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RYR - REG > II. Business Law-Government Regulation of Business > Flashcards

II. Business Law-Government Regulation of Business Flashcards

1
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Defining a Security

Which of the following transactions is subject to registration requirements of the Securities Act of 1933?

  1. The public sale of stock of a trucking company regulated by the Interstate Commerce Commission.
  2. A public sale of municipal bonds issued by a city government.
  3. The issuance of stock by a publicly traded corporation to its existing shareholders because of a stock split.
  4. The public sale by a corporation of its negotiable ten-year notes.
A
  1. These sales of stock are regulated, but not by the Securities and Exchange Commission (SEC) and not under the 1933 Act. They are exempt.
  2. Because of states rights, local transactions are exempt under the 1933 Act. Municipal bonds are not registered with the SEC.
  3. Stock splits are not considered sales of securities and are exempt under the 1933 Act.
  4. The 1933 Act applies to sales of securities, including stocks, bonds and notes that are issued for periods over nine months.
    ​correct
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2
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Defining a Security

Which of the following is least likely to be considered a security under the Securities Act of 1933?

  1. Stock options.
  2. Warrants.
  3. General partnership interests.
  4. Limited-partnership interests.
A

3.

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.

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3
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. The Registration Process

III. Basic Legal Framework

A
  1. During the Prefiling Period—A company can neither offer to sell securities nor sell them.
  2. During the Waiting Period—A company may make oral offers and certain types of written offers but cannot sell the securities.
  3. Elaboration—During the waiting period, oral offers are permitted along with certain specified types of written offers, most importantly:
    1. The preliminary or “red herring” prospectus, and
    2. The “tombstone” ad, a black-bordered advertisement usually placed in the Wall Street Journal that would contain only:
      1. The name of the issuer;
      2. 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.
    3. Both the red herring prospectus and the tombstone ad will contain cautionary words that they constitute neither offers to sell nor solicitations of offers to buy and that no binding contract can be entered into until after the registration statement becomes effective.
  4. During the Post-Effective Period—An issuer may both offer and sell the securities.
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4
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. The Registration Process

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?

  1. May 10.
  2. May 20.
  3. May 25.
  4. May 30.
A

1.

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.

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5
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. The Registration Process

When a common stock offering requires registration under the Securities Act of 1933,

  1. The registration statement is automatically effective when filed with the SEC.
  2. The issuer would be acting unlawfully if it were to sell the common stock without providing the investor with a prospectus.
  3. The SEC will determine the investment value of the common stock before approving the offering.
  4. The issuer may make sales ten days after filing the registration statement.
A

2.

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.

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6
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. The Registration Process

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.

  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.
A

2.

B 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.

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7
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. The Registration Process

Which of the following disclosures must be contained in a non-WKSI issuer’s securities-registration statement filed under the Securities Act of 1933?

  1. A list of all existing stockholders.
  2. The principal purposes for which the offering proceeds will be used.
  3. A copy of the corporation’s latest proxy solicitation statement.
  4. The names of all prospective accredited investors.
A

2.

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.

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8
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Exempt Transactions and Securities

B. Examples of Exempt Securities

A
  1. Bank and government securities
    1. Rationale—Securities issued by banks and by governmental units are heavily regulated by other state and federal laws, so SEC registration is unnecessary.
    2. Limitation—Public utilities’ securities are not exempt.
  2. Short-term notes
    1. Commercial notes are exempt if carrying maturity of less than nine months.
    2. Notes issued for investment purposes are not exempt.
  3. Charitable organizations’ securities
    1. Examples—nonprofit educational, religious, benevolent, or fraternal organizations
  4. Regulated savings and loans
  5. Federally regulated common carriers
  6. Receiver or trustees in bankruptcy (that issue securities with court approval)
  7. Insurance and annuity policies
    1. However, the stock issued by insurance companies is not exempt.
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9
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Exempt Transactions and Securities

Sloban Corporation wishes to raise a lot of money without filing a registration statement with the SEC. It is interested in knowing more about Rule 506 of Regulation D. Which of the following is true?

  1. Firms may raise up to $50 million in a 12-month period under Rule 506.
  2. General solicitation is never allowed under Rule 506.
  3. Investors’ resale of securities purchased under Rule 506 is restricted.
  4. Unlike under Rule 504, issuers need not file a Form D.
A
  1. Incorrect. There is no ceiling at all under Rule 506. Issuers may raise more than $50 million in a 12-month period.
  2. Incorrect. General solicitation is allowed under subsection (c) of Rule 506. All purchasers must be accredited investors or acting through purchaser representatives, however.
  3. Correct! Purchasers must hold until Rule 144 allows resale, which for most investors is six months.
  4. Incorrect. Rule 506 issuers, like Rule 504 issuers, must file a Form D within 15 days of beginning the offering.
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10
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Exempt Transactions and Securities

Noxious Corporation is located in Idaho and wishes to sell securities to Idaho residents without filing a registration statement. Noxious would like to know more about the difference between Rule 147 and Rule 147A. Which of the following is not the same under both rules?

  1. There is no limit on the amount of money that can be raised in a 12-month period.
  2. There is no requirement that specified information be disclosed to investors.
  3. All offerees must be reasonably believed to be Idaho residents.
  4. Resale to non-Idaho residents by investors will be restricted.
A

3.

Correct! This is the choice where the two rules differ. Only Rule 147 requires that all offerees be state residents. Rule 147A requires only that all purchasers be state residents.

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11
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Exempt Transactions and Securities

Dizzle Corporation is just starting out and has heard about Regulation Crowdfunding. The company’s officers wish to know which of the following is true about the regulation:

  1. The maximum amount that can be raised in a 12-month period is $5 million.
  2. General solicitation is allowed without qualification.
  3. There are limitations on how much individuals may invest in a 12-month period.
  4. There are no informational requirements for issuers.
A
  1. Incorrect. The maximum amount was originally $1 million (which is inflation adjusted upward every five years).
  2. Incorrect. General solicitation is allowed, but the issuer must sell through an intermediary, such as a funding portal.
  3. Correct! There are limitations on how much investors may put into crowdfunding ventures in a 12-month period. These are occasionally inflation-adjusted and vary with the amount of income the investor has.
  4. Incorrect. One of the major criticisms of Regulation Crowdfunding is that it has arguably burdensome financial disclosure requirements.
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12
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Exempt Transactions and Securities

Kamp is offering $10 million of its securities for sale. Under Rule 506 of Regulation D of the Securities Act of 1933:

  1. The securities may be debentures.
  2. Kamp must be a corporation.
  3. There must be more than 35 purchasers.
  4. The securities may be resold without restriction by any purchasers.
A
  1. Correct! The securities may be debentures. All these federal exemptions are available for offerings of either equity or debt securities.
  2. Incorrect. Kamp may be a corporation, but it need not be. LLCs, for example, may also utilize Reg D.
  3. Incorrect. There may be more than 35 purchasers (though no more than 35 non-accredited investors), but there is no requirement that there be more than 35.
  4. Incorrect. Rule 506 securities are restricted resale.
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13
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Purposes, Requirements and Provisions of the 1934 Act

III. Created SEC—This Act created the Securities and Exchange Commission to enforce all federal securities laws. Among other things, the SEC:

A
  1. Enforces the 1933 Act’s registration and anti-fraud provisions
  2. Enforces the 1934 Act’s continuous disclosure and anti-fraud provisions
  3. Registers and regulates broker-dealers
  4. Registers and regulates investment advisers
  5. Enforces rules regarding proxy solicitations and tender offers
  6. Enforces criminal provisions of the federal securities laws by investigating fraud and referring cases to the Department of Justice for prosecution.
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14
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Purposes, Requirements and Provisions of the 1934 Act

IV. Disclosure Requirements Under the 1934 Securities Exchange Act

A
  1. Who are reporting companies that must file disclosure documents regularly with the SEC?
    1. All companies who have listed securities on a national exchange, such as the New York Stock Exchange or the Nasdaq Global Market.
    2. A company with (a) $10 million in assets, and (b) 2,000 shareholders or 500 shareholders who are not accredited investors. Note that such a company may later deregister under this provision if it falls below 300 shareholders, no matter how much it has in assets.
    3. A company that files a registration statement with the SEC under the 1933 Securities Act.
  2. Even companies that have not registered with the SEC if they have more than $10 million in assets and more than 2,000 shareholdersin a single class
  3. A company that made a registered public offering during the year
  4. OTC (over the counter) “Bulletin Board” companies
  5. Remember that under the JOBS Act of 2012, firms that declare themselves to be Emerging Growth Companies (EGCs) need not comply with these filings for five years after their initial public offering (or until they no longer comply with the EGC requirements)
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15
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Purposes, Requirements and Provisions of the 1934 Act

An accountant will be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that

  1. The accountant was negligent.
  2. There was a material omission.
  3. The security involved was registered.
  4. The security was part of an original issuance.
A

2.

A plaintiff must generally show several things to win a Section 10(b) case. A CPA must have

(1) intentionally or recklessly
(2) made a misstatement of material fact or omitted a material fact
(3) that was relied upon by the defendant.

Section 10(b) and Rule 10b-5 govern material misstatements and omissions that are related to the sale of any security. To win a case against a CPA based on one of these theories, the plaintiff must show that

  1. (s)he relied on the misstatements; that
  2. the misstatements were material; and that
  3. the CPA knew of the misstatements (acted with scienter).

If GAAS has been followed, this probably indicates that a CPA will not be liable, but a CPA may lose a case like this even if GAAS has been followed, so long as all three elements can be shown.

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16
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Purposes, Requirements and Provisions of the 1934 Act

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?

  1. Lack of gross negligence.
  2. Exercise of due care.
  3. Good faith and lack of knowledge of the statement’s falsity.
  4. Lack of privity with an injured party.
A
  1. Section 18(a) applies to false statements in documents that are filed with the SEC (as opposed, for example, to false statements in press releases or interviews) and establishes a negligence standard, rather than a gross-negligence standard or a scienter standard, such as that contained in Section 10(b) of the 1934 Act.
  2. 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.” Although this is often referred to as a due-diligence defense, the C choice is more precise.
  3. This Answer is Correct; 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.”
  4. Lack of privity is not a defense under Section 18(a). However, plaintiffs have the burden to establish “eyeball reliance” (“I saw, read, and I believed the false statement”) before they can recover under Section 18(a).
17
Q

II. Business Law-Government Regulation of Business

  1. Federal Securities Regulation
  2. Criminal Liability
A
  1. 1933 Securities Act
    1. Accountants are liable for any “willful” violation of any provision of the 1933 Act.
    2. Penalties: Up to $10,000 fine and/or five years in jail
  2. 1934 Securities Exchange Act
    1. Accountants are liable for any “willful” violation of any provision of the 1934 Act.
    2. Penalties: Up to $2,500,000 fine and/or 20 years in jail (up to $25 million fine if defendant is a firm).
    3. These criminal penalties are cumulative; they may be imposed on top of the civil liability discussed elsewhere.
    4. The SEC cannot bring criminal charges itself; rather, it refers these cases to the Department of Justice, which actually files and prosecutes the cases, often based on evidence provided by the SEC.
  3. Sarbanes-Oxley Criminal Provisions
    1. SOX added several criminal provisions to the U.S. Code that accountants must be aware of.
18
Q

II. Business Law-Other Federal Laws and Regulation

  1. Employment Tax

FUTA Eligibility for benefits usually requires that the employee:

A
19
Q

II. Business Law-Other Federal Laws and Regulation

  1. Employment Tax

FUTA Eligibility for benefits usually requires that the employee:

For the entire year of 2016, Ral Supermarket, Inc. conducts its business operations without any permanent or full-time employees.

Ral employs temporary and part-time workers during each of the 52 weeks in the year.

Under the provisions of the Federal Unemployment Tax Act (FUTA), which of the following statements is correct regarding Ral’s obligation to file a federal unemployment tax return for 2016?

  1. Ral must file a 2016 FUTA return only if aggregate wages exceed $100,000 during 2016.
  2. Ral must file a 2016 FUTA return because it had at least one employee during at least 20 weeks of 2016.
  3. Ral is obligated to file a 2016 FUTA return only if at least one worker earned $50 or more in any calendar quarter of 2016.
  4. Ral does not have to file a 2016 FUTA return, because it had no permanent or full-time employees in 2016.
A

2.

A return must be filed under FUTA if there are ANY employees during a substantial portion of the year.

If a full OR part-time employee is around for over 20 weeks in a given year, a return must be filed.

20
Q

II. Business Law-Other Federal Laws and Regulation

  1. Affordable Care Act
A
  1. “eliminates pre-existing conditions,
  2. stops insurance companies from dropping you when you are sick,
  3. protects against gender discrimination,
  4. expands free preventative services and health benefits,
  5. expands Medicaid and CHIP, improved Medicare,
  6. requires larger employers to insure their employees,
  7. creates a marketplace for subsidized insurance providing tens of millions of individuals, families, and small businesses with free or low-cost health insurance.”
21
Q

II. Business Law-Other Federal Laws and Regulation

  1. Affordable Care Act

B. Medicare Surtax(also known as Net Investment Income Surtax and as the Unearned Income Medicare Contribution Tax)—The ACA imposes a 3.8% surtax on net investment income (NII) of individuals and estates and trusts above a certain level.

The Medicare NII surtax falls primarily on the relatively wealthy, because it applies only to investment income earned by individuals with AGIs above these levels (in 2016):

  1. $200,000 for a single taxpayer
  2. $250,000 for joint filers
  3. $125,000 for a married taxpayer filing separately
A
  1. The Medicare surtax on NII does not apply to any amount of gain that is excluded from AGI for regular income tax purposes, such as the first $250,000 ($500,000 for married couples) of gain recognized on sale of a principal residence.
  2. The taxable amount subject to the 3.8% surcharge is the lesser of:
    1. Net investment income, or
    2. The excess of AGI over the AGI thresholds.
  3. Example—If a single filer has active income of $170,000 and NII of $100,000, then the 3.8% tax should be paid on $70,000 of income. The excess of AGI over the AGI threshold is $70,000 versus the NII of $100,000. Because the tax applies to the lesser of these two amounts, it would be 3.8% of $70,000, or $2,660.
  4. Example—Dave and Carol are married and file a joint return. Each earns $175,000. They also have $40,000 in investment income. Their AGI is over the threshold of $250,000 by $140,000, so they will owe 3.8% of the lesser sum of $40,000, or $1,520.
22
Q

II. Business Law-Other Federal Laws and Regulation

  1. Affordable Care Act

D. Additional Medicare Tax

  1. The ACA imposes a 0.9% Additional Medicare Tax (AMT) on wages and self-employment income above a certain amount (e.g., $200,000 for a single taxpayer, $250,000 for joint filers, and $125,000 for a married taxpayer filing separately).
  2. Employers are required to withhold this surtax from employees’ paychecks but need not match it.
  3. This tax also falls primarily on the relatively wealthy.
  4. But passive investment income is excluded.
A
  1. Example—Maria, an unmarried taxpayer, earned wages of $190,000 and had $50,000 in passive income. She need not pay the 0.9% AMT, because her earned income was less than the $200,000 threshold for unmarried individual filers. However, her AGI is $240,000, so she must pay the 3.8% Medicare Surtax on unearned income. That calculation is the lesser of her AGI over the threshold ($240,000 – $200,000 = $40,000) or the amount of unearned income ($50,000). So, Maria owes zero AMT, but $1,520 (3.8% of $40,000) in Medicare Surtax.
23
Q

II. Business Law-Other Federal Laws and Regulation

  1. Affordable Care Act

Under his health care plan, Tran has a deductible of $1,200, a coinsurance of 20%, and an out-of-pocket limit that matches the federal maximum of $6,850 (in 2016). Tran has significant surgery for which his bill is $5,000, hospitalization for which his bill is $40,000, and home health care after he leaves the hospital which comes to $4,000. How much of the hospital bill will Tran pay, assuming he pays the three bills in the order mentioned?

  1. $40,000
  2. $6,850
  3. $3,425
  4. $4,890
A

Choice d: Correct! And here’s why. Tran first pays for the surgery–$1,200 for the deductible and then the co-pay which is 20% × $3800 ($5,000 cost − $1,200 deductible) which is $760. So far, he has paid $1,960 ($1,200 + $760), which is less that the maximum. Then Tran turns to the hospital bill. His deductible has been exhausted, so he would pay, absent the ceiling, coinsurance of 20% of $40,000, or $8,000. However, this puts him well over the maximum. He would pay only $6,850 (the maximum) minus $1,960 (the amount he has already paid), which comes to $4,890. The health insurer will pay the other $35,110 ($40,000 − $4,890). And it will pay the entire cost of the home health care ($4,000) and all of the rest of Tran’s essential medical care expenses for the rest of the year.

24
Q

II. Business Law-Other Federal Laws and Regulation

  1. Affordable Care Act

The ABC Co. has 75 full-time employees. It does not offer any health insurance to those employees, some of whom buy insurance policies from the ACA Marketplace and qualify for federal subsidy. What is its annual penalty under the ACA’s employer mandate?

  1. The greater of $1 million or 20% of ABC’s gross revenue.
  2. The lesser of $1 million or 20% of ABC’s gross revenue.
  3. $150,000.
  4. $90,000.
A

Choice d: Correct! ABC’s liability would be $90,000 because it has 75 employees, but the first 30 are exempted. 75 – 30 = 45. 45 × $2,000 = $90,000

25
Q

II. Business Law-Other Federal Laws and Regulation

  1. Worker Classification Laws and Regulations

LMN Corporation classified many of its workers as independent contractors, but that classification became the subject of litigation and was determined to be erroneous. Which of the following does not support a safe harbor defense for LMN?

  1. An opinion from its corporate counsel.
  2. The classification is consistent with industry practice.
  3. A previous IRS ruling found these workers to be independent contractors
  4. An IRS ruling in a case involving JKL Co. found similarly situated workers to be independent contractors.
A

Choice a: Correct! This is the correct choice. It is good that LMN sought the opinion of its counsel, but this is not sufficient to support the safe harbor defense.

26
Q

II. Business Law-Other Federal Laws and Regulation

  1. Worker Classification Laws and Regulations

C. Safe Harbor

A

Section 530(a) of the Revenue Act of 1978 provides a “safe harbor” allowing companies to classify workers as “independent contractors” even though the 11-part test indicates they are employees, so long a “reasonable basis” for the classification exists. A “reasonable basis” may derive from any one of the following:

  1. The classification is consistent with industry practice,
  2. A previous IRS or court ruling found the workers to not be employees, or
  3. An IRS ruling or opinion letter supports the classification.
27
Q

II. Business Law-Other Federal Laws and Regulation

  1. Employment Tax

FUTA Eligibility for benefits usually requires that the employee:

For the entire year of 2016, Ral Supermarket, Inc. conducts its business operations without any permanent or full-time employees.

Ral employs temporary and part-time workers during each of the 52 weeks in the year.

Under the provisions of the Federal Unemployment Tax Act (FUTA), which of the following statements is correct regarding Ral’s obligation to file a federal unemployment tax return for 2016?

  1. Ral must file a 2016 FUTA return only if aggregate wages exceed $100,000 during 2016.
  2. Ral must file a 2016 FUTA return because it had at least one employee during at least 20 weeks of 2016.
  3. Ral is obligated to file a 2016 FUTA return only if at least one worker earned $50 or more in any calendar quarter of 2016.
  4. Ral does not have to file a 2016 FUTA return, because it had no permanent or full-time employees in 2016.
A

2.

A return must be filed under FUTA if there are ANY employees during a substantial portion of the year.

If a full OR part-time employee is around for over 20 weeks in a given year, a return must be filed.

RYR - REG (22 decks)

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