Deck 29: Investor Protection and Corporate Governance

Question 1

Typically,state laws have disclosure requirements and antifraud provisions patterned after Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Answer 1

True

Question 2

Selling securities under an exemption for which the securities do not qualify results in liability.

Answer 2

True

Question 3

Once the registration statement has been filed,there is no waiting period-the issuer can offer and sell the securities without restrictions.

Answer 3

False

Question 4

Private parties can sue violators of Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

Question 5

For civil sanctions to be imposed under Section 10(b)of the Securities Exchange Act of 1934 and SEC Rule 10b-5,scienter must not exist.

Question 6

Liability under Section 10(b)of the Securities Exchange Act of 1934 has been extended to include certain "outsiders."

Question 7

Securities must be registered under the Securities Act of 1933 for the Securities Exchange Act of 1934 to apply.

Question 8

Noninvestment companies are firms that are not engaged primarily in the business of investing or trading in securities.

Question 9

It is always wrong to disclose material,nonpublic information about a company to a person who would not otherwise be privy to it.

Question 10

To be considered material,a fact must be significant enough that it would likely affect an investor's decision to buy or sell a company's securities.

Question 11

The Securities and Exchange Commission rarely issues interpretive releases to explain how securities laws apply in the online environment.

Question 12

Under the Sarbanes-Oxley Act of 2002,chief financial officers must certify the accuracy of information in corporate financial statements.

Question 13

The Securities and Exchange Commission creates regulations governing the purchase and sale of securities.

Question 14

Most securities can not be resold without registration.

Question 15

Corporate accountability can be increased by imposing strict disclosure requirements for securities transactions.

Question 16

The Securities and Exchange Commission can seek sanctions against those who violate foreign securities laws.

Question 17

A prospectus is a contract in which a person (1)invests (2)in a common enterprise (3)reasonably expecting profits.

Question 18

Securities offerings in unlimited amounts can be exempt from the registration requirements in certain circumstances.

Question 19

Violations of Section 16(b)of the Securities Exchange Act of 1934 include the sale by insiders of stock acquired less than six months before the time of sale.

Question 20

For a defendant to be convicted in a criminal prosecution under the securities laws,a jury is allowed to speculate that the defendant may have acted wrongfully.

Question 21

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

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 22

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

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 23

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

A)most forms of securities.
B)only bonds.
C)only securities registered under the Securities Act of 1933.
D)only stock.

Question 24

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

A)avoid the costs and complications of registration.
B)buy and sell the securities without liability for "recaptures."
C)make forward-looking financial forecasts without liability.
D)withhold inside information from accredited investors.

Question 25

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

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 26

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

A)a fine and damages only.
B)a fine and imprisonment only.
C)a fine,imprisonment,and damages.
D)damages only.

Question 27

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

A)an apology only.
B)damages to the extent of Freda's illegal profits only.
C)damages to the extent of Freda's illegal profits or rescission of Ernie's contract to buy securities from Freda.
D)rescission of Ernie's contract to buy securities from Freda only.

Question 28

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

A)the blue-sky theory.
B)the misappropriation theory.
C)the red-herring theory.
D)the tipper/tippee theory.

Question 29

Nouveau Riche Corporation,and its officers,directors,and shareholders,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 30

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

A)antifraud and disclosure provisions.
B)antifraud provisions only.
C)disclosure provisions only.
D)neither antifraud nor disclosure provisions.

Question 31

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 is products.

Question 32

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

A)an offering circular.
B)a notice of the issue.
C)a red herring prospectus.
D)a tombstone ad.

Question 33

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

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

Question 34

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

A)Hometown Shops and Interstate Outlets.
B)Hometown Shops only.
C)Interstate Outlets only.
D)neither Hometown Shops nor Interstate Outlets.

Question 35

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

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 36

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 37

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

A)the declaration of dividends by Excel's board of directors.
B)the later re-registration of Excel's securities.
C)the short-swing activities of Excel's insiders.
D)the solicitation of proxies from Excel's shareholders.

Question 38

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 39

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 40

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

A)after Sid told Velma of the new game.
B)after Velma bought Tech stock.
C)after the public release of the game.
D)just before the game was released.

Question 41

Drew is an officer of Energy Fuel,Inc.Drew knows that an Energy engineer recently developed a new,inexpensive method for converting hydrogen into fuel.Drew takes advantage of this information to buy Energy stock from Gert and,after the discovery is announced,to sell the stock to Holly at a profit.Gert claims that this is a violation of federal law.Is Gert correct? If so,what federal law has Drew violated,and what are its possible penalties?

Question 42

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?