Clark 11e TB a Ch41

421

Chapter 41

Corporations—Securities Law and

Corporate Governance

TRUE/FALSE QUESTIONS

A1. The least common forms of securities are stocks and bonds issued bycorporations.

ANSWER: F PAGE: 837 TYPE: =NAT: AACSB Analytic AICPA Legal

A2. A registration statement must include a financial statement certified byan independent public accounting firm.

ANSWER: T PAGE: 839 TYPE: NNAT: AACSB Analytic AICPA Legal

A3. Before filing a registration statement, an issuer must attempt to sell, orat least offer to sell, the securities.

ANSWER: F PAGE: 839 TYPE: NNAT: AACSB Analytic AICPA Legal

A4. A free-writing prospectus may be used before the Securities andExchange Commission completes its review of a related registrationstatement.


A5. Securities of charitable organizations are exempt from the registrationrequirement of the 1933 Securities Act.


422 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A6. Securities that are exempt from the registration requirement cangenerally be sold and resold without being registered.


A7. Private offerings of securities in unlimited amounts can never be exemptfrom the registration requirement of the Securities Act of 1933.

ANSWER: F PAGE: 843 TYPE: +NAT: AACSB Analytic AICPA Legal

A8. Willful violations of the Securities Act of 1933 may be subject to criminalprosecution.


A9. The Securities Exchange Act of 1934 provides for continuous, periodicdisclosures by publicly held corporations.


A10. SEC Rule 10b-5 prohibits the commission of fraud in connection with thepurchase or sale of any security


A11. The key to liability under Section 10(b) of the Securities Act of 1933 andSEC Rule 10b-5 is whether undisclosed inside information is material.

ANSWER: T PAGE: 845 TYPE: =NAT: AACSB Analytic AICPA Legal

A12. “Forward-looking” financial forecasts are prohibited under SEC Rule10b-5.

ANSWER: F PAGE: 847 TYPE: NNAT: AACSB Analytic AICPA Legal

A13. Anyone who receives inside information as a result of an insider’s breachof his or her fiduciary duty can be liable under SEC Rule 10b-5.


CHAPTER 41: CORPORATIONS—SECURITIES LAW & CORPORATE GOVERNANCE 423

A14. Section 10(b) of the Securities Exchange Act of 1934 covers onlycorporate officers, directors, and majority shareholders.


A15. Scienter is a requirement for liability under Section 10(b) of theSecurities Exchange Act of 1934.


A16. Violations of the Securities Exchange Act of 1934 may be subject tocriminal prosecution.


A17. State securities laws apply only to interstate transactions.


A18. “Blue sky laws” are federal securities laws.

ANSWER: F PAGE: 855 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A19. Willful violations of the Sarbanes-Oxley Act of 2002 may be subject tocriminal prosecution.


A20. “Pumping and dumping” occurs when a person buys shares, combinesthem with shares of the same stock that he or she already owns, andsells them all together.

ANSWER: F PAGE: 857 TYPE: NNAT: AACSB Reflective AICPA Critical Thinking


MULTIPLE CHOICE QUESTIONS

A1. Frothy Beverage Corporation is a public company whose shares aretraded in the public securities markets. Under the Securities Act of1933, Frothy is required to

a. contribute to the operations of national stock exchanges.b. disclose financial and other information about its securities.c. engage in market surveillance to deter undesirable practices.d. solicit proxies for voting.

ANSWER: B PAGE: 837 TYPE: NNAT: AACSB Reflective AICPA Legal

A2. RingTone Corporation is a public company whose securities are tradedamong investors. Under the Securities Act of 1933, a security is

a. almost any stake in the ownership or debt of a company.b. an investment that is guaranteed to make a profit.c. only such common forms of debt and equity as bonds and stocks.d. whatever a company represents to the public as a security.

ANSWER: A PAGE: 837 TYPE: NNAT: AACSB Reflective AICPA Legal

A3. Start-Up Enterprises, Inc., completes its registration process and beginsadvertising the availability of its new issue of securities. Start-Up placesa tombstone ad in the financial papers. This ad tells prospectiveinvestors

a. about investing.b. about the company.c. where to buy the securities.d. where to obtain a prospectus.

ANSWER: D PAGE: 839 TYPE: =NAT: AACSB Reflective AICPA Legal

A4. Celfone Corporation is required to file a registration statement with theSecurities and Exchange Commission. This statement must contain

a. a copy of prospectuses to be provided to investors.b. a description of securities being offered for sale.c. a record of pre-registration sales in securities.d. a sample of advertising to be used to attract investments in

Celfone.



A5. Flo-Thru Corporation is poised to issue securities that, under theSecurities Act of 1933, are “exempt.” This means that the securities canbe sold

a. on the basis of a material omission or misrepresentation.b. on the basis of nonpublic information.c. within any six-month period by certain insiders.d. without being registered.

ANSWER: D PAGE: 840 TYPE: NNAT: AACSB Reflective AICPA Legal

A6. Country Golf Club, Inc., wants to issue stock of $1 million in a singleoffering. Country does not have to provide any investors with anymaterial information about itself, its business, or its securities if

a. all investors are accredited.b. all investors are unaccredited.c. any investors are accredited.d. any investors are unaccredited.

ANSWER: A PAGE: 842 TYPE: =NAT: AACSB Reflective AICPA Legal

A7. To raise $12 million to expand operations, Star Corporation makes astock offering directly to sixty accredited investors and twentysophisticated, but unaccredited investors. Star plans to notify the SEC ofsales. Under the Securities Act of 1933, this issue may qualify as an“exempt” transaction

a. as is.b. if all of the investors are also given certain material information.c. if the offering is also made available to the general public.d. under no circumstances.



A8. Hobie, the chief executive officer of Ideal Gamers, Inc. (IGI), intentionallyunderstates the amount of IGI’s debts in information provided toinvestors as part of an issue of IGI stock. Jack buys the stock and suffersa loss. Hobie may be subject to

a. government prosecution and Jack’s suit.b. neither government prosecution nor Jack’s suit.c. only government prosecution.d. only Jack’s suit.


A9. New Discoveries Corporation, and its officers, directors, and share-holders, buy and sell securities. Section 10(b) of the Securities ExchangeAct of 1934 applies to

a. only the purchase or sale of a security by an investment company.b. only the purchase or sale of a security involving short-swing

profits.c. only the purchase or sale of a security involving a tipper and

tippee.d. the purchase or sale of any security.

ANSWER: D PAGE: 845 TYPE: =NAT: AACSB Analytic AICPA Legal

A10. Nouveau Riche Corporation, and its officers, directors, and shareholders,buy and sell securities. SEC Rule 10b-5 applies to

a. only the purchase or sale of a security by a financial corporation.b. only the purchase or sale of a security involving an officer or

director.c. only the purchase or sale of a security involving a shareholder.d. the purchase or sale of any security.

ANSWER: D PAGE: 845 TYPE: =NAT: AACSB Analytic AICPA Legal


Fact Pattern 41-1A (Questions A11–A14 apply)Dhani, an accountant for Eureka, Inc., learns of undisclosed company plans tomarket a new laptop. Dhani buys 1,000 shares of Eureka stock. He reveals thecompany plans to Fay, who buys 500 shares. Fay tells Geoff, who tells Hu, eachof whom buy 100 shares. They knows that Fay got her information from Dhani.When Eureka publicly announces its new laptop, Dhani, Fay, Geoff, and Husell their stock for a profit.

A11. Refer to Fact Pattern 41-1A. If Dhani is liable under the Securities Ex-change Act of 1934, it will be because the information on which he basedhis purchase of Eureka stock was

a. a forward-looking forecast.b. not material.c. not yet public.d. not yet true.

ANSWER: C PAGE: 845 TYPE: NNAT: AACSB Reflective AICPA Legal

A12. Refer to Fact Pattern 41-1A. Under the Securities Exchange Act of 1934,Fay is most likely

a. liable for insider trading.b. not liable because Fay did not prevent others from profiting.c. not liable because Fay did not solicit information from Dhani.d. not liable because Fay does not work for Eureka.


A13. Refer to Fact Pattern 41-1A. Under the Securities Exchange Act of 1934,Geoff is most likely

a. liable for insider trading.b. not liable because Geoff did not prevent others from profiting.c. not liable because Geoff did not solicit information from Dhani.d. not liable because Geoff does not work for Eureka.



A14. Refer to Fact Pattern 41-1A. Under the Securities Exchange Act of 1934,Hu is most likely

a. liable for insider trading.b. not liable because Hu is only a tippee, not a tipper.c. not liable because Hu is too far down the chain of disclosure.d. not liable because Hu traded on the basis of a true fact.


A15. Riley, an engineer for Super Seed Corporation, learns that Super Seedhas developed a corn hybrid to triple the output of any farm. Riley buys10,000 shares of Super Seed stock. He tells Tess, who buys 5,000 shares.After the new hybrid is announced publicly, the price of Super Seedstock increases. Riley and Tess sell their shares for a profit. Under theSecurities Exchange Act of 1934, liability may be imposed on

a. neither Riley nor Tess.b. only Riley.c. only Tess.d. Riley and Tess.

ANSWER: D PAGE: 849 TYPE: =NAT: AACSB Reflective AICPA Legal

A16. Della, an officer for Energy Petrol Corporation (EPC), buys 100 shares ofEPC stock. One week later, EPC announces that it will merge with acompetitor, Fuel Oil Company, and the price of EPC stock increases. Onemonth later, Della sells her shares for a profit. Under Section 16(b) of theSecurities Exchange Act of 1934, Della would not be liable if, afterbuying the stock, she had waited

a. less than fourteen days to sell it.b. more than six months to sell it.c. ninety days to sell it.d. two months to sell it.

ANSWER: B PAGE: 849 TYPE: =NAT: AACSB Reflective AICPA Legal


A17. North American Properties, Inc., and its officers, directors, and share-holders, buy and sell securities. Section 16(b) of the Securities ExchangeAct of 1934 covers

a. all purchases and sales of securities.b. only purchases and sales of securities by investment companies.c. only purchases and sales of securities involving short-swing

profits.d. only purchases and sales of securities involving tippers and

tippees.

ANSWER: C PAGE: 849 TYPE: =NAT: AACSB Reflective AICPA Legal

A18. Mo, an officer with NuProduct Company, receives a bounty payment,which is a payment from

a. a government official to a recipient for an act beneficial to thestate.

b. an investor to a company officer for material, inside information.c. a private corporation to an employee for a business opportunity.d. any tippee to any tipper for any tip.


A19. Kirk is the chief financial officer of Lemon Corporation, which is re-quired to file certain financial statements with the Securities andExchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002,Kirk must personally

a. certify that the statements are accurate.b. delegate the responsibility for preparing the statements.c. deliver the statements to the appropriate SEC officer.d. prepare the statements.



A20. Flux Corporation is a public company whose shares are traded in thepublic securities markets. Under the Sarbanes-Oxley Act of 2002, Flux issubject to the direct corporate governance requirements of

a. any other public company with which Flux exchanges shares.b. any state in which Flux does business.c. the federal government.d. the state in which Flux incorporated.

ANSWER: C PAGE: 855 TYPE: +NAT: AACSB Reflective AICPA Legal

ESSAY QUESTIONS

A1. In May 2001, National Biotech Corporation generally advertises that itwill make a $4 million offering of stock in June. National makes the offer-ing as advertised and, ten days after the first sale, notifies the Securitiesand Exchange Commission (SEC). All buyers of the stock are given mate-rial information about the company, its business, and the stock. Beforethe end of the year, the offering is completely sold out. The buyersinclude forty unaccredited investors and fifty accredited investors.National does not register the offering. The SEC files a suit againstNational, seeking civil sanctions on the ground that this offering was notexempt from registration. National argues that the applicable exemptionis Rule 505 of Regulation D of the Securities Act of 1933 and thatbecause of this exemption, any resale of the stock is also exempt. Who iscorrect?

ANSWER: The SEC is correct on both points. To be exempt under Rule505 of Regulation D of the Securities Act of 1933, a private,noninvestment company offering for less than $5 million in any twelve-month period may be sold to any number of accredited investors but nomore than thirty-five unaccredited investors, an offering must not begenerally advertised or solicited, and the SEC must be notified of thesales. If a sale involves any unaccredited investor, all investors must begiven material information about the offering company before the sale.Precautions must be taken against nonexempt, unregistered resales. Inthis problem, National’s offering complies with all of the requirementsexcept the following: the offering is generally advertised, and the stock issold to forty unaccredited investors. This is enough to remove National’soffering from the exemption. Even if the offering were exempt fromregistration, however, resales might not be exempt. Securities initiallyexempt under Rule 505 are restricted securities. This means that theymust be registered before resale unless they qualify under a Rule 144 orRule 144A exemption.

PAGES: 842 & 843–844 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling


A2. Standard Corporation is a public company whose shares are traded inpublic securities markets. Standard’s officers want to set up and main-tain a system of “good corporate governance.” What is “corporate govern-ance”? What is its practical significance? What, at a minimum, should a“good” system of corporate governance include?

ANSWER: Corporate governance is the relationship between a corpora-tion and its shareholders: the system by which business corporations aredirected and controlled. Corporate governance is the essential purpose ofcorporation law, which sets out the structure of a corporation. A “good”system of corporate governance involves, at a minimum, (1) the auditedreporting of financial progress at the firm, so that its managers can beevaluated and (2) legal protection for shareholders, so that parties whoviolate the law to take advantage of shareholders can be punished fortheir misconduct and their victims can recover damages. Practically,good corporate governance in the form of accountability to investors pro-vides the opportunity to enhance corporate wealth, because firms withexpanded shareholder rights—a hallmark of good corporate govern-ance—have been shown to have increased profits, sales growth, companyvalue, and other economic advantages.

PAGES: 853–855 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

Clark 11e TB a Ch41

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