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Regulation - CPA Excel > Government Regulations > Flashcards

Government Regulations Flashcards

1
Q

General Partners

A

Not considered securities because they invest money with the expectation of profit and can protect themselves by being actively involved in the enterprise

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2
Q

Limited Partners

A

Considered securities because they rely on people like limited partners to direct the enterprise and protect their liabilities

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3
Q

Passive investors that need legal protection rather than investors that are actively involved in the enterprise are more likely to be deemed as securities (e.g. limited partners vs. general partners) (T/F)

A

True

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4
Q

A transaction involving an investment purpose is more likely a security rather than a transaction involving consumption

A

True

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5
Q

Are certificate of deposits securities? Why or why not?

A

No because they are regulated by bank authorities

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6
Q

What are elements of investment contract?

A

Investment of money
In a common enterprise
With an expectation of profit
To be earned primarily by the actions of others

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7
Q

What are some examples of securities?

A

Corporate stocks, bonds, debentures, collateral trust, certificates, puts, calls, straddles, options

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8
Q

What is the different between 1933 and 1934 act?

A

1933-“Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in a profit-sharing agreement, collateral-trust certificate, pre-organization certificate of subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group of index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrumentality common known as a ‘security,’ or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”
The 1933 Act applies to sales of securities, including stocks, bonds and notes that are issued for periods over nine months.

1934- investment contract

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9
Q

During the waiting period what type of oral offers are permissable?

A
  1. Preliminary or “red herring” prospectus, and
  2. “tombstone” ad, a black-bordered advertisement usually placed in the Wall Street Journal that would contain only:
    a. The name of the issuer;
    b. The full title of the security and the amount being offered;
  3. A brief description of the company’s business;
  4. The price range of the security;
  5. The name of the managing underwriter;
  6. The contemplated date of the issuance; and
  7. A few other minor items.
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10
Q

Contents of Registration statement

A

Financial Statements audited by independent CPA
Names of issuer, directors, officers, underwriters, etc.
Risks
Description of issuer’s business
Description of security and intended use for proceeds

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11
Q

Disclosure of final prospectus to investors

A
  • Final price is not given during waiting period
  • Final prospectus is used after the effective date
  • Final prospectus must be delivered before or along with securities
  • May be supplemented by written advertisement called “free writing” that is not allowed during waiting period
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12
Q

SEC Review

A

Reviews during 20 day waiting period and becomes effective on the 20th day
Exception is seasoned issuers where they accelerate their registration statements and sell them before 20 day period expires
If company is going public takes much long 20-80 days
Does not review merits of securities or make guarantees instead SEC is simply indicating that there are nothing wrong with the disclosures

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13
Q

Shelf Registration

A

Largest 2,000 company to file a single registration statement that would cover securities that they expect to sell for the next 3 years and whenever a market window opens then these companies can immediately take the securities off the shelf and begin to sell them within a day or two

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14
Q

Securities Offering Reform Program (SORP)

A

expanded shelf registration to company registration where the largest firms can file within 3 year and ignore waiting and prefiling requirements

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15
Q

What are the largest category SORP is divided into?

A

well known seasoned issuers (WKSI’s) - report to SEC for at least a year and eligible to use form S-3 or F-3 and have either $700M public common equity OR issued $1B of registered debt in the previous three years; market is well known about WKSi’s

these firms make up 30% of listed firms but make up 95% of listed firms assets

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16
Q

Free Writing Prospectus (FWP)

A

initially, after the effective date firms were allowed to supplement final prospectus with free writing but now WKSI’s are allowed to use additional material at any time with few restrictions other than that the material usually has to be filed with SEC

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17
Q

Jobs Act of 2012

A

Allowing firms to declare themselves as emerging growth companies to receive certain breaks from certain rules

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18
Q

Which type of securities are exempt from registration?

A
  1. Bank and government securities
    - public utilities securities are not exempt
  2. Short term notes
    - commercial notes are exempt only if less than 9m
    - notes for investment purposes are not exempt
  3. Charitable Organizational Securities
  4. Regulated Savings and Loans
  5. Federally Regulated Common carriers
  6. Receiver or trustees in bankruptcy
  7. Insurance and Annuity Policies
    - stocks issued by insurance are not exempt
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19
Q

Accredited Investors

A
  1. individuals/couples who are millionaires
  2. individual income over $200K or joint over $350K
  3. officers or directors
  4. certain banks, insurance companies, brokers
  5. charitable orgs with assets over $5M
  6. entities in which owners are accredited
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20
Q

General Solicitation

A
  • ad, cold calls, notice, newspaper, etc.
  • to avoid large scale communication deemed as general solicitation is to have a relationship with the preexisting offerees
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21
Q

Integration

A
  • big and small sale together
  • if one is exempt it is not applicable
  • sales part of single financing?
  • sales involve issuance of the same class of securities?
  • sales made at or about the same time?
  • same type of securities?
  • same type of consideration?
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22
Q

Rule 504

A
  • aim to help smaller issuers
  • no general solicitation (except a few circumstances)
  • no limit on the number of purchasers
  • no info needed to be provided to investors
  • issuer needs to file Form D within 15 days after the first sale to alert SEC existence of offering (failure may cause SEC to withhold future use of Reg D from an offending issuer)
  • Resale is not restricted if it meets the other three criteria under general solicitation
  • Integration is allowed but not allowed 6 months before or after the offering started so no similar securities may be sold unless it is under the employment benefit plan
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23
Q

Who is Rule 504 limited to?

A
  • 1934 Act (firms shared on the national stock exchange with at least 2,000 shareholders of a single class and $10M in assets)
  • Investment companies (mutual funds)
  • Blank Check Companies
  • Bad Actors (companies who have been in trouble for fraud or similar)
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24
Q

How much may an issuer raise under 504?

A

$5M in any 12 month period without registration or procedural requirements

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25
Q

What are the rules of general solicitation under 504?

A

General solicitation is not allowed unless it means one of the following 3 criteria and even if it does then investors must be protected by the states if solicitation occurs:

  1. offer occurs in 1 or more states that require registration of securities, public filing, and disclosure
  2. offer occurs in 1 or more states that do not have registration provisions
  3. offering is made exclusively pursuant to state law exemptions as long as they are made to accredited investors
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26
Q

Regulation A

A
  • mini IPO
  • used by most start up companies but not mutual funds, bad actors, or non-canadian foreign issuers
  • general solicitation is allowed
  • No resell
  • must file “test the waters” document with SEC and Form 1-A
  • Integration allowed but not with previous offers/sales or subsequent sales that are registered under 1933 act, made more than 6 months after Reg A offering, or made pursuant to crowdfunding rules
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27
Q

How much may an issuer raise under Reg A?

A

$20M or $50M in a 12 month period

Tier 1: no investor qualification; upto $20M in 12m. (blue sky laws)
- must include BS/IS for two years and audited FS if prepared
Tier 2: $50M but nonaccredited investors cannot buy stock that is more than 10% of their annual income or net worth unless the stock is also listed on a national stock exchange
- must include BS/IS for two years and audited FS if prepared

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28
Q

What information must be provided to investors under Reg A?

A

offering circular must be provided which is a mini prospectus and has the basic info of issuer and securities

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29
Q

Crowdfunding

A
  • $1M in 12m period
  • must invest through the website of the broker or funding portal registered by FINRA or SEC
  • no requirement for accredited or sophisticated
  • may not resell unless it is to a family member, accredited investor, issuer, divorce, or death
  • No integration allowed
30
Q

General Solicitation for Crowdfunding

A

Allowed but must:

  • provide investors with basic info for risk of investment loss
  • perform due diligence by obtaining background checks and securities enforcement regulatory histories of officers, directors, and 20% shareholders; and
  • ensure proceeds are put into escrow and given to issuers only when the targeted offering amount is obtained.
31
Q

Purchase Qualifications for Crowdfunding

A
  1. If either the investor’s annual income or net worth is less than $100,000 ($107,000), the investor may buy no more than the greater of $2,000 ($2,200) or 5% of the lesser of his or her annual income or net worth.
  2. If the investor’s annual income and net worth are both greater than $100,000 ($107,000), the investor is limited to 10% of the lesser of his or her annual income or net worth, up to an annual maximum of $100,000 ($107,000).
32
Q

What information must crowdfunding issuer provide to its investors?

A
  • If a company raises $100,000 ($107,000) or less, it must file only its most recent tax return, if any, and financial statements certified by the company’s CEO.
  • If a company raises between $100,000 ($107,000) and $500,000 ($535,000), it must also have the financial statements reviewed by a CPA.
  • If a company raises between $500,000 ($535,000) and $1,000,000 ($1,070,000), the financial statements must be audited by a CPA, unless the issuer has never sold under Reg CF before, in which case the financial statements need only be reviewed by a CPA.
33
Q

What must a crowdfunding issuer file with the SEC?

A

offering statement

must inform SEC within 5 days of meeting 50% and 100% of its targeted offering amount

34
Q

Purchase qualifications for Rule 506

A

506b - unlimited accredited investors but no more than 35 unaccredited investors who must be either sophisticated or acting through a purchaser representative

506c - may only sell to accredited investors acting through qualified purchaser representatives

35
Q

Rule 506

A 
Private Placement Exemption
1933 Reg D 
- available to all issuers except bad actors
- may raise unlimited
- 506b prohibits general solicitation
-506c allows general solicitation but has limits
- must only file Form D
- May only resale after 6months
36
Q

What information can Rule 506 provide to investors?

A

506b - for unaccredited must disclose information to investors
audited BS and FS if substantial money is raised
506c- no information to offerrees since they are only selling to accreddited investors that can protect themselves

37
Q

Rule 147

A
  • Intrastate offering exemptions
  • investment companies are not allowed to use this rule
  • issuers must be residents (principal business is in state or is incorporated) of the state in which they intend to raise money
  • must do business in the state (80% of assets, gross revenue, or net proceeds or majority of employees are in state)
  • No ceiling
  • No general solicitation
  • securities may not be resold to nonresidents within 6 months
  • Integration allowed but not with offers or sale of securities
38
Q

Rule 147A

A
  • easier to make money using both intrastrate and crowdfunding
  • requires only that the issuer have its principal business in the state in order to be a resident
  • no limitation
  • any form of solicitation
  • must wait 6 months to resell to non resident
  • Integration allowed but not with offers or sale of securities
39
Q

Emerging Growth Company (EGC)

A
  • Have less than $1 billion in annual gross revenues during its most recently completed fiscal year;
  • Have been publicly traded for less than five years;
  • Have a public float of less than $700 million; and
  • Have not issued $1 billion in nonconvertible debt in the prior three-year period.
40
Q

Emerging Growth Company (EGC)

A
  • Have less than $1 billion in annual gross revenues during its most recently completed fiscal year;
  • Have been publicly traded for less than five years;
  • Have a public float of less than $700 million; and
  • Have not issued $1 billion in nonconvertible debt in the prior three-year period.
  • EGC until lave rest day of the following fiscal year of the 5 year anniversary until they are not qualified whichever comes first
41
Q

What are the benefits of EGC?

A
  • Include 2 audited FS
  • Reduce disclosure requirements
  • Draft registration to SEC for confidential review for filing
  • 5 year exemption for complying with SOX, PCAOB, and compensation provisions
42
Q

What are the three primary causes of the 1933 provisions?

A

Sec 11 - remedies misleading omissions and statements as of its effective date
Sec 12a -remedy violation of section 5
*offering a security before filing a registration
*selling a security without prospectus
*selling before registration becomes effective
*providing prospectus that doesn’t comply with SEC
-Sec 12b - misstatements in the sale of securities that occur outside of the registration statement

43
Q

What are the elements that a Plaintiff must prove for Section 11 claim?

A
  1. accounting firm is only liable for part of the FS that it prepared (Tracing)
  2. Materiality
  3. plaintiff bought securities issued under the defective registration statement (false statement or omission)
  4. Damages (plaintiff)
  • doesn’t need to provide reliance in order to prevail
44
Q

What are the defenses of Section 11?

A

Due Diligence - reasonable basis, investigation, and good belief (e.g. failure to use GAAP)
Alternate Causation
Statute of Limitation

45
Q

Who is not liable under Section 11?

A
  • defendants and accountants are liable

- outside directors and underwriters are not liable

46
Q

How do you calculate Section 11 damages?

A
  1. Calculate amount paid, which is the lesser of
    a. the amount actually paid by P
    b. price at which the security was offered to the public
  2. Apply Formula
  3. When P sells share prior to filing lawsuit
    Damages = Amount Paid - Sales Price
  4. When P still owns the share at the time of the judgment
    Damages = Amount Paid - Value at the time of the suit
  5. When P sells shares during litigation at a price higher than the price “at time of suit”
    Damages = Amount Paid - Sale
  6. When P sells during litigation at a price lower than price at time of suit
  7. No punitive damages are calculated
47
Q

Who are the defendants for Section 11?

A
  1. underwriters
  2. issuer
  3. officer directors
  4. experts
48
Q

What is the violation of 12a?

A
  1. Sale of unregistered securities
  2. Failure to deliver prospectus
  3. Use of inadequate prospectus
  4. Offer before RS is filed
49
Q

What must plaintiffs show to win 12a?

A
  1. D violated Section 5
  2. D was a seller
  3. P lost money
50
Q

What are the defenses for 12a?

A

Statute of limitations

51
Q

What must a plaintiff show to win 12b?

A
  1. False statements or omissions
  2. Materiality
  3. D is a seller
  4. Tracing
  5. Damages
52
Q

What are the defenses for 12b?

A
  1. Due Diligence
  2. Alternative cause
  3. Statute of Limitaiton
53
Q

Who is required to disclose under 1934 Act?

A
  1. All companies who have listed on national exchange
  2. A company in $10M in assets or 2,000 shareholders or 500 shareholders who are not accredited
  3. company that files under 1933 with SEC
  4. company who made registered public offering
  5. OTC over the counter bulletin board companies

Note: EGC companies need not comply with these filings 5 years after going IPO

54
Q

What documents must be filed under 1934?

A
  1. initial registration form (Form 10)
    - name of officers and directors
    - nature of business
    - financial structure of firm
    - bonus and profit sharing provisions of officers + directors
  2. continuous registration form
    - 10Ks
    - 10Q’s
    - 8K’s
55
Q

Other document filing requirements under 1934

A
  1. Concentration of shares
    - an individual that acquires 5% securities must file schedule 13d within 10 days
    * purpose of the purchase
    * amount and source of funds
    * name and background of acquirer
  2. Tender offers
  3. Proxy solicitations - in order to hold state law annual meetings to elect directors and special meetings
    * material facts to be voted on
    * background of nominees
    * advantages and disadvantages of transactions
    * MUST include 2 year audited FS
  4. Insider trading - short swing
    - anytime when the insider buys within 6 months of selling or sells 6 months of buying
    - officers
    - directors
    - holders of 10% securities
  5. Insider trader - fraud
56
Q

What must a plaintiff prove for 1934?

A 
1. False statement or material omission of material fact
    scienter by defendant (recklessness)
2. Causation
3. Reliance (depends) 
4. Damages
5. Materiality
6. Purchase or Sale
57
Q

When must a plaintiff prove reliance in 1934?

A

Omission - no reliance

Active misrepresentation - reliance must be proved

58
Q

What are the defenses for 1934?

A
  1. Statute of limitations - 2 years should have been discovered or 5 years of fraud
  2. Fraudulent or reckless conduct by plaintiff
59
Q

Section 18a

A
  • pertains to docs filed with SEC
60
Q

Plaintiff proof for 18a

A
  1. Defendant made or caused to be made a false or misleading statement or omission;
  2. In a filed document;
  3. Materiality;
  4. Plaintiff’s purchase or sale of securities;
  5. Plaintiff’s “eyeball” reliance;
  6. Causation; and
  7. Damages.
61
Q

Defenses for 18a

A
  1. Good faith / knowledge

2. Statute of Limitations (1 and 3 years)

62
Q

What was the purpose of 1934?

A
  • created SEC
  • Punishes fraud in secondary market
  • created the periodic disclosure system
  • Regulates the security industry
63
Q

What is the penalty for 1933?

A

$10,000 fine and/or five years in jail

64
Q

What is the penalty for 1934?

A

$2.5M or 20 years in jail

65
Q

Destruction of records

A

20 years in jail

66
Q

Willful failure to retain audit and review workpaper

A

5-10 years in jail and a fine

67
Q

Corrupt tampering with docs

A

20 years in jail

68
Q

SEC can bring civil charges, DOJ can bring criminal charges (T/F).

A

True

69
Q

FUTA

A

The employer may credit the amounts paid to a state fund against contributions required by the federal government.

70
Q

Under ACA all expenses over 10% of income can be deducted from income tax (T/F)

A

True

71
Q

Medicare Surtax

A

3.8% of the lesser of the net investment income or the excess AGI over AGI threshold

72
Q

3 conditiosn for a Statuatory Employee

A
  • contract states that all services are performed by worker personally
  • the worker does not have a substantial investment in the equipment and property used to perform
  • services the services are performed on a continuing basis for the same business.

Regulation - CPA Excel (7 decks)

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