Deck 24: Investor Protection and Corporate Governance

Question 1

The Securities Exchange Act of 1934 provides for continuous,periodic disclosures by publicly held corporations.

Answer 1

True

Question 2

A registration statement must state how a corporation plans to use the proceeds from the sale of the securities.

Answer 2

True

Question 3

SEC Rule 10b-5 prohibits the commission of fraud in connection with the purchase or sale of any security

Answer 3

True

Question 4

Before filing a registration statement,an issuer must attempt to sell,or at least offer to sell,the securities.

Question 5

Willful violations of the Securities Act of 1933 may be subject to criminal prosecution.

Question 6

A free-writing prospectus may be used before the Securities and Exchange Commission completes its review of a related registration statement.

Question 7

Private parties cannot sue violators of the Securities Act of 1933.

Question 8

Generally,stock offerings that are made in a limited manner during any twelve-month period are not exempt from the registration requirement.

Question 9

The least common forms of securities are bonds issued by corporations.

Question 10

A corporation whose security does not qualify for an exemption can avoid the cost and complexity associated with registration.

Question 11

Securities of charitable organizations are exempt from the registration requirement of the 1933 Securities Act.

Question 12

Sales of securities must occur within twenty days of registration.

Question 13

Any corporation with more than $10 million in assets and five hundred or more shareholders must register their securities with the Securities and Exchange Commission.

Question 14

Most securities can be resold without registration.

Question 15

Against a charge of a violation of the Securities Act of 1933,only an issuer of stock can assert the due diligence defense.

Question 16

SEC Rule 10b-5 applies in relatively few cases involving the trading of securities.

Question 17

Securities that are exempt from the registration requirement can generally be sold and resold without being registered.

Question 18

Private offerings of securities in unlimited amounts can never be exempt from the registration requirement of the Securities Act of 1933.

Question 19

Generally,stock offerings that involve a small dollar amount are not exempt from the registration requirement.

Question 20

A registration statement must include a financial statement certified by an independent public accounting firm.

Question 21

Readmore Bookstore Corporation files a registration statement with the Securities and Exchange Commission and provides a prospectus describing the securities to investors.These items are intended to provide sufficient information so that the financial risks involved can be evaluated by

A)market professionals to explain to all investors.
B)government regulators to disclose to the general public.
C)sophisticated investors only.
D)unsophisticated investors.

Question 22

Corporate governance can be defined as the relationship between a corporation and its shareholders.

Question 23

Only outsiders who would ordinarily be deemed fiduciaries of the corporations in whose stock they trade can be liable for insider trading.

Question 24

Willful violations of the Sarbanes-Oxley Act of 2002 may be subject to criminal prosecution.

Question 25

Private parties cannot sue violators of Section 10(b)and Rule 10b-5.

Question 26

Pumping up a company occurs when a single person using multiple aliases on an online forum creates the illusion of widespread interest in a stock.

Question 27

Generally,states have antifraud patterned after federal securities law.

Question 28

"Blue sky laws" are state securities laws.

Question 29

State securities laws apply only to interstate transactions.

Question 30

"Forward-looking" financial forecasts are prohibited under SEC Rule 10b-5.

Question 31

Buying or selling securities on the basis of nonpublic information is illegal only if the profit from the transaction is unreasonable.

Question 32

A corporation can recapture any profits realized by an insider on any purchase or sale of the firm's stock within any twelve-month period.

Question 33

Corporations' chief executive officers are directly accountable for the accuracy of financial statements filed with the Securities and Exchange Commission.

Question 34

Frothy Beverage Corporation is a public company whose shares are traded in the public securities markets.Under the Securities Act of 1933,Frothy is required to

A)contribute to the operations of national stock exchanges.
B)disclose financial and other information about its securities.
C)engage in market surveillance to deter undesirable practices.
D)solicit proxies for voting.

Question 35

Violations of the Securities Exchange Act of 1934 may be subject to criminal prosecution.

Question 36

RingTone Corporation is a public company whose securities are traded among investors.Under the Securities Act of 1933,a security is

A)almost any stake in the ownership or debt of a company.
B)an investment that is guaranteed to make a profit.
C)only such common forms of debt and equity as bonds and stocks.
D)whatever a company represents to the public as a security.

Question 37

The key to liability under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5 is whether undisclosed inside information is material.

Question 38

Section 10(b)of the Securities Exchange Act of 1934 covers only corporate officers and directors.

Question 39

Cotton Products Corporation is a public company whose shares are traded in the public securities markets.The Securities Act of 1933 requires Cotton to disclose financial and other significant information concerning its securities in order to

A)increase corporate accountability by imposing responsibility on chief corporate executives.
B)prevent insiders from trading among themselves.
C)protect investors.
D)provide a "safe harbor" for companies that make forward-looking statements.

Question 40

Bild-It-Rite Corporation is a public company that is preparing to issue securities that do not qualify for an exemption from registration.This means that Bild-It-Rite must

A)file a registration statement with the SEC.
B)issue the securities through an online registration site.
C)refrain from issuing the securities to unregistered investors.
D)register the securities with a national stock exchange.

Question 41

Celfone Corporation is required to file a registration statement with the Securities and Exchange Commission.This statement must contain

A)a copy of prospectuses to be provided to investors.
B)a description of securities being offered for sale.
C)a record of pre-registration sales in securities.
D)a sample of advertising to be used to attract investments in Celfone.

Question 42

New Discoveries Corporation,and its officers,directors,and shareholders,buy and sell securities.Section 10(b)of the Securities Exchange Act of 1934 applies to

A)only the purchase or sale of a security involving misappropriation.
B)only the purchase or sale of a security involving short-swing profits.
C)only the purchase or sale of a security involving a tipper and tippee.
D)the purchase or sale of any security.

Question 43

Refer to Fact Pattern 24-2.Under SEC Rule l0b-5,Sid would not be liable if he had waited to buy Tech stock until

A)after Sid told Uri of the new game.
B)after Uri bought Tech stock.
C)after the public release of the game.
D)just before the game was released.

Question 44

Lexy,a salesperson for My-T-Fine Corporation,learns that My-T-Fine will increase the dividend it pays to shareholders.Lexy buys 10,000 shares of My-T-Fine stock.When the price increases,Lexy sells the shares for a profit.Lexy would not be liable for insider trading if the information about the dividend was

A)material when she sold the stock.
B)public after she bought the stock.
C)public before she bought the stock.
D)speculative when she bought the stock.

Question 45

Refer to Fact Pattern 24-3.If Dhani is liable under the Securities Exchange Act of 1934,it will be because the information on which he based his purchase of Eureka stock was

A)a forward-looking forecast.
B)not material.
C)not yet public.
D)not yet true.

Question 46

Refer to Fact Pattern 24-2.Regarding Sid's profits on the purchase and sale of Tech stock,under Section 16(b)of the Securities Exchange Act of 1934 Tech may recapture

A)all of Sid's profits.
B)half of Sid's profits.
C)10 percent of Sid's profits.
D)none of Sid's profits.

Question 47

Refer to Fact Pattern 24-3.Under the Securities Exchange Act of 1934,Fay is most likely

A)liable for insider trading.
B)not liable because Fay did not prevent others from profiting.
C)not liable because Fay did not solicit information from Dhani.
D)not liable because Fay does not work for Eureka.

Question 48

Nouveau Riche Corporation,and its officers,directors,and shareholders,buy and sell securities.SEC Rule 10b-5 applies to

A)only the purchase or sale of a security by a financial corporation.
B)only the purchase or sale of a security involving an officer or director.
C)only the purchase or sale of a security involving a shareholder.
D)the purchase or sale of any security.

Question 49

Fresh Seasonal Fruit Company has assets of less than $10 million and fewer than fifty shareholders.Gourmand Pastries,Inc.,has assets of more than $50 million and more than five hundred shareholders.The Securities Exchange Act of 1934 applies to

A)Fresh Seasonal Fruit and Gourmand Pastries.
B)Fresh Seasonal Fruit only.
C)Gourmand Pastries only.
D)neither Fresh Seasonal Fruit nor Gourmand Pastries.

Question 50

Begin Anew Enterprise,Inc.,completes its registration process and issues a free-writing prospectus.This tells prospective investors

A)about investing freely.
B)how to write their own prospectus.
C)that they can "freely write their own ticket" to buy Begin's securities.
D)that they may obtain the prospectus at the SEC's Web site.

Question 51

GR8 Stuf Company files a registration statement with the SEC before making an offering to the general public.The registration contains false,immaterial statements of which the investors are unaware.GR8 Stuf is charged with violating the Securities Act of 1933.GR8 Stuf's best defense is

A)the investors were not aware of the misrepresentations.
B)the issuer reasonably believed the misstatements were true.
C)the offering was made available to the general public.
D)the untrue statements were not material.

Question 52

To raise capital to form Plasticity Corporation with Quinn,Rona sells bonds and stock in other companies,and plans to register an initial public offering under the Securities Act of 1933.SEC Rule l0b-5 covers

A)most forms of securities.
B)only bonds.
C)only securities registered under the Securities Act of 1933.
D)only stock.

Question 53

Mit-E Clean Corporation wants to make an offering of securities to the public.This offering is not exempt from registration under the Securities Act of 1933.Before the firm sells its securities,it must provide investors with

A)a forward-looking financial forecast.
B)an investment contract.
C)a prospectus.
D)a road show.

Question 54

Refer to Fact Pattern 24-1.Fresh decides to sell its new securities via the Internet.This offering

A)will avoid the payment of commissions to brokers or underwriters.
B)is an investment scam.
C)is a Ponzi scheme.
D)constitutes insider trading.

Question 55

To raise $12 million to expand operations,Star Corporation makes a stock offering directly to sixty accredited investors and twenty sophisticated,but unaccredited investors.Star plans to notify the SEC of sales.Under the Securities Act of 1933,this issue may qualify as an "exempt" transaction

A)as is.
B)if all of the investors are also given certain material information.
C)if the offering is also made available to the general public.
D)under no circumstances.

Question 56

Refer to Fact Pattern 24-1.If Fresh is exempt from the federal registration requirement,Fresh is

A)automatically exempt from any state registration requirement.
B)not subject to any state securities laws.
C)not necessarily exempt under a state registration requirement.
D)automatically subject to all state registration requirements.

Question 57

Flo-Thru Corporation is poised to issue securities that,under the Securities Act of 1933,are "exempt." This means that the securities can be sold

A)on the basis of a material omission or misrepresentation.
B)on the basis of nonpublic information.
C)within any six-month period by certain insiders.
D)without being registered.

Question 58

Hobie,the chief executive officer of Ideal Gamers,Inc.(IGI),intentionally understates the amount of IGI's debts in information provided to investors as part of an issue of IGI stock.Jaq buys the stock and suffers a loss.Hobie may be subject to

A)government prosecution and Jaq's suit.
B)neither government prosecution nor Jaq's suit.
C)only government prosecution.
D)only Jaq's suit.

Question 59

Kitsch Niche Corporation is a noninvestment company that wants to issue $3 million of stock in a twelve-month period.Kitsch Niche,with less than $20 million in annual sales,qualifies as a small business issuer.Before Kitsch Niche sells the stock,it must provide investors with

A)an offering circular.
B)a notice of the issue.
C)a red herring prospectus.
D)a tombstone ad.

Question 60

Refer to Fact Pattern 24-3.Under the Securities Exchange Act of 1934,Geoff is most likely

A)liable for insider trading.
B)not liable because Geoff did not prevent others from profiting.
C)not liable because Geoff did not solicit information from Dhani.
D)not liable because Geoff does not work for Eureka.

Question 61

Heavy Hauling,Inc.,is a public company whose shares are traded in the public securities markets.Under the Sarbanes-Oxley Act of 2002,to ensure that Heavy Hauling's financial results are accurate and timely,the firm's senior officers must set up and maintain

A)internal "disclosure controls and procedures."
B)external "release and reveal timetables."
C)personal "peruse and review liability policies."
D)public "information and discussion forums."

Question 62

When Looking Glass Corporation wishes to issue certain securities,it must provide sufficient information for Alice,and other unsophisticated investors,to evaluate the financial risk involved.Specifically,the law imposes liability for making a false statement or omission that is "material." What sort of information would Alice consider material

Question 63

Dee,an accountant,does not work for Emergent Company,but wrongfully obtains inside information concerning Emergent.Based on the information,Dee buys and sells Emergent stock for personal gain.The Securities and Exchange Commission prosecutes Dee,arguing that she is liable because she stole information rightfully belonging to another.This argument is

A)the blue-sky theory.
B)the misappropriation theory.
C)the red-herring theory.
D)the tipper/tippee theory.

Question 64

Della,an officer for Energy Petrol Corporation (EPC),buys 100 shares of EPC stock.One week later,EPC announces that it will merge with a competitor,Fuel Oil Company,and the price of EPC stock increases.One month later,Della sells her shares for a profit.Under Section 16(b)of the Securities Exchange Act of 1934,Della would not be liable if,after buying the stock,she had waited

A)less than fourteen days to sell it.
B)more than six months to sell it.
C)ninety days to sell it.
D)two months to sell it.

Question 65

Madison is the chief executive officer of Nitro Medico,Inc.,which is required to file certain financial reports with the Securities and Exchange Commission (SEC).Under the Sarbanes-Oxley Act of 2002,Madison must

A)certify that the reports are complete and accurate.
B)designate a corporate official to assume liability for inaccuracies.
C)do nothing.
D)read the reports and be prepared to answer questions about them.

Question 66

Refer to Fact Pattern 24-3.Under the Securities Exchange Act of 1934,Hu is most likely

A)liable for insider trading.
B)not liable because Hu is only a tippee,not a tipper.
C)not liable because Hu is too far down the chain of disclosure.
D)not liable because Hu traded on the basis of a true fact.

Question 67

Riley,an engineer for Shur-2-Gro Seed Corporation,learns that Shur-2-Gro has developed a corn hybrid to triple the output of any farm.Riley buys 20,000 shares of Shur-2-Gro stock.He tells Tess,who buys 15,000 shares.After the new hybrid is announced publicly,the price of Shur-2-Gro stock increases.Riley and Tess sell their shares for a profit.Under the Securities Exchange Act of 1934,liability may be imposed on

A)none of these parties.
B)Riley and Tess only.
C)Riley only.
D)Riley,Shur-2-Gro,and Tess.

Question 68

In May 2009,National Biotech Corporation generally advertises that it will make a $4 million offering of stock in June.National makes the offering as advertised and,ten days after the first sale,notifies the Securities and Exchange Commission (SEC).All buyers of the stock are given material information about the company,its business,and the stock.Before the end of the year,the offering is completely sold out.The buyers include forty unaccredited investors and fifty accredited investors.National does not register the offering.The SEC files a suit against National,seeking civil sanctions on the ground that this offering was not exempt from registration.National argues that the applicable exemption is Rule 505 of Regulation D of the Securities Act of 1933 and that because of this exemption,any resale of the stock is also exempt.Who is correct

Question 69

Flux Corporation is a public company whose shares are traded in the public securities markets.Under the Sarbanes-Oxley Act of 2002,Flux is subject to the direct corporate governance requirements of

A)any other public company with which Flux exchanges shares.
B)any state in which Flux does business.
C)the federal government.
D)the state in which Flux incorporated.

Question 70

North American Properties,Inc.,and its officers,directors,and shareholders,buy and sell securities.Section 16(b)of the Securities Exchange Act of 1934 covers

A)all purchases and sales of securities.
B)only purchases and sales of securities involving misappropriation.
C)only purchases and sales of securities involving short-swing profits.
D)only purchases and sales of securities involving tippers and tippees.

Question 71

Kirk is the chief financial officer of Lemon Corporation,which is required to file certain financial statements with the Securities and Exchange Commission (SEC).Under the Sarbanes-Oxley Act of 2002,Kirk must personally

A)certify that the statements are accurate.
B)delegate the responsibility for preparing the statements.
C)deliver the statements to the appropriate SEC officer.
D)prepare the statements.

Question 72

Hi-Five Aero Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934.Section 14(a)of the act regulates

A)the declaration of dividends by Hi-Five's board of directors.
B)the later re-registration of Hi-Five's securities.
C)the short-swing activities of Hi-Five's insiders.
D)the solicitation of proxies from Hi-Five's shareholders.