Deck 19: Investor Protection and Corporate Governance

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

Any corporation with more than $10 million in assets and five hundred or more shareholders must register with the Securi?ties and Exchange Commission.

Question 8

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

Question 9

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

Question 10

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

Question 11

Sales of securities must occur within twenty days of the filing of a registration statement.

Question 12

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

Question 13

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

Question 14

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

Question 15

Most securities can be resold without registration.

Question 16

A corporation whose security does not qualify for an exemption can dispense with the requirement of a registration statement.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

SEC Rule 10b-5 can apply in virtually any case involving the trading of securities.

Question 24

Generally, states do not have antifraud pro?visions that cover securities.

Question 25

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

Question 26

"Pumping and dumping" occurs when a person buys shares, combines them with shares of the same stock that he or she already owns, and sells them all together.

Question 27

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 28

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

Question 29

State securities laws apply only to interstate transactions.

Question 30

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 31

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 32

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

Question 33

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

Question 34

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 35

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

Question 36

"Blue sky laws" are state securities laws.

Question 37

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

Question 38

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

Question 39

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

Question 40

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 41

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 42

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 43

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 44

Fact Pattern 19-2 (Questions 21-24 apply)
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 19-2. 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 45

Mit-E 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 the firm sells its securities, it must provide in?vestors with

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

Question 46

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 47

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 48

Fact Pattern 19-2 (Questions 21-24 apply)
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 19-2. 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 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 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 50

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 51

Fact Pattern 19-2
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. Both Geoff and Hu buy 100 shares. They know 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 19-2. 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 52

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 53

Fact Pattern 19-2 (Questions 21-24 apply)
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 19-2. 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 54

Nouveau Riche Corporation, and its 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 55

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 56

Fact Pattern 19-1 (Questions 16-17 apply)
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 19-1. 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 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

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

Fact Pattern 19-1 (Questions 16-17 apply)
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 19-1. 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 60

Begin Anew Enterprise, Inc., completes its registration process and be?gins ad?vertising the availability of its new issue of securi?ties. The firm places a tomb?stone ad in the financial papers. This ad tells pro?spective investors

A) about investing.
B) about the company.
C) where to buy the securities.
D) where to obtain a prospectus.

Question 61

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 62

Kirk is the chief financial officer of Lemon Corporation, which is re?quired 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 63

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

Question 64

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 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

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 67

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 68

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 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

Mo, an officer with NuProduct Company, receives a bounty payment, which is a payment from

A) a government official to a recipient for an act beneficial to the state.
B) an investor to a company officer for material, inside information.
C) a private corporation to an employee for a business opportunity.
D) any tippee to any tipper for any tip.

Question 71

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 72

Thom, an accountant for Uno Company, learns that Viral, a Uno director, has violated insider-trading laws. Thom does not suffer a loss in trading with Viral, but reports her to the Securities and Exchange Commission. Thom may be entitled to

A) a bounty payment.
B) damages equal to the amount of Viral's profits.
C) damages equal to the amount of Uno's losses (if any).
D) triple Viral's profits.