R5-5 Flashcards

1
Q

Tork purchased restricted securities that were issued pursuant to Regulation D of the Securities Act of 1933. Which of the following statements is correct regarding Tork’s ability to resell the securities?

a.

Tork may resell the securities so long as the sale does involve interstate commerce.

b.

Tork may resell the securities as part of another transaction exempt from registration.

c.

Tork may not resell the securities unless Tork obtains a written SEC exemption.

d.

Tork may not resell the securities if the certificates contain a legend indicating that they are unregistered securities.

A

Choice “b” is correct. Under Regulation D of the Securities Act of 1933, Tork may only resell if the resale transaction continues to fall under the registration exemptions found in Section 3 of the 1933 Act.

Choice “a” is incorrect. Regulation D prohibits immediate reoffering to the public regardless of whether the reoffering is an interstate transaction or not.

Choices “d” and “c” are incorrect; there are no such rules.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

The prospectus for the sale of securities of a not-for-profit corporation contained material misrepresentations due to the negligence of the person who prepared the financial statements. As a result of the misrepresentations, purchasers of the shares lost their investment. Do the anti-fraud provisions of the Securities Act of 1933 apply in this situation?

a.

No, because the securities are exempt from registration.

b.

Yes, because the securities are required to be registered.

c.

Yes, because the misrepresentations were material.

d.

No, because only the issuer was negligent.

A

Choice “c” is correct. While the securities of a not-for-profit corporation are indeed exempt from registration (making choice “a” a tempting choice), where a prospectus is issued and contains material misrepresentations, liability can be imposed under the 1933 Act.

Choice “b” is incorrect. Securities of not-for-profit corporations need not be registered.

Choice “a” is incorrect. See above explanation.

Choice “d” is incorrect. The 1933 Act imposes liability on the negligent issuer for making material misrepresentations in any written offer, and a prospectus is considered to be a written offer under the 1933 Act.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

An original issue of transaction exempt securities was sold to the public based on a prospectus containing intentional omissions of material facts. Under which of the following federal securities laws would the issuer be liable to a purchaser of the securities?

I.

The anti-fraud provisions of the Securities Act of 1933.

II.

The anti-fraud provisions of the Securities Exchange Act of 1934.

a.

I only.

b.

Both I and II.

c.

Neither I nor II.

d.

II only.

A

Choice “b” is correct. The issuer could be liable for issuing securities by means of a false statement under the 1933 Act and can be liable for making false statements under the 1934 Act.

Choices “a”, “d”, and “c” are incorrect. Each of these choices incorrectly addresses either I and/or II.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Dean, Inc., a publicly traded corporation, paid a $10,000 bribe to a local zoning official. The bribe was recorded in Dean’s financial statements as a consulting fee. Dean’s unaudited financial statements were submitted to the SEC as part of a quarterly filing. Which of the following federal statutes did Dean violate?

a.

Securities Exchange Act of 1934.

b.

Securities Act of 1933.

c.

Federal Trade Commission Act.

d.

North American Free Trade Act.

A

Choice “a” is correct. Publicly traded corporations must register with the SEC and make certain periodic reports under the 1934 Act. These reports include business reports (10K, 10Q & 8K), insider trading tender offers & proxy solicitations. The unaudited financials, which are part of the company’s 10Q filing, fraudulently described the bribe.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Under the Securities Exchange Act of 1934, which of the following conditions generally will allow an issuer of securities to terminate the registration of a class of securities and suspend the duty to file periodic reports?

~~The corporation has fewer than 300 shareholders
~~The securities are listed on a national securities exchange
a.

No

No

b.

Yes

Yes

c.

Yes

No

d.

No

Yes

A

Choice “c” is correct. The reporting requirements of the 1934 Act apply to any company:

Whose shares are traded on a national exchange, or

Which has at least 500 shareholders in any one class who are not accredited and more than $10 million in assets.

Choices “b”, “d”, and “a” are incorrect, per the above.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Under the liability provisions of Section 11 of the Securities Act of 1933, an auditor may help to establish the defense of due diligence if:

I.

The auditor performed an additional review of the audited statements to ensure that the statements were accurate as of the effective date of a registration statement.

II.

The auditor complied with GAAS.

a.

Both I and II.

b.

II only.

c.

Neither I nor II.

d.

I only.

A

Choice “a” is correct. Due diligence is an affirmative defense that requires the CPA to prove that the CPA made a reasonable investigation and had reasonable grounds to believe that the financial statements were true and that no material facts were omitted. In essence, the CPA must prove that he or she followed GAAS.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Under the registration requirements of the Securities Act of 1933, which of the following items is (are) considered securities?

~~Investment contracts
~~Collateral-trust certificates
a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

A

Choice “a” is correct. A collateral trust certificate is a bond secured by collateral and deposited with a trustee. Like other bonds, it is considered a security. Under the securities laws, “investment contracts” are specifically deemed to be securities. While not defined in the securities laws, an investment contract generally is defined as any financial contract, investment, or scheme in which the investor expects to make a profit solely through the management by others.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Under the Securities Act of 1933, which of the following statements most accurately reflects how securities registration affects an investor?

a.

The investor is guaranteed by the SEC that the facts contained in the registration statement are accurate.

b.

The investor is provided with information on the stockholders of the offering corporation.

c.

The investor is assured by the SEC against loss resulting from purchasing the security.

d.

The investor is provided with information on the principal purposes for which the offering’s proceeds will be used.

A

Choice “d” is correct. One piece of information required in a registration statement is a statement of how the funds received will be used.

Choice “b” is incorrect. Generally, the registration statement need not include a list of the issuer’s current shareholders.

Choice “a” is incorrect. The SEC does not guarantee the accuracy of the facts contained in a registration statement.

Choice “c” is incorrect. The SEC does not assess the financial merit of registered securities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

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 issued by savings and loan associations.

c.

Securities guaranteed by domestic governmental organizations.

d.

Securities issued by insurance companies.

A

Choice “d” is correct. There is an exemption for insurance policies [Securities Act 3(a)(8)], but other securities issued by insurance companies must generally be registered.

Choice “a” is incorrect. Securities Act 3(a)(4) exempts securities of not-for-profit organizations.

Choice “c” is incorrect. Securities Act 3(a)(2) exempts securities guaranteed by domestic governmental organizations.

Choice “b” is incorrect. Securities Act 3(a)(5) exempts securities issued by a savings and loan association.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Which of the following requirements must be met by an issuer of securities who wants to make an offering by using shelf registration?

~~Original registration statement must be kept updated
~~The offeror must be a first-time issuer of securities
a.

No

Yes

b.

Yes

No

c.

No

No

d.

Yes

Yes

A

Choice “b” is correct. Shelf registrations are permitted when the issuer, for example, a well-known seasoned issuer (WKSI), is frequently issuing securities on a national exchange. The original registration statement must be kept current in order to provide accurate information to investors, and the SEC will not allow an issuer to use shelf registrations unless the issuer has a history of issuing securities. SA Rule 415.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Under the Securities Act of 1933, which of the following statements concerning an offering of securities sold under a transaction exemption is correct?

a.

The offering is exempt from the anti-fraud provisions of the 1933 Act.

b.

Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act.

c.

The offering is subject to the registration requirements of the 1933 Act.

d.

Resales of the offering are exempt from the provisions of the 1933 Act.

A

Choice “b” is correct. A transaction exemption applies only to the particular transaction. Subsequent sales must qualify for their own exemption, or they must be registered.

Choice “a” is incorrect. Exemption from the registration requirements does not exempt a security from the anti-fraud provisions.

Choice “c” is incorrect. If a security is exempt, it is not subject to registration.

Choice “d” is incorrect. A transaction exemption applies only to the transaction at hand. Subsequent sales must qualify for their own exemption, or they must be registered.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following situations would require Link to be subject to the reporting provisions of the 1934 Act?

~~Shares listed on a national securities exchange
~~More than one class of stock
a.

No

Yes

b.

No

No

c.

Yes

No

d.

Yes

Yes

A

Choice “c” is correct. A company must register under the 1934 Act if the company is registered on a national exchange, but having more than one class of stock does not require registration.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following documents must Link file with the SEC?

~~Quarterly reports (Form 10-Q)
~~Proxy statements
a.

Yes

Yes

b.

Yes

No

c.

No

No

d.

No

Yes

A

Choice “a” is correct. A corporation registered under the 1934 Act must file quarterly reports (Form 10-Q) and proxy solicitations by management.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following reports must be submitted to the SEC?

~~Report by any party making a tender offer to purchase Link’s stock
~~Report of proxy solicitations by Link stockholders
a.

No

Yes

b.

Yes

Yes

c.

Yes

No

d.

No

No

A

Choice “b” is correct. The 1934 Act (section 13) requires persons making a tender offer to shareholders of a registered corporation to file a report with the SEC, and the 1934 Act (section 14) prohibits anyone from soliciting proxies in a registered company without filing a report with the SEC.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933?

a.

The securities are nonvoting preferred stock.

b.

The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.

c.

The securities are AAA-rated debentures that are collateralized by first mortgages on property that has a market value of 200% of the offering price.

d.

The issuing corporation was closely held prior to the offering.

A

Choice “b” is correct. The 1933 Act generally is concerned with sales by issuers, underwriters, or dealers. Sales by other persons are exempt.

Choice “a” is incorrect. There is no exemption from registration for issuances of nonvoting stock.

Choice “d” is incorrect. The fact that the issuer was closely held prior to the public offering does not qualify the offering for an exemption.

Choice “c” is incorrect. The fact that securities appear to be relatively safe does not provide an exemption from the registration requirements.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

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 regulated by the SEC.

b.

The offering would be subject to the registration requirements of the Securities Exchange Act of 1934.

c.

The offering would be exempt from the registration requirements of the Securities Act of 1933.

d.

The shares of the offering could not be resold to investors outside the state for at least one year.

A

Choice “c” is correct. Intrastate securities offerings are exempt from the registration requirements of the Securities Act of 1933.

Choice “b” is incorrect. The 1934 Act does not apply to initial offerings. It controls exchanges once the securities are in the market.

Choice “a” is incorrect. Intrastate offerings are exempt from the Securities Act.

Choice “d” is incorrect. Shares exempt under the intrastate offering exemption may not be resold for nine months.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Which of the following statements concerning the prospectus required by the Securities Act of 1933 is correct?

a.

The prospectus is a part of the registration statement.

b.

The prospectus is prohibited from being distributed to the public until the SEC approves the accuracy of the facts embodied therein.

c.

The prospectus must be filed after an offer to sell.

d.

The prospectus should enable the SEC to pass on the merits of the securities.

A

Choice “a” is correct. The registration statement is divided into two parts. Part I is the prospectus; Part II contains other information about the securities being issued.

Choice “d” is incorrect. The SEC never passes on the merits of a security. The prospectus merely gives an investor information on which to make an investment decision.

Choice “c” is incorrect. The registration statement, including the prospectus, must be filed before any offer to sell may be made.

Choice “b” is incorrect. The SEC does not review the accuracy of the prospectus, but merely assures that it contains the required information.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

A preliminary prospectus, permitted under SEC Regulations, is known as the:

a.

“Blue-sky” prospectus.

b.

“Red-herring” prospectus.

c.

Unaudited prospectus.

d.

Qualified prospectus.

A

Choice “b” is correct. The regulations allow the use of a “red herring” prospectus in certain circumstances. A “red herring” prospectus may be missing certain information that is not yet available.

Choice “c” is incorrect. There is no provision for an unaudited prospectus.

Choice “d” is incorrect. There is no provision for a qualified prospectus.

Choice “a” is incorrect. “Blue sky” is the general name given to state securities laws, derived from the idea that without the laws, people could be lured into investing in the “blue sky.”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

A tombstone advertisement:

a.

May be substituted for the prospectus under certain circumstances.

b.

May contain an offer to sell securities.

c.

Notifies prospective investors that a previously offered security has been withdrawn from the market and is therefore effectively “dead.”

d.

Makes known the availability of a prospectus.

A

Explanation

Choice “d” is correct. A tombstone ad can be placed before a registration statement is effective. Only certain information, such as the nature of the security, the price, and the availability of a prospectus, may be included in the ad.

Choice “a” is incorrect. A tombstone ad is merely a brief advertisement. It cannot replace the prospectus.

Choice “b” is incorrect. A tombstone ad may indicate the nature of the securities to be issued, the price, and the availability of a prospectus; the ad may not make an offer to sell.

Choice “c” is incorrect. A tombstone ad is used before a registration statement for newly issued securities is effective; the ad does not announce the death of an old offering.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Which of the following factors, by itself, requires a corporation to comply with the reporting requirements of the Securities Exchange Act of 1934?

a.

Total assets of $2 million.

b.

Six hundred employees.

c.

Four hundred holders of equity securities.

d.

Shares listed on a national securities exchange.

A

Choice “d” is correct. A corporation must register under the 1934 Act if either: (i) the corporation’s securities are traded on a national exchange or (ii) the corporation has more than 2,000 shareholders (or 500 unaccredited shareholders) in any outstanding class and more than $10 million in assets.

Choice “b” is incorrect. The number of employees is irrelevant to whether a corporation must register under the 1934 Act.

Choice “a” is incorrect. The fact that a corporation has $2 million in assets does not invoke the registration requirement.

Choice “c” is incorrect. The fact that a corporation has 400 shareholders does not invoke the registration requirement.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Which of the following events must be reported to the SEC under the reporting provisions of the Securities Exchange Act of 1934?

~~Tender offers
~~Insider trading
~~Soliciting proxies
a.

Yes

Yes

Yes

b.

Yes

No

Yes

c.

Yes

Yes

No

d.

No

Yes

Yes

A

Choice “a” is correct. Tender offers, insider trading, and proxy solicitations all must be reported under the 1934 Act.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Which of the following transactions will be exempt from the full registration requirements of the Securities Act of 1933?

a.

All intrastate offerings.

b.

Any stockbroker transaction.

c.

All offerings made under Regulation A.

d.

Any resale of a security purchased under Regulation D offering.

A

Choice “c” is correct. Regulation A provides an exception from the full registration requirements. It provides a more simplified form of registration.

Choice “a” is incorrect. Not all intrastate offerings are exempt from registration. Only intrastate offerings made by issuer’s doing 80% or more of their business in that state are exempt from registration.

Choice “d” is incorrect. Resales must qualify for their own exemption. The fact that the securities were purchased pursuant to a Regulation D offering does not mean that a resale would necessarily be exempt from the registration requirements.

Choice “b” is incorrect. Stockbroker transactions are exempt only if the transaction (i) is on a customer’s order, (ii) is through an exchange or over-the-counter market, and (iii) constitutes a usual brokerage function.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Under the Securities Exchange Act of 1934, which of the following types of instruments is excluded from the definition of “securities?”

a.

Nonconvertible debentures.

b.

Certificates of deposit.

c.

Convertible debentures.

d.

Investment contracts.

A

Choice “b” is correct. Certificates of deposit issued by a bank are not deemed to be securities. A certificate of deposit is an instrument issued by a bank noting a deposit of funds and containing a promise to repay them at a later date.

Choice “d” is incorrect. There is no exemption for investment contracts.

Choice “c” is incorrect. There is no exemption for convertible debentures.

Choice “a” is incorrect. There is no exemption for nonconvertible debentures.

24
Q

If securities are exempt from the registration provisions of the Securities Act of 1933, any fraud committed in the course of selling such securities can be challenged by:

~~SEC
~~Person defrauded
a.

No

Yes

b.

Yes

Yes

c.

Yes

No

d.

No

No

A

Choice “b” is correct. The anti-fraud provisions of the 1933 Act are not limited to registered securities. An action can be brought under Sections 12 or 17 by either a private citizen or the SEC.

25
Q

One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed under the Securities Act of 1933 is that the:

a.

Plaintiff suffered a loss.

b.

Plaintiff gave value for the security.

c.

Issuer failed to exercise due care in connection with the sale of the securities.

d.

Issuer and plaintiff were in privity of contract with each other.

A

Choice “a” is correct. Under Section 11, all a plaintiff must prove is a false statement in the registration statement and damages.

Choice “d” is incorrect. A plaintiff must prove a false statement in the registration statement and damages. Privity is not required.

Choice “c” is incorrect. The plaintiff need not show that the issuer failed to exercise due care. All the plaintiff need show is that: (i) the plaintiff acquired (not necessarily bought) the stock, (ii) the plaintiff suffered a loss, and (iii) the registration statement contained a misrepresentation of, or an omission of, a material fact.

Choice “b” is incorrect. A plaintiff need not have given value for the securities as long as the plaintiff can prove a material misstatement and a loss. The plaintiff could have received the securities as a gift.

26
Q

An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer:

a.

Sell only to accredited investors.

b.

File an offering circular with the SEC.

c.

Provide investors with a proxy registration statement.

d.

Provide investors with the prior four years’ audited financial statements.

A

Choice “b” is correct. Under Regulation A, an offering circular must be filed with the SEC.

Choice “a” is incorrect. Under Regulation A, sales can be made to any number of investors as long as sales do not exceed $5 million.

Choice “d” is incorrect. There is no requirement of providing investors with four years’ audited financial statements.

Choice “c” is incorrect. There is no requirement under Regulation A that investors be provided with proxy registrations.

27
Q

Adler, Inc. is a reporting company under the Securities Exchange Act of 1934. The only security it has issued is voting common stock. Which of the following statements is correct?

a.

Adler need not file its proxy statements with the SEC because it has only one class of stock outstanding.

b.

Any person who owns more than 10% of Adler’s common stock must file a report with the SEC.

c.

It is unnecessary for the required annual report (Form 10K) to include audited financial statements.

d.

Because Adler is a reporting company, it is not required to file a registration statement under the Securities Act of 1933 for any future offerings of its common stock.

A

Choice “b” is correct. Persons who own more than 10% of a corporation’s stock must file an annual report with the SEC.

Choice “d” is incorrect. Corporations are not exempted from registering new issues under the 1933 Act simply because the corporations report under the 1934 Act.

Choice “a” is incorrect. All proxy statements must be filed, even if there is only one class of stock.

Choice “c” is incorrect. 10Ks must include audited financials.

28
Q

Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements?

a.

A member of the board of directors.

b.

An attorney for the corporation.

c.

A stockholder who owns more than 10% of the outstanding common stock.

d.

An owner of 5% of the corporation’s outstanding debentures.

A

Choice “d” is the correct choice. Officers, directors, and more than 10% stockholders are required to register and report under Section 16(a) of the 1934 Act. Holders of debt securities are not considered insiders and are not subject to the registration and reporting requirements.

Choice “b” is an incorrect choice. An attorney can be an insider, at least for purposes of Rule 10b-5.

Choices “a” and “c” are incorrect choices. Officers, directors, and 10% equity holders are required to register and report under Section 16(a) of the 1934 Act.

29
Q

Pix Corp. is making a $6,000,000 stock offering. Pix wants the offering exempt from registration under the Securities Act of 1933.

Which of the following provisions of the Act would Pix have to comply with for the offering to be exempt?

a.

Regulation A.

b.

Regulation D, Rule 505.

c.

Regulation D, Rule 504.

d.

Regulation D, Rule 506.

A

Choice “d” is correct. Rule 506 allows offerings of an unlimited amount to be made as long as all the other requirements of this rule are satisfied.

Choice “a” is incorrect. Regulation A offerings are limited to $5 million.

Choice “c” is incorrect. Rule 504 offerings are limited to $1 million.

Choice “b” is incorrect. Rule 505 offerings are limited to $5 million.

30
Q

Pix Corp. is making a $6,000,000 stock offering. Pix wants the offering exempt from registration under the Securities Act of 1933.

Which of the following requirements would Pix have to comply with when selling the securities?

a.

No more than 35 investors.

b.

Unaccredited investors only.

c.

No more than 35 unaccredited investors.

d.

Accredited investors only.

A

Choice “c” is correct. There can be no more than 35 unaccredited investors under a Rule 506 offering. Note that the 35 unaccredited investors must be sophisticated investors.

Choice “a” is incorrect. Although there can be no more than 35 unaccredited investors under Rule 506, there can be any number of accredited investors.

Choice “d” is incorrect. There can be up to 35 sophisticated unaccredited investors under a Rule 506 offering.

Choice “b” is incorrect. There can be any number of accredited investors.

31
Q

Frey, Inc. intends to make a $2,000,000 common stock offering under Rule 505 of Regulation D of the Securities Act of 1933. Frey:

a.

Must notify the SEC within 15 days after the first sale of the offering.

b.

Must provide all investors with a prospectus.

c.

May make the offering through a general advertising.

d.

May sell the stock to an unlimited number of investors.

A

Choice “a” is correct. Under Regulation D, the SEC must be notified within 15 days after the first sale of the offering.

Choice “d” is incorrect. Rule 505 offerings can be sold to an unlimited number of accreditedinvestors, but there can be no more than 35 unaccredited investors.

Choice “c” is incorrect. General solicitation generally is prohibited under Regulation D.

Choice “b” is incorrect. Under Rule 505, a balance sheet is required if there are unaccredited investors, but a prospectus is not required.

32
Q

Which of the following disclosures must be contained in a securities registration statement filed under the Securities Act of 1933?

a.

A copy of the corporation’s latest proxy solicitation statement.

b.

A list of all existing stockholders.

c.

The principal purposes for which the offering proceeds will be used.

d.

The names of all prospective accredited investors.

A

Choice “c” is correct. Under sections 6 and 7 of the 1933 Act, a registration statement must include specific financial information such as a balance sheet and a profit and loss statement, and “other material facts.” One such material fact is the principal purpose(s) for which the proceeds of the issuance will be used.

Choice “b” is incorrect. The registration statement need not include a list of current stockholders.

Choice “a” is incorrect. A registration statement need not include a corporation’s latest proxy statement.

Choice “d” is incorrect. The registration statement need not include the names of all prospective investors; indeed, there might not be any prospective investors at the time the registration statement is filed since preregistration solicitation is limited.

33
Q

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

a.

General partnership interests.

b.

Warrants.

c.

Stock options.

d.

Limited partnership interests.

A

Choice “a” is correct. An investment is a security if it is generally recognized as a security, mentioned in the Securities Act, or represents a profit-making investment, transaction, or scheme whereby one invests in a business and expects to make a profit from the efforts of others. A general partnership interest is not included within this definition because the partners take part in running the business and are not passive investors.

Choice “c” is incorrect. Stock options generally are recognized as securities.

Choice “b” is incorrect. Warrants generally are recognized as securities.

Choice “d” is incorrect. A limited partnership interest is a security since the limited partner does not take part in management of the firm but, rather, is very much like a stockholder of a corporation.

34
Q

Corporations that are exempt from registration under the Securities Exchange Act of 1934 are subject to the Act’s:

a.

Provisions imposing periodic audits.

b.

Antifraud provisions.

c.

Proxy solicitation provisions.

d.

Provisions dealing with the filing of annual reports.

A

Choice “b” is correct. The Securities Exchange Act’s antifraud provisions apply to all schemes to sell stock in interstate commerce and are not limited to registered corporations.

Choice “c” is incorrect. An issuer must follow the proxy provisions of the Securities Exchange Act only if the issuer is subject to the Act’s registration requirements.

Choice “d” is incorrect. An issuer must file annual reports under the Securities Exchange Act only if the issuer is subject to the Act’s registration requirements.

Choice “a” is incorrect. An issuer is subject to the periodic audit requirements of the Securities Exchange Act only if the issuer is subject to the Act’s registration requirements.

35
Q

Under the Securities Exchange Act of 1934, a corporation with common stock listed on a national stock exchange:

a.

Must distribute copies of Form 10-K to its stockholders.

b.

Is subject to having the registration of its securities suspended or revoked.

c.

Is prohibited from making private placement offerings.

d.

Must submit Form 10-K to the SEC except in those years in which the corporation has made a public offering.

A

Choice “b” is correct. A reporting company is subject to having its registration revoked for willful violation of the securities laws.

Choice “c” is incorrect. A company can make a private placement even if it has stock listed on a national exchange.

Choice “d” is incorrect. There is no exemption from filing a 10K annually merely because a public offering was made that year.

Choice “a” is incorrect. Form 10K must be submitted to the SEC, not to the shareholders.

36
Q

Regulation D of the Securities Act of 1933:

a.

Restricts the number of purchasers of an offering to 35.

b.

Is limited to offers and sales of common stock that do not exceed $1.5 million.

c.

Permits an exempt offering to be sold to both accredited and unaccredited investors.

d.

Is exclusively available to small business corporations as defined by Regulation D.

A

Choice “c” is correct. Under Regulation D’s rules 504, 505, and 506, sales may be made to both accredited and unaccredited investors, although under rules 505 and 506 the unaccredited investors may not number more than 35, and under rule 506 the unaccredited investors must also be sophisticated investors.

Choice “a” is incorrect. The 35 investor limit refers to the number of unaccredited investors under rules 505 and 506. There may be an unlimited number of investors under rule 504 of Regulation D and an unlimited number of accredited investors under rules 505 and 506 under Regulation D.

Choice “b” is incorrect. Under rule 505 under Regulation D there may be up to $5 million in sales. Sales under rule 506 are unlimited in amount.

Choice “d” is incorrect. Regulation D is for limited offerings, not small businesses.

37
Q

Under the liability provisions of Section 18 of the Securities Exchange Act of 1934, for which of the following actions would an accountant generally be liable?

a.

Intentionally preparing and filing with the SEC a reporting corporation’s incorrect quarterly report.

b.

Intentionally failing to notify a reporting corporation’s audit committee of defects in the verification of accounts receivable.

c.

Negligently filing a reporting corporation’s tax return with the IRS.

d.

Negligently approving a reporting corporation’s incorrect internal financial forecasts.

A

Choice “a” is correct. Section 18 of the Securities Exchange Act of 1934 subjects a defendant to liability for false or misleading information in the registration statement or other required reports (i.e., 10K, 10Q, or 8K). The defendant is not liable if the defendant can prove a lack of scienter. Because quarterly reports (10Q) are required under the 1934 Act, a defendant who intentionally prepared and filed an incorrect quarterly report would be liable under Section 18.

Choices “d” and “c” are incorrect because they do not deal with registration statements or reports required under the 1934 Act. Additionally, these choices specify that the accountant acted negligently. The 1934 Act requires scienter or intentional action.

Choice “b” is incorrect because it does not deal with registration statements or reports required under the 1934 Act.

38
Q

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 for 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.

a.

Both I and II.

b.

I only.

c.

II only.

d.

Neither I nor II.

A

Choice “c” is correct. The principal purpose of the Securities Act of 1933 is to provide investors with sufficient information to make an informed investment decision. The act accomplishes this goal by requiring registration of new issues of securities. Thus, II is a correct statement. The SEC does not guarantee the accuracy of this information, evaluate the offering’s financial merits or give assurances against loss. Thus, I is an incorrect statement.

39
Q

Under the Securities Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the Act?

~~Civil liability of monetary damages
~~Criminal liability of a fine
a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

A

Choice “a” is correct. Violation of Rule 10b-5 of the Securities Exchange Act of 1934 can result in civil damages, an SEC injunctive action and or criminal fines and penalties.

Only choice “a” reflects that both civil and criminal liability can be assessed against a CPA who intentionally violates the provisions of Rule 10b-5 of the Securities Exchange Act of 1934.

40
Q

Which of the following securities is exempt from registration under the Securities Act of 1933?

a.

One-year notes issued to raise working capital.

b.

Municipal bonds.

c.

Securities sold by a discount broker.

d.

Pre-incorporation stock subscriptions.

A

Choice “b” is correct. Municipal bonds are securities issued by the government and are generally exempt from registration.

Choice “c” is incorrect. A security is not exempt from registration merely because it is issued by a discount broker.

Choice “d” is incorrect. There is no exemption from registration for pre-incorporation stock subscriptions.

Choice “a” is incorrect. One-year notes are securities that are required to be registered and do not fall within the exempt securities of Section 3 of the 1933 Act.

41
Q

The Securities Act of 1933 provides an exemption from registration for:

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

Yes

Yes

b.

No

No

c.

Yes

No

d.

No

Yes

A

Choice “a” is correct. The 1933 Act generally requires issuances of securities to be registered unless a securities or transaction exemption applies. The 1933 Act includes a securities exemption for bonds issued by a municipality for governmental purposes and for securities issued by a not-for-profit charitable organization (and for certain other securities, too).

42
Q

Which of the following circumstances is a defense to an accountant’s liability under Section 11 of the Securities Act of 1933 for misstatements and omissions of material facts contained in a registration statement?

a.

Due diligence on the part of the accountant.

b.

Nonreliance by purchasers on the misstatements.

c.

The absence of scienter on the part of the accountant.

d.

The absence of privity between purchasers and the accountant.

A

Choice “a” is correct. To establish a case under Section 11, a plaintiff need only prove that the plaintiff acquired the stock; there was a material misstatement in a registration statement signed by the defendant, and damages. However, an accountant can avoid liability by raising the defense of due diligence.

Choice “c” is incorrect. Because scienter is not an element of the cause of action, the absence of scienter is not a defense.

Choice “d” is incorrect. Because privity is not required, the absence of privity is not a defense.

Choice “b” is incorrect. Because reliance on the misstatement is not a requirement, the absence of reliance is not a defense.

43
Q

Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC’s continuous disclosure system?

a.

Companies with assets in excess of $10 million and 500 or more shareholders.

b.

Companies with assets in excess of $5 million and 300 or more shareholders.

c.

Companies with annual revenues in excess of $10 million and 500 or more shareholders.

d.

Companies with annual revenues in excess of $5 million and 300 or more shareholders.

A

Choice “a” is correct. Under Section 12, a company must register (is subject to continuous disclosure requirements) if it is listed on a national securities exchange or if it has at least 500 shareholders in any outstanding class and has more than $10 million in assets.

Choices “d”, “c”, and “b” are incorrect, per the above.

44
Q

Under Regulation D of the Securities Act of 1933, what is the maximum time period during which an exempt offering may be made?

a.

Three months.

b.

Twelve months.

c.

Twenty-four months.

d.

Six months.

A

Choice “b” is correct: twelve months. Under Rule 504 the issuance of securities may not exceed $1 million dollars in a 12-month period. Under Rule 505 the issuance of securities may not exceed $5 million dollars in a 12-month period. Rule 506 permits an unlimited amount of stock to be issued. 506 is often referred to as a private placement because that rule exempts transactions not involved in a public offering.

Choices “a”, “d”, and “c” are incorrect because there are no 3-month, 6-month or 24-month restrictions found in Rules 504, 505 or 506 of Regulation D.

45
Q

Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA who certifies financial statements included in a registration statement generally will not be liable to a purchaser of the security:

a.

If the CPA can prove due diligence.

b.

Unless the purchaser can prove privity with the CPA.

c.

Unless the purchaser can prove scienter on the part of the CPA.

d.

If the financial statements were materially misstated.

A

Choice “a” is correct. Under Section 11 of the Securities Act of 1933, a CPA who certifies financial statements is generally liable if the purchaser can prove the purchaser acquired the stock, the purchaser suffered a loss, and in the registration statement there was a misrepresentation of, and/or an omission of, a material fact. The purchaser does not have to prove scienter or negligence on the part of the CPA. The purchaser does not have to prove reliance. However, the CPA is not liable if the CPA can prove “due diligence.”

Choice “c” is incorrect because it states the purchaser must prove scienter.

Choice “b” is incorrect because there is no privity defense in the securities acts. Privity is only a defense to negligence actions by third parties against an accountant. Privity is not a defense to a ‘33 action, a ‘34 action or fraud.

Choice “d” is incorrect. The purchaser must prove the financial statements were materially misstated. Materially misstated financial statements would never be a defense of a CPA.

46
Q

What is the standard that must be established to prove a violation of the anti-fraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?

a.

Negligence.

b.

Intentional misconduct.

c.

Criminal intent.

d.

Strict liability.

A

Choice “b” is correct. A violation of Rule 10b-5 will be found only if the person acted with scienter (intent to deceive or reckless disregard for the truth).

Choice “a” is incorrect. The defendant’s negligence is too low a standard for liability under rule 10b-5; rather, liability requires at least gross negligence (the defendant’s reckless disregard for truth).

Choice “c” is incorrect. In order to hold the defendant liable, the plaintiff need not establish the defendant’s criminal intent; rather, the plaintiff must show scienter (the defendant’s intentional deceit or the defendant’s reckless disregard for truth).

Choice “d” is incorrect. Strict liability is liability without proof of any fault. Rule 10b-5 requires proof of at least gross negligence (the plaintiff can also prevail if the plaintiff establishes that the defendant acted with intentional misconduct).

47
Q

Under the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted:

a.

Negligently.

b.

Without due diligence.

c.

With independence.

d.

Without good faith.

A

Choice “d” is correct. Section 10(b) prohibits fraud in connection with the sale of securities. If a CPA acts without good faith, the CPA is probably acting fraudulently.

Choice “a” is incorrect. Section 10(b) is violated by fraudulent conduct; the defendant’s negligence is not sufficient to hold the defendant culpable.

Choice “c” is incorrect. Section 10(b) prohibits fraud in connection with the sale of securities. Acting with independence is not tantamount to fraud. Indeed, a CPA generally must be independent when performing an audit.

Choice “b” is incorrect. Section 10(b) prohibits fraud in connection with the sale of securities. Lack of due diligence probably indicates negligence, but does not necessarily constitute fraud.

48
Q

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

a.

Issuance of stock by a publicly-traded corporation to its shareholders because of a stock split.

b.

The public sale by a corporation of its negotiable 10-year notes.

c.

The sale across state lines of municipal bonds issued by a city.

d.

The public sale by a charitable organization of 10-year bearer bonds.

A

Choice “b” is correct. The Securities Act of 1933 requires registration of issuances of securities unless an exemption applies. Long-term notes (with maturity dates beyond nine months) are considered securities, and there is no exemption for 10-year notes of corporations. Thus, the sale must be registered.

Choice “d” is incorrect. Securities of charitable organizations enjoy a securities exemption and need not be registered under the 1933 Act.

Choice “c” is incorrect. Securities issued by municipalities enjoy a securities exemption – even if they are sold across state lines. Thus, registration is not required under the 1933 Act.

Choice “a” is incorrect. A transaction exemption applies when a corporation issues stock to its own shareholders and no commission is paid, as in the case of a stock split.

49
Q

What 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.

Exercise of due care.

b.

Good faith and lack of knowledge of the statement’s falsity.

c.

Lack of privity with an injured party.

d.

Lack of gross negligence.

A

Choice “b” is correct. Section 18 of the Securities Exchange Act of 1934 imposes civil liability on persons who intentionally make false statements in a registration statement or any other document required to be filed under the act. Since the act proscribes only intentional misconduct, lack of intent to deceive is a defense. Good faith and lack of knowledge of the statement’s falsity would show that the false or misleading statement was not made with an intent to deceive.

Choice “d” is incorrect. Lack of gross negligence sets the bar too high for the defense. Gross negligence can be proved through reckless conduct. Under section 18, liability cannot be imposed merely because the CPA acted recklessly.

Choice “a” is incorrect. Due care is the standard for negligence. It is a much higher standard of care than is required under section 18. Under section 18, a CPA need not prove that he or she was careful; only that he or she did not intentionally deceive.

Choice “c” is incorrect. Privity (e.g., a contractual relationship) is not a requirement of a section 18 cause of action. Therefore, lack of privity is not a defense.

50
Q

According to the Securities Act of 1933, which of the following statements is correct regarding an issuer of securities?

a.

An issuer is permitted to advertise an initial offering of securities only through distribution of the prospectus.

b.

If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid.

c.

All securities issuers must register the securities offering with the Securities and Exchange Commission (SEC).

d.

All securities issuers must provide potential investors with a prospectus containing specified information.

A

Choice “b” is correct. A purchaser has a right to rescind under section 12 of the 1933 Act if the issuer fails to meet disclosure requirements.

Choice “d” is incorrect. Under rule 506 of Regulation D, if only accredited investors invest, no prospectus need be given.

Choice “a” is incorrect. Red herring prospectuses, tombstone ads, and oral offers also are permitted.

Choice “c” is incorrect. Certain issuers (e.g., charities, banks) do not need to register.

51
Q

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

a.

The public sale by a corporation of its negotiable 10-year notes.

b.

The issuance of stock by a publicly-traded corporation to its existing shareholders because of a stock split.

c.

A public sale of municipal bonds issued by a city government.

d.

The public sale of stock of a trucking company regulated by the Interstate Commerce Commission.

A

Choice “a” is correct. No registration exemption is available for sales of long term notes.

Choice “d” is incorrect. Securities of regulated common carriers are within a securities exemption (on the rationale that the regulating government agency will oversee the securities issuance).

Choice “c” is incorrect. The issuance of securities of governmental bodies generally is within a securities exemption.

Choice “b” is incorrect. Exchanges with existing shareholders are within a transaction exemption if no sales commission is paid in connection with the sale.

52
Q

Sam’s Retail Outlet’s certified public accountant prepares financial statements that omit a material fact. The financial statements are part of Sam’s registration statement. An investor purchases Sam’s stock. Under Section 11 of the Securities Act of 1933, the accountant can avoid liability by showing that she:

a.

Lacked criminal intent in preparing the financial statements.

b.

Was not in privity of contract with the Investor.

c.

None of the answer choices are correct.

d.

Exercised due diligence in preparing the financial statements.

A

Choice “d” is correct. A CPA’s best defense to a 1933 Section 11 action is that the CPA exercised due diligence by performing the audit in accordance with generally accepted auditing standards.

Choice “a” is incorrect. It is not necessary to prove criminal intent on the part of the CPA. Thus, lack of criminal intent is not a defense.

Choice “b” is incorrect. Privity is not necessary in a Section 11 lawsuit.

Choice “c” is incorrect, per the above explanations.

53
Q

KMC, Inc., is issuing $7 million of stock in a single offering. If KMC does not want to provide investors with any material information about itself, its business, or its securities, it may only do so if:

a.

All of the investors are sophisticated.

b.

At least 35 investors are accredited.

c.

Any of the investors are accredited.

d.

All of the investors are accredited.

A

Choice “d” is correct. An offering of the type described can only be made under Rule 506. Under Rule 506 an offering can be made of any amount of securities without registering the offering if it is made to any number of accredited investors and no more than 35 unaccredited investors who are sophisticated in investing. If only accredited investors purchase the securities, the issuer is not required to make any disclosures, but if any unaccredited investors purchase any of the securities, all investors must receive at least an annual report containing audited financial statements.

Choices “a”, “b”, and “c” are incorrect, per the above explanation.

54
Q

Under the liability provisions of Section 11 of the Securities Act of 1933, which of the following must a plaintiff prove to hold a CPA liable?

I.

The misstatements contained in the financial statements certified by the CPA were material.

II.

The plaintiff relied on the CPA’s unqualified opinion.

a.

Both I and II.

b.

I only.

c.

Neither I nor II.

d.

II only.

A

Explanation

Choice “b” is correct. Under Section 11 of the 1933 Act, the plaintiff merely needs to prove that he acquired the stock, and that there was a material misstatement of fact in a registration statement signed by the defendant and damages.

55
Q

Under Regulation D, Rule 505, of the Securities Act of 1933, which of the following statements is correct regarding a $3,000,000 stock offering sold only to accredited investors?

a.

The issuer may sell the stock to only 35 accredited investors.

b.

The issuer must supply all accredited investors with financial information.

c.

The issuer must notify the SEC within 15 days after the first sale of the offering.

d.

The issuer may make the offering through a general advertising.

A

Choice “c” is correct. This is a private offering because it is offered only to accredited investors. Therefore, Rules 504, 505, and 506 will apply. A general condition that applies to Rules 504, 505, and 506 is that the issuer must notify the SEC within 15 days after the first sale of the offering.

Choice “a” is incorrect. Rule 505 requires that the offering be made to no more than 35 unaccredited investors. There is no limit on the number of accredited investors in the offering.

Choice “d” is incorrect. General advertising is prohibited under Rules 504, 505, and 506.

Choice “b” is incorrect. The issuer does have to supply all investors with financial information if there are any unaccredited investors in the offering. When the offering is made only to accredited investors, no disclosures are required.

56
Q

Pick, CPA, was engaged by Edge Corp. to audit Edge’s financial statements. Pick, in performing the audit and rendering an unmodified opinion, intentionally ignored several material omissions in the financial statements. Edge included Pick’s audit report in its annual filing with the SEC and in its annual stockholders’ report. Drane purchased shares of Edge stock based on Drane’s review of the past performance of the stock and current-year financial statements. When the omissions in the financial statements became known, the value of Edge stock declined and Drane suffered a loss. Under the provisions of Rule 10b-5 of the Securities Exchange Act of 1934, what will be the result of a suit by Drane against Pick?

a.

Drane will lose because the stock purchased was not part of a new issue.

b.

Drane will win because Pick was negligent.

c.

Drane will win because Pick acted with intent.

d.

Drane will lose because only Edge is liable.

A

Choice “c” is correct. To recover damages for violation of Rule 10b-5, a plaintiff must prove all of the following: the plaintiff bought or sold the securities, the plaintiff suffered a loss, there was a material misrepresentation or material omission of fact, scienter (intent to deceive or reckless disregard for the truth), the plaintiff relied on the misrepresentation, and interstate commerce was involved.

Choices “b”, “d”, and “a” are incorrect, per the above rule.