Deck 23: Securities Regulation

Question 1

The Securities and Exchange Commission was created by the Securities Act of 1933.

Answer 1

False
Explanation: The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC).

Question 2

A tombstone advertisement is a prospectus with a notice written in a conspicuous font at the top of the page warning investors that the registration has been filed with the Securities and Exchange Commission but is not yet approved.

Answer 2

False
Explanation: A red-herring prospectus is a prospectus with a notice written in red print at the top of the page warning investors that the registration has been filed with the Securities and Exchange Commission (SEC)but is not yet approved.A tombstone advertisement announces a forthcoming sale of securities in a format similar to that of a tombstone.

Question 3

Under the Securities Exchange Act of 1934,corporate officers are not considered insiders.

Answer 3

False
Explanation: Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934 define insiders as corporate officers,directors,employees,lawyers,consultants,accountants,majority shareholders,or any other individuals who receive private information regarding the trading of securities.

Question 4

The Securities Act of 1933 offers a simplistic definition of a security.

Question 5

According to the Securities Act of 1933,any security offered or sold to a permanent resident of the single state where the issuer of the security resides and does business is exempt from the registration process.

Question 6

A person who violates the Securities Act of 1933 can be fined,but he or she cannot be subject to imprisonment.

Question 7

In its SEC v.W.J.Howey Co.decision,the United States Supreme Court defined a security as an investment in a common enterprise with the reasonable expectation of profit gained from one's own efforts.

Question 8

If an investor purchased securities and suffered damages as a result of an issuer's false or misleading statement,the investor is entitled to bring a civil suit to recover his or her losses.

Question 9

The Securities Act of 1933 oversees the purchase and sale of corporate securities,while the Securities Exchange Act of 1934 regulates how companies issue securities.

Question 10

In order to protect investors,the Securities and Exchange Commission periodically issues opinions regarding the worth of certain securities.

Question 11

The Securities and Exchange Commission is an independent agency whose function is to administer federal securities laws.

Question 12

In its Landreth Timber Co.v.Landreth decision,the United States Supreme Court held that courts should presumptively treat as a security any financial instrument designated as commercial paper.

Question 13

Issuers who make private offerings of securities are exempt from the registration process.

Question 14

The purpose of securities regulation in China is similar to that of the Securities and Exchange Commission in the United States.

Question 15

Although issuers of securities are required to file a registration statement with the Securities and Exchange Commission,they are not required to file a prospectus because the prospectus is merely an advertising tool that issuers distribute to potential investors.

Question 16

According to the Securities Act of 1933,securities issued by governments are exempt from the registration process.

Question 17

Under the due diligence defense,the defendant must show that he or she investigated the registration statement and had reasonable grounds to believe that the statement was accurate.

Question 18

Securities may be sold during the prefiling period.

Question 19

The average investor must register securities when he or she wants to sell.

Question 20

Investment contracts are not securities.

Question 21

The ________ created the Securities and Exchange Commission.

A)Securities Act of 1933
B)Securities Exchange Act of 1934
C)Wall Street Accountability Act of 1931
D)Ponzi Scheme Elimination Act of 1932
E)New York Stock Exchange Restoration Act of 1930

Question 22

Which of the following was the result on appeal in United States v.Carpenter,the case in the textbook in which it was claimed that federal securities law was violated by a scheme by which confidential information gained in the course of obtaining news material for the Wall Street Journal was sold to stockbrokers?

A)That the defendants were criminally liable for violating federal securities laws by misappropriating material,nonpublic information for their own profit in the purchase and sale of securities.
B)That the defendants were not criminally liable for violating federal securities laws by misappropriating material,nonpublic information for their own profit in the purchase and sale of securities,but could be held liable in a civil action to any investors who suffered harm.
C)That the stockbrokers were criminally liable for violating federal securities laws by misappropriating material,nonpublic information for their own profit in the purchase and sale of securities,but there was no basis upon which the newspaper employees could be held criminally liable.
D)That the newspaper employees could be held criminally liable for violating federal securities laws by misappropriating material,nonpublic information for their own profit,but there was no basis upon which the stockbrokers could be held liable.
E)That there was no basis upon which either the newspaper employees or the stockbrokers could be held criminally liable under federal securities law or under civil causes of action brought by investors.

Question 23

Which of the following was the ruling in Stoneridge Inv.Partners,LLC v.Scientific-Atlanta,Inc.,the case in the textbook in which the United States Supreme Court addressed the issue of the liability of bankers,lawyers,and other third parties who did not directly mislead investors but worked with corporations that did?

A)That bankers,lawyers,and other third parties who did not directly mislead investors but worked with corporations that did can be held liable to the same extent as the primary wrongdoers.
B)That bankers,lawyers,and other third parties who did not directly mislead investors but worked with corporations that did could be held liable to shareholders only if the primary wrongdoers were insolvent,and that the secondary wrongdoers could be punished by criminal prosecution and enforcement actions by the Securities and Exchange Commission.
C)That bankers,lawyers,and other third parties who did not directly mislead investors but worked with corporations that did could be held liable to shareholders only if the primary wrongdoers were insolvent,and that the secondary wrongdoers could not be punished by criminal prosecution and enforcement actions by the Securities and Exchange Commission.
D)That bankers,lawyers,and other third parties who did not directly mislead investors but worked with corporations that did cannot be sued by shareholders,and cannot be held criminally liable or be subject to enforcement actions by the Securities and Exchange Commission.
E)That bankers,lawyers,and other third parties who did not directly mislead investors but worked with corporations that did cannot be sued by shareholders but can be subject to criminal prosecutions and enforcement actions by the Securities and Exchange Commission.

Question 24

How are the heads of the Securities and Exchange Commission chosen?

A)They are appointed by the president.
B)Each state has one appointee appointed by the governor of each state.
C)They are appointed by a two-thirds vote of the United States Senate.
D)They are appointed by a majority vote of the United States Senate.
E)They are appointed by a majority vote of the United States House of Representatives.

Question 25

Which of the following legislation oversees the purchase and sale of securities?

A)The Securities Act of 1933
B)The Securities Exchange Act of 1934
C)The Wall Street Accountability Act of 1931
D)The Ponzi Scheme Elimination Act of 1932
E)The New York Stock Exchange Restoration Act of 1930

Question 26

________ are financial instruments such as stocks or bonds which are issued by corporations to raise capital for corporate expansion.

A)Acknowledgements
B)Securities
C)Options
D)Promissory notes
E)Funding agreements

Question 27

________ regulate(s)securities transactions.

A)The Securities Act of 1933
B)The Securities Exchange Act of 1934
C)The Anti-Fraud Securities Act of 2001
D)The Securities Act of 1933,the Securities Exchange Act of 1934,and the Anti-Fraud Securities Act of 2001
E)The Securities Act of 1933 and the Securities Exchange Act of 1934,but not the Anti-Fraud Securities Act of 2001

Question 28

How long does each member at the head of the Securities and Exchange Commission serve?

A)Five years
B)Three years
C)Two years
D)One year
E)Eighteen months

Question 29

Blue-sky laws regulate the offering and sale of intrastate securities.

Question 30

Which of the following was the result on appeal in Securities and Exchange Commission v.Texas Gulf Sulphur Co,the case in the textbook in which it was alleged that corporate employees possessed inside information involving the likelihood of a major mineral find precluding them from trading in their company's stock?

A)That the defendants could not be held liable because they were not executives of the company.
B)That the defendants could not be held liable because company policy precluded them from disclosing the information at issue to the public.
C)That the defendants could not be held liable because a significant mineral discovery was not sufficiently certain to require disclosure to the public.
D)That the defendants could be held liable because of their status as insiders,regardless of whether the information would be deemed material.
E)That the defendants could be held liable because they failed to reveal material information to the public.

Question 31

Which of the following legislation regulates how companies issue corporate securities?

A)The Securities Act of 1933
B)The Securities Exchange Act of 1934
C)The Wall Street Accountability Act of 1931
D)The Ponzi Scheme Elimination Act of 1932
E)The New York Stock Exchange Restoration Act of 1930

Question 32

Which of the following legislation directed Securities and Exchange Commission oversight of the Public Company Accounting Oversight Board to regulate public accounting firms?

A)The Sarbanes-Oxley Act of 2002
B)The Securities Acts Amendments of 1990
C)The Market Reform Act of 1990
D)The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E)The National Securities Markets Improvement Act of 1996

Question 33

The Investment Company Act of 1940 recognizes banks,insurance companies,savings and loans,and finance companies as investment companies.

Question 34

Which of the following are examples of securities?

A)Debentures and stocks
B)Warrants,bonds,and stocks
C)Stocks and bonds
D)Debentures,warrants,and stocks
E)Debentures,stocks,bonds,and warrants

Question 35

Section 16(b)of the Securities Exchange Act of 1934 imposes strict liability on statutory insiders who earn short-swing profits.

Question 36

Which of the following legislation allows the Securities and Exchange Commission to suspend securities trading if prices vary excessively within a short time period?

A)The Sarbanes-Oxley Act of 2002
B)The Securities Acts Amendments of 1990
C)The Market Reform Act of 1990
D)The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E)The National Securities Markets Improvement Act of 1996

Question 37

The United States Congress passed the ________ in reaction to the mistrust of securities transactions before the Great Depression.

A)Securities Exchange Act of 1934
B)Wall Street Accountability Act of 1931
C)Ponzi Scheme Elimination Act of 1932
D)New York Stock Exchange Restoration Act of 1930
E)Securities Act of 1933

Question 38

Insider trading occurs if a company employee or executive uses material inside information to make a profit.

Question 39

Which of the following are main functions/purposes of the Sarbanes-Oxley Act of 2002?

A)To issue cease-and-desist orders against violators of any federal securities law and to seek civil monetary penalties against any violators.
B)To create rules to require brokers and dealers to provide information concerning prices and risks associated with the penny-stock market and to seek civil monetary penalties against those who violate such rules.
C)To permit the Securities and Exchange Commission to exempt persons,securities,and transactions from securities regulations,thereby promoting private-sector economic growth.
D)To increase corporate disclosure requirements and penalize violators of securities laws more heavily.
E)To decrease the regulatory authority of the Securities and Exchange Commission and to promote corporate self-regulation in terms of the issuance and sale of corporate stock.

Question 40

The Securities and Exchange Commission is headed by how many individuals?

A)50
B)25
C)20
D)10
E)5

Question 41

Which of the following refers to a defense that requires the defendant to demonstrate that he or she investigated the registration statement and had reasonable grounds to believe that the statement was accurate?

A)reasonable care
B)good faith
C)due care
D)due diligence
E)substantial compliance

Question 42

Which of the following refers to the time period that begins when the Securities and Exchange Commission declares the registration statement effective and ends when the issuer sells all securities offered or withdraws them from sale?

A)The posteffective period
B)The acknowledgement period
C)The prefiling period
D)The waiting period
E)The declaratory period

Question 43

Which of the following is a written document filed with the Securities and Exchange Commission that contains a description of a security and other financial information regarding the company offering the security?

A)Statement of intent
B)Prospectus
C)Advertisement
D)Proxy
E)Solicitation

Question 44

A(n)________ investor is a private investor who is allowed to accept private securities offerings under certain specific guidelines established by the Securities and Exchange Commission.

A)restricted
B)qualified
C)accredited
D)contingent
E)statutorily privileged

Question 45

Investment banking firms that purchase securities from the issuing corporation with the intent to sell them to brokerage houses are known as ________.

A)underwriters
B)venture capitalists
C)jobbers
D)accredited purchasers
E)stock intermediaries

Question 46

Which of the following permits qualified issuers to register securities they will sell "off the shelf" on a delayed or continuous basis in the future?

A)Retail registrations
B)Registrations with reserve
C)Preliminary registrations
D)Shelf registrations
E)Qualified registrations

Question 47

Which of the following refers to the time period that begins when an issuer starts to think about issuing securities and ends when the issuer files the registration statement and prospectus with the Securities and Exchange Commission?

A)Preliminary issuance
B)Securities float
C)Prefiling
D)Securities honeymoon
E)Anticipatory issuance

Question 48

Which of the following is true regarding the Securities Exchange Act of 1934?

A)It regulates the subsequent trading of securities.
B)It requires that certain issuers file periodic reports with the Securities and Exchange Commission.
C)It permits the Securities and Exchange Commission to monitor securities markets for fraud and market manipulation.
D)It regulates the subsequent trading of securities,it requires that certain issuers file periodic reports with the Securities and Exchange Commission,and it permits the Securities and Exchange Commission to monitor securities markets for fraud and market manipulation.
E)It regulates the subsequent trading of securities and requires that certain issuers file periodic reports with the Securities and Exchange Commission,but it does not permit monitoring by the Securities and Exchange Commission.

Question 49

A person who controls,is controlled by,or is in common control with the issuer is known as a(n):

A)affiliate
B)associate
C)general partner
D)limited partner
E)insider

Question 50

Securities which do not have to go through the registration process include:

A)Limited offers and intrastate issues
B)Intrastate issues and resale securities
C)Resales of securities and limited offers
D)Limited offers,intrastate issues,and resales of securities
E)Limited offers only

Question 51

Which of the following laws permit(s)the Securities and Exchange Commission to seek punishment of violators of foreign securities laws?

A)The Sarbanes-Oxley Act of 2002
B)The Securities Acts Amendments of 1990
C)The Market Reform Act of 1990
D)The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E)The National Securities Markets Improvement Act of 1996

Question 52

________ of the Securities Exchange Act of 1934 prohibits fraud associated with the purchase or sale of all securities.

A)Section 2a-6
B)Section 15(b)
C)Rule 10b-5
D)Rule 5(c)(2)
E)Rule 2(c)(5)

Question 53

According to Section 10(b)and Rule 10b-5 of the Securities Exchange Act of 1934,which of the following constitute(s)a material omission or misrepresentation during a securities transaction?

A)A change in the status of litigation against the company.
B)A change in dividends.
C)A new product,process,or discovery.
D)A change in the status of litigation against the company; a change in dividends; or a new product,process,or discovery.
E)A change in the status of litigation against the company or a change in dividends,but not a new product,process or discovery.

Question 54

Once an issuer files a registration statement and prospectus,the ________ period begins.

A)intermediation
B)post-filing
C)waiting
D)prefiling
E)posteffective

Question 55

A(n)________ announces a forthcoming sale of securities during the waiting period though a brief advertisement.

A)proxy advertisement
B)special offering
C)invitation to negotiate
D)tombstone advertisement
E)red-herring prospectus

Question 56

A ________ prospectus has a warning written in red print at the top of the page warning investors that the registration has been filed with the Securities and Exchange Commission but has not yet been approved.

A)red-line
B)red-herring
C)preliminary disclaimer
D)bait-and-switch
E)hook-and-ladder

Question 57

Which of the following laws permit(s)the SEC to exempt persons,securities,and transactions from securities regulations?

A)The Sarbanes-Oxley Act of 2002
B)The Securities Acts Amendments of 1990
C)The Market Reform Act of 1990
D)The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E)The National Securities Markets Improvement Act of 1996

Question 58

Which of the following must occur in order for the exemption involving intrastate issues to apply?

A)Issuers must do at least 80 percent of their business within the state.
B)Issuers must have at least 80 percent of their assets within the state.
C)Issuers must plan to use at least 80 percent of the profits within the state.
D)Issuers must have their main offices in the state.
E)All of these.

Question 59

Which of the following is a provision of the Securities Exchange Act of 1934 that prohibits the use of manipulative and deceptive devices to bypass Securities and Exchange Commission rules?

A)Section 1(a)
B)Section 10(b)
C)Section 5
D)Rule 2
E)Rule 2(b)-5

Question 60

Accredited investors include:

A)Colleges and universities
B)Corporations or partnerships with total assets in excess of $5 million
C)Insiders of the issuers (such as executive officers or directors)
D)Colleges and universities and insiders of the issuers (such as executive officers or directors),but not corporations or partnerships with total assets in excess of $5 million
E)Colleges and universities,corporations or partnerships with total assets in excess of $5 million,and insiders of the issuers (such as executive officers or directors)

Question 61

Presidential Profits.Linda was president of a publicly traded tractor company,Tough Tractors.Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors.The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made.Before the news was made public,Linda immediately purchased a significant number of shares in Tough Tractors.Linda also told her friend Frank about the contract to purchase assets.Frank,who knew that the information was not public,told his brother,George.Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale.After the public announcement was made and the purchase of assets went through,Linda,George and Frank,all sold their shares in Tough Tractors and made a significant profit.Which of the following would describe Frank in providing information about the asset sale to George?

A)Tipper
B)Provider
C)Assignor
D)Tippee
E)Delegator

Question 62

Presidential Profits.Linda was president of a publicly traded tractor company,Tough Tractors.Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors.The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made.Before the news was made public,Linda immediately purchased a significant number of shares in Tough Tractors.Linda also told her friend Frank about the contract to purchase assets.Frank,who knew that the information was not public,told his brother,George.Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale.After the public announcement was made and the purchase of assets went through,Linda,George and Frank,all sold their shares in Tough Tractors and made a significant profit.Which of the following would describe Linda in providing information about the asset sale to Frank?

A)Tipper
B)Enabler
C)Informant
D)Leaker
E)Third-party beneficiary

Question 63

In Trouble.Bruno,an issuer of stock,may be in trouble.He sold stock in a new health club venture before the effective date of registration.He did so because he was in financial trouble involving other ventures of his and needed additional funds.Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale.Unfortunately,he was wrong.The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible.Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus.Investors bitterly complained.Rick,a new lawyer,told Bruno that as far as he knew,the Securities and Exchange Commission (SEC)could fine Bruno under the Securities Act of 1933 but could not send him to jail.Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture.Bruno says that he plans to rely on the due diligence defense.Bruno also asks Rick if he is aware of any other defenses.Bruno says that he has never previously been in trouble with the SEC.Which of the following,if any,may be defenses for Bruno?

A)Except for the violation of selling securities before the effective registration date,Bruno could raise the defense that an omitted or false statement was immaterial to the sale of the security.
B)Except for the violation of selling securities before the effective registration date,Bruno could raise the defense that the plaintiff was aware of the omission or false statement when the security was purchased.
C)Except for the violation of selling securities before the effective registration date,Bruno could raise the defense that a plaintiff was aware of the omission or false statement when the security was purchased,and that any omitted or false statement was immaterial to the sale of the security.
D)For any alleged violations,Bruno could raise the specific filing rule.
E)No defenses are available to Bruno because he had already been held liable by the SEC on one occasion.

Question 64

Presidential Profits.Linda was president of a publicly traded tractor company,Tough Tractors.Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors.The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made.Before the news was made public,Linda immediately purchased a significant number of shares in Tough Tractors.Linda also told her friend Frank about the contract to purchase assets.Frank,who knew that the information was not public,told his brother,George.Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale.After the public announcement was made and the purchase of assets went through,Linda,George and Frank,all sold their shares in Tough Tractors and made a significant profit.For which of the following is Linda liable?

A)Her own profits only.
B)Her profits and Frank's profits only.
C)Her profits,Frank's profits,and George's profits.
D)Her profits only plus a 10% penalty.
E)Nothing,because she did nothing illegal.

Question 65

Coffee shops.Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops.Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC).He tells her that she has to provide information to the SEC involving a description of the securities,an explanation of how proceeds will be used,information regarding the management of the company,and other matters.He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities.Bernice says that she does not want to do that.She explains to Robbie that insofar as the coffee shop venture is concerned,she does not want to advertise,and she wants to offer securities only to a limited number of wealthy friends.Particularly,she has in mind Scott who has a net worth of at least $3 million and Mary,a psychiatrist.Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office.Although her income for the past couple of years has been in the range of $80,000,business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion.Which of the following is the term for the document Robbie referenced to be provided to the SEC that will be used as an advertising tool by potential investors who can rely on it to decide whether they should buy securities?

A)An advertising statement
B)A prospectus
C)An inventory
D)A proposed income statement
E)A securities advertisement

Question 66

Presidential Profits.Linda was president of a publicly traded tractor company,Tough Tractors.Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors.The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made.Before the news was made public,Linda immediately purchased a significant number of shares in Tough Tractors.Linda also told her friend Frank about the contract to purchase assets.Frank,who knew that the information was not public,told his brother,George.Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale.After the public announcement was made and the purchase of assets went through,Linda,George and Frank,all sold their shares in Tough Tractors and made a significant profit.In which of the following prohibited practices was Linda engaged by purchasing the shares after she found out about the merger?

A)Insider trading
B)Embezzlement
C)Grafting
D)Receipt of bribery
E)Solicitation of bribery

Question 67

In Trouble.Bruno,an issuer of stock,may be in trouble.He sold stock in a new health club venture before the effective date of registration.He did so because he was in financial trouble involving other ventures of his and needed additional funds.Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale.Unfortunately,he was wrong.The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible.Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus.Investors bitterly complained.Rick,a new lawyer,told Bruno that as far as he knew,the Securities and Exchange Commission (SEC)could fine Bruno under the Securities Act of 1933 but could not send him to jail.Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture.Bruno says that he plans to rely on the due diligence defense.Bruno also asks Rick if he is aware of any other defenses.Bruno says that he has never previously been in trouble with the SEC.Is Rick correct in that the SEC would have no authority to send Bruno to jail?

A)Rick is correct because there are no criminal penalties for violating the Securities Act of 1933.
B)Rick is incorrect because the SEC criminally prosecutes some violators although the action would only be a misdemeanor.
C)Rick is correct in that the SEC itself would not send Bruno to jail,but the SEC could recommend criminal action to the United States Department of Justice resulting in imprisonment for up to five years for a violation.
D)Rick is incorrect because the SEC criminally prosecutes some violators,and a violation of the act is considered a felony that could lead to a prison term of 10 years.
E)Rick is correct in that the SEC itself would not send Bruno to jail,but the SEC could recommend criminal action to the Federal Bureau of Investigation (FBI)resulting in imprisonment for up to ten years for a violation.

Question 68

When a company employee or executive uses material inside information to make a profit,he or she is engaging in:

A)Embezzlement
B)Insider trading
C)Grafting
D)A Ponzi scheme
E)Solicitation of bribery

Question 69

Which of the following legislation limits shareholders' ability to bring class action suits against nationally traded companies?

A)The Class Action Prohibition Act of 1997
B)The Sarbanes-Oxley Act of 2002
C)The National Securities Markets Improvement Act of 1996
D)The Market Reform Act of 1990
E)The Securities Litigation Uniform Standards Act of 1998

Question 70

Coffee shops.Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops.Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC).He tells her that she has to provide information to the SEC involving a description of the securities,an explanation of how proceeds will be used,information regarding the management of the company,and other matters.He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities.Bernice says that she does not want to do that.She explains to Robbie that insofar as the coffee shop venture is concerned,she does not want to advertise,and she wants to offer securities only to a limited number of wealthy friends.Particularly,she has in mind Scott who has a net worth of at least $3 million and Mary,a psychiatrist.Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office.Although her income for the past couple of years has been in the range of $80,000,business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion.Which of the following is the term for the document referenced by Robbie involving information to be provided to the SEC involving a description of the securities,an explanation of how proceeds will be used,information regarding the management of the company,and other matters?

A)Robbie was wrong as no such document exists.
B)A confirmation statement.
C)A registration statement.
D)An acknowledgement statement.
E)A reference statement.

Question 71

In Trouble.Bruno,an issuer of stock,may be in trouble.He sold stock in a new health club venture before the effective date of registration.He did so because he was in financial trouble involving other ventures of his and needed additional funds.Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale.Unfortunately,he was wrong.The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible.Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus.Investors bitterly complained.Rick,a new lawyer,told Bruno that as far as he knew,the Securities and Exchange Commission (SEC)could fine Bruno under the Securities Act of 1933 but could not send him to jail.Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture.Bruno says that he plans to rely on the due diligence defense.Bruno also asks Rick if he is aware of any other defenses.Bruno says that he has never previously been in trouble with the SEC.Which of the following is true regarding Bruno's sale of securities before the effective date of registration?

A)He will be able to avoid liability if he can establish the due diligence defense.
B)He will be able to avoid liability if he can establish that the investors who purchased stock early were aware that the securities were sold before the effective date of registration.
C)He will be able to avoid liability if he can establish that the sales before the effective date did not directly result in any losses to investors.
D)That is not a violation of the securities laws,so there is no question about liability.
E)He will almost certainly be liable because the Securities Act of 1933 provides no defenses for that violation.

Question 72

The United States Congress passed the ________ in an effort to prevent the exploitation of small investors.

A)Investment Company Act of 1940
B)Securities Enforcement Remedies and Penny Stock Reform of 1990
C)Market Reform Act of 1990
D)Securities Act Amendments of 1990
E)National Securities Markets Improvement Act of 1932

Question 73

Coffee shops.Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops.Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC).He tells her that she has to provide information to the SEC involving a description of the securities,an explanation of how proceeds will be used,information regarding the management of the company,and other matters.He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities.Bernice says that she does not want to do that.She explains to Robbie that insofar as the coffee shop venture is concerned,she does not want to advertise,and she wants to offer securities only to a limited number of wealthy friends.Particularly,she has in mind Scott who has a net worth of at least $3 million and Mary,a psychiatrist.Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office.Although her income for the past couple of years has been in the range of $80,000,business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion.Considering only the information available,which of the following is a term that would describe Mary as an investor?

A)Approved
B)Sophisticated
C)Accredited
D)Unapproved
E)Unaccredited

Question 74

Presidential Profits.Linda was president of a publicly traded tractor company,Tough Tractors.Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors.The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made.Before the news was made public,Linda immediately purchased a significant number of shares in Tough Tractors.Linda also told her friend Frank about the contract to purchase assets.Frank,who knew that the information was not public,told his brother,George.Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale.After the public announcement was made and the purchase of assets went through,Linda,George and Frank,all sold their shares in Tough Tractors and made a significant profit.Which of the following would describe Frank in receiving the information from Linda and acting upon it?

A)Incidental beneficiary
B)Third-party beneficiary
C)Assignee
D)Tippee
E)Delegatee

Question 75

Why did the United States Congress pass the Private Securities Litigation Reform Act of 1995?

A)To provide protection to companies who issue forecasts of earnings.
B)To provide stronger penalties against companies who issue forecasts of earnings that turn out to be wrong.
C)To provide stronger penalties against insiders who trade on forecasts of earnings.
D)To provide protection to insiders who trade on forecasts of earnings.
E)To provide protection to companies who issue forecasts of earnings and to provide protection to insiders who trade on such forecasts.

Question 76

In Trouble.Bruno,an issuer of stock,may be in trouble.He sold stock in a new health club venture before the effective date of registration.He did so because he was in financial trouble involving other ventures of his and needed additional funds.Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale.Unfortunately,he was wrong.The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible.Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus.Investors bitterly complained.Rick,a new lawyer,told Bruno that as far as he knew,the Securities and Exchange Commission (SEC)could fine Bruno under the Securities Act of 1933 but could not send him to jail.Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture.Bruno says that he plans to rely on the due diligence defense.Bruno also asks Rick if he is aware of any other defenses.Bruno says that he has never previously been in trouble with the SEC.Which of the following is true regarding Bruno's plan to rely on the due diligence defense with regard to all charges?

A)He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question the registration statement had they reviewed it with due diligence.
B)He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question the prospectus had they reviewed it with due diligence.
C)He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question either the registration statement or the prospectus had they reviewed them with due diligence.
D)He will not be able to use that defense unless he can establish that he reviewed the registration statement and the prospectus,and had reasonable grounds to believe that the registration statement was accurate and had no omission of material facts.
E)He will not be able to rely on that defense because he is an issuer.

Question 77

________ profits are made from the sale of company stock within any six-month period by a statutory insider.

A)Short-swing
B)Red-herring
C)Preliminary
D)Off-the-record
E)Projected

Question 78

Which of the following organizations are excluded from the Investment Company Act's definition of an investment company?

A)Banks and insurance companies,but not savings and loans and finance companies
B)Banks,insurance companies,savings and loans,and finance companies
C)Savings and loans and finance companies,but not banks and insurance companies
D)Banks and savings and loans,but not insurance companies and finance companies
E)Insurance companies and finance companies,but not banks and savings and loans

Question 79

Coffee shops.Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops.Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC).He tells her that she has to provide information to the SEC involving a description of the securities,an explanation of how proceeds will be used,information regarding the management of the company,and other matters.He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities.Bernice says that she does not want to do that.She explains to Robbie that insofar as the coffee shop venture is concerned,she does not want to advertise,and she wants to offer securities only to a limited number of wealthy friends.Particularly,she has in mind Scott who has a net worth of at least $3 million and Mary,a psychiatrist.Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office.Although her income for the past couple of years has been in the range of $80,000,business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion.Which of the following may allow Bernice to avoid registration with the SEC?

A)The limited exemption
B)The accredited exemption
C)The unadvertised exemption
D)The private placement exemption
E)Section 4(6)of the Securities Exchange Act of 1934

Question 80

Coffee shops.Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops.Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the Securities and Exchange Commission (SEC).He tells her that she has to provide information to the SEC involving a description of the securities,an explanation of how proceeds will be used,information regarding the management of the company,and other matters.He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities.Bernice says that she does not want to do that.She explains to Robbie that insofar as the coffee shop venture is concerned,she does not want to advertise,and she wants to offer securities only to a limited number of wealthy friends.Particularly,she has in mind Scott who has a net worth of at least $3 million and Mary,a psychiatrist.Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office.Although her income for the past couple of years has been in the range of $80,000,business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion.Considering only the information available,which of the following is a term that would describe Scott as an investor?

A)Approved
B)Sophisticated
C)Accredited
D)Unapproved
E)Unaccredited