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A1. Frothy Beverage Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, 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.

b. disclose financial and other information about its securities.

A2. RingTone Corporation is a public company whose securities are traded among 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.

a. almost any stake in the ownership or debt of a company.

A3. Start-Up Enterprises, Inc., completes its registration process and begins advertising the availability of its new issue of securities. Start-Up places a tombstone ad in the financial papers. This ad tells prospective investors
a. about investing.
b. about the company.
c. where to buy the securities.
d. where to obtain a prospectus.

d. where to obtain a prospectus.

A4. Celfone Corporation is required to file a registration statement with the Securities 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.

b. a description of securities being offered for sale

A5. Flo-Thru Corporation is poised to issue securities that, under the Securities Act of 1933, are "exempt." This means that the securities can be 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.

d. without being registered.

A6. Country Golf Club, Inc., wants to issue stock of $1 million in a single offering. Country does not have to provide any investors with any material 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.

a. all investors are accredited.

A7. To raise $12 million to expand operations, Star Corporation makes a stock offering directly to sixty accredited investors and twenty sophisticated, but unaccredited investors. Star plans to notify the SEC of
sales. 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.

b. if all of the investors are also given certain material information.

A8. Hobie, the chief executive officer of Ideal Gamers, Inc. (IGI), intentionally understates the amount of IGI's debts in information provided to investors as part of an issue of IGI stock. Jack buys the stock and suffers
a 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.

a. government prosecution and Jack's suit.

A9. New Discoveries Corporation, and its officers, directors, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act 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.

d. the purchase or sale of any security.

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.

d. the purchase or sale of any security.

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

A11. Refer to Fact Pattern 41-1A. If Dhani is liable under the Securities Exchange Act of 1934, it will be because the information on which he based his purchase of Eureka stock was
a. a forward-looking forecast.
b. not material.
c. not yet public.
d. not yet true.

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.

A11: c. not yet public.
A12: a. liable for insider trading.
A13: a. liable for insider trading.
A14: a. liable for insider trading.

A15. Riley, an engineer for Super Seed Corporation, learns that Super Seed has developed a corn hybrid to triple the output of any farm. Riley buys 10,000 shares of Super Seed stock. He tells Tess, who buys 5,000 shares.
After the new hybrid is announced publicly, the price of Super Seed stock increases. Riley and Tess sell their shares for a profit. Under the Securities Exchange Act of 1934, liability may be imposed on
a. neither Riley nor Tess.
b. only Riley.
c. only Tess.
d. Riley and Tess.

d. Riley and Tess.

A16. Della, an officer for Energy Petrol Corporation (EPC), buys 100 shares of EPC stock. One week later, EPC announces that it will merge with a competitor, Fuel Oil Company, and the price of EPC stock increases. One
month later, Della sells her shares for a profit. Under Section 16(b) of the Securities Exchange Act of 1934, Della would not be liable if, after
buying 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.

b. more than six months to sell it.

A17. North American Properties, Inc., and its officers, directors, and shareholders, buy and sell securities. Section 16(b) of the Securities Exchange Act 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

c. only purchases and sales of securities involving short-swing profits.

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 the state.
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.

a. a government official to a recipient for an act beneficial to the state.

A19. Kirk is the chief financial officer of Lemon Corporation, which is required to file certain financial statements with the Securities and Exchange 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.

a. certify that the statements are accurate.

A20. Flux Corporation is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, Flux is subject 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.

c. the federal government.

B1. Cotton Products Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, Cotton's disclosure of financial and other significant information concerning its securities is designed to
a. increase corporate accountability by imposing responsibility on
chief corporate executives.
b. prevent insiders from trading among themselves.
c. protect investors.
d. provide a "safe harbor" for companies that make forward-looking
statements.

c. protect investors.

B2. Readmore Bookstore Corporation files a registration statement and delivers a prospectus to the appropriate parties. These items are intended to enable the evaluation of certain financial risks by
a. market professionals to explain to all investors.
b. government regulators to disclose to the general public.
c. sophisticated investors only.
d. unsophisticated investors.

d. unsophisticated investors.

B3. Bild-It-Rite Corporation is a public company that is poised to issue securities that do not qualify for an exemption from registration. This means that Bild-It-Rite must
a. file a registration statement with the SEC.
b. issue the securities through an online registration site.
c. refrain from issuing the securities to unregistered investors.
d. register the securities with a national stock exchange.

a. file a registration statement with the SEC.

B4. Mit-E Clean Corporation wants to make an offering of securities to the public. This offering is not exempt from registration under the Securities Act of 1933. Before the firm sells its securities, it must provide investors with
a. a forward-looking financial forecast.
b. an investment contract.
c. a prospectus.
d. a road show.

c. a prospectus.

B5. Delta Corporation is a noninvestment company that wants to issue stock of $3 million in a twelve-month period. Delta, with less than $20 million in annual sales, qualifies as a small business issuer. Before Delta sells
the stock, it must provide investors with
a. an offering circular.
b. a notice of the issue.
c. a red herring prospectus.
d. a tombstone ad.

a. an offering circular.

B6. Flite Airline Corporation is poised to issue securities in a transaction that, under the Securities Act of 1933, is "exempt." This enables Flite to
a. avoid the costs and complications of registration.
b. buy and sell the securities without liability for "recaptures."
c. make forward-looking financial forecasts without liability.
d. withhold inside information from accredited investors.

a. avoid the costs and complications of registration.

B7. As part of a stock offering for Equine Corporation, Flem, Equine's accountant, intentionally misrepresents material facts in the prospectus. Gigi buys the stock unaware of the misrepresentation and suffers a loss. Flem may be subject to
a. a fine and damages only.
b. a fine and imprisonment only.
c. a fine, imprisonment, and damages.
d. damages only.

c. a fine, imprisonment, and damages.

B8. GR8 Stuf Company files a registration statement with the SEC before making an offering to the general public. The registration contains false, immaterial statements of which the investors are unaware. GR8 Stuf is charged with violating the Securities Act of 1933. GR8 Stuf's best defense is
a. the investors were not aware of the misrepresentations.
b. the issuer reasonably believed the misstatements were true.
c. the offering was made available to the general public.
d. the untrue statements were not material.

d. the untrue statements were not material.

B9. Instant Retail Company has assets of less than $10 million and fewer than five hundred shareholders. Jiffy Outlets, Inc., has assets of more than $10 million and more than five hundred shareholders. The
Securities Exchange Act of 1934 applies to
a. Instant Retail and Jiffy Outlets.
b. Instant Retail only.
c. Jiffy Outlets only.
d. neither Instant Retail nor Jiffy Outlets.

a. Instant Retail and Jiffy Outlets.

B10. Lex, a salesperson for Macro Corporation, learns that Macro will increase the dividend it pays to shareholders. Lex buys 1,000 shares of Macro stock. When the price increases, Lex sells his shares for a profit. Lex would not be liable for insider trading if the information about the
dividend was
a. material when he sold the stock.
b. public after he bought the stock.
c. public before he bought the stock.
d. too speculative when he bought the stock.

c. public before he bought the stock

B11. To raise capital to form Plasticity Corporation with Quinn, Rona sells bonds and stock in other companies, and plans to register an initial public offering under the Securities Act of 1933. SEC Rule l0b-5 covers
a. most forms of securities.
b. only bonds.
c. only securities registered under the Securities Act of 1933.
d. only stock.

a. most forms of securities.

Fact Pattern 41-1B (Questions B12-B13 apply)
Sid, a director of Tech Software Company, learns that a Tech engineer has developed a new, exciting video game. Sid buys Tech stock and tells his friend Uri, who also buys Tech stock. When the new game is released three weeks
later, Sid and Uri sell their stock for a big profit.

B12. Refer to Fact Pattern 41-1B. Under SEC Rule l0b-5, Sid would not be liable if he had waited to buy Tech stock until
a. after Sid told Uri of the new game.
b. after Uri bought Tech stock.
c. after the public release of the game.
d. just before the game was released.

B13. Refer to Fact Pattern 41-1B. Regarding Sid's profits on the purchase and sale of Tech stock, under Section 16(b) of the Securities Exchange Act of 1934 Tech may recapture
a. all of Sid's profits.
b. half of Sid's profits.
c. 10 percent of Sid's profits.
d. none of Sid's profits.

B12: c. after the public release of the game.
B13: a. all of Sid's profits.

B14. Dave, an accountant, does not work for Emergent Company, but wrongfully obtains inside information concerning Emergent. Based on the information, Dave buys and sells Emergent stock for personal gain. The
Securities and Exchange Commission prosecutes Dave, arguing that he is liable because he stole information rightfully belonging to another. This argument is
a. the blue-sky theory.
b. the misappropriation theory.
c. the red-herring theory.
d. the tipper/tippee theory.

b. the misappropriation theory.

B15. Excel Aviation Corporation is required to register its securities under Section 12 of the Securities Exchange Act of 1934. Section 14(a) of the act regulates
a. the declaration of dividends by Excel's board of directors.
b. the later re-registration of Excel's securities.
c. the short-swing activities of Excel's insiders.
d. the solicitation of proxies from Excel's shareholders.

d. the solicitation of proxies from Excel's shareholders.

B16. Thom, an accountant for Uno Company, learns that Viral, a Uno director, has violated insider-trading laws. Thom does not suffer a loss in trading with Viral, but reports her to the Securities and Exchange Commission. Thom may be entitled to
a. a bounty payment.
b. damages equal to the amount of Viral's profits.
c. damages equal to the amount of Uno's losses (if any).
d. triple Viral's profits.

a. a bounty payment.

B17. Ernie contracts to buy securities from Freda. Later, believing that Freda committed fraud in the deal, Ernie files a suit against her. If Freda is found liable, Ernie may obtain
a. an apology only.
b. damages to the extent of Freda's illegal profits only.
c. damages to the extent of Freda's illegal profits or rescission of Ernie's contract to buy securities from Freda.
d. rescission of Ernie's contract to buy securities from Freda only.

c. damages to the extent of Freda's illegal profits or rescission of Ernie's contract to buy securities from Freda.

B18. Heavy Hauling, Inc., is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, to ensure that Heavy Hauling's financial results are accurate and timely,
the firm's senior officers must set up and maintain
a. internal "disclosure controls and procedures."
b. external "release and reveal timetables."
c. personal "peruse and review liability policies."
d. public "information and discussion forums."

a. internal "disclosure controls and procedures."

B19. Lara is the chief executive officer of Micro, Inc., which is required to file certain financial reports with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Lara must
a. certify that the reports are complete and accurate.
b. designate a corporate official to assume liability for inaccuracies.
c. do nothing.
d. read the reports and be prepared to answer questions about them.

a. certify that the reports are complete and accurate.

B20. Fine Café Company offers its stock for sale only in a single state. The law in Fine's state is like the law in most states. Fine's offer is subject to
state securities statutes that include
a. antifraud and disclosure provisions.
b. antifraud provisions only.
c. disclosure provisions only.
d. neither antifraud nor disclosure provisions.

a. antifraud and disclosure provisions.

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