Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

legal issues > Chapter 16 > Flashcards

Chapter 16 Flashcards

1
Q

Securities transactions have what type of settings?

A

1) original and re-issuance by a business to raise capital (primary market)
2) the purchase and sale of securities between investors (secondary market)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What governs the securities market?

A

federal and state securities laws

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Issuing a security to the public market for the first time is known as…

A

Initial Public Offering

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Why do investors sell securities in the secondary market?

A

investors sell securities to other investors in the hopes of making a profit or preventing a loss. business do not use the secondary market to raise capital
*it is a way to provide cash flow so investors can continue their investments in the primary market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What type of investments are regulated by securities laws?

A
  • stocks and bonds *agreements to invest
  • partnership interests *participation in a pool of assets
  • stock options *certain types of promissory notes
  • warrants
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the two ways a federal securities statute defines a security?

A

1) by recognizing specific forms of securities such as notes, stocks, treasury stocks, transferable shares, bonds, and debentures
2) by a generic, catchall definition including profit sharing agreements, collateral trust certificates, preorganization certificates or subscriptions, investment contracts, and a fractional undivided interest in gas, oil, or other mineral rights.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the general definition of a security?

A

any investment where a person gives something with an expectation of profit through the efforts of a third party

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What constitutes a security offering (Howey Test)?

A

1) cash or non-cash investment in exchange for the hope of a return
2) investments that have a horizontal commonality (multiple investors with a common expectation of profit) or a vertical commonality (single investor with the hope of a profit from the promoter of the investment)
3) expectation of a return on the investment
4) the efforts of the promoter must be the primary source of revenue that results in a profit. investor is not really involved

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What constitutes a security offering (Howey Test)?

A

1) cash or non-cash investment in exchange for the hope of a return
2) investments that have a horizontal commonality (multiple investors with a common expectation of profit) or a vertical commonality (single investor with the hope of a profit from the promoter of the investment)
3) expectation of a return on the investment
4) the efforts of the promoter must be the primary source of revenue that results in a profit. investor is not really involved

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the two general types of securities?

A

equity and debt

*some securities have restriction on the right to sell the security

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is an equity instrument?

A

an investor’s ownership interests where the return is based on the ventures performance without the promise of a return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the two prevalent forms of securities?

A

common stock and preferred stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is common stock (most common) ?

A

the investor is entitled to payments (dividends) based on the company’s profitability
*the BOD decides whether or not to pay dividends and the amount of payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Under what circumstance is a common stockholder given the right to payment?

A

if the company is sold for a profit or dissolved

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Do common stockholders have the right to vote?

A

depends on if they have voting or nonvoting stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Why do common stockholders have the greatest amount of risk?

A

they are subordinate to creditors and preferred stockholders.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What type of equity is less risky than common stock?

A

preferred stock because they have preference rights over common stockholders when 1) the company pays dividends and 2) the company fails or files for bankruptcy
*preferred stock may be voting or non-voting

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are examples of debt instruments?

A

promissory notes (most common), bond, debentures

  • debt instruments are senior in priority to common and preferred stock
  • investors are primarily interested in a fixed rate of return regardless of profitability and expect repayment of debt
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is a promissory note?

A

a promise to pay back a certain sum of money plus accrued interest over a period of time. the lender is paid monthly with principal and interest payments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are bonds?

A
  • debt instruments that secured with collateral
  • used to raise capital by splitting up long-term debt
  • investors expect fixed interest payments at regular intervals
  • the face amount of the bond is not due until maturity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is a debenture?

A

unsecured debt backed by the corporations general credit history

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the rationale behind secuities regulations?

A

to protect investors and assure public confidence in the integrity of the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the underlying premise of all securities regulations?

A

disclosure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Are securities law primarily a federal or state matter?

A

federal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is the Securities and Exchange Commission?

A

the federal administrative agency charged with rulemaking, enforcement, and adjudication of federal securities laws?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

How is the SEC different from other administrative agencies?

A
  • its an independent agency that does not have a seat in the President’s cabinet
  • the agency is not subject to direct control by the President
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Who composes the SEC?

A

five commissions appointed by the President and subject to the advice and consent approval by the Senate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What may cause the removal of a commissioner?

A

misconduct

*the SEC has wide-ranging executive, legislative, and judicial powers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

The SEC has what type of executive powers?

A
  • the power to investigate potential violations of securities laws and regulations
  • the power to issue a cease and desist order
  • the power to initiate criminal charges against and individual or company
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What type of legislative powers is given to the SEC?

A
  • Congress grants the SEC power to draft and publish securities regulations and interpretations of statutes, rules, and court decisions.
  • ability to issue interpretive letters and no-action letters to advise the community on how to proceed (not binding, but carry significant weight with courts)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

The SEC’s judicial powers include…

A
  • its role as a hearing tribunal for enforcing certain securities violations including alleged indiscretions of brokers in their business dealings
  • it has the power to suspend or revoke professional licenses of brokers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What is the highest profile division of the SEC?

A

The Enforcement and Corporation Finance because of its responsibility to investigate and enforce action against violators

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What is EDGAR?

A

a public database that acts as a clearinghouse for corporations to submit filing requirements and disclosures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What are the mandates of the Securities Act of 1933?

A

1) a registration filing for any venture selling securities to the public
2) certain disclosures concerning the issuer’s governance and financial condition
3) SEC oversight over the registration and issuance of securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What are the preregistration documents required for a company to sell securities?

A

1) letter of intent-indicates management and board of approval to issue shares
2) comfort letters-corporate counsel verifying adherence to corporate formalities, compliance, and opinion on the financial records
3) underwriting agreement-amt of securities offered, compensation for underwriters, representations and warranties of the issue and underwriters

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What are the four phases of registration?

A

1) preregistration documents
2) issuer beings prefiling period while the registration statement is being prepared
3) SEC review of the statement
4) after the registration statement expires

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What are the two parts of the registration statement?

A

1) prospectus-gives realist view of the issuer’s business, risk factors, financial position, financial statements, and disclosures
2) supplemental information supporting the prospectus

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Can securities be marketed or sold during the SEC’s review of the registration documents?

A

nope

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

How many days does the SEC have to review the registration document?

A

10

40
Q

During the 10 day registration review period, what can the SEC do to prevent the registration from taking effect?

A

the SEC can issue a refusal order within the 10 day review period

41
Q

Can the SEC stop the registration from taking effect after the 10 registration review period?

A

yes, by issuing a stop order

42
Q

At what point is it too late for the SEC to stop the registration?

A

if the SEC does not respond 20 days after the filing date, then the registration becomes effective

43
Q

Can the security be marketed or sold during the SEC review phase?

A

the security can be marketed under strict guidelines, but it cannot be sold

44
Q

When can securities be sold to the public?

A

once the registration becomes effective

45
Q

What happens during the post-registration time?

A

securities may be sold and marketed to investors, but investors must receive a prospectus
*marketing materials are still subject to SEC oversight

46
Q

What is the purpose of allowing companies to file for exemption from the securities registration process?

A

to assist business ventures seeking smaller amounts of capital from the public investment community
*most businesses offer their securities on an exempt basis

47
Q

What is the most common type of exemption?

A

nonpublic offerings to a limited number of sophisticated investors who know the issuer or who privately negotiate their securities purchases

48
Q

What is a safe harbor exemption?

A

offerings with specified dollar limitations and/or limitations on the number of investors

49
Q

What is a condition of estabilishing an exemption?

A

the seller must make available or provide an investor with a company prospectus and disclosures

50
Q

What are some examples of securities that are exempt from the registration requirements?

A

1) commerical paper with a maturity date of less than 9 months
2) securities of charitable organizations
3) annuities and other issues of insurance companies
4) government-issued securities (municipal bonds)
5) securities issued by banks and other institutions supervised by the government
6) under Regulation D, securities up to $5 million in any 12 month period

51
Q

Are both transactions and securities eligible for exemption?

A

yes, transaction exemptions fall under Regulation D

52
Q

What are Regulation D transactions?

A

limited offers of a relatively small amount of money or offers made in a limited manner

53
Q

What are some of the Regulation D exemptions (by rule number)?

A

1) Rule 504-exempts a noninvestment company offering up to $1 million in any 12 month period
2) Rule 504a-exempts offerings up to $500k in any 12 month period by certain companies
3) Rule 505-exempts a private investment company offering up to $5 million in any 12 month period
4) Rule 506-exempts a private noninvestment company offerings in unlimited amounts that are not generally advertised to the public

54
Q

Which Regulation D rule apply to private noninvestment companies?

A

rule 505 and 506

55
Q

What is the dollar limit amount for rule 504?

A

$1 million within 12 months

56
Q

Is there a dollar limit amount for rule 506?

A

nope

57
Q

What is the dollar limit amount for rule 504a?

A

$500k within 12 months

58
Q

What is a private placement?

A

the issuer only accepts investments from those who meet the standards for accredited investors (sufficient experience to understand the investment risk, ability to protect their own interests)

  • investors must meet personal net worth or income requirements in order to qualify
  • company disclosures are made through a private placement memorandum
59
Q

What are the most common private placement transactions?

A

1) offerings made up to $5 million to accredited investors within a 12 month period
2) purely local offerings, both issuer and investor must be within the same state, cannot sell to nonresident for 9 months

60
Q

How does the 33’ act penalizes violators?

A

1) recission of the investment by the investor
2) civil penalties and fines
3) incarceration for egregious cases

61
Q

If a company fails to comply with the 33’ act, what are its possible defenses?

A

1) ommission or misrepresentation was not material

2) the investor knew about the risk and proceeded anyway

62
Q

What is the purpose of the Securities Act of 1934?

A

it regulates the sale of securities between investors after an investor purchased it from a business entitly issuer.

63
Q

The 34’ act has authority over who?

A

brokers, dealers, securities associations, brokerage firms

64
Q

What is required by the 34’ act if an issuer wants to sell a security on a national exchange

A

registration with the SEC and disclosure of all pertinent details to the potential investor

65
Q

The 34; act requires disclosure of what type of information?

A

1) the financial performance
2) corporate governance procedures
3) any changes in risk since the last report

66
Q

What is covered in Section (10)b of the 34’ act?

A
  • the primary antifraud provision covering the trading of securities
  • against the law to engage in fraud, directly or indirectly, in connection with the purchase and sale of any security
  • known as insider trading
67
Q

Who is considered an “insider”?

A

executives, managers, corporate counsel, consultants, employees, brokers, accountants, vendors, partners, and majority shareholders

68
Q

What is the Insider Trading and Securities Fraud Enforcement Act?

A
  • it raised the criminal penalties for insider trading
  • increased the liability of brokerage firms for wrongful acts of their employees
  • gave the SEC more power to pursue violators
69
Q

What is the tipper-tippee liability?

A

an extension of rule 10(b)(5) that includes outside parties who leak and who learn of the insider information and trade stock based on that information

70
Q

Rule 10(b)(5) is violated if…

A

1) the information released by the tipper constitutes a breach of fiduciary duty to the company
2) the tipper receives a personal benefit for giving up the tip
3) the tippee knew that the information was wrongfully disclosed
4) the tippee benefited from the information

71
Q

What is Section 16 of the 34’ act?

A

it imposes restrictions and reporting requirements on ownership positions and stock trades made by certain corporate insiders
*provides transparency of all stock trades by insiders and prohibits insiders from earning short-wing profits

72
Q

According to Section 16, who is an insider?

A

an executive officer, a director, or a shareholder with ten percent or more ownership
*insiders are required to file reports with the SEC disclosing stock ownership and trading of their company stock

73
Q

Why would the SEC want a report disclosing ownership and trading activity?

A

to monitor unusual activity that could be a sign of trouble or stock manipulation

74
Q

What is the clawback provision of Section 16(b)?

A

it allows a corporation to recapture any profits earned by an insider on the purchase and sale of the company’s stock that occurred within a six month period (short-wing profits)

75
Q

What is the purpose of the clawback provision?

A

to deter insiders from profiting by manipulating the stock’s short-term performance
* a strict liability statue because the insider’s intent does not matter

76
Q

What is the Private Securities Litigation Reform Act of 1995 (PSLRA) ?

A
  • made it difficult to pursue litigation based solely on management’s comments about company performance
  • provide safe harbor from lawsuits as long as the principals acted in good faith and disclosed all relevant facts
  • must prove scienter
77
Q

What is scienter?

A

evidence of specific intent to deceive, manipulate, or defraud

78
Q

What is scienter?

A

evidence of specific intent to deceive, manipulate, or defraud

79
Q

What is the Securities Litigation Uniform Standards Act of 1998?

A

to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of “the Reform Act” (PSLRA)

80
Q

What is the purpose of blue-sky laws?

A

to protect investors from unsavory issuers selling nothing more than blue sky

  • intended to cover intrastate securities
  • additional safeguard for investors when the federal government declines jurisdiction
81
Q

Are blue-sky laws state or federal?

A

state

82
Q

What are some provisions of blue-sky laws?

A
  • fraud in the sale of securities
  • registration requirements for brokers and dealers
  • exemptions
  • civil liability for issuers failing to comply
  • remedies for defrauded investors
83
Q

What is corporate governance?

A
  • the procedure and system used by the officers and directors to establish lines of responsibility, approval, and oversight among the key stakeholders
  • set out rules for making corporate decisions
84
Q

What is the purpose of direct government regulation of corporate decision making?

A
  • to ensure public confidence in publicly traded markets

* to protect investors

85
Q

What is the Sarbanes-Oxley Act of 2002?

A
  • to impose stricter regulation and controls on how corporations do business through regulation of three broad areas: auditing, financial reporting, and internal corporate governance
  • provides for additional enforcement and increased penalties for violation of existing securities laws
86
Q

What is the Sarbanes-Oxley Act of 2002?

A
  • to impose stricter regulation and controls on how corporations do business through regulation of three broad areas: auditing, financial reporting, and internal corporate governance
  • provides for additional enforcement and increased penalties for violation of existing securities laws
87
Q

What is the Public Company Accounting Oversight Board (PCAOB) ?

A

a federal agency that replaced the accounting industry’s self-regulation

88
Q

What does the PCAOB do?

A
  • it implements, administers, and enforces the SOX act

* establishes regulations that standardize certain auditing procedures and ethical parameters

89
Q

Who is required to register with the PCAOB?

A

accounting firms that audit public companies must register with the PCAOB and they are subject to its oversight and enforcement authority

90
Q

How does the SOX act increase auditors independence?

A

1) setting mandatory rotation of auditing partners
2) banning accounting firms from providing its customers with non-auditing consulting services
3) restrict accounting employees from leaving the firm to work for the client

91
Q

How does SOX make corporate officers more accountable?

A
  • CEO and CFO must personally certify the accuracy of all SEC filings
  • they must ensure that the certification is based on reliable and accurate information through internal financial fraud-detection controls subject to review by outside auditors
92
Q

The SOX Act regulations set standardized_________ ________ ________ and restricts certain types of _________ ________ that are not ____________to auditors

A

financial reporting formats, accounting methods, transparent

93
Q

The SOX Act requires that public companies maintain audit committees compose of…

A

independent directors with at least one director with sufficient financial acumen to probe audit in depth

94
Q

What is the audit committee’s obligations?

A

1) authority to monitor, engage, and terminate the company’s outside auditing firm
2) implement a system of controls that involves a comprehensive examination of the audit reports and methods used by the company and outside auditors
3) establish a structure that facilitates communication directly between the audit committee and the auditors

95
Q

Does the SOX Act require companies to establish a code of ethics and conduct for its top financial officers?

A

Duh!

*officers and directors are also obligated to disclose their own buying and selling of stock within a certain time frame

96
Q

Under what conditions are executive performance bonuses required to be retroactively forfeited back to the company?

A

If the bonuses are tied back to false reports or issued without appropriate controls (clawback provision)

legal issues (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions