Stock Lawyer Stock Market 5 â Questions and Answers
Question 1: Which exemption under the Securities Act of 1933 allows issuers to sell securities to 'accredited investors' without SEC registration?
- Regulation D, Rule 506 (Correct answer)
- Regulation S
- Section 4(a)(1)
- Rule 144A
Correct answer: Regulation D, Rule 506
Regulation D, Rule 506(b) and 506(c), provides a safe harbor for private placements to accredited investors without requiring SEC registration.
Question 2: What is 'naked short selling' and why is it controversial?
- Short selling by undisclosed foreign investors, violating U.S. disclosure rules
- Selling shares short without first borrowing or locating them, potentially creating phantom shares (Correct answer)
- Short selling by company insiders in violation of Section 16
- Selling call options without holding the underlying shares
Correct answer: Selling shares short without first borrowing or locating them, potentially creating phantom shares
Naked short selling involves selling securities short without borrowing them first, which can create artificial selling pressure and fail-to-deliver situations, raising market integrity concerns.
Question 3: Under the Dodd-Frank Act's whistleblower program, what percentage of sanctions can a qualifying SEC whistleblower receive?
- 1% to 5% of sanctions collected
- 10% to 30% of sanctions over $1 million collected (Correct answer)
- Up to 50% of sanctions collected in any enforcement action
- A flat fee of $250,000 per successful case
Correct answer: 10% to 30% of sanctions over $1 million collected
The SEC whistleblower program awards between 10% and 30% of monetary sanctions collected in cases where the sanction exceeds $1 million.
Question 4: What is a 'secondary offering' in U.S. securities markets?
- An offering of shares that occurs exactly one year after an IPO
- A registered offering of shares after the initial public offering, either by the company or existing shareholders (Correct answer)
- An offering made exclusively to foreign investors after the domestic IPO
- A private resale of IPO shares by underwriters to institutional clients
Correct answer: A registered offering of shares after the initial public offering, either by the company or existing shareholders
A secondary offering is any registered public offering of shares after the IPO, which may be a new issuance by the company (dilutive) or a sale by existing shareholders (non-dilutive to the company).
Question 5: Which SEC rule sets forth the conditions under which a security may be resold by an affiliate of the issuer without registration?
- Rule 10b-5
- Rule 144 (Correct answer)
- Rule 506(c)
- Rule 701
Correct answer: Rule 144
SEC Rule 144 establishes the conditionsâincluding holding periods, volume limitations, and current public information requirementsâunder which restricted and control securities may be publicly resold.
Question 6: What is the legal significance of a company achieving 'large accelerated filer' status under SEC rules?
- The company may skip quarterly reporting and file only annual reports
- The company is subject to stricter SOX Section 404(b) auditor attestation requirements and shorter filing deadlines (Correct answer)
- The company's shares are automatically upgraded to a higher exchange tier
- The company must obtain SEC pre-approval before issuing new shares
Correct answer: The company is subject to stricter SOX Section 404(b) auditor attestation requirements and shorter filing deadlines
Large accelerated filers (public float â„ $700 million) face the shortest SEC filing deadlines and must comply with the full Sarbanes-Oxley Section 404(b) internal control audit requirement.
Question 7: In the context of stock market regulation, what is 'Reg NMS' (Regulation National Market System) primarily designed to do?
- Require all U.S. companies to list on the NYSE or Nasdaq
- Establish rules to promote fair and efficient access to quotations and executions across all trading venues (Correct answer)
- Regulate the conduct of mutual funds and ETFs in equity markets
- Set minimum capital requirements for broker-dealers trading equities
Correct answer: Establish rules to promote fair and efficient access to quotations and executions across all trading venues
Reg NMS, adopted by the SEC in 2005, modernized the U.S. equity market structure by requiring best execution, promoting competition among trading venues, and protecting customer limit orders.
Stock Lawyer Stock Market 5
Which exemption under the Securities Act of 1933 allows issuers to sell securities to 'accredited investors' without SEC registration?