Deck 37: Investor Protection, Insider Trading, Corp Governance

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Securities of nonprofit, educational, and charitable organizations are not exempt from the registration requirement of the 1933 Securities Act.

Answer 3

False

Question 4

Section 10(b) of the Securities Exchange Act of 1934 covers only corpo?rate officers and di?rectors.

Question 5

Generally, stock offerings that involve a small dollar amount are ex?empt from the registration requirement.

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

Before filing a registration statement, an issuer must offer to sell securities.

Question 8

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

Question 9

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

Question 10

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

Question 11

Private parties can sue violators of the Securities Act of 1933.

Question 12

Few securities can be resold without registration.

Question 13

One of the most common forms of securities are bonds issued by corporations.

Question 14

Private offerings of securities in unlimited amounts can be exempt from the registration requirement of the Securities Act of 1933.

Question 15

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

Question 16

Sales of securities must occur within five days of registration.

Question 17

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

Question 18

Any corporation with less than $10 million in assets and fewer than five hundred shareholders must register their securities with the Securi?ties and Exchange Commission.

Question 19

Generally, stock offerings that are made in a limited manner during any twelve-month period are ex?empt from the registration requirement.

Question 20

Willful violations of the Securities Act of 1933 may be subject to civil liability, but not criminal prosecution.

Question 21

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 22

SEC Rule 10b-5 applies to almost all cases involving the trading of securities.

Question 23

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 24

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

Question 25

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 26

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

Question 27

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 28

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

Question 29

Olive Grove Enterprises, Inc., completes its registration process and issues a free-writing prospectus. This tells pro?spective investors

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

Question 30

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

Question 31

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

Question 32

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

Question 33

Violations of the Securities Exchange Act of 1934 may be subject to criminal prosecution, but not civil liability.

Question 34

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 35

Willful violations of the Sarbanes-Oxley Act of 2002 may be subject to harsh penalties.

Question 36

State securities laws apply mainly to intrastate transactions.

Question 37

Generally, federal se?curities law are patterned after states' antifraud laws.

Question 38

"Blue sky laws" regulate securities data stored in cloud computing servers.

Question 39

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

Question 40

A major problem facing the Securities and Exchange Commission is how to enforce the antifraud provisions of the securities laws in the online environment.

Question 41

Kitsch Niche Corporation is a noninvestment company that wants to is?sue $3 million of stock in a twelve-month period. Kitsch Niche, with less than $20 mil?lion 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 42

Fact Pattern 37-1
Fresh Cream, Inc., wants to make an initial public offering of securi?ties. Fresh believes that it qualifies for an exemption under Regulation A from the full registration requirement of the federal Securities Act of 1933.
Refer to Fact Pattern 37-1. 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 43

Nouveau Riche Corporation's officers, directors, and sharehold?ers 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 44

Fact Pattern 37-3
Dhani, an accountant for Eureka, Inc., learns of undisclosed com?pany plan?s to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He re?veals the company plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu. Both Geoff and Hu buy 100 shares. They know that Fay got her informa?tion from Dhani. When Eureka publicly an?nounces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit.
Refer to Fact Pattern 37-3. Under the Securities Ex?change 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 45

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 mil?lion 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 46

Fact Pattern 37-2
Sid, a director of Tech Software Company, learns that a Tech engineer has developed a new, exciting video game. Sid buys Tech stock and tells his friend Uri, who also buys Tech stock. When the new game is released three weeks later, Sid and Uri sell their stock for a big profit.
Refer to Fact Pattern 37-2. 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

Squeaky Clean Corporation wants to make an offering of securities to the pub?lic. This offering is not exempt from registration under the Se?curities Act of 1933. Before Squeaky sells its securities, it must provide in?vestors with

A) a forward-looking financial forecast.
B) an investment contract.
C) a prospectus.
D) samples of its products.

Question 48

Players Video Game Centers, Inc., wants to issue stock of $1 million in a single offer?ing. Players must provide all investors with material in?forma?tion about itself, its business, and its securities if

A) all investors are accredited.
B) under any circumstances.
C) any investors are accredited.
D) any investors are unaccredited.

Question 49

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 50

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 51

Fact Pattern 37-2
Sid, a director of Tech Software Company, learns that a Tech engineer has developed a new, exciting video game. Sid buys Tech stock and tells his friend Uri, who also buys Tech stock. When the new game is released three weeks later, Sid and Uri sell their stock for a big profit.
Refer to Fact Pattern 37-2. Under SEC Rule l0b-5, Sid would not be li?able 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 52

Fact Pattern 37-3
Dhani, an accountant for Eureka, Inc., learns of undisclosed com?pany plan?s to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He re?veals the company plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu. Both Geoff and Hu buy 100 shares. They know that Fay got her informa?tion from Dhani. When Eureka publicly an?nounces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit.
Refer to Fact Pattern 37-3. If Dhani is liable under the Securities Ex?change Act of 1934, it will be because the infor?mation 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 53

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 54

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 55

Fact Pattern 37-3
Dhani, an accountant for Eureka, Inc., learns of undisclosed com?pany plan?s to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He re?veals the company plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu. Both Geoff and Hu buy 100 shares. They know that Fay got her informa?tion from Dhani. When Eureka publicly an?nounces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit.
Refer to Fact Pattern 37-3. Under the Securities Ex?change 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 56

Lexy, a salesperson for My-T-Fine Corporation, learns that My-T-Fine will in?crease 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 57

To raise capital to form Plasticity Corporation with Quinn, Rona sells bonds and stock in other companies, and plans to register an initial public of?fer?ing 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 58

Global Investments Corporation buys and sells securities. Section 10(b) of the Securities Ex?change Act of 1934 applies to

A) only the purchase or sale of a security involving an insider.
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 59

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 60

Fact Pattern 37-1
Fresh Cream, Inc., wants to make an initial public offering of securi?ties. Fresh believes that it qualifies for an exemption under Regulation A from the full registration requirement of the federal Securities Act of 1933.
Refer to Fact Pattern 37-1. 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 61

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.

Question 62

Dee, an accountant, does not work for Emergent Company, but wrong?fully obtains inside information concerning Emergent. Based on the in?forma?tion, Dee buys and sells Emergent stock for personal gain. The Securities and Exchange Commission prose?cutes Dee, arguing that she is liable because she stole in?formation right?fully 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 63

In May 2013, National Biotech Corporation generally advertises that it will make a $4 million offering of stock in June. National makes the offer?ing as advertised and, ten days after the first sale, notifies the Securities and Exchange Commission (SEC). All buyers of the stock are given mate?rial 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 reg?istration. National argues that the applicable exemption is Rule 505 of Regulation D of the Securities Act of 1933 and that because of this exemp?tion, any resale of the stock is also exempt. Who is correct?

Question 64

Maple Products Corporation is a public company, which New Hampshire regulates and in which Orin invests. The Sarbanes-Oxley Act of 2002 introduced direct federal corporate governance requirements to

A) public companies.
B) private investors.
C) state regulators.
D) none of these choices.

Question 65

Fact Pattern 37-3
Dhani, an accountant for Eureka, Inc., learns of undisclosed com?pany plan?s to market a new laptop. Dhani buys 1,000 shares of Eureka stock. He re?veals the company plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu. Both Geoff and Hu buy 100 shares. They know that Fay got her informa?tion from Dhani. When Eureka publicly an?nounces its new laptop, Dhani, Fay, Geoff, and Hu sell their stock for a profit.
Refer to Fact Pattern 37-3. Under the Securities Ex?change 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 66

When Looking Glass Corporation wishes to issue certain securities, it must provide sufficient in?for?mation for Alice, and other unsophisticated investors, to evaluate the fi?nancial 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 67

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 68

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 69

Catalina promises high returns to Darby and other investors, who then agree to trust their funds to Catalina. She uses these funds to pay previous investors. This is

A) a Ponzi scheme.
B) a stock option.
C) an accredited investor.
D) a tombstone ad.

Question 70

North American Properties, Inc., and its officers, directors, and share?holders, 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

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 in?creases. 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 72

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.