Section 2 Gov. Regulation Flashcards
SECURITIES ACT OF 1933
The Securities Act of 1933 is a federal statute regulating the initial ____and private placement of ___.
It creates liability of the seller to
Requires registration of securities and full public ___ of all ___information about the securities and the __
It is designed to protect the unsophisticated ___.
public offering, securities
to all third-party purchasers of the securities.
disclosure, material, company
investing public
SECURITIES ACT OF 1933
The basis for a claim against an accountant under this statute is a ____ or ___ of a material fact in the audited financial statements.
There is no need to prove negligence, fraud, reliance, or even proximate cause. T/F
false statement or omission
True
What offering is exempt from the antifraud provision of the1933 act?
No offering is exempt from the antifraud provisions of the 1933 Act
Under the Securities Act of 1933, ___ of securities may be made without registration
However, any resales of the offering may be subject to ____ unless another exemption provision of the Act is applicable
, original offerings
registration
The ____is a federal statute that regulates the trading of securities that are already issued and outstanding.
What did it create?
Securities Exchange Act of 1934
Created SEC
Who established Requirements for registration and operation of stock exhcnages/brokers
Securities exchange act of 1934
What required reporting to the SEC
Securities exchange act of 1934
The partnership of Rodgers & Higgs, CPAs, performed audits of Alt Corp., a publicly traded company, for the past several years. After issuing the current year’s audit report, the CFO of Alt confessed to having committed fraud against Alt. Under which of the following statutes would the investors most likely bring suit against Rodgers & Higgs?
Securities Act of 1933, if they can prove ordinary negligence
Securities Act of 1933, if they can prove gross negligence
Securities Exchange Act of 1934, if they can prove ordinary negligence
Securities Exchange Act of 1934, if they can prove scienter
Securities Exchange Act of 1934, if they can prove scienter
What does scienter mean?
Scienter refers to the knowledge of a falsity, knowingly acting with malice or evil intent
Knowledge of fraud
Which of the following is least likely to be considered a security under the Securities Act of 1933?
Stock options
Warrants
General partnership interests
Limited partnership interests
GENERAL PARTNERSHIP INTEREST
Stock options and warrants are commonly considered securities.
A limited partnership interest is specifically included in the definition of a security, but a general partnership interest is not included.
If securities are offered and sold, and their registration statement, including the prospectus, contains material misstatements and/or material omissions, the following are true about the purchaser: (5)
Can sue if $ is lost Not requried to show reliance of F/S Can sue issuer Can sue experts Can Recover damages
What is a prospectus
How can a prospectus create a liability?
prospectus is any notice, circular, advertisement, or communication that offers any security for sale
Create a liability if it is misleading
If the SEC does not send a “comment” letter, the company may begin to sell its shares to the public ___days after filing its registration.
20
Regulation D of the Securities Act of 1933 permits an exempt offering to be sold to both accredited OR nonaccredited investors
Both
Nonaccredited investors must meet what test?
Sophistication test — they must be sophisticated
The duties of the SEC include: (3)
What type of criminal violations do they prosecute?
requiring disclosure of facts about listed securities,
regulating securities brokers,
investigating securities fraud.
They dont – DOJ prosecutes
A CPA meets the required standard of care in conducting an audit of a client’s financial statements by exercising the same skill and care expected of an ordinarily prudent ___under the same or similar circumstances.
CPA
The Securities Act of 1933 requires the disclosure of the ___purposes for which the offering ___ will be used
principal, proceeds
Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn’s objectives without requiring the approval of the shareholders of either corporation?
A cash tender offer, whereby Acorn acquires at least 90% of Trend’s shares, followed by a short-form merger of Trend into Acorn… WHY?
shareholders (and board of directors) must approve any merger or consolidation except for a short-form merger if 90% of the stock was acquired.
The shareholders of Trend, the target, are free to voluntarily sell the shares—they are not forced to sell in a tender offer—and thus do not need to give approval. Once the 90% level of control has been achieved, the short form (or parent and sub merger) is effected without need for any approvals
SEC Rule 10b-5 goes to the liability of a person who commits fraud with the purchase or sale of any security. Which of the following is NOTTTT one of the terms of Rule 10b-5?
Scienter (actual misconduct) is necessary.
Negligence is enough for purposes of Rule 10b-5.
Only actual purchasers or sellers of the security can recover.
To recover, the purchaser or seller must have relied on the false statement and must not have known it was fals
Negligence is enough for purpose of Rule 10b-5.
If SEC, scienter. If 1933 Act, Negligence
The Securities Exchange Act of 1934 is applicable to any firm whose shares are listed on a national securities exchange and also to any firm with at least ___shareholders and gross assets of at least $__
500, $10M
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
Shares listed on national Sec. Exchange ONLY
More than 1 class of stock is irrelevant for the 1934 act
a sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer (e.g., a stockbroker) is exempt from ___ under the Securities Act of 1933.
registration
These securities are exempt from registration (not from antifraud provision) (9)
Commercial Paper - (if mature w/in 9 months).
Securities for gov
Securities of banks
Securiteis of noprofit
Securities of loan associations
Securities of contract carriers
Insurance/annuity/endowment polices (NOT INSURANCE COMPANIES)
Securities issued in bankruptcy reorganizations
Securities exchanged w/ existing security holders
Which of the following requirements must be met by an issuer of securities who wants to make an offering by using shelf registration?
The original registration statement must be kept updated.
The offeror must be a first-time issuer of securities.
The original registration statement must be kept updated.
the law requires the original registration statement to be updated periodically.
Who is required to file a cash tender offer was created? The people making the offer or the people receiving the offer
What is the name of the required report to display changes in stock prices?
people making the offer
There is no reporting requirement by companies to report changes in their stock prices.
“Short swing” transactions are ___. It is the ___who bears the liability for failure to comply with the “short swing” rules under the Securities Exchange Act of 1934.
illegal, insider
Under SEC reporting requirements, the company is required to file the periodic report listing newly appointed ___
officers
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?
The anti-fraud provisions of the Securities Act of 1933
The anti-fraud provisions of the Securities Exchange Act of 1934
Both b/c they both deal with omissions
Regulation A of the Securities Act of 1933 provides a safe harbor for the issuer with the filing of an offering ___with the SEC without a qualification on ___, provision of____, or provision of ____ registration statements to investors.
circular, investors, audited financial statements, proxy registration
A “tombstone” advertisement makes known the availability of a ___. The ad is generally placed during the “___,” and thus cannot contain an offer to __. It is attempting to generate ___in the security which will soon be offered for sale.
prospectus, waiting period, sell, interest
During the 20-day period that the SEC has to examine the registration statement
can the issuer publish a tombstone advertisement?
Sell securiteis?
What type of prospectus can be distributed?
What type of offers can be received
Yes
No
Red Herring
Oral, NOT WRITTEN
What is a red herring prospectus?
(statement in red ink that says a registration statement has been filed, but not effective)
Also known as a preliminary prospectus
Under the securities laws, what is an accredited investor?
Persons with a net worth of over $1,000,000 or an annual income of over $200,000 for the last two years
Any director/exec officer/general partner of issuer
Certain bank/insurance companies/trusts that have assets exceeding $5M
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?
Tork may resell the securities as part of another transaction exempt from registration…. why?
these securities can be resold without being registered if sold by an average investor, or if the transaction falls within the safe harbors of Rule 144 and Rule 144A.
Rule 144 exempts registration if there is sufficient current public information about the company & seller held at least a year.
Craven was the CEO of Engines Plus, Inc., a publicly traded company. Hanson, CPA, was the longtime controller for the company. Engines Plus was about to be sued in a class action suit for defective engines. Only Craven knew about the impending suit. On March 1, Craven told Hanson about the impending suit. On March 2, Craven told Spore, an old friend, about the suit. Spore knew that Craven was the CEO of Engines Plus. On March 3, Craven, Hanson, and Spore all sold the stock they owned in Engines Plus. On March 4, the class action suit was filed and the value of Engine Plus stock plummeted. Under the insider trading provisions of the Securities Exchange Act of 1934, which of the following statements is correct regarding Craven, Hanson, and Spore?
Craven and Hanson would be considered insiders and Spore would be considered a tippee, all with knowledge of material, nonpublic information.
Insiders: conducted by officers, directors, and/or employees. However, insider trading violations may also include “tippees”: individuals outside the company who have been “tipped off” about the nonpublic problem,
Compliance with federal law assures compliance with state law….T/F
False - States can have their own laws. They must adopt Fed laws, but can have their own laws too
SEC Rule 504 can only be used by companies not reporting to the SEC, usually closely-held companies. No registration is required if no more than $5 million of securities are sold within a 12-month period with the following: (4)
No limit on # of investors
No general public offering/advertisement
No restriction on resale by investor
Sales are only allowed to accredited investors
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
Peron defrauded
Both.
Even though a security may be exempt from registration under the Securities Act of 1933, when fraud is committed in the course of selling the stock, it is very likely that the provisions of the Securities and Exchange Act of 1934 will be applicable. Hence, the fraudulent activity can be challenged by both the SEC and by the victim of the fraud.
Any person who owns more than _% of common stock must file a report with the SEC.
Why?
10%, An insider must register with the SEC their initial ownership and subsequent changes in ownership.
General Insiders: Director/executive
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
Both
Proxy solicitations by stockholders also require the filing of a report with the SEC.
Rule 10b5 is under 1933 act or 1934 act?
1934
Rule 10b-5
What is required for liability?
Only actual purchasers or sellers of the security can _
To recover, the purchaser or seller must have relied _
Rule 10b-5 applies to any trading of __
Rule 10b-5 applies to all types of __
Securities can be registered under either__ or __
Rule10b-5 must involve interstate commerce (__)
Rule10b-5 What transactions are exempt?
Scienter recover. upon the false statement securities (OTC/Stock exchange/Private Sale) all types of securities Either 1934 act or 1933 act or unregistered (mail) No transactions are exempt
Under Regulation D of the Securities Act of 1933, what is the maximum time period during which an exempt offering may be made?
12 months
REGULATION D
What are the two SEC rules?
Rule 504: Can only be used by companies not ___
Rule 504: When no registration? & what (4)
Rule 506: No registration is required for a __
Rule 506: How many accredited investors?
Rule 506: How many unaccredited investors?
Rule 506: General Public offer? Restricted resale?
Rule 506: Distributon of what to nonaccredited investors?
504 & 506
Not reporting to the SEC
No registration when no more than $5M in securities are sold within 12 months &(No limit on # of investor/No gen public offer/No restriction or resale by investor
Private placement
Unlimited
Up to 35, but need to be sophisticated
No general public offer and restricted resales
Distribution of Audited F/S to nonaccredited investors
REGULATION D
Under 506, when can they advertise?
If all investors are accredited and company ensure they’re all accredited
SEC RULE 144
This rule allows the purchaser of restricted securities to ___ those securities w/o ___ IF (5)
resell, w/o registration
- Seller held for at least 2 yrs
- Seller sells through a broker
- Trading volume formula
- Must be adequate current info about the issuing company before sale is made
- File 144 if sale involves more than 5K shares or greater than $50K in any 3 month period
Restricted securities are securities acquired in ___/ from the issuing company or from an affiliate of the issuer.
unregistered/private sales
Each investor must always be given a prospectus. T/F
True
Universal Corp. intends to sell its common stock to the public in an interstate offering that will be registered under the Securities Act of 1933. Under the Act:
Universal’s filing of a registration statement with the SEC does not automatically result in compliance with the “blue sky” laws of the states in which the offering will be made. WHYYYY
Compliance with SEC regulations does not automatically result in compliance with state laws.
Under the Securities and Exchange Act of 1934, which of the following types of instruments is excluded from the definition of “securities”?
Investment contracts
Convertible debentures
Nonconvertible debentures
Certificates of deposit
CDs are NOT securities because they do not constitute an investment in a common enterprise with the expectation of profit as do investment contracts and both convertible and nonconvertible debentures.
World Corp. wanted to make a public offering of its common stock. On May 10, World prepared and filed a registration statement with the SEC. On May 20, World placed a “tombstone ad” announcing that it was making a public offering. On May 25, World issued a preliminary prospectus, and the registration statement became effective on May 30.
On what date may World first make oral offers to sell the shares?
May 10th
A class of stock given in exchange for another class of stock by the issuer to its existing stockholders without the issuer paying a commission is ___ from registration under the Securities Act of 1933.
exempt
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?
The offering would be exempt from the registration requirements of the Securities Act of 1933. WHY
Intrastate (i.e., within a state only) offerings are exempt from the registration requirements of the Securities Act of 1933
Imperial Corp. is offering $450,000 of its securities under Rule 504 of Regulation D of the Securities Act of 1933. Under Rule 504, Imperial is required to:
notify the SEC within 15 days after the first sale of the securities.
Regulation D is a combination of the private placement and small issue exemptions. Issuers must file Form D, which lists minimal information with the SEC. In the Form D instructions, the issuer will find they have 15 calendar days after the “date of first sale” of securities to submit the form.
Under the Securities Exchange Act of 1934, a corporation with common stock listed on a national stock exchange: T/F
1) is prohibited from making private placement offerings.
2) is subject to having the registration of its securities suspended or revoked.
3) must submit Form 10-K to the SEC except in those years in which the corporation has made a public offering.
4) must distribute copies of Form 10-K to its stockholders.
F
T
F
F
Which of the following factors, by itself, requires a corporation to comply with the reporting requirements of the Securities Exchange Act of 1934? (3)
traded on national excange
500 shareholders AND assets of $10M or more
What is the standard that must be established to prove a violation of the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?
Intentional misconduct
Criminal intent
Intentional Misconduct (known as scienter)
A prospectus is part of the required ____materials filed with the ___
registration statement
SEC
prospectus is filed (before or after)there is an offer to sell.
before
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.
Under the Securities Act of 1933, which of the following statements is (are) correct regarding the purpose of registration?
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.
The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities.
II only
While the purpose of the Act is not to allow for the detection of management fraud, it does have antifraud provisions
Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements?
An attorney for the corporation
An owner of 5% of the corporation’s outstanding debentures
A member of the board of directors
A stockholder who owns 10% of the outstanding common stock
Owner of 5% of corp outstanding debentures
Which of the following transactions will be exempt from the full registration requirements of the Securities Act of 1933?
All intrastate offerings
All offerings made under Regulation A
Any resale of a security purchased under a Regulation D offering
Any stockbroker transaction
All offerings under Reg A
Under the registration requirements of the Securities Act of 1933, which of the following items are considered securities?
Investment contracts
Collateral-trust certificates
Both
Collateral-trust certs are issued by banks
Intrastate
Exemption requirements are that _% of the issuing company’s business must be in a particular state, and all of the ___must be in that state.
80, investors
The registration requirements of the Securities Exchange Act of 1934 apply to ___,__,__,__ , rather than to the securities offering. The purpose of this Act is more the regulation and supervision of market activities than of individual offerings.
issuers, underwriters, brokers, and exchanges
Companies that are exempt from the 1934 Act do not have to worry about filing of ___and provisions imposing periodic ___.
annual reports , audits
The actual sale of shares may not occur until the registration has “gone effective,” which is usually 20 days after the filing unless the SEC has issued a “___” letter that requires changes.
comment
The ____is the end result of the registration process that contains the material financial and other information concerning securities offered for public sale
registration statement
This type of registration of securities that are registered for an offering to be made on a continuous (i.e., an employee stock benefit plan)
Shelf registration
Can also be b/c of a delayed basis (waiting for better market conditions
A corporation with common stock listed on a national stock exchange is/isn’t prohibited from making private placement offering
is not
T/F - 1933 Securities Act
All securities issuers must provide potential investors with a prospectus containing specified information.
An issuer is permitted to advertise an initial offering of securities only through distribution of the prospectus.
All securities issuers must register the securities offering with the Securities and Exchange Commission (SEC).
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.
False - dont need a prospectus
False - can advertise a different way
False - if they meet the criteria, they dont have to register
True
This makes known the availability of a prospectus.
tombstone advertisement
When a common stock offering requires registration under the Securities Act of 1933, the issuer would act unlawfully if it were to sell the common stock without a __
prospectus
