934 Act for one year and the information is continuously updated

Question 7

When is the registration statement effective?

Answer 7

20 days after filing

Question 8

What is the timetable of sales activity (for IPO)?

Answer 8

1. 30 days prior to registration: no sales activity allowed; only negotiations with underwriters
2. After registration but before effectiveness (20 days): oral offers to sell, tombstone ads, preliminary prospectus
3. After Effective Date: may be sold; investors must receive a prospectus

Question 9

What are securities exemptions?

Answer 9

Securities issued by the following issuers:  
Banks
Railroads
Insurance 
Not-for-profits (charitable orgs)
Government (muni bonds)
Short-term commercial paper

Question 10

What are the transaction exemptions?

Answer 10

1. Casual sales (not by issuer, underwriter, or dealer)
2. Issuer exchanges securities with existing holders (ie: stock dividends, stock splits)
3. Intrastate sales (not federal laws)
4. Regulation A (partial exemption): sales may not exceed 5m in 12-month period; simplified form of registration (unaudited financials); “offering statement” “offering circular”
5. Private Offering Exemption

Question 11

What are the three private offering exemptions under Regulation D?

Answer 11

Rule 504: 1 million limit; no specific disclosures required
Rule 505: 5 million limit; may be sold to any number of accredited investors and 35 or fewer unaccredited investors; disclosures required if there are any unaccredited investors
Rule 506: unlimited dollar amounts; sophisticated investors only

Question 12

What are the elements of a Section 11 Cause of Action?

Answer 12

LAM **anyone liable if they signed registration statement*
Suffered a loss
Acquired the stock
Material omission

Question 13

Under the 1934 Act, what two types of companies must register their securities?

Answer 13

1. Companies whose shares are traded on a national exchange (required to report under 1933 Act)
2. Companies that have (i) more than 10 m in assets, and (ii) at least 2000 shareholders, or 500 shareholders who are not accredited

Question 14

What companies are exempt from 1934 Act registration requirements?

Answer 14

Investment companies, savings and loans, and charitable organizations

Question 15

What are the 1934 Act Reporting Requirements?

Answer 15

1. 10-K (90 days after y/e); 10-Q (40 days after q/e); 8-K (4 days after major change)
2. 5% or more owners must report
3. Tender offers (one making tender offer)
4. Insiders
5. Proxy solicitations, proxy statements

Question 16

Elements of Cause of Action for 10b-5 (antifraud provision 1934 Act):

Answer 16

1. Acquired securities 2. suffered a loss 3. material misstatement 4. Scienter 5. Reliance 6. Interstate commerce

Question 17

Tork purchased restricted securities that were issued pursuant to Regulation D of the Securities Act of 1933. Which of the following statements is correct regarding Tork’s ability to resell the securities?

Answer 17

Under Regulation D of the Securities Act of 1933, Tork may only resell if the resale transaction continues to fall under the registration exemptions found in Section 3 of the 1933 Act.

Question 18

Under the Securities Act of 1933, which of the following statements concerning an offering of securities sold under a transaction exemption is correct?

a. The offering is subject to the registration requirements of the 1933 Act.
b. The offering is exempt from the anti-fraud provisions of the 1933 Act.
c. Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act.
d. Resales of the offering are exempt from the provisions of the 1933 Act.

Answer 18

c. A transaction exemption applies only to the particular transaction. Subsequent sales must qualify for their own exemption, or they must be registered.

Question 19

A tombstone advertisement:

Answer 19

A tombstone ad can be placed before a registration statement is effective. Only certain information, such as the nature of the security, the price, and the availability of a prospectus, may be included in the ad.

Question 20

What 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?

Answer 20

Section 18 of the Securities Exchange Act of 1934 imposes civil liability on persons who intentionally make false statements in a registration statement or any other document required to be filed under the act. Since the act proscribes only intentional misconduct, lack of intent to deceive is a defense. Good faith and lack of knowledge of the statement’s falsity would show that the false or misleading statement was not made with an intent to deceive.

Question 21

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

Answer 21

Without good faith

Question 22

Under Regulation D of the Securities Act of 1933, what is the maximum time period during which an exempt offering may be made?

Answer 22

twelve months. Under Rule 504 the issuance of securities may not exceed $1 million dollars in a 12-month period. Under Rule 505 the issuance of securities may not exceed $5 million dollars in a 12-month period. Rule 506 permits an unlimited amount of stock to be issued. 506 is often referred to as a private placement because that rule exempts transactions not involved in a public offering.

Question 23

Under the Securities Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the Act?

Answer 23

Violation of Rule 10b-5 of the Securities Exchange Act of 1934 can result in civil damages, an SEC injunctive action and or criminal fines and penalties.

Question 24

Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart’s financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay’s opinion was included in Dart’s registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known.

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

Answer 24

The amount of any loss caused by the fraud. Under Section 10(b) and Rule 10b-5, a successful plaintiff (Larson) will be entitled either to recover the amount of any loss caused by the fraud or to obtain rescission.

Question 25

Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA?

Answer 25

Gross negligence in applying generally accepted auditing standards.

Question 26

What is the statute of limitations for Section 11 of the 1933 Act?

Answer 26

The statute of limitations for Section 11 of the Securities Act of 1933 is one year after the discovery of the untrue statement or omission and within three years of the offering date.