Federal Securities Acts

Question 2

What entities are exempt from filing registration statements under the 1933 Securities Act?

Answer 2

BRINGS
Banks
Railroads securities
Insurance policies (not insurance companies)
Not for profit organizations - charities
Short term Commercial Paper
Governments

Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can’t occur within 9 months to interstate parties.

Question 3

What are the key points of the 1933 Securities Act?

Answer 3

Governs Initial Public Offerings (not subsequent sales). Covers registration statements and accompanying information filed with SEC

Information must include audited financial statements & a prospectus

Note: Even if a company is exempt from registering under the 1934 Act; they still must adhere to the anti-fraud provisions of the Act

Question 4

What entities are exempt from filing registration statements under the 1933 Securities Act?

Answer 4

Banks; Commercial Paper; Farmers; Co-ops; Charities; Governments

Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can’t occur within 9 months to interstate parties.

Question 5

Under the 1933 Securities Act; Regulation D; what are Rules 504; 505 and 506?

Answer 5

Rule 504- Max Amount per year: $1M; Max Investors: Unlimited

Rule 505 - Max Amount per year: $5M; Max Investors: 35 Unaccredited or Unlimited Accredited

Rule 506 - Max Amount per year: Unlimited; Same as 505; but Unaccredited investors must be “sophisticated”

Question 6

What are the registration form options under the 1933 Securities Act?

Answer 6

S-1 – Long Form or

S-2 and S-3 – Less Detailed and preferred by issuers

Question 7

Name the securities registered under the Securities Act of 1933.

Answer 7

Stocks
Stock Options
Stock Warrants
Limited Partnership Interests - General Partnerships not allowed
Bonds

Question 8

Who can sue under the Securities Act of 1933?

Answer 8

Purchasers of securities only

Question 9

Name the Requirements for Accountant to be liable under the Securities Act of 1933.

Answer 9

o Damages & Material Misstatements Only

o Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered

o Proving negligence is not a requirement

Question 10

Name the Defenses of an Accountant under the Securities Act of 1933.

Answer 10

o Accountant used Due Diligence

o Accountant followed GAAP

o Damages weren’t caused by accountant’s work

o Plaintiff knew of the material misstatements

Question 11

What does the Securities Act of 1934 govern?

Answer 11

The trading/selling of securities after the IPO

Question 12

What reports must be filed under the Securities Act of 1934?

Answer 12

o Form 10-K Annual Report - Must be audited

o Form 10-Q Quarterly Report - Must be reviewed; but not audited

o Form 8-K - A notice of a material event; Must be filed within 4 days of event

Question 13

Who can sue under the Securities Act of 1934?

Answer 13

Purchases and Sellers of Securities

Question 14

Name the Requirements for an Accountant to be liable for fraud under the Securities Act of 1934.

Answer 14

Damages

Material Misstatements

Reliance on financial statements

Scienter or reckless disregard for the truth

Question 15

What procedures must an Accountant have in place under the Securities Act of 1934?

Answer 15

Accountant must have procedures in place to:

o Determine if Going Concern is an issue

o Determine if any material related party transactions occurred

o Determine if material illegal acts occurred

Question 16

Insider trading rules under the Securities Act of 1934 apply to which individuals?

Answer 16

Officers; Directors and 10% Owners

Question 17

What are the Proxy Solicitation Requirements under the Securities Act of 1934?

Answer 17

o Proxy must give shareholders audited balance sheets from 2 most recent years

o Requirement holds true even if one class of stock

Question 18

What’s the accountant’s best defense for fraud?

Answer 18

Lack of Scienter / good faith.

Question 19

What the Plaintiff must prove for CPA who signs off on FS in a registration statement be held liable under Section 11 of the 1933 Act?

Answer 19

LAM
Loss was suffered
Acquired stock
Material misrepresentation or material omission of fact

Question 20

What the Plaintiff must prove for CPA to be held liable for material misstatement or omissions under Section 10b-5 of the 1934 Act?

Answer 20

LAM +
Scienter
Reliance

Question 21

What type of activity is allowed during the 20 day waiting period after the registration but before effectiveness?

Answer 21

Oral offers to sell
Tombstone ads can be made
preliminary (red herring) prospectus can be made
Summary prospectuses are allowed

Question 22

What are tombstone ads

Answer 22

Ad identifying the security, its price, and who will execute orders.

Question 23

What are the differences between Regulation D rules 504,505, and 506

Answer 23

The only differentiate in the limitation of dollar and unaccredited buyers.

504 - $1 mil - no limit on unaccredited buyers
505 - $5 mil - up to 35 unaccredited buyers
506 - no $ limit - up to 35 unaccredited buyer who must be sophisticated

Question 24

What does the Regulation A entails?

Answer 24

Regulation A is a partial exemption, permitting a simplified form of registration that costs less to prepare than a full one.
Instead Registration Statement, the issuer files an Offering Statement
Regulation A sales may not be more than $5 mil in a 12-month period

Question 25

What is the Regulation D and what does it entails?

Answer 25

Regulation D has 3 private offerings, rule 504, 505, and 506.
GR -
No advertising
Immediate Resale to Public is prohibited - must be held 2 years or more
SEC must be informed within 15 days

Question 26

What are the special rules for some 1934 Act reporting companies?

Answer 26

These special rules a applied to seasonal issuers and well-known seasoned issuers, also called WKSIs ( large private companies now going public).
A WKSI may make oral or written offers, at any time. It also has a special form of shelf registration that is effective immediately. May also issue a “free writing” prospectus.

Question 27

What are seasonal issuers?

Answer 27

Seasonal Issuers - have continuously reporting under 1934 for at least 12 months, and have not failed to pay a dividend or required payment on preferred stock, and have not defaulted on material debt or a long-term rent obligation in the current year.

Question 28

What are well known seasonal issuers?

Answer 28

At least $700 million in equity outstanding worldwide.