Q&A Hero

Q: Insider trading occurs if a company employee or executive uses material inside information to make a profit.

Q: Under the 1933 act, any security offered or sold to a permanent resident of the single state where the issuer of the security resides and does business is exempt from the registration process.

Q: The average investor does not have to register securities when he or she wants to sell.

Q: A person who violates the 1933 Securities Act can be fined but not sent to jail.

Q: Under the due diligence defense, the defendant must show that she investigated the registration statement and had reasonable grounds to believe that the statement was accurate.

Q: An accredited investor is allowed to accept private securities offerings under certain specific guidelines set by the SEC.

Q: Under SEC Rule 506, issuers who make private offerings of securities must still go through the registration process but they can advertise their private offerings to the general public.

Q: A tombstone advertisement announces a forthcoming sale of securities in a format similar to that of a tombstone.

Q: A prospectus is a written document filed with the SEC that contains a description of a security and other financial information regarding the company offering the security.

Q: Securities may be sold during the prefiling period. FALSE

Q: The purpose of securities regulation in China is similar to that of the SEC in the United States.

Q: If a violation of federal securities laws is serious enough to merit criminal prosecution, the Fraud Section of the Securities and Exchange Commission prosecutes the action.

Q: The Securities and Exchange Commission was created by the Securities Act of 1933.

Q: The SEC is an independent agency whose function is to administer federal securities laws.

Q: The SEC issues opinions regarding the worth of securities.

Q: The value of a security is based upon what the paper represents.

Q: The U.S. Supreme Court has interpreted the Securities Act of 1933 to mean that only stocks and bonds should be treated as a security.

Q: Investment contracts are securities.

Q: Rebecca, a secretary at ABC Software Company, a publicly traded company, enjoyed snooping through the desk of her boss, Emma. One day while snooping, Rebecca came across information indicating that ABC Software was in the process of launching a new type of software that it was believed would be very profitable. Rebecca immediately purchased a large amount of stock in ABC Company and sold it for a nice profit after the product was made public. Her conscience was bothering her a bit, so she confessed her snooping to a friend, Jason. Jason told Rebecca not to worry because she could have no liability. Is Jason correct; and, if not, what theory of liability could be applied against Rebecca? Additionally, set forth the definition of insider under Section 10(b) and Rule 10b-5.

Q: What is a proxy solicitation and how does the SEC regulate it?

Q: A prospectus is a financial instrument designed as a note, stock, or bond to raise capital for corporate expansion.

Q: Set forth the four major responsibilities of the SEC.

Q: Set forth what a registration statement filed with the SEC generally contains.

Q: Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. For which of the following is George liable? A. His own profits and also the profits of Frank. B. His own profits and also the profits of both Frank and Linda. C. His own profits regardless of whether he knew he was trading in information that had not been made public. D. Only his own profits and those of Linda. E. Only his own profits and then only if it can be shown that he knew or should have known that the material information was not public.

Q: Set forth the Howey three-part test for determining if a security exists.

Q: Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. Which of the following would describe Frank in receiving the information from Linda and acting upon it? A. Tipper B. Provider C. Providee D. Tippee E. Revealor

Q: Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. Which of the following would describe Frank in providing information about the asset sale to George? A. Tipper B. Provider C. Providee D. Tippee E. There is no designation for his behavior because he did nothing illegal.

Q: Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. For which of the following is Linda liable? A. Her own profits only. B. Her profits and those of Frank only. C. Her profits, the profits of Frank, and also the profits of George. D. Her profits only plus a 10% penalty. E. Nothing because she did nothing illegal.

Q: In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following, if any, may be defenses for Bruno? A. Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that an omitted or false statement was immaterial to the sale of the security. B. Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that the plaintiff was aware of the omission or false statement when the security was purchased. C. Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that a plaintiff was aware of the omission or false statement when the security was purchased, and that any omitted or false statement was immaterial to the sale of the security. D. For any alleged violations Bruno could raise the specific filing rule. E. No defenses are available to Bruno because he had already been held liable to the SEC once.

Q: Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. In which of the following prohibited practices was Linda engaged by purchasing the shares after she found out about the merger? A. Insider trading B. Outlaw trading C. Presidential trading D. Officer profiting E. Prohibited profiting

Q: Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. Which of the following would describe Linda in providing information about the asset sale to Frank? A. Tipper B. Provider C. Providee D. Tippee E. Revealor

Q: In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Is Rick correct in that the SEC would have no authority to send Bruno to jail? A. Rick is correct because there are no criminal penalties for violating the 1933 act. B. Rick is incorrect because the SEC criminally prosecutes some violators although the action would only be a misdemeanor. C. Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Department of Justice resulting in imprisonment for up to five years for a violation. D. Rick is incorrect because the SEC criminally prosecutes some violators, and a violation of the act is considered a felony that could lead to a prison term of 10 years. E. Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Federal Bureau of Investigation resulting in imprisonment for up to ten years for a violation.

Q: In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following is true regarding Bruno's plan to rely on the due diligence defense in regard to all charges? A. He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question the registration statement had they reviewed it with due diligence. B. He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question the prospectus had they reviewed it with due diligence. C. He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question either the registration statement or the prospectus had they reviewed them with due diligence. D. He will not be able to use that defense unless he can establish that he reviewed the registration statement and the prospectus, and had reasonable grounds to believe that the registration statement was accurate and had no omission of material facts. E. He will not be able to rely on that defense because he is an issuer.

Q: In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following is true regarding Bruno's sale of securities before the effective date of registration? A. He will be able to avoid liability if he can establish the due diligence defense. B. He will be able to avoid liability if he can establish that the investors who purchased stock early were aware that the securities were sold before the effective date of registration. C. He will be able to avoid liability if he can establish that the sales before the effective date did not directly result in any losses to investors. D. That is not a violation of the securities laws, so there is no question about liability. E. He will almost certainly be liable because the 1933 act provides no defenses for that violation.

Q: Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following may allow Bernice to avoid registration with the SEC? A. The limited exemption. B. The accredited exemption. C. The unadvertised exemption. D. The private placement exemption. E. Section 4(6).

Q: Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Considering only the information available, which of the following is a term that would describe Scott as an investor? A. Approved B. Sophisticated C. Accredited D. Unapproved E. Unaccredited

Q: Which of the following refer to state securities laws? A. Pink-sky laws B. Blue-sky laws C. Orange-sky laws D. Brown-ground laws E. Green-grass laws

Q: Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following is the term for the document referenced by Robbie involving information to be provided to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company and other matters? A. Robbie was wrong, and there is no such document. B. A confirmation statement. C. A registration statement. D. An acknowledgement statement. E. A reference statement.

Q: Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following is the term for the document referenced by Robbie to be provided to the SEC that will be used as an advertising tool by potential investors who can rely on it to decide whether they should buy securities? A. An advertising statement B. A prospectus C. An inventory D. A proposed income statement E. A securities advertisement

Q: Why did Congress pass the Private Securities Litigation Reform Act of 1995? A. To provide protection to companies who issue forecasts of earnings. B. To provide stronger penalties against companies who issue forecasts of earnings that turn out to be wrong. C. To provide stronger penalties against insiders who trade on forecasts of earnings. D. To provide protection to insiders who trade on forecasts of earnings. E. To provide protection to companies who issued forecasts of earnings and also to provide protection to insiders who trade on such forecasts.

Q: __________________ limits shareholders' ability to bring class action suits against nationally traded companies. A. The Class Prohibition Act of 1997 B. The Sarbanes-Oxley Act of 2002 C. The National Securities Markets Improvement Act of 1996 D. The Market Reform Act of 1990 E. The Securities Litigation Uniform Standards Act of 1998

Q: ___________________ are profits made from the sale of company stock within a six-month period by a statutory trader. A. Short-swing profits B. Short-term profits C. Insider profits D. Insider profiting profits E. Contempt profits

Q: Congress passed _________________ in an effort to prevent exploitation of small investors. A. the Investment Company Act of 1940 B. the Securities Enforcement Remedies and Penny Stock Reform of 1990 C. the Market Reform Act of 1990 D. the Securities Act Amendments of 1990 E. the National Securities Market Improvement Act of 1996

Q: ___________________ prohibits fraud associated with the purchase or sale of all securities. A. Section 32(c) B. Section 15(b) C. Rule 10b-5 D. Rule 5(c)(2) E. Rule 2(c)(5)

Q: Which of the following is an example of a material omission or misrepresentation during a securities transaction under Section 10(b) and Rule 10b-5? A. A change in the status of litigation against the company. B. A change in dividends. C. A new product, process, or discovery. D. A change in the status of litigation against the company; a change in dividends; and a new product, process, or discovery. E. A change in the status of litigation against the company and a change in dividends; but not a new product, process or discovery.

Q: _______________ is the illegal buying or selling of a corporation's stock or other securities by officers and directors in breach of a fiduciary duty. A. Statutory insiders B. Insider trading C. Misappropriation theory D. Tipping E. Restricted securities

Q: The __________________ defense requires that the defendant demonstrates that she investigated the registration statement and had reasonable grounds to believe that the statement was accurate. A. restricted securities B. red-herring C. insider trading D. due diligence E. proxy

Q: Which of the following is true regarding the Securities Exchange Act of 1934? A. It regulates the subsequent trading of securities. B. It requires that certain issuers file periodic reports with the SEC. C. It permits the SEC to monitor securities markets for fraud and market manipulation. D. It regulates the subsequent trading of securities, it requires that certain issuers file periodic reports with the SEC, and it permits the SEC to monitor securities markets for fraud and market manipulation. E. It regulates the subsequent trading of securities and requires that certain issuers file periodic reports with the SEC, but it does not permit monitoring by the SEC.

Q: ________________ prohibits the use of manipulative and deceptive devices to bypass SEC rules. A. Section 15(a) B. Section 10(b) C. Section 5 D. Rule 2 E. Rule 2(5)

Q: _________________ are accredited investors. A. Natural persons whose annual income has been at least $200,000 for the two previous years and expects to make at least $200,000 in the current year B. Corporations or partnerships with total assets in excess of $5 million C. Insiders of the issuers, such as executive officers or directors D. Colleges and universities E. All of these.

Q: Which of the following must occur in order for the exemption involving intrastate issues to apply? A. Issuers must do at least 80 percent of their business within the state. B. Issuers must have at least 80 percent of their assets within the state. C. Issuers must plan to use at least 80 percent of the profits within the state. D. Issuers must have their main offices in the state. E. All of these.

Q: ___________________ is a person who controls, is controlled by, or is in common control with the issuer. A. An affiliate B. An associate C. A partner D. A holder E. A tipper

Q: Which of the following permits qualified issuers to register securities that they will sell on a delayed or continuous basis in the future? A. Delayed registrations B. Continuous registrations C. Approved registrations D. Shelf registrations E. None of these because that practice is illegal

Q: A(n) _____________ investor is a private investor who is allowed to accept private securities offerings under certain specific guidelines set by the SEC. A. securities B. prospectus C. accredited D. due diligent E. insider

Q: ________________ are securities which do not have to go through the registration process. A. Limited offers and intrastate issues B. Intrastate issues and resale securities C. Resales of securities and limited offers D. Limited offers, intrastate issues, and resales of securities E. Limited offers only

Q: ______________________ begins when the SEC declares the registration statement effective, and ends when the issuer sells all securities offered or withdraws them from sale. A. The posteffective period B. The acknowledgement period C. The approved period D. The sell period E. The investment period

Q: Once an issuer files a registration statement and prospectus, the ______ period begins. A. advertising B. post-filing C. waiting D. approval E. prospectus

Q: A ______ prospectus has a warning written in red print at the top of the page warning investors that the registration has been filed with the SEC but has not yet been approved. A. red-line B. red-herring C. red-fish D. bait E. None of these because a prospectus may not be issued prior to approval

Q: A(n) _______________ announces a forthcoming sale of securities during the waiting period though a brief advertisement. A. proxy advertisement B. special offering C. unsolicited advertisement D. tombstone advertisement E. None of these because no ads may be issued during the waiting period

Q: Mary is a director of a company that develops expensive residential subdivisions. The company is considering attempting to purchase a large section of land on which to put a development. Mary happens to own some of the land. What duty, if any, does she have regarding disclosure and why or why not; what steps, if any should be taken by the board when considering the matter; and may the board take action that benefits Mary personally?

Q: Two security services, ABC Security and Knight Security, propose to merge. The proposed merger receives majority shareholder approval. Richard, a minority shareholder who owns 10% of the stock in Knight Security, however, is very much opposed to the merger. He tells the other shareholders in Knight Security that unless they convince him otherwise, he will block the merger. What are Richard's rights as a dissenting shareholder, and does he have the power to block the merger?

Q: Investment banking firms that purchase securities from the issuing corporation with the intent of selling them to brokerage houses that then sell them to the public are known as ______________. A. underwriters B. offerors C. issuers D. accredited purchasers E. None of these because that practice is illegal

Q: Warren was the president of a corporation whose articles of incorporation specified that the corporation's purpose was to market dairy products. Warren, however, convinced the board of directors to support him in opening a furniture store. Warren proceeded to enter into contracts with furniture suppliers. When some of the shareholders discovered that the corporation was going into the furniture business, they wanted the furniture venture ended. Unfortunately, the corporation had already entered into a contract for upholstery supplies that had been delivered. What is the term for acts of a corporation beyond its express and implied powers, and what remedies does the Revised Model Business Corporation Act provide when a corporation commits such act? What is the most likely result if the supplier of the upholstery supplies sues for payment?

Q: What are the requirements for being a director? Must a director own stock in the corporation?

Q: Set forth the ways discussed in the text in which the directors and officers of Enron failed in their duty of care.

Q: Skateboard Growth. Both Bernie and John were presidents of small businesses manufacturing and selling skateboards. Bernie's store was called "Skateboard City" and John's business was called "Skateboard for Health." Because a large sports store was coming into town, they, along with the boards of directors decided that it would be a good idea to combine the businesses. They decided to retain the name "Skateboard for Health" and simply amend the articles of consolidation. Bernie was concerned, however, with the change because he was contemplating filing a lawsuit against Hank who had purchased 10 custom skateboards and had not paid for them. He was excited, however, about the prospect of not being liable for a lawsuit he expects to be filed by Greg who fell when a wheel came off on a skateboard sold by Bernie's corporation resulting in a serious ankle sprain and medical bills. After investigation, Bernie is aware that the wheel was negligently attached to the skateboard. Bernie told John that one reason he wanted to retain John's name was to prevent Greg from being able to recover against him. Which of the following is the appropriate term for the action taken by Bernie and John in combining their businesses? A. Merger B. Consolidation C. Mixing D. Restructuring E. Reforming

Q: Skateboard Growth. Both Bernie and John were presidents of small businesses manufacturing and selling skateboards. Bernie's store was called "Skateboard City" and John's business was called "Skateboard for Health." Because a large sports store was coming into town, they, along with the boards of directors decided that it would be a good idea to combine the businesses. They decided to retain the name "Skateboard for Health" and simply amend the articles of consolidation. Bernie was concerned, however, with the change because he was contemplating filing a lawsuit against Hank who had purchased 10 custom skateboards and had not paid for them. He was excited, however, about the prospect of not being liable for a lawsuit he expects to be filed by Greg who fell when a wheel came off on a skateboard sold by Bernie's corporation resulting in a serious ankle sprain and medical bills. After investigation, Bernie is aware that the wheel was negligently attached to the skateboard. Bernie told John that one reason he wanted to retain John's name was to prevent Greg from being able to recover against him. Which of the following is true in most states regarding Bernie's concern that the surviving company might not be able to sue Hank for the price of the skateboards? A. The surviving company will not be able to sue Hank. B. The surviving company will be able to sue Hank only if Hank purchased the skateboards within 30 days of the joinder of the businesses. C. The surviving company will be able to sue Hank only if Hank approves in writing the joinder of the businesses. D. The surviving company will be able to sue Hank only if Hank is notified by certified letter of the joinder of the businesses. E. The surviving company will retain the right to sue Hank.

Q: Skateboard Growth. Both Bernie and John were presidents of small businesses manufacturing and selling skateboards. Bernie's store was called "Skateboard City" and John's business was called "Skateboard for Health." Because a large sports store was coming into town, they, along with the boards of directors decided that it would be a good idea to combine the businesses. They decided to retain the name "Skateboard for Health" and simply amend the articles of consolidation. Bernie was concerned, however, with the change because he was contemplating filing a lawsuit against Hank who had purchased 10 custom skateboards and had not paid for them. He was excited, however, about the prospect of not being liable for a lawsuit he expects to be filed by Greg who fell when a wheel came off on a skateboard sold by Bernie's corporation resulting in a serious ankle sprain and medical bills. After investigation, Bernie is aware that the wheel was negligently attached to the skateboard. Bernie told John that one reason he wanted to retain John's name was to prevent Greg from being able to recover against him. Which of the following is true regarding Bernie's belief that Greg will be unable to collect anything for the accident after the joinder of the businesses? A. Bernie is correct that Greg will be unable to win in litigation against the surviving company so long as the joinder is completed before Greg files the lawsuit. B. Bernie is correct that Greg will be unable to win in litigation against the surviving company regardless of whether the lawsuit occurs before or after the joinder as long as no judgment is entered prior to the joinder. C. Bernie is correct that Greg will be unable to sue the surviving company unless Greg files in court an objection to the joinder and prevails. D. Bernie is correct that Greg will be unable to win in litigation against the surviving company unless Greg can establish fraud in connection with the joinder. E. Bernie is incorrect, and the joinder will have no effect on the lawsuit.

Q: Discuss the rights of corporations under the Bill of Rights.

Q: Machine Malfunction. Bruno, the president of a corporation operating work out facilities, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and the corporation lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. The board of directors agrees to allow Frances, the ringleader of the shareholders, to purchase stock of the company at below its fair market value. She purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members. Which of the following is a term for stock issued to individuals below its fair market value? A. No-par stock B. Reduced stock C. Watered stock D. Less-value stock E. Unapproved stock

Q: Machine Malfunction. Bruno, the president of a corporation operating work out facilities, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and the corporation lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. The board of directors agrees to allow Frances, the ringleader of the shareholders, to purchase stock of the company at below its fair market value. She purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members. Which of the following is true regarding liability of Frances, if any, for purchasing the stock at below its fair market value? A. If the board wanted to offer it to her, they had that right; and there is no consequence to Frances because she proceeded with complaints of the shareholders. B. She is liable for double the stated corporate value of the stock in addition to any price she already paid. C. She is liable for the stated corporate value of the stock in addition to any price she already paid. D. She is liable for paying the difference between the price she paid for the shares and the stated corporate value of the shares. E. She is liable for paying the difference between the price she paid for the shares and the stated corporate value of the shares plus a $10,000 penalty.

Q: Machine Malfunction. Bruno, the president of a corporation operating work out facilities, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and the corporation lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. The board of directors agrees to allow Frances, the ringleader of the shareholders, to purchase stock of the company at below its fair market value. She purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members. Under which of the following should Bruno and the board of directors defend themselves in an action brought by shareholders for harming the corporation? A. The Superior Judgment Rule B. The Research and Investigation Rule C. The Business Judgment Rule D. The Rule of Corporate Integrity E. There is no defense.

Q: Kite Sales. Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites, she started to make kites at home and to promote them to large toy stores. She also started selling kites to friends. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing. What duty, if any, did Wendy violate? A. She did not commit any violation. B. She violated the duty of loyalty. C. She violated the duty of care. D. She violated the duty of understanding. E. She violated the duty of profit maximization.

Q: Kite Sales. Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites, she started to make kites at home and to promote them to large toy stores. She also started selling kites to friends. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing. In which of the following objectionable activities was Wendy involved, if any, in selling and marketing the kites? A. She was not involved in any objectionable activities. B. She was involved in objectionable self-dealing. C. She was involved in objectionable personal-profit allocation. D. She was involved in objectionable private-profit allocation. E. She was involved in objectionable corporate profit reduction.

Q: Kite Sales. Wendy is president of a business that manufactures kites. The kites of her company, ABC Kites, are sold to large toy stores. After Wendy learned a great deal about kites, she started to make kites at home and to promote them to large toy stores. She also started selling kites to friends. Some of the directors learned about her kite sales and accused her of wrongdoing. Wendy denied any wrongdoing. What remedy will be imposed on Wendy, if any, for her home kite sales? A. Nothing because Wendy did not engage in any wrongdoing. B. She will be required to cede to the corporation half of any profits she earned as a result of the breach. C. She will be required to cede to the corporation only profits she earned as a result of the breach that the corporation can prove by a preponderance of the evidence it lost as a result of her actions. D. She will be required to cede to the corporation any profits she earned as a result of the breach unless she can by a preponderance of the evidence that the corporation lost no sales as a result of her actions. E. She will be required to cede to the corporation all the profits she earned as a result of the breach.

Q: Shaky Bicycles. Rhonda, an incorporator who filed the articles of incorporation for ABC Corporation, a corporation set up to sell bicycles, listed the correct town and street but incorrectly put the wrong street number in the document. Helen, a manufacturer of bicycle parts, had sold a number of parts to ABC Corporation. Unfortunately, the corporation was not making any profit, and Helen was not paid in a timely manner. Rhonda told her that the corporation was not liable because it was not validly formed due to the address mistake. Bernice, another creditor of ABC Corporation, also claimed that a shareholder of Shaky Bicycles, Slick, was personally liable to her. Bernice alleged that Slick committed fraud against her when he told her that ABC Corporation was making large amounts of money, that if she would only loan $50,000 to the corporation he would marry her, and that the corporation would make so much money that she would be wealthy in six months. She loaned the funds, but the corporation has been unable to repay her. Slick told her that he is sorry, but that her only avenue of recovery is through the corporation. Assuming ABC's corporate status is in place, which of the following is Bernice's best theory in order to hold Slick personally liable to her? A. That the corporate veil should be pierced because Slick committed fraud through the corporation. B. That in equity Slick should be held personally liable. C. That Slick should be personally liable because of his status as a shareholder. D. That the corporate environment should be removed because Slick committed fraud through the corporation. E. None of these. There is no theory under which she could hold Slick personally liable to her.

Q: Self-Centered President. Tina is the new president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders because she does not believe that they have any influence over the company because they cannot even elect a director. She is told, however, that the corporation has a practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal tax evasion. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases. How many votes will the minority shareholders have in the election? A. 2,000 B. 4,000 C. 6,000 D. 10,000 E. 20,000

Q: Self-Centered President. Tina is the new president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders because she does not believe that they have any influence over the company because they cannot even elect a director. She is told, however, that the corporation has a practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal tax evasion. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases. Is Tina accurate that she owes no duties to shareholders? A. Yes, she is accurate because it is the directors who owe a duty to shareholders. B. No, she is inaccurate because she owes a duty of care to shareholders although she owes no other duties. C. No, she is inaccurate because she owes a duty of loyalty to shareholders although she owes no other duties. D. No, she is inaccurate and owes both a duty of care and a duty of loyalty to shareholders. E. She is partially accurate. She owes both a duty of care and a duty of loyalty to minority shareholders but no duties to majority shareholders because the law assumes that they have the power to protect their own interests.

Q: Self-Centered President. Tina is the new president of "We Manage You," a corporation set up to manage physician practices. Tina has never been very concerned with minority shareholders because she does not believe that they have any influence over the company because they cannot even elect a director. She is told, however, that the corporation has a practice of cumulative voting. An election is coming up in which 10 directors will be elected. Minority shareholders own 2,000 shares while majority shareholders own 8,000 shares. Tina tells her vice president, George, that she wants to ignore minority shareholders and focus her interests on majority shareholders and the directors. She also tells George that she wants to be particularly conscientious toward directors because the directors appoint officers, and she does not believe that she owes any actual duties to shareholders. She further orders George to destroy some documents subpoenaed in a criminal investigation against the company for illegal tax evasion. When George protests, Tina tells him not to worry because officers cannot be held responsible for criminal actions so long as the actions are done as part of the duties of an officer. She explains to him that only the corporation can be charged with liability in such cases. Is Tina correct in that officers cannot be held criminally responsible for their actions on behalf of a corporation? A. Yes, she is correct. B. She is correct only so long as the corporation is solvent. C. She is correct only if the board of directors has accepted all liability for acts of officers. D. She is correct only if environmental or employment matters are involved. E. She is incorrect.

Q: Nails. Mona and her friends Jack and Bobby, all U.S. citizens, want to open a nail salon in Tennessee. They would all like to avoid personal liability for debts of the business and for wrongful acts of each other. They would also like to avoid taxation as much as possible. Mona is in favor of a corporation and asks if there is any problem with that form of business. Jack and Bobby say that they want to receive profit distributions and that they are concerned about excessive taxation with a corporation. Jack and Bobby urged the formation of a partnership even in the face of personal liability. Mona did some research and suggested an S corporation to Jack and Bobby. Would the proposed business qualify as an S corporation if it were incorporated in Delaware? A. No, because there must be at least 100 shareholders involved. B. No, because a business must operate as a partnership for at least two years before converting to an S corporation and also because it must be incorporated under the state law of the location of the principal place of business. C. No, because a business must operate as a regular corporation for at least two years before converting to an S corporation. D. Yes, so long as more than one class of shares is issued. E. Yes, so long as only one class of shares is issued.