Government Regulation of Business - Federal Securities

Question 1

Which of the following transactions is subject to registration requirements of the Securities Act of 1933?
A. The public sale of stock of a trucking company regulated by the Interstate Commerce Commission.
B. A public sale of municipal bonds issued by a city government.
C. The issuance of stock by a publicly traded corporation to its existing shareholders because of a stock split.
D. The public sale by a corporation of its negotiable ten-year notes.

Answer 1

D - The 1933 Act applies to sales of securities, including stocks, bonds and notes that are issued for periods over nine months.

Question 2

Which of the following is least likely to be considered a security under the Securities Act of 1933?
	A.  	Stock options.
	B.  	Warrants.
	C.  	General partnership interests.
	D.  	Limited-partnership interests.

Answer 2

C - 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.

Question 3

Taso Limited Partnership intends to offer $400,000 of its limited partnership interests under Rule 504 of Regulation D of the Securities Act of 1933.

Which of the following statements is correct?
A. The exemption under Rule 504 is not available to an issuer of limited-partnership interests.
B. The limited-partnership interest may be sold only to accredited investors.
C. The total number of non-accredited investors who purchase the limited-partnership interests may not exceed 35.
D. The resale of the limited partnership interests by a purchaser will generally be restricted.

Answer 3

D - The relevant rules have changed back and forth over the years, but currently resale is restricted in Rule 504 offerings, unless either (a) the securities are registered under a state law requiring public filing and delivery of a substantive disclosure document to investors, or (b) the securities are issued under a state-law exemption that permits general solicitation, so long as sales are made only to accredited investors.

Question 4

The Securities Act of 1933 provides an exemption from registration for

1. Bonds issued by a municipality for governmental purposes
2. Securities issued by a not-for-profit charitable organization

Answer 4

Both - The 1933 Act allows many exemptions to the registration requirement. The exemptions are often based on the type of issuing entity, and bonds issued by governments, charities, banks, savings and loans, and farmers’ co-operatives are usually exempt.

Question 5

Which of the following securities would be regulated by the provisions of the Securities Act of 1933?
A. Securities issued by not-for-profit, charitable organizations.
B. Securities guaranteed by domestic governmental organizations.
C. Securities issued by savings and loan associations.
D. Securities issued by insurance companies.

Answer 5

D - The 1933 Act makes several types of securities exempt from its registration requirements. Among them are securities of charities, government entities, banks, savings and loans, and farmers’ co-operatives. Some issues by insurance companies are exempt, but only if the issuing company is a state-regulated company. Otherwise, an insurance company’s issues must be registered.

Question 6

Zack Limited Partnership intends to sell $6mn of its limited-partnership interests. Zack conducts all of its business activities in the state in which it was organized. Zack intends to use the offering proceeds to acquire municipal bonds.

Which of the following statements is correct concerning the offering and the registration exemptions that might be available to Zack under the Securities Act of 1933?
A. The offering is exempt from registration, because of the intended use of the offering proceeds.
B. Under Rule 147 (regarding intrastate offerings), Zack may make up to five offers to non-residents without jeopardizing the Rule 147 exemption.
C. If Zack complies with the requirements of Regulation D, any subsequent resale of a limited-partnership interest by a purchaser is automatically exempt from registration.
D. If Zack complies with the requirements of Regulation D, Zack may make an unlimited number of offers to sell the limited-partnership interests.

Answer 6

D - Under Rule 506, Zack can make an unlimited number of offers, but can sell to no more than 35 non-accredited investors (and an unlimited number of accredited investors), and those 35 must each be either sophisticated or acting through a purchaser representative.

Question 7

Winslow, Inc. intends to make a $450,000 common-stock offering under Rule 504 of Regulation D of the Securities Act of 1933. Winslow
A. Must make the offering through a general advertising.
B. Must provide all investors with a prospectus.
C. May sell the stock to an unlimited number of investors.
D. Must offer the stock for a period of 24 months.

Answer 7

C - 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

Question 8

Regulation D of the Securities Act of 1933
A. Restricts the number of purchasers of an offering to 35.
B. Permits an exempt offering to be sold to both accredited and non-accredited investors.
C. Is limited to offers and sales of common stock that do not exceed $1.5mn.
D. Is exclusively available to small business corporations as defined by Regulation D.

Answer 8

B - Regulation D provides exemptions for offers that are limited. Private non-investment companies can offer up to $5mn in any one-year period as long as there are not more than 35 NON-ACCREDITED investors. There is no limit on accredited investors, such as banks and investment companies.

Question 9

Which of the following statements concerning an initial intrastate securities offering made by an issuer residing in and doing business in that state is correct?
A. The offering would be exempt from the registration requirements of the Securities Act of 1933.
B. The offering would be subject to the registration requirements of the Securities Exchange Act of 1934.
C. The offering would be regulated by the SEC.
D. The shares of the offering could not be resold to investors outside the state for at least one year.

Answer 9

A - The 1933 Act gives many exemptions to registration. One of them (in Rule 147) involves intrastate issues. If an offering is made by an issuer who resides in the state, and the offering is made entirely to residents of that state, then registration is unnecessary. There are important requirements contained in Rule 147 that must be met, including that 80% of the funds raised must be used in the state.

Question 10

Kamp is offering $10mn of its securities. Under Rule 506 of Regulation D of the Securities Act of 1933
A. The securities may be debentures.
B. Kamp must be a corporation.
C. There must be more than 35 purchasers.
D. Kamp may make a general solicitation in connection with the offering.

Answer 10

A - Rule 506 merely requires that the securities not be advertised to the general public and not be sold to more than 35 non-accredited investors. Any type of security may qualify for this exemption, including stocks and debentures. There is no limit on the dollar value of the issue, so long as the other restrictions are complied with.

Question 11

A qualifying firm that declares itself to be an EGC enjoys the following benefits during its IPO:
A. Confidential review of its registration statement by the SEC.
B. Reduced requirement for audited financial statements.
C. A and B.
D. None of the above.

Answer 11

C - 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.

Question 12

Under the JOBS Act, a foreign company cannot
	A.  	Be an EGC.
	B.  	Use the crowdfunding exemption.
	C.  	A and B.
	D.  	None of the above.

Answer 12

B

Question 13

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?
	A.  	$0
	B.  	$10,000
	C.  	$100,000
	D.  	$1,000

Answer 13

A - $100,000 is the most someone can invest in crowdfunded ventures during the course of a single year.

Question 14

The JOBS Act allows general solicitation in a Reg D Rule 506 offering if the issuer takes “reasonable steps” to insure what?
A. That it files a registration statement with the SEC within 15 days of its first sale.
B. That it raises no more than $50 million in a single year.
C. That it sells only to accredited investors.
D. All of the above.

Answer 14

C

Question 15

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
A. There was fraudulent activity by Worth.
B. There was a material misstatement in the financial statements.
C. Quincy relied on Worth’s opinion.
D. Quincy was in privity with Worth.

Answer 15

B - The 1933 Act requires only a showing of material misstatement. If the CPAs made a significant misstatement, they may be held liable.

Question 16

To be successful in a civil action under Section 11 of the Securities Act of 1933, concerning liability for a misleading registration statement, the plaintiff must prove the
Defendant’s intent to deceive. Plaintiff’s reliance on the registration statement.

Answer 16

Neither are required - Section 11 states that if “any part of the registration statement…contained an untrue statement of material fact…any person acquiring such security…(may bring a civil lawsuit).” Showing an intent to deceive is unnecessary to win a civil lawsuit, as is a plaintiff’s reliance on the false statement.

Question 17

Is lack of due diligence and privity of contract required for a securities suit under securities act of 1933 and/or 1934?

Answer 17

No neither is required

Question 18

Which 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?
A. Lack of gross negligence.
B. Exercise of due care.
C. Good faith and lack of knowledge of the statement’s falsity.
D. Lack of privity with an injured party

Answer 18

C - Section 18(a) establishes a presumption of liability for false statements in filed documents, but allows defendants to escape liability if they prove that they “acted in good faith and had no knowledge that such statement was false or misleading

Question 19

Ted buys Synchotic Corporation shares based on Synchotic’s announcement of record earnings. But just a few days later, on July 1, 2010, Synchotic admits that its earnings had been artificially inflated via fraudulent earnings management. Its stock price drops dramatically that day, and Ted makes a significant loss. Ted wishes to bring a 1934 Act securities-fraud lawsuit against Synchotic. In terms of the statute of limitations, when must Ted bring his lawsuit?
A. Within one year of when he should have discovered the fraud or within three years of the fraud.
B. Within one year of when he should have discovered the fraud and within three years of the fraud.
C. Within two years of when he should have discovered the fraud or within five years of the fraud.
D. Within two years of when he should have discovered the fraud and within five years of the fraud.

Answer 19

D - This answer is correct because it uses the correct statute of limitations (2yr/5yr, rather than 1yr/3yr for 1933), and notes properly that the plaintiff must meet both deadlines.

Question 20

Dart Corp. engages Jay Associates, CPAs, to assist in a public stock offering. Jay audits Dart’s financial statements and gives an unqualified opinion, despite knowing that the financial statements contain misstatements.
Jay’s opinion is included in Dart’s registration statement. Larson purchases shares in the offering and suffers a loss when the stock declines in value after the misstatements became known.

In a suit against Jay, under the anti-fraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, Larson must prove all of the following, except
A. Larson was an intended user of the false registration statement.
B. Larson relied on the false registration statement.
C. The transaction involved some form of interstate commerce.
D. Jay acted with intentional disregard of the truth.

Answer 20

A - A private action under the 1934 Act is similar to a common-law fraud action in that the plaintiff must show that he relied on the misstatement and that the defendant intended to deceive in making the misstatement.
But, unlike a common-law fraud action, there is no requirement of privity, or even that the plaintiff was an intended user of the false statement.

Question 21

Turtle was audit partner on ABC Accounting’s audit of Jemison Corporation. Turtle knew that the audit was ineptly performed, although he hoped (without much reason) that the financial statements were accurate. He certified them as such. Which of the following is true?
A. If a court decided that Turtle had acted willfully, he could be held criminally liable under the federal securities laws.
B. If a court decided that Turtle had acted negligently, he could be held criminally liable under the federal securities laws.
C. Both A and B.
D. None of the above.

Answer 21

A - WILLFULLY is the key

Question 22

Seimone, an auditor for the ABC accounting firm, learns that her audit client, Bupkis Co., is about to announce a record profit. She buys Bupkis shares in a fake name and profits upon the public announcement. Which of the following is true?
A. The SEC may bring civil charges against Seimone.
B. The SEC may bring criminal charges against Seimone.
C. A and B.
D. None of the above.

Answer 22

A - only the DOJ can bring criminal charges against someone

Question 23

The Dodd-Frank Act created:
A. The Public Company Accounting Oversight Board (PCAOB).
B. The Financial Stability Oversight Council (FSOC).
C. The Consumer Financial Protection Bureau (CFPB).
D. B and C.

Answer 23

D - Dodd-Frank created the FSOC and the CFPB, but not the PCAOB

Question 24

Among the ways that the Dodd-Frank Act impacts accountants are:
A. It created the Consumer Financial Protection Bureau (CFPB) to minimize accountants’ abuses of their clients.
B. It authorizes the PCAOB to regulate accountants who audit non-public broker-dealers.
C. It designates the “Big Four” accounting firms as “too big to fail.”
D. All of the above

Answer 24

B - The Bernie Madoff ponzi scheme prompted Congress to extend the PCAOB’s authority to cover non-public broker-dealers.