Question 1

Fleet Delivery Corporation is a public company with a market capitalization of less than $75 million. Fleet is poised to issue securities in a transaction that, under the Securities Act of 1933, is "exempt." This enables Fleet to​

Accepted Answer

An exempt transaction under the Securities Act of 1933 allows a company to reduce compliance costs, such as not requiring an auditor report, because it does not have to register the securities with the SEC.

Question 2

Beachware, Inc., wants to issue stock of $4 million in a single offering. The corporation must provide disclosure documents that generally are the same as those used in registered offerings to​

Accepted Answer

The answer of Beachware, Inc., wants to issue stock of...

Question 3

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

Accepted Answer

The misappropriation theory holds that a person who wrongfully obtains and trades on material nonpublic information in breach of a fiduciary duty to the source of the information, is guilty of insider trading. In this case, Rico wrongfully obtained inside information concerning Street Bikes Company and used it for personal gains, making him liable under the misappropriation theory. The other theories listed do not fit the scenario described.

Question 4

Space Trips Inc. 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. The firm is charged with violating the Securities Act of 1933. Its best defense is​

Accepted Answer

The best defense for Space Trips Inc. would be to argue that the untrue statements made in the registration statement were not material. Materiality refers to the importance or significance of the information that is being disclosed. If the misstatements were not material, then it is not considered a violation of the Securities Act of 1933. However, if the misstatements were found to be both false and material, the investors could have legal grounds for a lawsuit.

Question 5

Food Service Corporation, and its officers, directors, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to the purchase or sale of a security​

Accepted Answer

Section 10(b) of the Securities Exchange Act of 1934 applies to the purchase or sale of a security in almost any circumstances, regardless of whether it involves an investment company, short-swing profits, or insider trading (tipping and tippers). It prohibits fraudulent and manipulative acts and practices in connection with the purchase or sale of any security.

Question 6

Household Products Corporation wants to make an offering of securities to the public. The offering is not exempt from registration under the Securities Act of 1933. Before the firm sells its securities, it must provide investors with​

Accepted Answer

Household Products Corporation must provide investors with a prospectus, which is a legal document containing information about the securities being offered, the company’s business operations, financial statements, and risks associated with the investment. This document helps investors make informed decisions about whether to invest in the company. A financial forecast would not be required, and providing samples of products would not be relevant to the offering of securities. An investment contract is a separate legal document that may be used to memorialize the terms of the securities offering, but it is not a requirement for registration under the Securities Act of 1933.

Question 7

Guitar Factory 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 Guitar Factory Corporation files a registration statement...

Question 8

Fact Pattern 42-2​
Ben, an accountant for AirLift, Inc., a ride service, learns of undisclosed company plans to distribute a new app. Ben buys 10,000 shares of AirLift stock. He reveals the company plans to Carly, who buys 5,000 shares. Carly tells Don, who tells Erwin, and each buys 1,000 shares. They know that Carly got her information from Ben. When AirLift publicly announces its new app, Ben, Carly, Don, and Erwin sell their stock for a profit.
-Refer to Fact Pattern 42-2. If Ben is liable under the Securities Exchange Act of 1934, it will be because the information on which he based his purchase of AirLift stock was​

Accepted Answer

Ben is liable under the Securities Exchange Act of 1934 because he used non-public information to make his stock purchase. The fact that the information was not yet public makes it material and gives him an unfair advantage over other investors.

Question 9

Fact Pattern 42-3​
Dan, an accountant for Eureka! Inc. learns of undisclosed company plans to market a new laptop. Dan buys 1,000 shares of the firm's stock. He reveals the company plans to Fay, who tells Greg. Both Fay and Greg buy 100 shares. Greg knows that Fay got her information from Dan. When Eureka! publicly announces its new laptop, Dan, Fay, and Greg sell their stock for a profit.
-Refer to Fact Pattern 42-3. Under the Securities Exchange Act of 1934, Fay is most likely​

Accepted Answer

Fay received material nonpublic information from Dan, who is an insider of the company, and then used that information to purchase the company's stock for personal gain. This behavior constitutes insider trading, which is prohibited under the Securities Exchange Act of 1934. The fact that Fay told Greg about the information and Greg also purchased the stock does not absolve Fay from liability.

Question 10

Global Trade Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that Global Trade must​

Accepted Answer

If Global Trade Corporation is issuing securities that do not qualify for an exemption, they must file a registration statement with the Securities and Exchange Commission (SEC) before being able to issue those securities to the public.

Question 11

Fact Pattern 42-3​
Dan, an accountant for Eureka! Inc. learns of undisclosed company plans to market a new laptop. Dan buys 1,000 shares of the firm's stock. He reveals the company plans to Fay, who tells Greg. Both Fay and Greg buy 100 shares. Greg knows that Fay got her information from Dan. When Eureka! publicly announces its new laptop, Dan, Fay, and Greg sell their stock for a profit.
-Refer to Fact Pattern 42-3. Under the Securities Exchange Act of 1934, Geoff is most likely​

Accepted Answer

Dan, as an accountant for Eureka! Inc., had inside information about the undisclosed company plan to market a new laptop. By buying 1,000 shares of the firm's stock and revealing this information to Fay, who then passed it on to Greg, Dan engaged in insider trading. Fay and Greg are also liable as tippees who benefited from the inside information. Therefore, under the Securities Exchange Act of 1934, Geoff, who traded on the basis of inside information received from Fay, is also liable for insider trading as a tippee.

Question 12

OnSpec, Inc., and its officers, directors, and shareholders, buy and sell securities. Section 16(b) of the Securities Exchange Act of 1934 covers purchases and sales of securities involving​

Accepted Answer

The answer of OnSpec, Inc., and its officers, directors, and...

Question 13

As part of a stock offering for Design Studio Corporation, the firm's accountant Eve intentionally misrepresents material facts in the prospectus. Fred buys the stock unaware of the misrepresentation and suffers a loss. Eve may be subject to​

Accepted Answer

Intentionally misrepresenting material facts in a stock offering prospectus is illegal and can result in both criminal and civil liability. Eve may face fines, imprisonment, and be liable for damages suffered by investors like Fred. Job termination and professional censure may also be possible consequences, but they alone are not sufficient to address the wrongdoing.

Question 14

To raise $120 million to expand operations, Primo Content Inc. makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. The firm 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 provides an exemption from registration requirements for private placements with a limited number of accredited investors and sophisticated unaccredited investors, but the issuer must provide them with material information about the firm, including its most recent financial statements. Therefore, option B is the best choice. Options A and C are not correct because the offering is limited to accredited and sophisticated unaccredited investors and is not being offered to the general public. Option D is incorrect because the offering may qualify for an exemption under the Securities Act of 1933.

Question 15

Fact Pattern 42-2​
Ben, an accountant for AirLift, Inc., a ride service, learns of undisclosed company plans to distribute a new app. Ben buys 10,000 shares of AirLift stock. He reveals the company plans to Carly, who buys 5,000 shares. Carly tells Don, who tells Erwin, and each buys 1,000 shares. They know that Carly got her information from Ben. When AirLift publicly announces its new app, Ben, Carly, Don, and Erwin sell their stock for a profit.
-Refer to Fact Pattern 42-2. Under the Securities Exchange Act of 1934, Carly is most likely​

Accepted Answer

Carly is most likely liable for insider trading because she purchased AirLift stock based on material nonpublic information that she received from Ben, an insider of the company. It does not matter if she shared the information with others or if she did not solicit information from Ben. The fact that she purchased the stock based on insider information is enough to make her liable for insider trading under the Securities Exchange Act of 1934.

Question 16

Shoes & Sox Corporation is a public company whose shares are traded in the public securities markets. With respect to financial and other significant information concerning its securities, the Securities Act of 1933​

Accepted Answer

The Securities Act of 1933 requires disclosure of financial and other significant information concerning a company's securities. This is to ensure that investors have access to important information before making investment decisions.

Question 17

Brian, the chief executive officer of Chairs & Tables, Inc., intentionally understates the amount of the firm's debts in information provided to investors as part of an issue of stock. Darla buys the stock and suffers a loss. Brian may be subject to​

Accepted Answer

Brian may be subject to both government prosecution and a private investor's suit because intentionally understating the amount of debts in information provided to investors is a violation of securities laws and can lead to both criminal and civil penalties.

Question 18

Orbital Flights, 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 insiders of companies that have registered securities under Section 12. This section prohibits any insider of a publicly traded company from profiting from the purchase and sale, or sale and purchase, of any equity security of that company within a six-month period.

Question 19

Karin, an officer for LNG Corporation, buys 10,000 shares of its stock. One week later, LNG announces that it will merge with a competitor, Mining & Piping Company, and the price of LNG stock increases. One month later, Karin sells her shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Karin 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 that officers and directors of a company must hold their shares for at least six months before selling them for a profit. Therefore, Karin would not be liable if she had waited for more than six months to sell her shares.

Question 20

Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries, Inc., has assets of more than $50 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to​

Accepted Answer

The Securities Exchange Act of 1934 primarily applies to companies that have assets exceeding $10 million and more than 500 shareholders, which describes Gourmand Pastries Inc. but not Fresh Fruit Company.

Quiz 42: Investor Protection, Insider Trading, and Corporate Governance

Fleet Delivery Corporation is a public company with a market capitalization of less than $75 million. Fleet is poised to issue securities in a transaction that, under the Securities Act of 1933, is "exempt." This enables Fleet to​

Beachware, Inc., wants to issue stock of $4 million in a single offering. The corporation must provide disclosure documents that generally are the same as those used in registered offerings to​

Space Trips Inc. 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. The firm is charged with violating the Securities Act of 1933. Its best defense is​

Food Service Corporation, and its officers, directors, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to the purchase or sale of a security​

Household Products Corporation wants to make an offering of securities to the public. The offering is not exempt from registration under the Securities Act of 1933. Before the firm sells its securities, it must provide investors with​

Guitar Factory 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​

Global Trade Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that Global Trade must​

OnSpec, Inc., and its officers, directors, and shareholders, buy and sell securities. Section 16(b) of the Securities Exchange Act of 1934 covers purchases and sales of securities involving​

As part of a stock offering for Design Studio Corporation, the firm's accountant Eve intentionally misrepresents material facts in the prospectus. Fred buys the stock unaware of the misrepresentation and suffers a loss. Eve may be subject to​

Shoes & Sox Corporation is a public company whose shares are traded in the public securities markets. With respect to financial and other significant information concerning its securities, the Securities Act of 1933​

Brian, the chief executive officer of Chairs & Tables, Inc., intentionally understates the amount of the firm's debts in information provided to investors as part of an issue of stock. Darla buys the stock and suffers a loss. Brian may be subject to​

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

Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries, Inc., has assets of more than $50 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to​

Fleet Delivery Corporation is a public company with a market capitalization of less than $75 million. Fleet is poised to issue securities in a transaction that, under the Securities Act of 1933, is "exempt." This enables Fleet to

Beachware, Inc., wants to issue stock of $4 million in a single offering. The corporation must provide disclosure documents that generally are the same as those used in registered offerings to

Space Trips Inc. 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. The firm is charged with violating the Securities Act of 1933. Its best defense is

Food Service Corporation, and its officers, directors, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to the purchase or sale of a security

Household Products Corporation wants to make an offering of securities to the public. The offering is not exempt from registration under the Securities Act of 1933. Before the firm sells its securities, it must provide investors with

Guitar Factory 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

Global Trade Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that Global Trade must

OnSpec, Inc., and its officers, directors, and shareholders, buy and sell securities. Section 16(b) of the Securities Exchange Act of 1934 covers purchases and sales of securities involving

As part of a stock offering for Design Studio Corporation, the firm's accountant Eve intentionally misrepresents material facts in the prospectus. Fred buys the stock unaware of the misrepresentation and suffers a loss. Eve may be subject to

Shoes & Sox Corporation is a public company whose shares are traded in the public securities markets. With respect to financial and other significant information concerning its securities, the Securities Act of 1933

Brian, the chief executive officer of Chairs & Tables, Inc., intentionally understates the amount of the firm's debts in information provided to investors as part of an issue of stock. Darla buys the stock and suffers a loss. Brian may be subject to

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

Fresh Fruit Company has assets of less than $10 million and fewer than fifty shareholders. Gourmand Pastries, Inc., has assets of more than $50 million and more than five hundred shareholders. The Securities Exchange Act of 1934 applies to