Stock Lawyer Stock Market 2 — Questions and Answers
Question 1: Under SEC Rule 10b-5, which element must a plaintiff prove to establish a securities fraud claim?
- That the defendant earned a profit
- That the misrepresentation was made in connection with the purchase or sale of a security (Correct answer)
- That the defendant held a fiduciary duty to all shareholders
- That the SEC had prior knowledge of the fraud
Correct answer: That the misrepresentation was made in connection with the purchase or sale of a security
Rule 10b-5 requires the misrepresentation or omission to be made 'in connection with' the purchase or sale of a security, among other elements.
Question 2: What is a 'short squeeze' in equity markets?
- A rapid decline in a stock's price due to mass selling
- A surge in a stock's price forcing short sellers to buy shares to cover losses (Correct answer)
- A regulatory action limiting short selling activity
- A broker margin call issued to long investors
Correct answer: A surge in a stock's price forcing short sellers to buy shares to cover losses
A short squeeze occurs when rising prices force short sellers to buy back shares to cover positions, further driving the price up.
Question 3: Which doctrine holds that a corporation may not trade in its own shares based on material non-public information?
- Corporate opportunity doctrine
- Business judgment rule
- Issuer insider trading prohibition (Correct answer)
- Piercing the corporate veil
Correct answer: Issuer insider trading prohibition
SEC rules and case law prohibit issuers from trading in their own securities on the basis of material non-public information.
Question 4: What is the primary purpose of a lockup agreement in an IPO?
- To guarantee the offering price for 180 days
- To prevent insiders from selling shares immediately after the IPO (Correct answer)
- To lock in underwriter compensation fees
- To restrict secondary market trading by retail investors
Correct answer: To prevent insiders from selling shares immediately after the IPO
Lockup agreements typically prohibit insiders from selling shares for 90–180 days post-IPO to stabilize the market price.
Question 5: Under the Securities Exchange Act of 1934, Section 16(b), what is the 'short-swing profit' rule?
- Insiders must disclose all trades within 2 business days
- Profits from purchases and sales within a 6-month window by insiders must be returned to the corporation (Correct answer)
- Directors must hold shares for at least one year before selling
- Hedge funds must disclose positions above 5% of outstanding shares
Correct answer: Profits from purchases and sales within a 6-month window by insiders must be returned to the corporation
Section 16(b) requires corporate insiders to disgorge any profit made from buying and selling company stock within any 6-month period.
Question 6: Which exchange listing standard generally requires a company to have a minimum of $4 million in stockholders' equity for initial listing on Nasdaq Capital Market?
- NYSE American
- NYSE Main Market
- Nasdaq Capital Market (Correct answer)
- OTC Bulletin Board
Correct answer: Nasdaq Capital Market
Nasdaq Capital Market sets minimum stockholders' equity thresholds, with one standard requiring at least $5 million, depending on which listing standard is chosen.
Question 7: What is 'market manipulation' under the Securities Exchange Act?
- Legal trading strategies used by institutional investors to maximize returns
- Artificial inflation or deflation of a security's price through deceptive practices (Correct answer)
- High-frequency trading activity that affects bid-ask spreads
- Short selling during a declining market
Correct answer: Artificial inflation or deflation of a security's price through deceptive practices
Market manipulation involves intentional conduct designed to deceive investors by artificially affecting a security's price or trading volume.
Stock Lawyer Stock Market 2
Under SEC Rule 10b-5, which element must a plaintiff prove to establish a securities fraud claim?