Question 1

Fact Pattern 
Fresh Fruits & Veggies,Inc. ,wants to make an initial public offering of securities.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 29-1A.Fresh decides to sell its new securities via the Internet.This offering

Accepted Answer

Selling securities via the internet can avoid the payment of commissions to brokers or underwriters, which can make it a cost-effective way for small companies to raise capital. It does not automatically make it an investment scam or a Ponzi scheme, and it is not related to insider trading.

Question 2

Lex,a salesperson for Macro Corporation,learns that Macro will increase the dividend it pays to shareholders.Lex buys 1,000 shares of Macro stock.When the price increases,Lex sells his shares for a profit.Lex would not be liable for insider trading if the information about the dividend was

Accepted Answer

If the information about the dividend was public before Lex bought the stock, then it is not considered insider information. Therefore, his actions would not be considered insider trading.

Question 3

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.Jack buys the stock and suffers a loss.Hobie may be subject to

Accepted Answer

Hobie's intentional understating of IGI's debts constitutes securities fraud, which is a violation of federal securities laws. Therefore, the government may prosecute Hobie for this action. Additionally, Jack may file a civil suit against Hobie for the loss suffered as a result of the fraud. Thus, both government prosecution and Jack's suit are possible outcomes.

Question 4

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

Accepted Answer

The term "exempt" in the context of securities issuance refers to the exemption from registration requirements under the Securities Act of 1933. This means that the securities can be sold without being registered with the Securities and Exchange Commission (SEC).

Question 5

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

Accepted Answer

The Sarbanes-Oxley Act of 2002 is a federal law that applies to all public companies traded in the United States securities markets. Therefore, Flux Corporation is subject to the direct corporate governance requirements set forth in the legislation by the federal government. Choices A, B, and D do not accurately reflect the applicability of the law to Flux Corporation.

Question 6

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

Accepted Answer

The Securities Act of 1933 defines a security as "any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any other instrumentality." Thus, a security is broadly defined and includes almost any stake in the ownership or debt of a company.

Question 7

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

Accepted Answer

The Securities Act of 1933 allows for exempt transactions if certain criteria are met. One of these criteria is that all investors, including unaccredited investors, must be given certain material information. Therefore, the stock offering made by Star Corporation may qualify for exemption if this condition is met.

Question 8

Fact Pattern 
Dhani,an accountant for Eureka,Inc. ,learns of undisclosed company plans to market a new laptop.Dhani buys 1,000 shares of Eureka stock.He reveals the company plans to Fay,who buys 500 shares.Fay tells Geoff,who tells Hu,each of whom buy 100 shares.They knows that Fay got her information from Dhani.When Eureka publicly announces its new laptop,Dhani,Fay,Geoff,and Hu sell their stock for a profit.
-Refer to Fact Pattern 29-2A.Under the Securities Exchange Act of 1934,Fay is most likely

Accepted Answer

Fay is most likely liable for insider trading as she received the information from Dhani, who was an insider and bought the stock based on that information. Fay shared the information with others, who also bought the stock based on that information. The fact that Fay did not prevent others from profiting or did not solicit information from Dhani does not absolve her from liability for insider trading. The Securities Exchange Act of 1934 prohibits insider trading and imposes liability on anyone who trades securities based on material nonpublic information obtained from an insider.

Question 9

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

Accepted Answer

Under the Sarbanes-Oxley Act of 2002, the chief financial officer (CFO) is required to personally certify that the financial statements are accurate, complete, and not misleading. This certification must be included in the company's annual report, and any false certification can lead to significant legal consequences for the CFO. Therefore, option A is the correct choice. The CFO cannot delegate this responsibility to anyone else. While the CFO may supervise the preparation of the financial statements, they are ultimately responsible for their accuracy. The CFO must also ensure that the statements are delivered to the appropriate SEC officer, but this is not their personal responsibility.

Question 10

Ridgeline Sports Gear,Inc. ,is required to register its securities under Section 12 of the Securities Exchange Act of 1934.Section 16(b)of the act covers

Accepted Answer

Section 16(b) of the Securities Exchange Act of 1934 covers the short-swing activities of Ridgeline's insiders. This means that any profits made from buying and selling or selling and buying back the same securities within a six-month period by insiders must be returned to the company. The purpose of this section is to prevent insiders from taking advantage of inside information for their personal gain.

Question 11

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

Accepted Answer

The Securities Act of 1933 requires companies that trade publicly to disclose financial and other information about their securities, which is aimed at promoting transparency and enabling investors to make informed decisions. Choices A, C and D are not required by the Securities Act of 1933.

Question 12

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

Accepted Answer

Section 16(b) of the Securities Exchange Act of 1934 requires corporate insiders to disgorge any profits made from the purchase and sale of company stock within a six-month period. As Della is an officer of EPC, she qualifies as a corporate insider. Therefore, to avoid liability under Section 16(b), Della would have to hold onto the stock for more than six months before selling it. Option B is the only one that meets this requirement.

Question 13

Rico,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.Rico buys 20,000 shares of Shur-2-Gro stock.He tells Taylor,who buys 15,000 shares.After the new hybrid is announced publicly,the price of Shur-2-Gro stock increases.Rico and Taylor sell their shares for a profit.Under the Securities Exchange Act of 1934,liability may be imposed on

Accepted Answer

The answer of Rico,an engineer for Shur-2-Gro Seed Corporation,learns that...

Question 14

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

Accepted Answer

Section 10(b) of the Securities Exchange Act of 1934 applies to the purchase or sale of any security, including those conducted by a corporation and its officers, directors, and shareholders.

Question 15

Fact Pattern 
Fresh Fruits & Veggies,Inc. ,wants to make an initial public offering of securities.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 29-1A.If Fresh is exempt from the federal registration requirement,Fresh is

Accepted Answer

Although Fresh may be exempt from the federal registration requirement under Regulation A, it does not necessarily mean that it is exempt from any state registration requirements. Each state has its own securities laws and regulations, and Fresh may need to comply with these laws in order to offer its securities to investors in those states.

Question 16

Start-Up Enterprises,Inc. ,completes its registration process and begins advertising the availability of its new issue of securities.Start-Up places a tombstone ad in the financial papers.This ad tells prospective investors

Accepted Answer

A tombstone ad typically only provides information on where to obtain a prospectus for the securities being offered, and does not provide extensive information about the company or the investment opportunity itself.

Question 17

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

Accepted Answer

Catalina is using new investors' money to pay previous investors, which is a classic example of a Ponzi scheme. This type of scheme inevitably collapses once there are not enough new investors to pay off the older ones.

Question 18

Fact Pattern 
Dhani,an accountant for Eureka,Inc. ,learns of undisclosed company plans to market a new laptop.Dhani buys 1,000 shares of Eureka stock.He reveals the company plans to Fay,who buys 500 shares.Fay tells Geoff,who tells Hu,each of whom buy 100 shares.They knows that Fay got her information from Dhani.When Eureka publicly announces its new laptop,Dhani,Fay,Geoff,and Hu sell their stock for a profit.
-Refer to Fact Pattern 29-2A.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

Accepted Answer

Dhani purchased the Eureka stock based on undisclosed company plans that were not yet public. This is considered insider trading and violates the Securities Exchange Act of 1934.

Question 19

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

Accepted Answer

The answer of Players Video Game Centers,Inc. ,wants to issue...

Question 20

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

Accepted Answer

The registration statement must include a description of the securities being offered for sale. This is required by the SEC to inform potential investors about the nature of the investment opportunity. A copy of the prospectus may be included as part of the registration statement, but it is not the only requirement. Additionally, there is no requirement to include a record of pre-registration sales or a sample of advertising in the registration statement.

Quiz 29: Investor Protection and Corporate Governance