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Exam 41: Corporations: Securities and Investor Protection

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Question 1

True/False

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Issuers are subject to either federal securities regulations or state securities laws, known as blue-sky laws, but not both.

A) True
B) False

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Question 2

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Government did not regulate securities prior to the Great Depression, and fraudulent transactions were common.

A) True
B) False

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Question 3

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[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 provided information about the asset purchase to Charlie, which of the following terms best describes Johan's role?

The Securities and Exchange Commission was created by which of the following acts?

An investor is entitled to bring a civil suit to recover his or her losses if the investor purchased securities and suffered damages as a result of an issuer's false or misleading statement.

[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. -Are the Valley Vineyard securities exempt from registration with the SEC?

[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. -Were Alessia's negotiations with underwriters permissible?

Who prosecutes criminal violations of security laws?

Executive officers are not considered statutory insiders under the Securities Exchange Act of 1934.

The Securities Litigation Uniform Standards Act of 1998 limits what?

Which of the following regulates how companies issue securities?

[Coffee Shops] Marley wants to open a chain of coffee shops but needs some investors. Her friend Marc tells her that she should be sure that she satisfies the requirements of the SEC. Marc tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy the securities. Marley says that she does not want to do that. She explains to Marc that insofar as the coffee shop venture is concerned, she does not want to advertise, and she only wants to offer securities to a limited number of wealthy friends. Particularly, she has her friend Annaliese in mind, who has a net worth of at least $3 million. -Which of the following is the term for the document referenced by Marc to be provided to the SEC that will be used as an advertising tool to potential investors who can rely on it to decide whether they should buy securities?

[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. -The Board of Directors of Faith Church, Inc. wants to issue securities to raise funds. Its attorney tells the Board that it does not need to file a registration document with the SEC. Is the attorney correct?

If Danbondson Corporation wants to expand, it can issue ________, stocks and bonds issued by corporations to raise capital.

[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 the SEC does not have to be involved because this is a private placement situation?

Which of the following, if any, is a securities regulation term that would describe Annaliese as an 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. -What information is missing from Quik Cosmetics' registration statement?

Assuming requirements are satisfied, which of the following, if any, may allow Marley to avoid registration with the SEC if she proceeds with her plan to offer securities only to friends without advertisement?

[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. -Should Kassie take her attorney's suggestion to spread the word about the securities so she can obtain more investors?

[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, if any, may be defenses for Isaiah?