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Exam 41: Corporations: Securities and Investor Protection

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Question 41

True/False

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Any security offered or sold to a permanent resident of the single state where the issuer of the security resides and does business is exempt under the 1933 act.

A) True
B) False

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Question 42

Multiple Choice

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Which of the following permits the SEC to exempt persons, securities, and transactions from securities regulations?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

F) A) and E)
G) C) and D)

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Question 43

Multiple Choice

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[In Trouble] Isaiah, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble due to other projects. Isaiah thought that the health club venture would be such a success that he would never get caught. Unfortunately, he was wrong. The health club venture has significant problems, and investors are looking for some way to hold Isaiah responsible. Another problem Isaiah has is that he inflated information regarding the prospects of the health club in the prospectus. Rafal, a new lawyer, told Isaiah that as far as he knew, Isaiah could be fined for violations under the Securities Act of 1933, but he could not be sent to prison. Isaiah told Rafal that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Isaiah says that he plans to rely on the due diligence defense. Isaiah also asks Rafal if he is aware of any other defenses. Isaiah says that once before he was held liable for a violation of the Securities Act of 1933, and he does not want to be in trouble again. -Which of the following is true regarding Isaiah's sale of securities before the effective date of registration?

Before filing a registration statement and prospectus with the SEC, an issuer cannot make any offers to sell securities.

Which of the following begins when the SEC declares the registration statement effective, and ends when the issuer sells all securities offered or withdraws them from sale?

In most situations, an issuer of securities usually files a written registration statement and a prospectus with the SEC.

[Vineyard Development] A community group in Montana wanted to revitalize the area and held a meeting urging residents to invest in local businesses. After the meeting, Mai and Trent, who own Valley Vineyard, decide to expand by adding a spa and first-class restaurant to the property to attract tourists. They plan to raise capital for the vineyard development by issuing securities to local investors. All of Valley Vineyard's property and assets are in Montana and their wine sales are about 85% to stores, consumers, or distributors within the state. Once the spa and restaurant are running, they would like to use their profits to open a small wine-bar in Florida. -Noelle, a Montana resident, purchases Valley Vineyard securities in January. In July, after the restaurant opens, Noelle wants to sell the securities to a well-known investor from Idaho. Is the sale permissible?

[RockOut Investors] Kassie, the president of RockOut, Inc., intends to line up celebrities in the music industry to invest in her recording company. Kassie has targeted 70 individuals to whom RockOut will make the private offer, although she knows not all of them are millionaires. Kassie is thrilled when her attorney tells her she does not have to register with the SEC and she does not have to waste her time providing financial information, in fact, the SEC does not ever have to be involved because it is a private offering. Kassie's attorney also suggests spreading the word about the securities in an effort to obtain more investors. -Is Kassie's attorney correct that she does not have to register with the SEC?

[Presidential Profits] Aurelia was president of a publicly traded tractor company, Tough Tractors. Aurelia became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Aurelia immediately purchased a significant number of shares in Tough Tractors. Aurelia also told her friend Johan about the contract to purchase assets although she told him to keep it quiet because it had not been made public yet. Nevertheless, unable to keep a secret, Johan told his brother, Charlie. Johan and Charlie purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Aurelia, Charlie, and Johan all sold their shares in Tough Tractors and made a nice profit. -By purchasing the shares after she found out about the merger, in which of the following prohibited practices, if any, was Aurelia engaged?

Which of the following statements is false about securities and securities regulation?

Which of the following is not considered an accredited investor?

[Cosmetic Securities] Alessia, the President of Quik Cosmetics, wanted to take her company public. She begins meeting with underwriters and sends out a press release mentioning the potential issuance of securities. She then files a registration document and prospectus. In her registration document, she described the securities, how the money from the sale of the securities will be used, described her business and property, and included information about a pending lawsuit in the process of being settled. -If a company has consistently satisfied registration requirements, do they receive any benefit for future registrations?

________ are profits made from the sale of company stock by a statutory insider within any six-month period.

[Presidential Profits] Aurelia was president of a publicly traded tractor company, Tough Tractors. Aurelia became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Aurelia immediately purchased a significant number of shares in Tough Tractors. Aurelia also told her friend Johan about the contract to purchase assets although she told him to keep it quiet because it had not been made public yet. Nevertheless, unable to keep a secret, Johan told his brother, Charlie. Johan and Charlie purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Aurelia, Charlie, and Johan all sold their shares in Tough Tractors and made a nice profit. -Considering Johan received the information from Aurelia and acted upon it by purchasing stock, which of the following terms best describes Johan's role?

A(n) ________ is a person who controls, is controlled by, or is in common control with the issuer.

[Wrongful Discharge] Monique worked as an administrative assistant for B&B Corporation. According to paragraph 16 of B&B's employee handbook's progressive discipline policy, an employee whose performance is unsatisfactory may be discharged if no improvement is shown within thirty days after receiving a written warning. Monique was having difficulty learning the software program required for her job. On July 1, she met with her supervisor, who told her that her performance needed improvement and gave her a written warning which referenced paragraph 16 of the employee handbook. Monique stayed up late each night trying to learn the new program. She was away from her job for one week for jury duty. On her return to work from jury duty on July 20, Monique was terminated for poor performance. Monique called B&B's Human Resources Department, but was told she has no case for wrongful discharge because she was an employee-at-will and can be terminated at any time for any reason. -If a violation of federal securities laws is serious enough to merit criminal prosecution, the Fraud

[Vineyard Development] A community group in Montana wanted to revitalize the area and held a meeting urging residents to invest in local businesses. After the meeting, Mai and Trent, who own Valley Vineyard, decide to expand by adding a spa and first-class restaurant to the property to attract tourists. They plan to raise capital for the vineyard development by issuing securities to local investors. All of Valley Vineyard's property and assets are in Montana and their wine sales are about 85% to stores, consumers, or distributors within the state. Once the spa and restaurant are running, they would like to use their profits to open a small wine-bar in Florida. -If Valley Vineyard is not required to register with the SEC, how much capital can it raise?

Which is the correct term for the practice of an owner of a particular stock telling other investors about the virtues of the stock, which artificially increases the demand for the stock and causes an increase in the price, only to sell it for a quick profit?

[Presidential Profits] Aurelia was president of a publicly traded tractor company, Tough Tractors. Aurelia became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Aurelia immediately purchased a significant number of shares in Tough Tractors. Aurelia also told her friend Johan about the contract to purchase assets although she told him to keep it quiet because it had not been made public yet. Nevertheless, unable to keep a secret, Johan told his brother, Charlie. Johan and Charlie purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announcement was made and the purchase of assets went through, Aurelia, Charlie, and Johan all sold their shares in Tough Tractors and made a nice profit. -Considering Aurelia provided information about the asset sale to Johan, which of the following terms best describes Aurelia's role?

________ is how the five individuals of the Securities and Exchange are selected.