Question 1

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

Accepted Answer

Since the securities do not qualify for an exemption from registration, Bild-It-Rite Corporation must file a registration statement with the Securities and Exchange Commission (SEC) before offering or selling the securities to the public. The registration statement must provide information about the company's business, financial statements, and the securities being offered, among other things. This is required to ensure that investors have access to adequate and accurate information before investing.

Question 2

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

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires CEOs to certify that the financial reports are complete and accurate. This is a critical provision meant to increase accountability and curb fraudulent financial practices. Therefore, choice A is the correct answer. B is incorrect because while the act does require companies to designate a corporate official, such an official is not liable for inaccuracies. C and D are also incorrect as they do not reflect the requirements of the Sarbanes-Oxley Act.

Question 3

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

Accepted Answer

SEC Rule 10b-5 covers most forms of securities, including both bonds and stock, as well as any other type of security that may be sold. Therefore, the best choice is A) most forms of securities.

Question 4

Flite Airline Corporation is poised to issue securities in a transaction that,under the Securities Act of 1933,is "exempt." This enables Flite to

Accepted Answer

The exemption under the Securities Act of 1933 allows companies like Flite Airline Corporation to avoid costly and complicated registration requirements. This exemption is typically granted for offerings to accredited investors or for offerings that meet certain criteria, such as Regulation D offerings.

Question 5

Fact Pattern 
Sid,a director of Tech Software Company,learns that a Tech engineer has developed "Ur Call," a new,exciting video game.Sid buys Tech stock and tells his friend Velma,who also buys Tech stock.When the new game is released three weeks later,Sid and Velma sell their stock for a big profit.
-Refer to Fact Pattern 29-1B.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

Accepted Answer

Section 16(b) of the Securities Exchange Act of 1934 requires that any profit made by a corporate insider (such as a director) on a purchase and sale of company stock within a six-month period must be returned to the company. In this case, Sid's purchase of Tech stock was based on insider information (knowledge of the new video game) and he sold it for a profit within three weeks. Therefore, Tech can recapture all of Sid's profits.

Question 6

As part of a stock offering for Equine Corporation,Flem,Equine's accountant,intentionally misrepresents material facts in the prospectus.Gigi buys the stock unaware of the misrepresentation and suffers a loss.Flem may be subject to

Accepted Answer

Flem may be subject to both criminal and civil penalties for intentionally misrepresenting material facts in the prospectus, including fines and imprisonment (criminal) and damages (civil). Gigi suffered a loss as a result of the misrepresentation, making it a valid case for a civil lawsuit.

Question 7

Ernie contracts to buy securities from Freda.Later,believing that Freda committed fraud in the deal,Ernie files a suit against her.If Freda is found liable,Ernie may obtain

Accepted Answer

If Freda is found liable for committing fraud, Ernie has the option to either seek damages to the extent of Freda's illegal profits or rescind the contract to buy securities from her. Rescission means that the contract is cancelled and both parties are restored to their original position before the contract was made. Therefore, Ernie may either seek compensation or return the securities and recover the money he paid for them. An apology or rescission alone wouldn't adequately remedy the harm caused by the fraud.

Question 8

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

Accepted Answer

This argument is based on the misappropriation theory, which holds that a person can be liable for insider trading if they wrongfully obtain material non-public information belonging to another party, such as a company, and then use that information to trade securities for personal gain. This theory differs from the classical theory, which requires that the insider have a duty to the company's shareholders and breach that duty by trading on insider information.

Question 9

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

Accepted Answer

SEC Rule 10b-5 applies to the purchase or sale of any security, regardless of whether it involves a financial corporation, officer, director, or shareholder. The rule prohibits any fraudulent or deceptive behavior in connection with the purchase or sale of securities.

Question 10

Corner Café Company offers its stock for sale only in a single state.The law in Corner's state is like the law in most states.Corner's offer is subject to state securities statutes that include

Accepted Answer

The question states that the state law, like most states, includes securities statutes that have antifraud and disclosure provisions. Therefore, option A is the correct choice as it includes both provisions. Option B and C are not correct, as they each only include one of the two provisions. Option D is not correct as it states that there are neither antifraud nor disclosure provisions, which is inconsistent with the information provided in the question.

Question 11

Squeaky 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 Squeaky sells its securities,it must provide investors with

Accepted Answer

Before selling securities, a company must provide investors with a prospectus that contains all relevant information about the securities being offered, the company's financials, risks associated with investing, and other important details. A forward-looking financial forecast or samples of products are not required for registration and may not be relevant to investors' decisions. An investment contract may be a legal document outlining terms of an investment, but it is not sufficient for compliance with Securities Act registration requirements.

Question 12

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

Accepted Answer

As a small business issuer, Mountain View Corporation must provide investors with an offering circular before selling stock. This document provides information about the company, its financials, risks, and the terms of the offering. Option B (notice of the issue) is not a required document, while option C (red herring prospectus) is typically used for larger securities offerings that are registered with the SEC, and option D (tombstone ad) is a type of advertisement used to announce the completion of a securities offering.

Question 13

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

Accepted Answer

The free-writing prospectus issued by Begin Anew Enterprise, Inc. informs potential investors that they can obtain the prospectus at the SEC's website. It does not give investors the ability to freely invest, teach them how to write their own prospectus or allow them to freely buy Begin's securities.

Question 14

Hometown Shops Retail Company has assets of less than $10 million and fewer than five hundred shareholders.Interstate Outlets,Inc. ,has assets of more than $10 million and more than five hundred shareholders.The Securities Exchange Act of 1934 applies to

Accepted Answer

The answer of Hometown Shops Retail Company has assets of...

Question 15

Readmore Bookstore Corporation files a registration statement and delivers a prospectus to the appropriate parties.These items are intended to enable the evaluation of certain financial risks by

Accepted Answer

The answer of Readmore Bookstore Corporation files a registration statement...

Question 16

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

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires companies listed on public securities markets to maintain internal controls and procedures to ensure the accuracy and timeliness of financial reporting. Therefore, Heavy Hauling's senior officers must set up and maintain internal "disclosure controls and procedures" to comply with the act. The other options are not required under the Sarbanes-Oxley Act.

Question 17

Excel Aviation Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934.Section 14(a)of the act regulates

Accepted Answer

Section 14(a) of the Securities Exchange Act of 1934 regulates the solicitation of proxies from a company's shareholders.

Question 18

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

Accepted Answer

The best defense for GR8 Stuf is that the untrue statements were not material. Materiality is a key element in determining liability under the Securities Act of 1933. In order for a misstatement to be material, it must have a significant effect on a reasonable investor’s decision to buy, hold, or sell securities. If the misstatements were immaterial and did not impact investors' decisions, GR8 Stuf may have a strong defense against the charges. The fact that the investors were unaware of the misrepresentations or that the offering was made available to the general public are not relevant defenses. The defense that the issuer reasonably believed the misstatements were true may be a relevant factor, but it is not as strong as the defense of immateriality.

Question 19

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

Accepted Answer

The Sarbanes-Oxley Act of 2002 introduced direct federal corporate governance requirements to public companies, such as Maple Products Corporation, to increase accountability and transparency in financial reporting. It does not apply to private investors or state regulators.

Question 20

Fact Pattern 
Sid,a director of Tech Software Company,learns that a Tech engineer has developed "Ur Call," a new,exciting video game.Sid buys Tech stock and tells his friend Velma,who also buys Tech stock.When the new game is released three weeks later,Sid and Velma sell their stock for a big profit.
-Refer to Fact Pattern 29-1B.Under SEC Rule l0b-5,Sid would not be liable if he had waited to buy Tech stock until

Accepted Answer

SEC Rule 10b-5 prohibits insider trading, which occurs when someone with non-public information trades on that information to gain an unfair advantage. In this case, Sid learned of the new video game before it was released to the public, and used that information to buy Tech stock and make a profit when the game was released. However, if Sid had waited to buy Tech stock until after the public release of the game, he would not have been trading on non-public information, and thus would not have violated Rule 10b-5.

Quiz 29: Investor Protection and Corporate Governance