Chapter 1-2

Question 1

“Best Practices” include…?

Answer 1

Communicating clearly with the client regarding the terms of the engagement;

Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating to applicable law to the relevant facts, and arriving at a conclusion supported by the law and the facts;

Advising the client regarding the import of the conclusions reached;

Acting fairly and with integrity in practice before the IRS.

Question 2

What is a covered opinion?

Answer 2

written advice (including electronic communications) by a practitioner concerning one or more federal tax issues arising from a transaction that is the same as or substantially similar to a transaction that, at the time the advice is rendered, the IRS has determined to be a tax avoidance transaction and that has been identified by published guidance as a listed transaction.

Question 3

What are the requirements for a CPA to represent conflicting interests before the IRS?

Answer 3

1) all directly affected parties provide informed written consent that the existence of conflict is known by the practitioner
2) representation is not prohibited by law
3) practitioner reasonably believes that she can provide competent and diligent representation to each client

Question 4

What is the purpose of the 1933 act?

Answer 4

To regulate initial offering of securities by requiring the filing of a registration statement with the SEC prior to sale or offer to sell.

Question 5

What are the objectives of 1933 act?

Answer 5

1) disclosure to potential investors of all material information
2) prevention of fraud

Question 6

What are the qualifications for a seasoned issuer?

Answer 6

1) Filed for at least one year

2) Market capitalization of at least #75 million

Question 7

What is Form S-X?

Answer 7

Prescribes form and content of financial statements to be included in SEC registration statements.

Question 8

What are items that must be included in Annual report?

Answer 8

1) Disclosure of causes of material changes in financial statements as a whole.
2) Information on effects of inflation and changing prices on financial statements.
3) Income from continuing operations and cash dividends per shs for past 5 years.
4) Description of accounting policies.
5) Number of shares outstanding.
6) MD&A

Question 9

Under 1933 act, when is the registration statement effective?

Answer 9

20th day after filing unless SEC accelerates the effective date or requires amendment.

Question 10

What are some exempt securities under the 1933 act?

Answer 10

1. Domestic Govt’s (if used for govt purpose)
2. Not-for-profit organizations.
3. Domestic banks and Savings & Loans
4. Issuers that are fed.regulated common carriers
5. receiver/trustee in bankruptcy w/ prior court appr.
6. Corp in reorg
7. stock dividends/stock splits
8. commercial paper < 9 months

Question 11

What are qualifications for exempt transaction - Rule 147 (intrastate offerings)?

Answer 11

1. issuer organized/incorporated in state of issue
2. 80% of proceeds are to be used in that state
3. 80% of assets and business is done there
4. all purchasers/offerees are residents of that state
5. No resales to nonresidents for at least 9 months
6. steps taken to prevent interstate distribution

Question 12

Regulation A - Qualifications?

Answer 12

1. up to $5 million in securities in 12 month period
   without full registration
2. no limit on number of investors
3. issuer files an offering statement (consists of a
   notification and offering circular)

Question 13

Regulation D (general conditions)

Answer 13

1. No advertising
2. issuer must exercise care to insure purchasers
   are not underwriters. Purchasing for own invest.
3. No resale for two years
4. SEC must be notified within 15 days after first
   sale

Question 14

Rule 504 exemption?

Answer 14

1. up to $1 million in securities within 12 month
   period
2. No limitation on number or type of purchasers
3. no specific disclosure to investors prior to sale

Question 15

Rule 505 exemption?

Answer 15

1. up to $5 million in securities within 12 month
   period
2. No limitation on number of accredited
   investors.
3. No more than 35 non-accredited investors
4. If only accredited investors, no disclosure is
   required. If ANY non-accredited, ALL investors
   must be given at least annual report containing
   audited fin stats.

Question 16

Rule 506 exemption?

Answer 16

1. unlimited amount of securities
2. No limitation on number of accredited
   investors.
3. No more than 35 non-accredited BUT
   SOPHISTICATED investors
4. If only accredited investors, no disclosure is
   required. If ANY non-accredited, ALL investors
   must be given at least annual report containing
   audited fin stats.

Question 17

What is an accredited investor?

Answer 17

1. institutional investor, bank, or person with at
   least $1 million in net worth or $200 annual
   income

Question 18

What are the elements of Section 11 of 1933 act?

Answer 18

ANYONE who signs a registration statement liable for all damages caused by any misstatement of material fact. Person wishing to sue need ONLY show:
1. plaintiff acquired stock
2. plaintiff suffered a loss
3. registration statement contained material
misstatement

Question 19

What is the statute of limitations of Section 11?

Answer 19

Cause of action must be brought within one year after discovery and three years from offering date.

Question 20

What is the defense for Section 11?

Answer 20

1. Due diligence (followed GAAS) is main

Also, defendant proving that misstatement did not cause the damages

or misstatement not material, or plaintiff knew of untruth or omission at the time of purchase.

Question 21

What is Section 12?

Answer 21

imposes civil liability if:
1. required registration was not made.
2. if prospectus was not given to all investors
3. if materially false statements were made or
omitted in connection with sales or offers to sell

The immediate purchaser may sue for damages. Need not prove scienter or reliance

Question 22

What is Section 17?

Answer 22

Imposes criminal penalties against anyone who uses any type of fraud in connection with issuance of a security.

Enforced by SEC / prosecuted by Justice Dept.

Question 23

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

Answer 23

1. Companies whose shares are traded on a
   national exchange
2. Companies that have at least 500 shareholders
   in any outstanding class and more than
   $10 million in assets

National stock exchanges, brokers and dealers must also register

Question 24

What information is required in the registration statement for the 1934 act?

Answer 24

1. company’s financial statement
2. nature of it’s businesses and outstanding
   securities
3. names and compensation of directors, officers,
   underwriters, and 10% or more shareholders
4. outstanding options
5. material contracts

Must also include audited financial statements

Question 25

What type of securities are exempted under 1934 act?

Answer 25

Securities of:

1. investment companies
2. savings and loans
3. charitable organizations

Question 26

What are the two categories of companies required to report under the 1934 act?

Answer 26

1. Those required to register under 1934 act
2. Any issuer that must register under the 1933
   act must report

Question 27

What are the periodic business reports that companies must file that are registered under 1933 act or 1934 act?

Answer 27

1. Form 10-K
2. Form 10Q
3. Form 8K

Question 28

What is deadline for 10K?

Answer 28

1. 60 days for large accelerated filers ($700 million
   or more in public float
2. 75 days for accelerated filers ($$75 million to
   $700 mill)
3. 90 days for non-accelerated filers (less than $75
   million)

Question 29

What is deadline for 10Q?

Answer 29

Must be filed within the following days after the last day of the first three quarters

1. 40 days for large accelerated filers ($700 million
   or more in public float
2. 40 days for accelerated filers ($$75 million to
   $700 mill)
3. 45 days for non-accelerated filers (less than $75
   million)

Question 30

What is deadline for 8K?

Answer 30

1. Within 4 calendar days of an event

Question 31

What information does the 10K contain?

Answer 31

information about the entity’s:

1. business activities
2. securities
3. stock prices
4. market for common equity
5. related party transactions
6. executive compensation
7. disagreement with accountants and disclosures
8. audited financial statements

Question 32

What information does the 10Q contain?

Answer 32

reviews of interim financial information by independent CPA’s

Question 33

What information does the 8K contain?

Answer 33

major change in company, such as:

1. change in control
2. disposition of major assets
3. change in officers or directors
4. resignation of directors
5. change in certifying accountant

Question 34

What is contained in the MD&A?

Answer 34

1. results of operations
2. effects of inflation and changing prices
3. significant events or uncertainties
4. liquidity
5. capital resources

Forward looking info encouraged but not required

Does not include management responsibility for fin stats

Need not include market competitivess

Question 35

What must 5% or more owners report under 1934 act?

5% TIP
5%

Answer 35

Must file with SEC, the issuer, and exchange where it is traded within 10 days. Must include info:

1. source of funds
2. amount of stock
3. price per share
4. future plans for company

Question 36

What is the requirement for a tender offer under 1934 act?

5% TIP
T

Answer 36

More than 5% must file with SEC, the issuer, and exchange within 10 days post acquisition tender offer.
1. issuer offering to repurchase its registered
securities
2. target of a hostile tender offer

Question 37

What is the requirement for insiders under 1934 act? (Section 16)

5% TIP
(I)

Answer 37

(Insiders are directors, officers, and those with more than 10% of stock in corp on national stock exchange or registered with SEC)

Form 3 - initial filing
Form 4 - changes
Form 5 - annual statement

1. ownership statement within 10 days
2. statement by end of second business day
   following the day on which the insider engaged
   in a transaction
3. annual statement within 45 days after company’s
   year end.

Question 38

What is the requirement for proxy solicitation under 1934 act? (Section 14(a)

5% TIP
(P)

Answer 38

Ten days prior to mailing a proxy statement to shareholders, issuing company must file a copy with the SEC.

Proxy is a POA given by shareholder to third party to vote their shares.

Question 39

What are short swing profits?

Answer 39

Insiders purchase and sale of the issuer’s stock within a six month period. Profits must be returned to corporation.

Question 40

What are the general elements of Antifraud provisions - Rule 10(b)-5?

Answer 40

Plaintiff (she) must prove:

1. she bought or sold securities
2. she suffered a loss
3. material missrepresention/omission of fact
4. scienter
5. reliance
6. interstate commerce

Question 41

What are the differences between an action under Section 11 of 1933 act and under rule 10b-5?

Answer 41

1. Section 11 requires no proof of scienter, reliance
   or negligence. Plaintiff need only show she
   bought or sold stock, suffered a loss, and a
   material missrepresention/omission of fact in
   registration statement.
   (bought/sold, lost, misstatement)
2. Rule 10b-5 requires proof of scienter and reliance
   in addition to show she bought or sold stock,
   suffered a loss, and a
   material missrepresention/omission of fact in
   registration statement.
   (bought/sold, lost, misstatement)

Section 11 came first (1933), so they added more to 10b-5 (1934).