Deck 20: Investor Protection and Corporate Governance

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

If a security does not qualify for an exemption from registration,an issuer cannot offer it to the public.

Question 6

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

Question 7

The definition of security in the Securities Act of 1933 does not include instruments commonly known as securities.

Question 8

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

Question 9

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

Question 10

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

Question 11

Most securities can be resold without registration.

Question 12

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

Question 13

The Securities Exchange Act of 1934 is a "one-time" disclosure law.

Question 14

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

Question 15

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 16

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

Question 17

Securities can be sold after the effective date of the registration statement without restrictions.

Question 18

Accredited investors include banks,but not investment companies.

Question 19

Section 10(b)of the Securities Exchange Act of 1934 covers only corporate officers and directors.

Question 20

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

Question 21

Private parties may sue violators of Section 10(b)and Rule 10b-5.

Question 22

State securities laws apply mainly to interstate transactions.

Question 23

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

Question 24

"Forward-looking" financial forecasts that turn out to be wrong are not protected against liability for securities fraud.

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

Anyone who wrongfully obtains inside information and trades on it for his or her personal gain can be liable under SEC Rule 10b-5.

Question 27

Exemptions from federal securities law are not exemptions from state laws.

Question 28

State corporation statues set up the legal framework for corporate.

Question 29

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 30

The antifraud provisions of the securities laws apply in the online environment.

Question 31

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

Question 32

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 33

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 34

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

Question 35

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

Question 36

Under the Sarbanes-Oxley Act of 2002,chief executive officers no longer need to certify the accuracy of information in corporate financial statements.

Question 37

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 38

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 39

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

Question 40

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 41

Fact Pattern 20-1
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 20-1.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 42

Sun & Ski Tours Corporation is poised to issue securities that,under the Securities Act of 1933,are "exempt." This means that the securities can be sold

A)only after registration.
B)on the basis of nonpublic information.
C)within a six-monthwaiting period by certain insiders.
D)without being registered.

Question 43

Luke,a salesperson for Mountaintop Coffee,Inc.,learns that Mountaintop will in-crease the dividend it pays to shareholders.Luke buys 10,000 shares of Mountaintop stock.When the dividend is announced to the public and the price of the stock increases,Luke sells his shares for a profit.Luke would not be liable for insider trading if the information about the dividend was​

A)material when he sold the stock.
B)available to the public after he bought the stock.
C)available to the public before he bought the stock.
D)forward-looking when he bought the stock.

Question 44

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 45

Fact Pattern 20-3
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 20-3.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 46

Fact Pattern 20-3
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 20-3.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 47

Fact Pattern 20-1
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 20-1.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 48

Fact Pattern 20-3
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 20-3.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 49

Global Resources Corporation,and its officers,directors,and share-holders,buy and sell securities.Section 10(b)of the Securities Ex-change Act of 1934 applies to the purchase or sale of a security​

A)only by an investment company.
B)only involving short-swing profits.
C)only involving a tipper and tippee.
D)in almost any circumstances.

Question 50

Adrian,the chief executive officer of Beds n' Sofas,Inc.,inten-tionally understates the amount of Beds n' Sofas'sdebts in information provided to investors as part of an issue of Beds n' Sofasstock.Cassie buys the stock and suffers a loss. Adrian may be subject to

A)government prosecution and Cassie's suit.
B)negative publicity but no criminal prosecution or civil suit.
C)only government prosecution.
D)only Cassie's suit.

Question 51

Electric Cycles,Inc.,wants to issue stock of $10 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 52

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

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

Question 53

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 54

Brianna,a salesperson for Cosmetics Corporation,learns that Cosmetics will in-crease the dividend it pays to shareholders.Brianna buys 10,000 shares of Cosmetics stock.When the price increases,Brianna sells the shares for a profit.If Brianna is liable for insider trading,it is because she​

A)bought and sold shares of stock for a profit.
B)did not file a registration statement with the Securities and Exchange Commission.
C)traded on information that was not available to the public.
D)bought and sold shares of stock in her employer.

Question 55

Hawaiian Shirts,Inc.,wants to issue stock of $1 million in a single offer-ing.The corporation must provide disclosure documents that generally are the same as those used in registered offerings to

A)all investors and the Securities and Exchange Commission.
B)the Securities and Exchange Commission.
C)any accredited investors.
D)any unaccredited investors.

Question 56

​Fact Pattern 20-2
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 20-2.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 57

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 58

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 59

​Fact Pattern 20-2
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 20-2.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 60

To raise $20 million to expand operations,Premiere Movies Corporation makes a stock offering directly to sixty accredited investors and twenty sophisticated,but unaccredited investors.Premiere Movies 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 material information about the firm,
C) if the offering is also made available to the general public.
D)under no circumstances.

Question 61

In May,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 62

Fact Pattern 20-3
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 20-3.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 63

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 64

 Lyman is the chief financial officer of Moneysworth Corporation,which is re-quired to file certain financial statements with the Securities and Exchange Commission (SEC).Under the Sarbanes-Oxley Act of 2002,Lyman 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 65

Solder Welding Corporation is a public company whose shares are traded in the public securities markets.Under the Sarbanes-Oxley Act of 2002,Solder Welding is subject to the direct corporate governance requirements of​

A)any other public company with which Solder Welding exchanges shares.
B)any state in which Solder Welding does business.
C)the federal government.
D)the state in which Solder Welding incorporated.

Question 66

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 67

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

A)a Ponzi scheme.
B)a stock option.
C)a forward-looking forecast.
D)a short-swing profit.

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

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 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

Medico Corporation is a public company whose shares are traded in public securities markets.Medico's officers want to set up and main-tain a system of "good corporate governance." What is "corporate govern-ance"? What is its practical significance? What,at a minimum,should a "good" system of corporate governance include?

Question 72

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.