Securities

• The Securities Act of 1933 regulates

  1. sales of securities by businesses to investors.
  2. The secondary trading of securities (sales from investors to investors).
  3. Both a and b.
  4. None of the above

  1
• The Howey test

  1. defines a security as a “contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promoter or third party.”
  2. can be passed by a license securities dealer.
  3. was established by the United States Supreme Court.
  4. Both a and c

  4
• All sellers of securities must complete certain filing requirements before the securities may be sold unless an exemption applies. T/F

  True
• An issuer of securities meets which of the following qualifications for the intrastate offering exemption

  1. The investors must all be residents of the same state
  2. The issuer has 80% of its assets in the state; 80% of operating income is from the state; and 80% of the proceeds of the sale are used on operations within the state
  3. Both A and B
  4. None of the above

  3

  This is called the “triple 80” test
• Accredited investors include

  1. A director, executive officer or general partner of the issuer.
  2. A person who purchases at least $150,000 of the securities being offered
  3. Natural persons with a net worth over $1 million
  4. A natural person with an individual income over $200,000 within the last 2 years or $300,000 per couple.
  5. All of the above.

  5

  [Note: Other investors are unaccredited and subject to limitations for certain types of registration exemptions. Also note that the value of the investor’s primary residence is not included in the net worth calculation.]
• The SEC reviews filings and if the security is a good investment, it may be issued. T/F

  False. The SEC only looks at whether the proper information has been disclosed, not whether the security will be a good investment.
• The SEC must take action within this time period or the registration will be deemed

  to be accepted

  1. 30 days.
  2. 20 days.
  3. 60 days.
  4. 90 days.

  2
• Issuers who do not submit a registration or who make a false statement on their registration statements in violation of the 1933 Act are criminally and civilly liable. T/F

  True.
• Any person who signs a registration can be held personally liable for violations of the 1933 Act. T/F

  True. Directors and officers are joint and severally liable.
• The Public Company Accounting Oversight Board was implemented by the Sarbanes Oxley Act. T/F

  True
• The 1934 Securities Exchange Act regulates the secondary trading of securities after the initial sale by the business seeking funds. T/F

  True
• All securities traded on national exchanges are regulated under the Securities Act of 1933. T/F

  False - it is the 1934 Securities Exchange Act that regulates securities on the secondary market. All securities traded on national stock exchanges must be registered.
• Withholding material information is not a violation of 10(b) of the Securities Exchange Act of 1934. T/F

  False. See the “fair disclosure rule”.
• The rule that requires companies to release publicly any information that they

  disclose to analysts or institutional investors

  1. The Securities Act of 1933
  2. Regulation FD
  3. Regulation D
  4. none of the above

  2

  [Material information must be made available to all investors at the same time]
• Under section 10b of the Securities Exchange Act of 1934, material information that

  must be disclosed to the public includes

  1. Possible lawsuits
  2. Mergers or takeovers
  3. Pending declaration of a large dividend
  4. Drops in quarterly earning
  5. All of the above.

  5
• Tipees are people who get their information from corporate insiders. T/F

  True
• A psychotherapist received insider information from a senior executive at Martin

  Marietta, that it was about to merge with Lockheed Martin. Notice of the merger was not

  yet public and the therapist bought call options

  1. This is not insider trading because the information was not from an insider.
  2. The therapist violated section 10(b).
  3. The therapist was not liable because he was not an insider
  4. A and c above.

  2

  [Note: The therapist is a tippee. The therapist is also in breach of a duty owed to the client.]
• When someone has insider information, he or she may not trade on it until the public has knowledge. T/F

  True. Note that it is not easy to determine exactly when the public has knowledge and those who buy or sell securities immediately following an announcement may be held in violation of 10(b).
• The Securities Exchange Act of 1934 of 10 (b) can be violated negligently. T/F

  False. There must be scienter or intent to defraud.
• A seller of stock has information that is not generally known to the public but does

  not disclose this information to the buyer before or during the sale of securities.

  1. There is no violation because there is no duty to disclose the information.
  2. This violates 10 (b) of the Securities Exchange Act of 1934.
  3. This is a violation of the Securities Act of 1933.
  4. All of the above

  2
• Under section 16 of the Securities Exchange Act of 1934,

  1. officers, directors and 10% shareholders are strictly liable for short-swing profits.
  2. officers, directors and 20% shareholders are strictly liable for short-swing profits.
  3. officers, directors and 10% shareholders can be held liable for short-swing profits.
  4. officers, directors and 20% shareholders can be held liable for short-swing profits.

  1

  [Note: They have no defense to a claim of insider trading due to their status.]
• Under section 16 of the Securities Exchange Act of 1934, short swing profits include profits earned by the sale and purchase OR the purchase and sale of securities during a six month period. T/F

  True. Note that these statutory insiders must disclose any changes

  in ownership within one day
• Section 16 of the Securities Exchange Act of 1934 does not apply to stock options. T/F

  False. The profits must be returned to the corporation if a trading violation occurs.
• A proxy statement containing required disclosures and proxy materials must be sent to the SEC before they are sent to shareholders. T/F

  True – at least 10 days before.
• Tender offers

  1. are mergers
  2. are publicly advertised offers to shareholders to buy their shares at certain price.
  3. are offers to buy companies.
  4. are publicly advertised offers by shareholders to investors to sell their shares at a certain price.

  2

  [Note: The offer is usually for a price above market value.]
• Takeovers are governed by

  1. The Securities Exchange Act of 1934
  2. The Williams Act
  3. The Insider Treading and Securities Fraud Enforcement Act
  4. The Sherman Act

  2

  [Note: The Williams Act applies to all offers to buy more than 5% of a

  corporation’s securities.]
• If the management of a firm favors acquisition by another firm, it is a friendly takeover. T/F

  True. If the target does not want to be acquired, it is a hostile takeover.
• If a target company does not want to be taken over in a hostile takeover, the target

  may

  1. Try to persuade shareholders that he takeover is not in their best interest.
  2. Match the tender offer or beat it.
  3. File a groundless lawsuit if you are unhappy.
  4. A and b only.

  4

  [Note: The target may also either file a lawsuit alleging antitrust violations OR seek another company to merge with, called a “white knight”.]
• State blue sky laws

  1. Govern intrastate sales of securities
  2. Govern all sales of securities
  3. Are uniform across all states
  4. None of the above.

  1

  [Note: Some states have regulatory agencies that do a merit review of securities before they can be offered.]
• Securities include

  1. Notes
  2. 2. Stocks
  3. Bonds
  4. Every investment contract that gives notice of an indebtedness or participation in a business for profit.
  5. All of the above.

  5

  [Note: Regardless of what you call it, if something meets the Howey test, it is a security.]