Law 1933 & 1934

Question 1

What is negligence?

Answer 1

Failure to follow GAAPs or exercise due care.

Question 2

What is fraud?

Answer 2

INTENTIONAL misrepresentations of a MATERIAL fact that was known by the CPA with an INTENT to deceive.

Question 3

What is Gross Negligence or Constructive Fraud?

Answer 3

CPA fails to exercise even slight care which is reckless disregard for the CPAs professional responsibility and a failure to follow GAAS.

Question 4

Best defense for negligence?

Answer 4

Followed GAAS (Due care)

Question 5

Best defense for common law fraud is?

Answer 5

lack of intent.

Question 6

Under the 1933 Act, what must be filed and with who?

Answer 6

Registration statement must be filed with the SEC for any new issuance of securities
Prospectus to potential investors

Question 7

What is the process of filing?

Answer 7

File-> Wait 20 days-> Sell on Day 20

Question 8

What is SEC reviewing during the 20 day time?

Answer 8

SEC reviews for FULL and FAIR disclosure.

Question 9

$$ limits of Regulation D?

Answer 9

504- $1,000,000 or less
505- up to $5,000,000
506- >$5,000,000

Question 10

General solicitations are allowed for which regulation D?

Answer 10

For 504, but advertising is not allowed under any.

Question 11

Up to 35 unaccredited allowed for which regulation D?

Answer 11

505, 506. 504 has no restriction.

Question 12

Act of 1934 regulates:

Answer 12

Re-sale of securities of companies which have more than $10 mil in assets and a class of securities held by at least 500 or more shareholders which are traded in Interstate Commerce. 
The resale transactions of any security which is traded on a national exchange. 
Issuers of securities registered under 1933 Act.

Question 13

What is 10K, 10Q or 8K? (1934 Act requires the firm to file these reports with the SEC on a regular ongoing basis)

Answer 13

10K is annual financial report- audited
10Q is quarterly financial report- not audited, reviewed.
8K filed within 4 calendar days of a material even that occurs in the firm/ Any stockholder owning more than 10% of a registered security must file with the SEC in any month that a change in ownership of the security occurs.

Question 14

What must be proved under 1933 and 1934?

Answer 14

1933: D&MM (damages and material misstatements)
1934: DIMMR (damages, Intent, material misstatements, reliance)

Question 15

If an accountant is seeking to sell an accounting practice, is he allowed to show the prospective purchaser working papers?

Answer 15

May allow prospective purchaser to look at working papers and tax returns without client permission, but after the CPA has committed to purchasing the practice, the accountant must obtain client permission to transfer working papers to the purchaser.

Question 16

As part of regulation of tender offers, under Securities Act of 1934. What must be filed if acquired more than 5% of any registered equity security? What info is reported?

Answer 16

File reports with the:
Issuer
Exchange on which the security is traded
SEC
Info reported includes:
Purchaser
Source of funding 
Purpose of acquisition
# of shares owned.

Question 17

What is a prospectus?

Who must it be furnished to?

Answer 17

A prospectus is a written document proposing a sale of securities to potential investors. The prospectus contains most of the info in the registration statement. It must be furnished to each potential investor prior to the time of delivery of the securities.

Question 18

What is a tort? Who will the court provide a remedy to?

Answer 18

A tort is an action by one party that causes a private or civil wrong to another party, other than a breach of contract. The courts will provide a remedy (action or damages) to the wronged party.

Question 19

What kind of remedy is generally not a remedy for breach of contract?

Answer 19

Punitive damages.

Question 20

In a case of Gross Negligence or Fraud who can sue?

Answer 20

Any foreseeable user. A foreseeable party is any party the accountant would reasonably foresee would use the CPA’s financial report.

Question 21

Explain 3rd party beneficiary and foreseen users?

Answer 21

A known 3rd party beneficiary is a non contracting party who the contracting party intended to receive primary benefit. Ultramares Rule- a specific minority rule under common law that states that the accountant is liable to clients and 3rd party primary beneficiaries for breach of contract and negligence.
Foreseen users: this is the majority rule in common law- is extends liability beyond 3rd party beneficiaries- it includes parties the accountant knew the work would be used by and if the accountant knows what purpose the work is being done for.

Question 22

Can SEC prosecute?

Answer 22

No, SEC cannot prosecute, they must leave this to the courts.

Question 23

Who has to comply with the 1933 Act?

Answer 23

Any issues of securities that are to be offered, sold, or delivered through interstate commerce or through the mail.

Question 24

What can you do during the 20 day wait period?
Can sales be made?
What does the SEC review for?

Answer 24

• preliminary prospectus may be delivered (red herring prospectus) to potential investors
• tombstone ads may be placed
• No sales, but can receive or make oral offers to sell the securities
• SEC reviewing for FULL and FAIR disclosure

Question 25

What is a Shelf Registration?

Answer 25

Shelf Registration is an exception to the single sale requirement. This type of registration permits the issuer to offer securities over a delayed period up to 3 years. Shelf securities are approved for sale over continuous period thus can be sold at anytime the company determines appropriate during the approved period. Only available to seasoned issuers.

Question 26

Do antifraud provisions apply to transactions that are exempt from the requirement of the 1933 Act?

Answer 26

Yes, the antifraud provisions still apply.

Question 27

For section 4 (6) how many securities may the issuer sell? Are both accredit and unaccredited allowed?

Answer 27

This exemption allows the issuer to sell up to 5 million in securities to all accredited investors. No unaccredited investors allowed.

Question 28

Regulation A:

Answer 28

Allows public issuances of securities up to $5,000,000 within a 12 month period without registering the securities with the SEC

Question 29

To recover under 1933, the plaintiff needs to establish that there were:

Answer 29

Damages & Material Misstatement (DAMM)

Question 30

Statute of Limitations:

Answer 30

expires 1 yr after the discovery of MM or omission OR

3 years after the effective date of the public offering.

Question 31

Under the 1934 Act registration, what must be contained in the registration?

Answer 31

-F/Ss for the preceding 3 years
-Info about the organization, financial structure and nature of the business
-Characteristics of the security and other securities that are outstanding
-Names of directors, officers, underwriters, and names of any security holders with more than 10% interest
-Description of bonus and profit sharing arrangement.
These requirements may be eliminated if the company’s number of equity securities holders falls below 300 (500 being the original criteria) and if a company can certify that on the last day of 3 consecutive annual reporting periods there were less than 500 holders of equity securities or assets were less than $10,000,000.

Question 32

What is a proxy statement?

Answer 32

A pamphlet or newsletter containing impartial info about the items which will be voted on at the meeting. It must also contain info on whose behalf the Proxy Solicitation is being made.

Question 33

Under Act of 1934, a purchaser of a security may recover damages if it can be proved that:

Answer 33

They incurred damages due to an intentional material misstatement made that was relied upon in a sale or purchase transaction of a security. DIMMR (damanges, intent, material misstatement, reliance)

Question 34

What is antifraud provision (Rule 10b and 10b-5)

Answer 34

This provision makes it illegal for any party using the mail or interstate commerce in connection with ANY security transaction (registered or not) to:
perform any activity with the intent to commit fraud and to misstate or omit a material fact.

Question 35

What is included in Form 10-K annual reports

Answer 35

MD and A of company’s financial condition and operating results
Executive compensation
5-year financial data
The market for the registrant’s common equity must be disclosed

Question 36

Registration under the 1934 act requires disclosure of

Answer 36

(1) corporate organization;
(2) financial structure;
(3) description of all securities;
(4) names of officers, directors, and underwriters;
(5) names of all owners of more than 10% of any class of nonexempt equity security;
(6) description of the nature of the business;
(7) financial statements; and
(8) bonus and profit-sharing arrangements.

Question 37

What law addresses the issue of insider trading?

Answer 37

The Securities Exchange Act of 1934 addresses the issue of insider trading. Specifically, insiders must turn over to the corporation any profits earned on purchases and sales of their company’s stock that fall within 6 months of each other. They also are prohibited from buying or selling stock based on inside information not available to the public.

Question 38

Under the Securities Exchange Act of 1934, short-swing profits arise from the sale and purchase (purchase and sale) of the issuer’s stock within

Answer 38

Short-swing profits are received by an insider from the sale and purchase (purchase and sale) of an issuer’s stock within a 6-month period. The corporation has the right to reclaim such profits.

Question 39

For the purposes of Section 16(b), an insider is:

Who is not an insider?

Answer 39

Officer
Director or
A beneficial owner of 10% or more of any class of equity securities registered under the 1934 act.

The holder of debentures (unsecured bonds) is not an insider because a debenture is a debt security, not an equity security

Question 40

As part of its regulation of tender offers, the Securities Exchange Act of 1934 requires any person who has acquired more than

Answer 40

5% of any registered equity security to file reports with the issuer, the exchange on which the security is traded, and the SEC. The information reported includes the identity of the purchaser, the source of funding, the purpose of the acquisition, and the number of shares owned.

Question 41

The 1934 reporting requirements may be eliminated if:

Answer 41

The company’s number of equity securities holders falls below 300.
A company can certify that on the last day of 3 consecutive annual reporting periods there were less than 500 holders of equity securities or assets were less than $10,000,000.

Question 42

Under the Securities Exchange Act of 1934 what must happen with the proxy statement?

Answer 42

Ten days prior to mailing a proxy statement to shareholders, a company reporting under the Securities Exchange Act of 1934 must file its proxy statements with the SEC.