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Exam 23: Securities Regulation

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Question 21

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Reference - In Trouble. Bruno, 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 was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick 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. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Is Rick correct in that the SEC would have no authority to send Bruno to jail?

A) Rick is correct because there are no criminal penalties for violating the 1933 Act.
B) Rick is incorrect because the SEC criminally prosecutes some violators although the action would only be a misdemeanor.
C) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Department of Justice resulting in imprisonment for up to five years for a violation.
D) Rick is incorrect because the SEC criminally prosecutes some violators, and a violation of the act is considered a felony that could lead to a prison term of 10 years.
E) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Federal Bureau of Investigation resulting in imprisonment for up to ten years for a violation.

F) B) and C)
G) A) and E)

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Question 22

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A[n] ______ prospectus is a prospectus with a warning written in red print at the top of the page warning investors that the registration has been filed with the SEC but has not yet been approved.

A) Red-line
B) Red-herring
C) Red-fish
D) Bait
E) None of these because a prospectus may not be issued prior to approval

F) A) and B)
G) A) and C)

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Question 23

Multiple Choice

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Which of the following are examples of securities?

For how long does each member at the head of the Securities and Exchange Commission serve?

Which of the following references stock and bonds issued by corporations to raise capital for corporate expansion?

Which of the following did Congress pass in an effort to prevent exploitation of small investors?

Investment contracts are securities.

The SEC issues opinions regarding the worth of securities.

Which of the following created the Securities and Exchange Commission?

Set forth the Howey three-part test for determining if a security exists.

Once an issuer files a registration statement and prospectus, the ___________ period begins.

Reference - In Trouble. Bruno, 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 was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick 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. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following is true regarding Bruno's plan to rely on the due diligence defense in regard to all charges?

Reference - Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He 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 securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following may allow Bernice to avoid registration with the SEC?

Which of the following is an example of a material omission or misrepresentation during a securities transaction under Section 10(b) and Rule 10(b) (5) ?

If a violation of federal securities laws is serious enough to merit criminal prosecution, the Fraud Section of the Securities and Exchange Commission prosecutes the action.

Which of the following permits qualified issuers to register securities that they will sell on a delayed or continuous basis in the future?

Which of the following is an example of an exempt transaction?

The average investor does not have to register securities when he or she wants to sell.

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?

Rebecca, a secretary at ABC Software Company, a publicly traded company, enjoyed snooping through the desk of her boss, Emma. One day while snooping, Rebecca came across information indicating that ABC Software was in the process of launching a new type of software that it was believed would be very profitable. Rebecca immediately purchased a large amount of stock in ABC Company and sold it for a nice profit after the product was made public. Her conscience was bothering her a bit, so she confessed her snooping to a friend, Jason. Jason told Rebecca not to worry because she could have no liability. Is Jason correct; and, if not, what theory of liability could be applied against Rebecca? Additionally, set forth the definition of insider under Section 10(b) and Rule 10b-5.