Deck 8: Securities Law Considerations When Obtaining Venture Financing

Question 1

Blue-sky laws are federal laws designed to protect individuals from investing in fraudulent security offerings.

Answer 1

False

Question 2

The Securities Act of 1933 provides a very narrow definition as to what constitutes a security.

Answer 2

False

Question 3

Regulation of investment companies (including professional venture capital firms)is carried out under the Investment Company Act of 1940.

Answer 3

True

Question 4

According to the Investment Advisers Act of 1940,a bank would not be classified as an "investment advisor".

Question 5

The securities Exchange act of 1934 provides for the regulation of securities exchanges and over-the-counter markets.

Question 6

The trading of securities is regulated under the Securities and Exchange Act of 1954.

Question 7

The Securities Act of 1933 is the main body of federal law governing the creation and sale of securities in the U.S.
F6.The Securities Exchange Act was passed in 1933 and the Securities Act was passed in 1934.

Question 8

SEC Rule 147 provides guidance on the issuer's diligent responsibilities in assuring that offerees are in-state and that securities don't move across state lines.

Question 9

It is usually easier to transfer ownership in a proprietorship relative to a corporation.

Question 10

A private placement,or transactions by an issuer not involving any public offering,is exempt from registering the security.

Question 11

The two basic types of exemptions from having to register securities with the SEC are security and transaction exemptions.

Question 12

Accredited investors are specifically protected by the Securities Act of 1933 from investing in unregistered securities issues.

Question 13

The Investment Company Act of 1940 defines investment companies and excludes them from using some of the registration exemptions originating in the 1933 Act.

Question 14

The Investment Advisers Act of 1940 provides a definition of an investment company.

Question 15

The life of a proprietorship is determined by the owner.

Question 16

Offerings and sales of securities are regulated under the Securities Act of 1933 and state blue-sky laws.

Question 17

The typical business organization for a venture in its rapid-growth stage is a partnership or LLC.

Question 18

State laws designed to protect high net-worth investors from investing in fraudulent security offerings are known as blue-sky laws.

Question 19

Investor liability in a proprietorship or corporation is unlimited.

Question 20

Investor liability in a limited liability company (LLC)is limited to the owners' investments.

Question 21

SEC Regulation D requires the registration of securities with the SEC.

Question 22

An early stage venture that is not an investment company and has written compensation agreements can structure compensation-related securities issues so they are exempt from SEC registration requirements.

Question 23

Regulation A offerings are allowed up $10 million and do not have limitations on the number or sophistication of offerees.

Question 24

One of the monetary requirements for individuals or natural persons as accredited investors as defined in Regulation D Rule 501 is individual annual income greater than $500,000.

Question 25

The typical business organization for a venture in its rapid-growth stage is a partnership or LLC.

Question 26

Regulation A,while technically considered an exemption from registration,is a public offering rather than a private placement.

Question 27

Rule 503 of Regulation D states that a Form D should be filed with the SEC within six months after the first sale of securities.

Question 28

The definition of an "accredited investor," initially defined in the Securities Act of 1933,was expanded in Rule 501 of Reg D.

Question 29

Which of the following is not true regarding the Securities Act of 1933?

A)it was passed in response to abuses thought to have contributed to the financial catastrophes of the Great Depression
B)it covers securities fraud
C)it requires securities to be registered formally with the federal government
D)it set of the nature and authority of the Securities and Exchange Commission
E)it focuses on those who provide investment advice

Question 30

Regulation A allows for registration exemptions on private security offerings so long as all investors are considered to be financially sophisticated.

Question 31

A Regulation D Rule 505 offering is limited to 35 accredited investors.

Question 32

Regulation D Rule 502 focuses,in part,on resale restrictions imposed on privately-placed securities.

Question 33

Rule 504 under Regulation D has a $2 million financing limit (i.e. ,applies to sales of securities not exceeding $2 million).

Question 34

A Rule 504 exemption under Regulation D has no limit in terms of the number and qualifications of investors.

Question 35

SEC Regulation D took effect in 1932 and provides the basis for "safe harbor" as a private placement.

Question 36

A Regulation D Rule 505 offering cannot exceed $5 million in a twelve-month period.

Question 37

A Regulation D Rule 506 offering has no limit in terms of the dollar amount of the offering but is limited to 35 unaccredited investors.

Question 38

One of the monetary requirements for individuals or natural persons as accredited investors as defined in Regulation D Rule 501 is a net worth greater than $1,000,000.

Question 39

In SEC v.Ralston Purina (1953),the U.S.Supreme Court took an important step toward defining a public offering for the purposes of Section 4(2)of the Securities Act of 1933.

Question 40

Regulation A issuers are allowed to "test the waters" before preparing the offering circular (unlike almost all other security offerings).

Question 41

Which of the following is not a security?

A)treasury stock
B)debenture
C)put option
D)real property
E)call option

Question 42

State securities regulations are referred to as:

A)Regulation A legislation
B)"stormy day" laws
C)"blue sky" laws
D)SEC oversight legislation

Question 43

All of the following do not create any securities registration responsibilities except?

A)Treasury securities
B)Municipal bonds
C)securities issued by publicly held companies
D)securities issued by banks
E)securities issued by the government

Question 44

In the Ninth Circuit Court of Appeals decision on SEC v.Murphy,all of the following were considerations in determining an offering to be a private placement except:

A)there must be an arm's length relationship between the issuer of the security and the prospective purchaser
B)the number of offerees must be limited
C)the size and the manner of the offering must not indicate widespread solicitation
D)the offerees must be sophisticated
E)some relationship between the offerees and the issuer must be present

Question 45

Which of the following is not true about registering securities with the SEC?

A)it is a time consuming process
B)it required the disclosure of accounting information
C)it is usually done with the help of an investment bank
D)it is an inexpensive process
E)it provides information to prospective investors

Question 46

"Security" exemptions from registration with the SEC include which of the following:

A)securities issued by banks and thrift institutions
B)government securities
C)intrastate offerings
D)securities issued by large,high quality corporations
E)a,b,and c above
F)a,b,c,and d above

Question 47

Which one of the following SEC registration exemptions has a financing limit in a 12-month period and permits a maximum of 35 unaccredited investors?

A)Section 4(2)
B)Reg D: Rule 504
C)Reg D: Rule 505
D)Reg D: Rule 506
E)Regulation A

Question 48

Ventures that reach their survival stage of their life cycles and seek first-round financing are typically organized as:

A)proprietorships or partnerships
B)LLCs or corporations
C)corporations
D)partnerships or LLCs
E)proprietorships or corporations

Question 49

The efforts to regulate the trading of securities takes place under which of the following securities laws?
A)Securities Act of 1933
B)state "blue-sky" laws
C)Securities and Exchange Act of 1934
D)Investment Company Act of 1940
E)Investment Advisers Act of 1940
F)4.Efforts to regulate the offerings and sales of securities take place under which of the following securities laws?
A)Securities Act of 1933
B)state "blue-sky" laws
C)Securities and Exchange Act of 1934
D)Investment Company Act of 1940
E)Investment Advisers Act of 1940
F)Both a and b
G)Both a and c
F)5.In securities law,which of the following is (are)true?

A)ignorance is no defense
B)security regulators may alter your investment agreement to the benefit of the investors
C)Securities Act of 1933 gives the SEC broad civil procedures to use in enforcement
D)Securities Act of 1933 gives the SEC some criminal procedures to use in enforcement
E)a,b,and c above
F)a,b,c,and d above

Question 50

Which one of the following is not an exemption method for making an offering exempt from SEC registration?

A)4(2)private offering
B)accredited investor
C)Regulation D
D)Regulation A
E)Regulation Z

Question 51

Rule 504 of Regulation D limits the total number of investors to:

A)35
B)100
C)35 unaccredited investors and any number of accredited investors
D)there is no limit on the number of accredited or unaccredited
Investors

Question 52

The basic types of "transaction" exemptions for registration with the SEC are:

A)private placement exemption
B)"too big to fail" exemption
C)accredited investor exemption
D)intrastate offering exemption
E)a and c above
F)b and d above

Question 53

The returning of all funds to equity investors as a common "remedy" for a "fouled up" securities offering is called:

A)just action
B)fraud
C)second round financing
D)a rescission
E)mezzanine financing

Question 54

Unless your security is exempted,what Section of the Securities Act of 1933 requires you to file a registration statement with the SEC?

A)Section 1
B)Section 2
C)Section 3
D)Section 4
E)Section 5

Question 55

Exemptions for private placement offerings and sales of securities in the amount of $2 million are handled under which one of the follow rules under Regulation D?

A)Rule 501
B)Rule 502
C)Rule 503
D)Rule 504
E)Rule 505

Question 56

Which SEC Regulation took effect in 1982 and provides the basis for "safe harbor" as a private placement?

A)Regulation A
B)Regulation B
C)Regulation C
D)Regulation D
E)Regulation E

Question 57

Offerings exempted from registration under rule 505 of Regulation D may raise up to $5 million in a:

A)6-month period
B)9-month period
C)12-month period
D)18-month period
E)24-month period

Question 58

Investor liability is "unlimited" under which of the following types of business organizational forms?

A)proprietorship
B)limited liability company (LLC)
C)corporation
D)S corporation
E)S limited liability company (SLLC)

Question 59

Which one of the following is not a requirement for registration of securities with the SEC?

A)the name under which the issuer is doing business
B)the name of the state where the issuer is organized
C)the names of all products sold by the issuer
D)the names and addresses of the directors
E)the names of the underwriters

Question 60

The U.S.federal law that impacts the creation and sales of securities is:

A)Securities Exchange Act of 1934
B)Securities Act of 1933
C)Investment Company Act of 1940
D)Investment Advisers Act of 1940

Question 61

Which of the following are requirements of natural persons to be accredited investors under Regulation D Rule 501?

A)net worth greater than $5 million
B)total assets greater than $1 million
C)individual (single)annual income greater than $200,000
D)stock market portfolio greater than $2 million
E)all of the above

Question 62

In securities law,which of the following is (are)true?

A)ignorance is no defense
B)security regulators may alter your investment agreement to the benefit of the investors
C)Securities Act of 1933 gives the SEC broad civil procedures to use in enforcement
D)Securities Act of 1933 gives the SEC some criminal procedures to use in enforcement
E)a,b,and c above
F)a,b,c,and d above

Question 63

An offering that raises $2,500,000 over a 12-month period,involving 35 unaccredited investors and 5 accredited investors,might be exempt from registration under:

A)Section 4(6)
B)Regulation D: Rule 504
C)Regulation D: Rule 505
D)none of the above

Question 64

Rule 501 of Regulation D expands the categories of accredited investors.Which is not one of the categories?

A)any organization formed for the specific purpose of acquiring securities with assets in excess of $5 million
B)any director or executive officer of the issuer of securities being sold
C)any individual whose net worth exceeds$1 million
D)any partnership
E)any trust with total assets greater the $5 million

Question 65

Which of the following exemptions involves a public,and not a private,offering?

A)Section 4(2)
B)Rule 501
C)Rule 505
D)Rule 506
E)Regulation A

Question 66

Which one of the following "rules" under Regulation D has a $5 million financing limit?

A)Rule 504
B)Rule 505
C)Rule 506
D)Rule 507
E)Rule 508

Question 67

Rule 502 of Regulation D deals with:

A)integration
B)information
C)solicitation
D)resale
E)a and b above
F)a,b,c,and d above

Question 68

The primary exemption from the prohibition of resale of unregistered securities (including,but not limited to,securities safely harbored in Rules 505 and 506 offerings)is:

A)Rule 111
B)Rule 122
C)Rule 133
D)Rule 144
E)Rule 147

Question 69

Rule 506 of Regulation D is limited in terms of the number of unaccredited investors to:

A)20
B)25
C)30
D)35
E)40

Question 70

While Section 4(2)does not limit the dollar amount of an offering,the interpretation of the law has stipulated that:

A)the investors must be sophisticated
B)the number of investors must be limited to 35
C)the funds must be raised within a 12-month period
D)the offering must be extended to the public,and not only investors
Who have a relationship with the issuer

Question 71

Of the following,which is not true about Regulation A?

A)it is shorter and simpler than the full registration
B)it does not have limitations on the number or sophistication of offerees.
C)it is a public offering rather than a private placement
D)it can generally be freely sold
E)it requires no offering statement be filed with the SEC

Question 72

Which of the following is not a condition of a Regulation D offering under Rule 502?

A)integration
B)offering
C)information
D)solicitation
E)resale

Question 73

Efforts to regulate the offerings and sales of securities take place under which of the following securities laws?

A)Securities Act of 1933
B)state "blue-sky" laws
C)Securities and Exchange Act of 1934
D)Investment Company Act of 1940
E)Investment Advisers Act of 1940
F)Both a and b
G)Both a and c

Question 74

Under Regulation A,which one of the following is not true?

A)issuers are allowed to test the waters prior to preparing the offering circular
B)after filing a SEC statement,the issuer can communicate with perspective investors orally,in writing,by advertising in newspapers,radio,television,or via the mail to determine investor interest
C)issuers can take commitments or funds
D)there is a formal delay of 20 calendar days before sales are made
E)if the interest level is insufficient,the issuer can drop Regulation A filing

Question 75

Rule 503 dictates that for all Reg D exemptions,a Form D should be filed within how many days after the first sale of securities?

A)1 day
B)15 days
C)30 days
D)six months
E)one year

Question 76

Which one of the following is not a characteristic of Regulation A?

A)An offering is limited to $5 million
B)the number offerees or investors is limited to 35
C)the offering is a public offering
D)the securities issued can generally be freely resold

Question 77

The efforts to regulate the trading of securities takes place under which of the following securities laws?

A)Securities Act of 1933
B)state "blue-sky" laws
C)Securities and Exchange Act of 1934
D)Investment Company Act of 1940
E)Investment Advisers Act of 1940