MODULE 22 FEDERAL SECURITIES ACTS AND ANTITRUST LAW
incorrect because a prospectus is any notice, circular, adver-
tisement, letter, or communication offering the security for
sale. No general offering or solicitation is allowed under
Rules 505 or 506 of Regulation D whether the purchaser is
accredited or not.
13. (a) Even if the securities are exempt under the Secu-
rities Act of 1933, they are still subject to the antifraud pro-
visions. Both the person defrauded and the SEC can
challenge the fraud committed in the course of selling the
securities.
14. Cc) The SEC adopted the Forms S-2 and S-3 to de-
crease the work that issuers have in preparing registration
statements by permitting them to give less detailed disclo-
sure under certain conditions than Form S-1 which is the
basic long form. Answer (a) is incorrect because these
forms decrease, not increase, reporting required. Answer Cb)
is incorrect because when permitted, these forms are used
instead of Form S-l which is the standard long-form regis-
tration statement. Answer (d) is incorrect because the pur-
pose of the forms was not directed at intrastate issues.
A.S. Exempt Transactions or Offerings
15. Cc) The issuance described in I is exempt because
Rule 504 exempts an issuance of securities up to $1,000,000
sold in a twelve-month period to any number of investors.
The issuer is not required to restrict the purchasers' resale.
The issuance described in 11 is also exempt because
Rule 505 exempts an issuance up to $5,000,000 sold in a
twelve-month period. It permits sales to thirty-five unac-
credited investors and to any number of accredited investors.
Since there were only ten investors, this is met. The issuer
also restricted the purchasers' right to resell for two years as
required.
16. (d) Under Regulation D, Rule 504 exempts an issu-
ance of securities up to $1,000,000 sold in a twelve-month
period. Rule 505 exempts an issuance of up to $5,000,000
in a twelve-month period. So Rule 506 has to be resorted to
for amounts over $5,000,000. Regulation A can be used
only for issuances up to ~1,500,000.
17. (d) When more than $5,000,000 in securities are
being offered, an exemption from the registration require-
ments of the Securities Act of 1933 is available under Rule
506 of Regulation D. Securities under the Act include de-
bentures and investment contracts.
18. .Ca) Under Regulation A of the 1933 Act, the issuer
must file an offering circular with the SEC. Answer (b) is
incorrect because the rules involving sales to unaccredited
and accredited investors are in Regulation D, not Regula-
tion A. Answer Cc) is incorrect because although financial
information about the corporation must be provided to offer-
ees, the financial statements in the offering circular need not
be audited .. Answer (d) is incorrect because the issuer is not
required to provide investors with a proxy registration
statement under Regulation A.
19. Cc) Sales or offers to sell by any person other than
an issuer, underwriter, or dealer are exempt under the 1933
Act. Answer (a) is incorrect because the Act covers all types
of securities including preferred stock. Answer (b) is incor-
rect because closely held corporations are not automatically
exempt. Answer (d) is incorrect because debentures, as debt
117
securities, are covered under the Act even if they are highly
rated or backed by collateral.
20. (b) Regulation D of the Securities Act of 1933 es-
tablishes three important exemptions in Rules 504, 505,
and 506. Although Rules 505 and 506 have some restric-
tions on sales to nonaccredited investors, all three rules un-
der Regulation D allow sales to both nonaccredited and ac-
credited investors with varying restrictions. Answer (a) is
incorrect because although Rules 505 and 506 allow sales to
up to thirty-five nonaccredited investors, all three rules al-
low sales to an unlimited number of accredited investors.
Answer Cc) is incorrect because Rule 506 has no dollar
limitation. Rule 505 has a $5,000,000 limitation in a twelve-
month period and Rule 504 has a $1,000,000 limitation in a
twelve-month period. Answer (d) is incorrect because
Regulation D is not restricted to only small corporations.
21. Cc) Under Rule 505 of Regulation D, the issuer must
notify the SEC of the offering within fifteen days after the
first sale of the securities. Answer (a) is incorrect because
under Rule 505, the issuer may sell to an unlimited number
of accredited investors and to thirty-five unaccredited in-
vestors. Answer (b) is incorrect because no general offering
or solicitation is permitted. Answer (d) is incorrect because
the accredited investors need not receive any formal infor-
mation. The un accredited investors, however, must receive
a formal registration statement that gives a description of the
offering.
22. (b) The private placement exemption permits sales
of an unlimited number of securities for any dollar amount
when sold to accredited investors. This exemption also al-
lows sales to up to thirty-five nonaccredited investors if they
are also sophisticated investors under the Act. Resales of
these securities are restricted for two years after the date that
the issuer sells the last of the securities. Answer (a) is incor-
rect because there is no such restriction of sale. Answer Cc)
is incorrect because sales may be made to an unlimited
number of accredited investors and up to thirty-five nonac-
credited investors. Answer (d) is incorrect because sales can
be made to up to thirty-five non accredited investors.
23. (a) When the issuer is a resident of that state, doing
80% of its busines in that state, and only sells or offers the
securities to residents of the same state, the offering qualifies
for an exemption under the 1933 Act as an intrastate issue.
Answer (b) is incorrect as the offering also qualifies for an
exemption under the 1934 Act. Therefore, as the offering is
exempted from both the 1933 and 1934 Acts, it would not be
regulated by the SEC. Answer (d) is incorrect because re-
sales can only be made to residents of that state nine months
after the issuer's last sale.
24. Cb) Rule 506 permits sales to thirty-five unaccred-
ited investors and to an unlimited number of accredited
investors. The unaccredited investors must also be sophisti-
cated investors (i.e., individuals with knowledge and experi-
ence in financial matters).
25. (b) Under Regulation A, an offering statement is
required instead of the more costly disclosure requirements
of full registration under the Securities Act of 1933. An-
swer (a) is incorrect because not all intrastate offerings are
exempt. They must meet specified requirements to be ex-
empt. Answer Cc) is iricorrect because many securities sold
under Regulation D cannot be resold for two years. An-