Deck 18: Securities Regulation

Question 1

Stocks must comply with federal securities laws only. Bonds must comply with state securities laws only.

Answer 1

False

Question 2

Debt financing bonds may be issued by governments not by private companies.

Answer 2

False

Question 3

Equity instruments, like stock, specify the amount of money, the time period it is to be held, and the rate of return to be paid.

Answer 3

False

Question 4

The term blue sky laws is attributed to a court opinion describing the purpose of state securities laws as working to prevent the "speculative schemes which would have no more basis than so many feet of blue sky."

Question 5

Officers of a company have a duty to use "reasonable efforts" to make a profit for shareholders, but are rarely liable for losses suffered during their leadership.

Question 6

Shares of stock in a company usually include ownership rights.

Question 7

A share of stock is, in part, a claim on a share of most recent year's profits of a company.

Question 8

A security is a written instrument that provides evidence of a debt or equity ownership.

Question 9

Debt and equity both provide sources of funds for a company.

Question 10

The 1933 Securities Act primarily concerns issuing of new securities, not the regulation of existing securities.

Question 11

If an investment is legally classified as a security, then the security issuer may choose to follow either state securities law or federal securities law.

Question 12

Stocks and bonds are the most commonly known form of securities.

Question 13

The 1933 Securities Act is supposed to prevent fraud and misrepresentation in the sale of new securities.

Question 14

A company has no legal liability to repay shareholders the amount they have invested.

Question 15

The Securities and Exchange Commission is responsible for enforcement and administration of federal securities law.

Question 16

A debt instrument will typically specify the rate of interest charged to the sum borrowed.

Question 17

Debt instruments, such as bonds, may not be sold for a commission.

Question 18

Stockholders have a claim on future profits of a company.

Question 19

The Federal Trade Commission is responsible for enforcement and administration of federal securities law.

Question 20

The sale of securities is the primary source of corporate finance.

Question 21

Despite the detailed listing of security instruments in the 1933 Securities Act, the Supreme Court has also given a broad definition to what is covered by the Act.

Question 22

An exempt security, like a government bond, is not subject to either the registration or disclosure requirements of the federal statutes.

Question 23

The Supreme Court's Howey test holds that a security is an investment of money in a common enterprise where others work to earn profits for investors.

Question 24

The term "security" has a legal meaning that includes only stock, bonds and debentures.

Question 25

SEC v. Howey provides the major definition for determining what investments will be deemed to be securities subject to securities law.

Question 26

Securities issued by banks and charitable organizations are exempt from SEC registration and disclosure requirements.

Question 27

In Latta v. Rainey the victims of an investment scam were promised high rates of return for an investment that looked to be solid.

Question 28

Securities do not include direct ownership in physical goods; they are an undivided interest in an asset.

Question 29

The Securities Act of 1933 concerns truth in disclosure at the time securities are first sold; the 1934 Securities Exchange Act concerns regulation of securities already in the market.

Question 30

New securities may be offered for sale on the Internet, but not many are sold that way exclusively.

Question 31

A security involves the pooling of money by a group of people; it cannot be an investment only by one person.

Question 32

Insurance policies are exempt from SEC registration and disclosure requirements.

Question 33

An investment in a common enterprise subject to the securities law includes those where each investor owns a specific part of the organization being financed, such as a construction partnership.

Question 34

Congress has passed a law to help securities offerings on the Internet not get caught up in state securities regulations.

Question 35

The term "security" is defined to include a wide range of investment devices.

Question 36

While securities issued by banks are exempt from SEC registration requirements, they are subject to the SEC's anti-fraud and civil liability provisions.

Question 37

In SEC v. Howey, the Supreme Court announced that securities covered by the federal securities laws are all listed in the Securities Act of 1933.

Question 38

In Latta v. Rainey the courts held that while the investment sold by Rainey was a money loser, he did not engage in misrepresentation so could not be liable for losses.

Question 39

In order to meet the requirements of the Howey test, an investor must not have direct control over the work that makes the investment a success or failure.

Question 40

In Latta v. Rainey the investment scam was run by a major New York investment firm that convinced investors to believe that the information provided must be true.

Question 41

Private placement offerings are most common for large security issues sold to institutional investors.

Question 42

"Material information" in an SEC disclosure is defined to mean the management structure of an issuer of securities.

Question 43

The prospectus condenses the longer registration statement provided by security issuers to the SEC.

Question 44

The investment banker who markets a new security offering is called an underwriter.

Question 45

Suppose Google sells $1 billion in new bonds to Northwest Mutual Life. That sale of securities will probably not have to be registered.

Question 46

The SEC cannot rule on the merits of an offering, but can, by stop orders and other procedures, delay a proposed security offering it thinks is bad.

Question 47

The costs of registering a new security offering with the SEC and marketing the securities to the public usually runs about $25,000.

Question 48

A prospectus must provide background information about the managerial experience and compensation packages of the promoters of a security.

Question 49

SEC examiners of a proposed securities offering can issue a "deficiency letter" if they believe the information in a prospectus is not complete. That can delay the sale of a security.

Question 50

The private placement exemption must be issued for all securities not sold on the public securities markets (such as the New York Stock Exchange).

Question 51

Securities that are exempt from SEC registration are also exempt from securities laws.

Question 52

If SEC examiners realize that a proposed securities offering is particularly foolish, they may stop the sale of the securities because it fails the merit test.

Question 53

An individual who is classified as an accredited investor has a net worth of at least $1 million.

Question 54

Even if the initial sale of securities is exempt from SEC registration, the securities are never exempt from the securities law.

Question 55

Accredited investors are those presumed sophisticated and wealthy enough to evaluate investment opportunities without the benefit of an SEC-approved prospectus.

Question 56

SEC examiners of a proposed securities offering can issue a "deficiency letter" if they believe the information in a prospectus is not complete. However, if the issuer responds in a timely manner, the SEC cannot delay the sale.

Question 57

The SEC may require that information be released about the high-risk factors of a proposed security offering.

Question 58

Accredited investors include institutions such as banks and insurance companies.

Question 59

The SEC registration statement consists, legally, only of a complete prospectus which is given to investors in a security.

Question 60

The preliminary version of a prospectus, called a "red herring," may not be released to the public until approved by the SEC.

Question 61

Securities sold subject to shelf-registration can be sold at any time over a three year period, rather than be sold all at once.

Question 62

The Securities Act of 1934 requires publicly held companies to file financial reports with the SEC and post them on the companies' websites.

Question 63

Companies that issue publicly traded securities must report daily stock transaction volumes to the SEC.

Question 64

Private placements under Rule 144A include large dollar security sales to big institutions.

Question 65

The 1934 Securities Exchange Act established regulation of new securities issues.

Question 66

Securities issued by well-known seasoned issuers can use a free-writing prospectus that can be continuously updated on the Web.

Question 67

The Securities Act of 1934 requires publicly held companies to file annual 10-Q financial reports.

Question 68

Accredited investors often buy private placement securities through Regulation D offerings. They receive a private-placement memorandum, which is similar to a prospectus, even though the security is not registered.

Question 69

Securities issued by well-known seasoned issuers must be sold within three months or be returned for re-review by the SEC staff.

Question 70

Accredited investors often buy private placement securities through Small Corporate Offering Registration (SCORs), which can be as small as a $1 million offering.

Question 71

Companies that issue publicly traded securities must turn in quarterly and annual financial reports to the SEC.

Question 72

Accredited investors often buy private placement securities through Regulation D offerings. The SEC must be informed of such offerings.

Question 73

The 1934 Act imposes disclosure requirements on corporations issuing new securities.

Question 74

A "publicly held company" is one that has issued securities that are publicly traded.

Question 75

The Securities Act of 1934 prevents the trading of securities of risky companies.

Question 76

Under Rule 144A some U.S. and foreign securities are exempt from registration requirements for the sale of stocks and bonds.

Question 77

By SEC rules, a private company is one with less than 100 shareholders that does not allow its stock to be actively traded.

Question 78

Securities issued by well-known seasoned issuers do not have to be submitted to the SEC for staff review of the offering before being sold.

Question 79

Securities issued by WKSIs are subject to fewer SEC rules than other new offerings.

Question 80

By SEC rules, a private company is one with less than 500 shareholders that does not have stock traded that is traded publicly.