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17 Key 1. A person cannot be considered an insider unless he/she owns at least 51 percent of a security. Answer: False An insider is any person who owns more than 10 percent of any security and is a director or an officer of the issuer of the security. 2. The blue sky laws can apply to securities subject to federal laws as well as to those securities exempt from the federal statutes. Answer: True The blue sky laws can apply to securities subject to federal laws as well as to those securities exempt from the federal statutes. 3. Whistleblowers who first use a company's internal processes before reporting to the SEC are entitled to potentially higher financial rewards. Answer: True Employees who first use a company's internal processes are entitled to potentially higher financial rewards. Employees reporting directly to the SEC will receive less of a reward. 4. The Security Act of 1933 requires the preparation and distribution to potential investors of the: A. registration statement only. B. registration statement and prospectus. C. prospectus and licensing agreement. D. registration statement, prospectus, and licensing agreement. E. licensing agreement. Answer: B. registration statement and prospectus. In regulating the initial sales of securities, the Securities Act of 1933 is viewed as a disclosure law. In essence, this law requires that securities subject to its provisions be registered prior to any sale and that a prospectus be furnished to any potential investor prior to any sale being consummated. 5. A(n) _______ is the individual or business organization offering a security for sale to the public. A. seller B. controlling person C. issuer D. underwriter E. financial sponsor Answer: C. issuer An issuer is the individual or business organization offering a security for sale to the public. 6. According to the Securities Act of 1933, which of the following is illegal during the waiting period? A. Soliciting buyers for a company's securities. B. Receiving offers to buy a company's securities. C. Selling security subject to the act. D. Soliciting through the use of a summary prospectus. E. Soliciting offers for later acceptance. Answer: C. Selling security subject to the act. After the registration statement is filed, a waiting period commences. This period typically lasts 20 days. During this time, the SEC staff investigates the accuracy of the registration statement to determine whether the sale of the securities should be permitted. During the waiting period, it is still illegal to sell a security subject to the act. 7. ________ refers to the intent of a defendant-seller to deceive or mislead. A. Handhabend B. Double jeopardy C. Per minas D. Mens rea E. Scienter Answer: E. Scienter The intent of a defendant-seller to deceive or mislead is known as scienter. 8. Section 10(b) and Rule 10b-5 are usually referred to as the _________ provisions of the 1934 Act. A. civil B. discretionary C. general duties D. antifraud E. rulemaking Answer: D. antifraud Section 10(b) and Rule 10b-5 are usually referred to as the antifraud provisions of the 1934 Act. 9. Under the 1934 Act, an individual found guilty of filing false or misleading documents with the SEC may be imprisoned up to: A. 5 years. B. 10 years. C. 15 years. D. 20 years. E. 25 years. Answer: D. 20 years. An individual found guilty of filing false or misleading documents with the SEC may be fined up to $5,000,000 and imprisoned for up to 20 years. 10. The Private Securities Litigation Reform Act mandated that: A. plaintiffs could proceed with minimal evidence of fraud. B. only the SEC could pursue claims against third parties not directly responsible for a securities law violation. C. the PCAOB was given the authority to decide whether third parties not directly responsible for a securities law violation were nevertheless involved so closely with the violation that they could have claims pursued against. D. private plaintiffs who suffered injury could maintain private causes of action against third parties not directly responsible for a securities law violation. E. the FTC could pursue claims against third parties not directly responsible for a securities law violation. Answer: B. only the SEC could pursue claims against third parties not directly responsible for a securities law violation. The Private Securities Litigation Reform Act (PSLRA) made it clear that only the SEC can pursue claims against third parties not directly responsible for the securities law violation. 11. According to the Sarbanes-Oxley Act, the accuracy of the company's financial records is certified by the: A. CEO and COO. B. COO and CFO. C. CEO and CFO. D. CEO and CIO. E. CFO and CIO. Answer: C. CEO and CFO. Section 302 of the law requires CEOs and CFOs to certify the accuracy of the quarterly and annual financial statements filed with the SEC. 12. According to the Sarbanes-Oxley Act, auditors are required to preserve audit records for a period of: A. three years. B. five years. C. two years. D. nine years. E. seven years. Answer: E. seven years. Sarbanes-Oxley requires that auditors preserve audit records for seven years. 13. Explain the term "waiting period" with regard to the registration of securities. Answer: After the registration statement is filed, a waiting period commences. This period typically lasts 20 days. During this time, the SEC staff investigates the accuracy of the registration statement to determine whether the sale of the securities should be permitted. During the waiting period, it is still illegal to sell a security subject to the Act. However, it is not illegal to solicit a buyer or receive offers to buy. However, during these waiting periods, sellers may solicit offers for later acceptance. Many solicitations during the waiting period are made in tombstone ads. Solicitations may also be made during the waiting period by use of a statistical summary, a summary prospectus, or a preliminary prospectus. These techniques allow dissemination of the facts that are to be ultimately disclosed in the formal prospectus. A registration becomes effective at the expiration of the waiting period, 20 days after it is filed, unless the SEC gives notice that it is not in proper form or unless the SEC accelerates the effective date. 14. Materiality is one of the several defenses that is recognized by the Securities Act of 1933 and may be used to avoid civil liability. Explain "materiality". Answer: The SEC and the courts have attempted to define materiality. The term "material" describes the kinds of information that an average prudent investor would want to have so that he/she can make an intelligent, informed decision whether or not to buy the security. A material fact is one that if correctly stated or disclosed would have deterred or tended to deter the average prudent investor from purchasing the securities in question. The term does not cover minor inaccuracies or errors in matters of no interest to investors. Facts that tend to deter a person from purchasing a security are those that have an important bearing upon the nature or condition of the issuing corporation or its business. 15. What are the common issues regarding litigation under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934? Answer: The common issues regarding litigation under Section 10(b) and Rule 10b-5 include the following: • Who is liable? • What can be recovered by the plaintiff, and does the defendant have the right to seek contribution from third parties? • When is information material to the transaction? • Where does the law apply? 16. What is the difference between Section 18 of the 1934 Act and Sections 11 and 12 of the 1933 Act with regard to liability in case of fraud? Answer: Two distinctions between Section 18 of the 1934 Act and Sections 11 and 12 of the 1933 Act are noteworthy. First, the requirement that an intent to deceive be proven under Section 18 means that the defendant's good faith is a defense. Good faith exists when a person acts without knowledge that the statement is false and misleading. In other words, freedom from fraud is a defense under an action based on Section 18. There is no liability under this section for simple negligence. In a Section 11 or 12 case under the 1933 Act, the plaintiff is not required to prove defendant's intent to deceive. Second, the plaintiff in a Section 18 case must prove reliance on the false or misleading filing. The simple fact that the filing is inaccurate is not sufficient. In a Section 11 or 12 case under the 1933 Act, the plaintiff does not have to establish reliance. 17. What are the four common exemptions from blue sky laws that have been identified? Answer: Individual states have varied in their adoption of blue sky law exemption provisions. The common four exemptions adopted are: • when the exemption is for an isolated transaction. • when the offer or sale is to a limited number of offerees or purchasers within a stated period of time. • when it is a private offering. • when the sale is to a number of holders that after the sale does not exceed a specified number. Test Bank for The Legal and Regulatory Environment of Business O. Lee Reed, Marisa Pagnattaro, Daniel Cahoy, Peter Shedd, Jere Morehead 9780073524993, 9780077437336, 9781260161793
