Federal Securities Flashcards
Which of the following is least likely to be considered a security under the Securities Act of 1933?
- Stock options.
- Warrants.
- General partnership interests.
- Limited-partnership interests.
General partnership interests.
When a person invests in an enterprise that is primarily managed by another, the investment will probably qualify as a security. In a general partnership, the partners themselves are in charge of management. Investments in such a venture are likely made only by the partner/managers themselves, and are unlikely to be classified as securities.
Which of the following transactions is subject to registration requirements of the Securities Act of 1933?
- The public sale of stock of a trucking company regulated by the Interstate Commerce Commission.
- A public sale of municipal bonds issued by a city government.
- The issuance of stock by a publicly traded corporation to its existing shareholders because of a stock split.
- The public sale by a corporation of its negotiable ten-year notes.
The public sale by a corporation of its negotiable ten-year notes. The 1933 Act applies to sales of securities, including stocks, bonds and notes that are issued for periods over nine months.
Which of the following is a “security” for federal securities law purposes?
- Shares of corporate stock.
- Limited-partnership interests.
- Fractional undivided interests in oil.
- All of the above.
All of the above.
A tombstone advertisement
- May be substituted for the prospectus under certain circumstances.
- May contain an offer to sell securities.
- Notifies prospective investors that a previously offered security has been withdrawn from the market and is therefore effectively “dead.”
- Makes known the availability of a prospectus.
Makes known the availability of a prospectus.
During the waiting period of 20 days immediately after registering with the SEC, tombstone ads may be placed. Tombstone ads are heavily restricted and may contain only limited information, such as the type of security and where a potential investor would acquire a now-available prospectus.
A preliminary prospectus, permitted under SEC regulations, is known as the
- Unaudited prospectus.
- Qualified prospectus.
- “Blue-sky” prospectus.
- “Red herring” prospectus.
“Red herring” prospectus.
After a prospectus and registration statement have been filed with the SEC, there is a 20-day waiting period before stocks may be issued. During this time, a preliminary, or “red herring,” prospectus may be issued to investors.
Which of the following statements concerning the prospectus required by the Securities Act of 1933 is correct?
- The prospectus is a part of the registration statement.
- The prospectus should enable the SEC to pass on the merits of the securities.
- The prospectus must be filed after an offer to sell.
- The prospectus is prohibited from being distributed to the public until the SEC approves the accuracy of the facts embodied therein.
The prospectus is a part of the registration statement.
Under the 1933 Act, information about the issuance of stocks must be made publicly available. All non-exempt securities must file a registration statement with the SEC, of which a prospectus is a part. The prospectus describes the issuing corporation, risks, and type of security being sold.
Which of the following disclosures must be contained in a non-WKSI issuer’s securities-registration statement filed under the Securities Act of 1933?
- A list of all existing stockholders.
- The principal purposes for which the offering proceeds will be used.
- A copy of the corporation’s latest proxy solicitation statement.
- The names of all prospective accredited investors.
The principal purposes for which the offering proceeds will be used. The registration statement required for all non-exempt securities must contain the following: a description of the security, how the corporation will use the proceeds from the sale, a description of the registrant’s business and management, and a financial statement. These disclosures are meant to assist investors in evaluating risk.
Non-WKSI issuer World Corp. wanted to make a public offering of its common stock. On May 10, World prepares and files a registration statement with the SEC.
On May 20, World places a “tombstone ad,” announcing that it was making a public offering. On May 25, World issues a preliminary prospectus and the registration statement became effective on May 30.
On what date may World first sell the shares?
- May 10.
- May 20.
- May 25.
- May 30.
May 30.
As soon as a registration statement is filed, ORAL offers may be made, as well as limited written advertising. The 20-day waiting period that exists applies to when the securities may actually be SOLD.
Unless the SEC speeds up the approval process, no sale can take place for 20 days after the filing. The AICPA’s answer assumes that the waiting period is 20 calendar days, when it is actually 20 business days, but this is still the best answer of the four.
Non-WKSI issuer World Corp. wants to make a public offering of its common stock. On May 10, World prepares and files a registration statement with the SEC.
On May 20, World places a “tombstone ad,” announcing that it was making a public offering.
On May 25, World issues a preliminary prospectus and the registration statement becomes effective on May 30.
On what date may World first make oral offers to sell the shares?
- May 10.
- May 20.
- May 25.
- May 30.
May 10. As soon as a registration statement is filed, ORAL offers may be made, as well as limited written advertising. The 20-day waiting period that exists applies to when the securities may actually be SOLD. Unless the SEC speeds up the approval process, no sale can take place for 20 days after the filing.
When a common stock offering requires registration under the Securities Act of 1933,
- The registration statement is automatically effective when filed with the SEC.
- The issuer would be acting unlawfully if it were to sell the common stock without providing the investor with a prospectus
- The SEC will determine the investment value of the common stock before approving the offering.
- The issuer may make sales ten days after filing the registration statement.
.
The issuer would be acting unlawfully if it were to sell the common stock without providing the investor with a prospectus.
If a security is non-exempt and must register, then all investors must be given a prospectus. This is true even if the investor is accredited. If anyone is entitled to a prospectus, then everyone is entitled to a prospectus.
Under the Securities Act of 1933, which of the following statements is (are) correct regarding the purpose of registration?
- I. The purpose of registration is to allow the detection of management fraud and prevent a public offering of securities when management fraud is suspected.
- II. The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities.
II ONLY. II is the best answer, because the primary purpose of registration is to enable investors to make an informed decision as to whether to invest in a public offering.
Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:
- Rule 504 of Regulation D
- Rule 505 of Regulation D
- Rule 506 of Regulation D
- Regulation A
- Rule 147 Intrastate Offering
- Rule 504 can be used mostly by small companies, not by 1934 Act reporting companies or investment companies.
- Limitation on amount – Rule 504 can be used to raise only $1 million in any 12-month period.
- Manner of offering – General solicitation and advertising are not allowed unless either (a) the securities are registered under a state law requiring public filing and delivery of a substantive disclosure document to investors before sale, or (b) the securities are issued under a state law exemption that permits general solicitation, as long as sales are made only to accredited investors.
- Purchaser requirements – There are no such requirements; Rule 504 securities may be sold to anyone.
- Information requirements – There are none.
- Filing requirements – The issuer need only file a Form D with the SEC within 15 days of the first sale of securities under the exemption. Even failure to comply with this requirement will not disqualify the offering from the exemption, but the SEC may prevent the issuer from using Reg D again in the future.
- Resale restrictions – Resale is restricted unless the conditions mentioned for the manner of offering are met.
Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:
- Rule 504 of Regulation D
- Rule 505 of Regulation D
- Rule 506 of Regulation D
- Regulation A
- Rule 147 Intrastate Offering
- Can’t be used by investment companies or companies that have recently been in trouble with the SEC (“bad boys”).
- Can be used to raise only $5 million in any 12-month period.
- Manner of offering – Cannot use general solicitation or advertising, unless sell only to AIs.
- Purchaser requirements – Can sell to an unlimited amount of accredited investors but no more than 35 unaccredited investors.
- Information requirements – Same as Rule 506.
- Filing requirements – Form D within 15 days.
- To prevent easy circumvention of the rule’s restrictions, the shares’ resale is restricted for a year and the issuer must take steps to ensure that buyers know that they are restricted, such as by printing a legend on the securities.
Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:
- Rule 504 of Regulation D
- Rule 505 of Regulation D
- Rule 506 of Regulation D
- Regulation A
- Rule 147 Intrastate Offering
- Nature of issuer – Cannot be used by companies that have recently been in trouble with the SEC (“bad boys”).
- Limit on amount – None.
- Manner of offering – Cannot use general advertising or solicitation, unless sell only to AIs.
- Purchaser requirements – Can sell to an unlimited number of accredited investors but no more than 35 unaccredited investors. Furthermore, all of the unaccredited investors must either be “sophisticated” in their own right or act through “purchaser representatives” who have the skill to evaluate the investments for them.
- Information requirements – No particular information must be disclosed if sales are exclusively to accredited investors, but if some sales are made to unaccredited investors, there are certain minimal disclosure requirements. The more funds are raised, the higher the disclosure requirements.
- Filing requirements – Form D within 15 days.
- Resale restrictions – To prevent easy circumvention of the rule’s restrictions, the shares’ resale is restricted for a year and the issuer must take steps to ensure that buyers know that they are restricted, such as by printing a legend on the securities.
Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:
- Rule 504 of Regulation D
- Rule 505 of Regulation D
- Rule 506 of Regulation D
- Regulation A
- Rule 147 Intrastate Offering
- Nature of issuer – Cannot be used by companies that have recently been in trouble with the SEC (“bad boys.”).
- Limit on amount – Can raise $50 million in any 12-month period, pursuant to the JOBS Act of 2012.
- Manner of offering – Unique “testing the waters” provision allows offeror to make some preliminary offers to determine whether there is sufficient interest in the securities and to cancel the deal completely without violation if there is not.
- Offeree and purchaser requirements – None.
- Information requirements – Simplified disclosure includes current balance sheet and 2 years unaudited financial statements.
- Filing requirements – Must file simplified Form 1-A, any sales materials used, and Form 2-A report to the SEC of sales and use of proceeds.
- Resale restrictions – None.
Characteristics of Key Transactions Exempt from Filing Registration Statement with the SEC:
- Rule 504 of Regulation D
- Rule 505 of Regulation D
- Rule 506 of Regulation D
- Regulation A
- Rule 147 Intrastate Offering
- Nature of issuer – Issuer must be organized and doing business in the state in which it plans to do the offering. To be safe, should meet “80%” test, including having at least 80% of its assets in-state, making 80% of its revenue in-state, and using 80% of the proceeds of the offering in-state.
- Limit on amount – No limit.
- Manner of offering – No limitation, except that the offering must stay intrastate.
- Offeree and purchaser requirements – All offerees and purchasers must be in-state residents; offer to even one out-of-state resident can disqualify the exemption.
- Information requirements – None.
- Filing requirements – None.
- Resale restrictions – For 9 months can resell only to other residents of the state.
Blue Sky Laws
Much of state securities regulation has been preempted by federal law…however:
- States can enforce anti-fraud rules
- States can require a “notice” filing
- States can no longer engage in “merit regulation.”
- States can no longer register “covered securities”
Pix, Corp. is making a $6mn stock offering. Pix wants the offering exempt from registration under the Securities Act of 1933.
With which of the following requirements would Pix have to comply when selling the securities?
- No more than 35 investors.
- No more than 35 non-accredited investors.
- Accredited investors only.
- Non-accredited investors only.
No more than 35 non-accredited investors.
To be exempt from registration, Pix will have to comply with Rule 506. This Rule allows the exemption, because most investors will be accredited. Accredited investors, such as banks, are sophisticated and need less protection from the SEC. So long as there are no more than 35 non-accredited investors, an issue may qualify for an exemption from registration under Rule 506.
Data, Inc., intends to make a $375,000 common-stock offering under Rule 504 of Regulation D of the Securities Act of 1933. Data
- May sell the stock to an unlimited number of investors.
- May make the offering through a general advertising.
- Must offer the stock for a period longer than 12 months.
- Must provide all investors with a prospectus.
May sell the stock to an unlimited number of investors.
Rule 504 of Regulation D applies to small issues. If a company will issue $1mn or less in a one-year period, it qualifies for this exemption.
So long as Data is not an investment company, there are no further restrictions on offerings this small, except that they cannot be offered through general advertising, unless certain requirements are met. Data may make the offering to any number of any kind of investors.
Winslow, Inc. intends to make a $450,000 common-stock offering under Rule 504 of Regulation D of the Securities Act of 1933. Winslow
- Must make the offering through a general advertising.
- Must provide all investors with a prospectus.
- May sell the stock to an unlimited number of investors.
- Must offer the stock for a period of 24 months.
May sell the stock to an unlimited number of investors.
Rule 504 does not set a limit on the overall number of investors. So long as a company’s total offerings for a year are under $1mn, and the company is not an investment company, Rule 504 may be used.
If securities are exempt from the registration provisions of the Securities Act of 1933, any fraud committed in the course of selling such securities can be challenged by
- SEC
- The person defrauded
BOTH…The SEC has broad powers if there is a violation of the Act. They may seek subpoenas, injunctions, and even criminal penalties. The person defrauded may also bring a claim under Section 11 of the Act.
Hamilton Corp. is making a $4.5mn securities offering under Rule 505 of Regulation D of the Securities Act of 1933.
Under this regulation, Hamilton is
- Required to provide full financial information to accredited investors only.
- Allowed to make the offering through a general solicitation.
- Limited to selling to no more than 35 non-accredited investors.
- Allowed to sell to an unlimited number of investors, both accredited and non-accredited.
Limited to selling to no more than 35 non-accredited investors.
To qualify for this exemption, no more than 35 non-accredited investors may be involved.
There is no limit on the number of accredited investors who may be involved.
Which of the following securities is exempt from the registration requirements of the Securities Act of 1933?
- Common stock with no par value.
- Warrants to purchase preferred stock.
- Bonds issued by a charitable foundation.
- Convertible debentures issued by a corporation.
Bonds issued by a charitable foundation.
Any security issued by a charity, railroad company, farmers’ co-operative, or bank is exempt from registering under the 1933 Act.
Imperial Corp. is offering $450,000 of its securities under Rule 504 of Regulation D of the Securities Act of 1933.
Under Rule 504, Imperial is required to
- Provide full financial information to all non-accredited purchasers.
- Make the offering through general solicitation.
- Register the offering under the provisions of the Securities Exchange Act of 1934.
- Notify the SEC within 15 days after the first sale of the securities.
Notify the SEC within 15 days after the first sale of the securities.
Rule 504 is a very broad exemption. There is no limit placed on the total number of any class of investors, and there is no requirement that anyone receive financial information.
The restrictions are that the offering cannot be made through general advertising and must not put the issuer over $1mn in offerings in the past year. Also, the SEC must be notified within 15 days of the first sale to qualify for this exemption.
Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933?
- The securities are non-voting preferred stock.
- The issuing corporation was closely held prior to the offering.
- The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.
- The securities are AAA-rated debentures that are collateralized by first mortgages on property that has a market value of 200% of the offering price.
The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.
So that investors may sell their shares on the secondary market without having to register (unless the shares are restricted-resale shares or the investors are affiliated shareholders), Section 4(1) of the 1933 Act exempts from registration all “transactions by any person other than an issuer, underwriter, or dealer.”
Under the JOBS Act, a foreign company cannot
- Be an EGC.
- Use the crowdfunding exemption.
- A and B
- None of the above
Use the crowdfunding exemption. Foreign firms cannot use the crowdfunding exemption.
A qualifying firm that declares itself to be an EGC enjoys the following benefits during its IPO:
- Confidential review of its registration statement by the SEC.
- Reduced requirement for audited financial statements.
- A and B.
- None of the above
Both A and B are true. While most benefits accruing to EGCs have to do with reduced regulatory burdens in the five years after going public, these two benefits accrue during the IPO process. Another benefit is more publicity, such as analyst research published by an investment bank that is part of the underwriting syndicate.
A qualifying firm that declares itself to be an EGC enjoys all the following benefits for up to five years after its IPO, except:
- Need not comply with SOX 404(b) requirement of audit for internal controls.
- Need not comply with new PCAOB rules.
- Reduced disclosure regarding executive compensation.
- Immunity from fraud liability.
Immunity from fraud liability.
Obviously even EGCs are not going to be allowed to commit fraud with impunity.
The maximum amount that a firm can raise through crowdfunding in a single year is:
- $1 million.
- $5 million.
- $10 million.
- Unlimited, so long as they sell only to accredited investors.
$1 million is the ceiling for the crowdfunding exemption.
Sam is a multimillionaire. He invested $100,000 in Company A’s crowdfunded venture. Later that year, he wanted to invest in Company B’s crowdfunded venture. What is the largest amount Sam can invest in B’s offering?
- $0
- $10,000
- $100,000
- $1,000
$0
$100,000 is the most someone can invest in crowdfunded ventures during the course of a single year.
The JOBS Act allows general solicitation in a Reg D Rule 506 offering if the issuer takes “reasonable steps” to insure what?
- That it files a registration statement with the SEC within 15 days of its first sale.
- That it raises no more than $50 million in a single year.
- That it sells only to accredited investors.
- All of the above.
That it sells only to accredited investors.
General solicitation will be allowed under Rule 506 (and 505) Reg D offerings only if the issuer takes reasonable steps to insure that it sells only to accredited investors. If it does not engage in general solicitation, the issuer can sell to up to 35 unaccredited investors under Reg. D.
Jay Associates, CPAs, gives an unqualified opinion on Nast Power Co.’s financial statements. Larkin bought Nast bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC includes Nast’s financial statements.
Larkin sues Jay for misstatements contained in the financial statements under the provisions of Section 11 of the Securities Act of 1933.
To prevail, Larkin must prove?
- Scienter
- Reliance
NEITHER…The 1933 Act makes a plaintiff’s job relatively easy. Plaintiffs need not establish either reliance or negligence to win a Section 11 case. The burden in both of these issues is on the defendants to prove that the plaintiff did not rely and that they acted with due diligence. Indeed, an issuing company cannot escape liability, even by showing due diligence - it is strictly liable for material misstatements in the registration statement that caused the plaintiff’s losses.
Under Section 11, P must prove:
- False statement or ommission occurred
- Materiality
- Tracing
- Damages
Quincy buys Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, give an unqualified opinion on Teal’s financial statements, which were included in the registration statement filed with the SEC.
Quincy sued Worth under the provisions of the 1933 Act that deals with omission of facts required to be in the registration statement.
Quincy must prove that
- There was fraudulent activity by Worth.
- There was a material misstatement in the financial statements.
- Quincy relied on Worth’s opinion.
- Quincy was in privity with Worth.
There was a material misstatement in the financial statements.
The 1933 Act requires only a showing of material misstatement. If the CPAs made a significant misstatement, they may be held liable.
In which of the following types of action, brought against a CPA who issues an audit report containing an unqualified opinion on materially misstated financial statements, may a plaintiff prevail without proving reliance on the audit report?
- An action for common-law fraud.
- An action for common-law breach of contract.
- An action brought under Section 11 of the Securities Act of 1933.
- An action brought under Rule 10b-5 of the Securities Exchange Act of 1934.
An action brought under Section 11 of the Securities Act of 1933.
With minor exceptions, a plaintiff in a Section 11 suit need not provide reliance in order to prevail.
Holly Corp. engage Yost & Co., CPAs, to audit the financial statements to be included in a registration statement Holly is required to file under the provisions of the Securities Act of 1933. Yost failed to exercise due diligence and did not discover the omission of a fact material to the statements.
A purchaser of Holly’s securities may recover from Yost under Section 11 of the Securities Act of 1933 only if the purchaser
- Brings a civil action within one year of the discovery of the omission and within three years of the offering date.
- Proves that the registration statement was relied on to make the purchase.
- Proves that Yost was negligent.
- Establishes privity of contract with Yost.
Brings a civil action within one year of the discovery of the omission and within three years of the offering date.
These are the relevant time limits. A plaintiff may not bring a claim forever, but must act within these time restraints.