D216 Business Law for Accountants - Set 5 - Part 2

Correct Answer: Not securities; profits from buyers' efforts

These sales fail the Howey test's fourth prong. Because each buyer works the land and profits flow from the buyer's own efforts rather than a promoter's, there is no investment contract and no security in this transaction. Option a is incorrect because an asset's value does not make its sale a security; the Howey analysis asks whether the buyer passively relies on another's efforts, which farming your own parcel plainly does not. Option b is incorrect because merely paying money is only one Howey element; without a common enterprise and reliance on others' efforts, an ordinary purchase does not become a regulated investment contract. Option d is incorrect because a transaction that fails the Howey test is not a security at all, so no registration duty arises; the active, self-directed buyer is outside securities law entirely.

Correct Answer: No; broad, covering investment contracts

The statutory definition of a security is deliberately broad, reaching beyond stocks and bonds to options, oil and gas interests, notes, and especially investment contracts, so promoters cannot escape the law by relabeling an investment. Option a is incorrect because limiting securities to stocks and bonds ignores the wide statutory list, which was written broadly precisely so clever promoters could not dodge regulation by using unconventional forms. Option c is incorrect because a stock certificate is not required for something to be a security; the investment-contract category captures many arrangements that never involve any certificate at all. Option d is incorrect because being unregistered does not remove something from the definition of a security; whether an instrument is a security is separate from whether its particular sale was registered.

Correct Answer: Profits from the efforts of others

The fourth Howey prong, profits derived primarily from the efforts of others, is the load-bearing element. It separates a passive investor relying on someone else's work from an active operator whose returns come from personal effort. Option a is incorrect because a written contract is not a Howey element; an investment contract can exist through the economic arrangement itself, and demanding a signed document would let promoters evade the test easily. Option b is incorrect because registration is a possible legal consequence of being a security, not a component of the Howey test that determines whether an investment contract exists in the first place. Option c is incorrect because the presence of an accredited investor bears on exemption rules, not on the Howey definition; the test focuses on passivity and reliance on others, not investor wealth status.

Correct Answer: A government-issued municipal bond

A government-issued bond is an exempt security, exempt from registration forever and freely resellable because the exemption follows the instrument itself. Government securities are already backed by a taxing authority and overseen through public budgeting. Option b is incorrect because a private placement is an exempt transaction, where a particular sale escapes registration; the exemption attaches to that sale rather than to the instrument, unlike a permanently exempt security. Option c is incorrect because an intrastate offering is an exempt transaction tied to how and to whom a sale is made, so its exemption is not the permanent, instrument-based status of an exempt security. Option d is incorrect because crowdfunding is an exempt transaction authorized to let issuers raise small sums online; the exemption covers that method of selling, not the security forever as with a government bond.

Correct Answer: The security lasts forever; transaction is one-time

An exempt security is exempt forever and freely resold because the status attaches to the instrument, while an exempt transaction gives only a one-time pass to a particular sale. That contrast is the core distinction to remember. Option a is incorrect because the two categories differ sharply: one exempts the instrument permanently while the other exempts only a specific sale, and conflating them misses a distinction the exam tests repeatedly. Option b is incorrect because an exempt security can be resold without registration, so it is false that both categories require registration before resale; the permanent exemption exists precisely to allow free resale. Option c is incorrect because it reverses the concepts; the transaction is the one-time pass and the security is the permanent status, so assigning forever to the transaction states the relationship backward.

Correct Answer: Up to thirty-five unaccredited investors

Rule 506 of Regulation D permits an unlimited number of accredited investors plus up to thirty-five unaccredited investors, with no general solicitation. The number thirty-five almost always points to this private-placement cap. Option a is incorrect because ten is not the Regulation D private-placement limit; the rule allows a considerably larger unaccredited group, capped at thirty-five, alongside unlimited accredited participants. Option c is incorrect because one hundred overstates the cap; the workhorse private-offering rule holds unaccredited investors to a much smaller number so the exemption stays genuinely limited in scope. Option d is incorrect because the rule does allow some unaccredited investors, just not an unlimited number; barring them entirely would misstate a private placement that expressly permits up to thirty-five.

Correct Answer: Regulation A

Regulation A offers a streamlined, mini-public offering with two tiers. The larger tier faces additional regulator review and limits unaccredited investors, and under the course figure it caps the raise at fifty million dollars over twelve months. Option a is incorrect because Rule 506 is a private-placement exemption with no general solicitation and no tier structure; it allows unlimited accredited investors rather than functioning as a two-tier mini-public offering path. Option b is incorrect because the intrastate offering rule simply restricts sales to residents of the issuer's own state; it has no tiers and no additional-review scheme like the framework described here. Option c is incorrect because Rule 144 is a resale safe harbor for restricted and control securities aimed at curbing insider trading, not a capital-raising framework with tiers and investor limits for new offerings.

Correct Answer: An independent public accounting firm

The registration statement must include a financial statement certified by an independent public accounting firm. Audited financials vouched for by an outside firm are a required content element investors rely on when deciding whether to invest. Option b is incorrect because the chief executive certifies financials for public-company reporting under governance law, but the registration statement's financials must be certified by an independent outside accounting firm, not company management. Option c is incorrect because the underwriter markets and distributes the offering and may raise a due-diligence defense, yet certifying the audited financials is the independent accounting firm's role, not the underwriter's. Option d is incorrect because the regulator reviews the filing for adequate disclosure but does not certify the numbers; an independent public accounting firm, not a government examiner, vouches for the financial statements.

Correct Answer: EDGAR, the securities regulator's filing database

EDGAR is the securities regulator's public online database of electronic filings. Domestic and foreign companies file their securities documents there, and investors can access registration statements, proxy statements, and annual reports through it. Option a is incorrect because a credit-reporting bureau compiles consumer credit histories, not corporate securities filings; investors reviewing registration statements and annual reports use the securities regulator's electronic system instead. Option b is incorrect because the database is a filing platform, not a category of investment; confusing a public filing system with an exempt security mixes up a disclosure tool with a type of instrument. Option c is incorrect because the trade commission's complaint system handles consumer grievances about deceptive practices, whereas securities registration and periodic reports are filed through the securities regulator's dedicated electronic database.

Correct Answer: Offer the securities but not complete sales

During the waiting period, while the regulator reviews the filed statement, the issuer may offer the securities but may not complete any sales. A preliminary prospectus may circulate, but actual sales must await the effective date. Option a is incorrect because the no-offer, no-sell restriction describes the prefiling period; once the statement is filed and under review, offers become permitted even though sales still cannot be completed. Option c is incorrect because free selling is only allowed in the posteffective period after approval; completing sales during review would jump the gun and let investors rescind their purchases. Option d is incorrect because the waiting period bars completed sales to everyone alike, including accredited investors; investor sophistication does not unlock early sales before the registration is declared effective.

Correct Answer: Twenty days

The minimum waiting period under the registration process is twenty days. During that stretch the regulator reviews the filed statement while the issuer may offer, but not sell, the securities to prospective investors. Option a is incorrect because five days matches the debt-collection validation-notice deadline, not the securities waiting period; the minimum review stretch during registration runs longer than that figure. Option b is incorrect because ten days understates the stated minimum; the waiting period during regulator review is set at a longer floor before an issuer can move toward completing sales. Option c is incorrect because thirty days is the default shipping deadline in the mail and telephone order rule, a consumer-protection figure unrelated to the securities registration waiting period.

Correct Answer: Neither offer nor sell the securities

In the prefiling period, before the registration statement is filed, the issuer may neither offer nor sell the securities. Drumming up interest by telling brokers shares are coming is an illegal offer during this stage. Option a is incorrect because selling is impossible in the prefiling stage; sales are barred until the registration is effective, so accepting broker commitments this early would violate the securities law. Option c is incorrect because offering is permitted only once the statement is filed and under review; the prefiling period prohibits offers entirely, making even soliciting broker interest unlawful. Option d is incorrect because the prefiling bar applies regardless of buyer sophistication; institutional or seasoned investors receive no early access, since no offers or sales may occur before filing.

Correct Answer: A Well-Known Seasoned Issuer

A Well-Known Seasoned Issuer qualifies by issuing at least one billion in securities over three years or holding at least seven hundred million in public float, and it may file the day it announces an offering. Option a is incorrect because accredited-investor status describes a wealthy or sophisticated buyer relevant to exemptions, not an issuer's ability to skip the registration wait and file on announcement day. Option b is incorrect because a Section 12 company is defined by its asset and shareholder size for ongoing reporting duties, which is a different threshold from the issuer status that grants the express registration lane. Option c is incorrect because an intrastate issuer simply sells only to residents of its own state under an exemption; that has nothing to do with the size-based fast-track filing privilege described here.

Correct Answer: The underwriter, but not the issuer

The due-diligence defense is available to an underwriter or subsequent seller who reasonably believed the statements were true after investigation, but it is not available to the issuer, which is held to strict accountability. Option a is incorrect because the issuer is the one party expressly denied the defense; as the source of its own registration statement, the issuer cannot escape liability by claiming it did its best. Option b is incorrect because the defense does exist and protects those who reasonably relied on the issuer's information after investigation, so it is wrong to say no party may ever raise it. Option d is incorrect because the regulator enforces the law rather than defending against liability; the due-diligence defense belongs to underwriters and subsequent sellers, not to a government agency.

Correct Answer: Over ten million assets, five hundred shareholders

A Section 12 company under the ongoing-trading Act has assets over ten million dollars and five hundred or more shareholders. Both conditions must be met, and such a company must file continuous annual and quarterly reports. Option b is incorrect because the shareholder figure is far too low and the asset figure too high; the real test pairs a ten-million asset floor with a five-hundred-shareholder threshold, not these numbers. Option c is incorrect because merely having issued stock does not trigger continuous reporting; the statute requires meeting specific asset and shareholder thresholds before a company must register and file periodic reports. Option d is incorrect because seventy-five million echoes the smaller-company governance carve-out and thirty-five echoes a private-placement cap; neither figure defines the reporting-company thresholds under the ongoing-trading Act.

Correct Answer: Yes; it reaches fraud in any security

Rule 10b-5 bans fraud in connection with the purchase or sale of any security, registered or not, and private parties may sue. The buyers can pursue the fraudster even though the shares were never registered. Option a is incorrect because the rule reaches any security literally, not just registered ones; limiting it to registered instruments would let fraudsters escape simply by trading in unregistered shares, which the law refuses to allow. Option b is incorrect because the antifraud rule expressly allows private parties to sue, so defrauded buyers need not wait for the regulator; private enforcement is a major reason the rule is heavily litigated. Option d is incorrect because the rule is not confined to exempt securities; it applies broadly to fraud in the purchase or sale of virtually any security, whether exempt, registered, or unregistered.

Correct Answer: A six-month holding period

A six-month holding period is not a Rule 10b-5 element; it belongs to the short-swing-profit provision. The rule's five elements are material misrepresentation or omission, scienter, reliance, economic loss, and causation. Option b is incorrect because a material misrepresentation or omission opens the required list for this fraud rule, so it genuinely belongs there rather than being the item borrowed from the short-swing provision. Option c is incorrect because scienter, the intent to defraud or knowledge of falsity, is the keystone requirement the fraud rule demands, so it is truly needed and not misplaced from elsewhere. Option d is incorrect because economic loss is a true element of the fraud claim; a plaintiff must actually have lost money, so this item correctly belongs among the rule's requirements.

Correct Answer: Any six-month period

Section 16(b) lets the corporation recapture an insider's short-swing profit from buying and selling company stock within any six-month period. Because Rivera's January purchase and May sale fall inside six months, the profit is recoverable. Option a is incorrect because thirty days is far shorter than the statutory window; the short-swing rule captures matched trades occurring within a full six-month span, not merely within a single month. Option c is incorrect because a one-year window is too long; the provision draws its bright line at six months, so trades matched beyond that period fall outside the automatic clawback. Option d is incorrect because ninety days does not match the rule's six-month measure; the corporation's recapture right keys to the half-year window, making the ninety-day figure incorrect here.

Correct Answer: Rule 10b-5 needs scienter; short-swing does not

Rule 10b-5 is an intent-based fraud rule requiring scienter, while the short-swing-profit provision is automatic and requires no scienter at all. That clean contrast between intent and strict liability is a favorite testing point. Option a is incorrect because the short-swing rule imposes strict liability with no mental-state requirement, so it is wrong to say both provisions demand scienter; only the fraud rule needs proof of intent. Option b is incorrect because the fraud rule squarely requires scienter, so claiming neither provision needs it ignores that intent is the keystone element of a Rule 10b-5 case. Option d is incorrect because it reverses the two rules; the short-swing provision is the automatic, no-scienter rule, while the fraud rule is the one that demands intent to defraud.

Correct Answer: The tipper/tippee theory

Under the tipper/tippee theory, liability flows from an insider's breach of fiduciary duty in passing a tip. Both the tipper and tippees, even remote tippees down the chain, can be liable for trading on that information. Option a is incorrect because the forward-looking safe harbor shields good-faith projections accompanied by cautionary language; it protects certain disclosures rather than imposing liability for trading on an insider's improperly passed tip. Option b is incorrect because Regulation A is a capital-raising exemption for smaller offerings, entirely unrelated to insider-trading liability arising from a chain of tips traced back to an insider's breach. Option c is incorrect because the resale safe harbor governs how restricted and control securities may be resold; it is not a theory for holding tippers and tippees liable for trading on inside information.