Business Law Chapters 14-17 (Connect Questions)

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True (The partnership is created when the parties agree to act as a partnership or their actions create a partnership by implication)
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T/F: General partnerships are not created by filing a form with a government agency
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False (There is no restriction as to the amount of employees a sole proprietorship may hire)
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T/F: One disadvantage of a sole proprietorship business entity is that it is restricted to the principal and the principal’s immediate family in terms of number of employees that may work for the business
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False (At minimum, he will also need to fill out and file a D.B.A. certificate naming himself as principal)
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T/F: Wayne Lewis wants to start a sole proprietorship named Lewis Plumbing Services. Because it will be a sole proprietorship, Wayne has no filing requirements other than obtaining the appropriate business license from the local and state government where the business will be located in
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False (The UPA called for termination of the business entity while RUPA encourages the entity to continue in existence)
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T/F: With regard to dissociation and dissolution, the Revised Uniform Partnership Act adopted and reserved the same general rules and procedures as its predecessor, the Uniform Partnership Act
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True (By implication, since the sole proprietorship is owned and managed by an individual, when the individual dies, the entity dies although an heir may continue it as their own sole proprietorship)
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T/F: A sole proprietorship automatically is dissolved when the owner dies
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False (A limited partnership is formed by the general partner filing a certificate of limited partnership with the appropriate state governmental authority)
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T/F: A limited partnership is formed by the limited partner filing a certificate of limited partnership with the appropriate state governmental authority
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True (The business’s assets must be exhausted before personal assets may be attacked)
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T/F: If someone successfully sues a sole proprietorship, they must exhaust the businesses assets before they may go after the principal’s personal assets
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False (A disadvantage of the sole proprietorship is that the owner is personally liable for the entity’s debts beyond their initial investment)
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T/F: An advantage of operating as a sole proprietorship is that personal liability for any business losses is limited to the owner’s investment in the business
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True (Profits or losses reflect on the principal’s personal taxes as the sole proprietorship pays no taxes itself)
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T/F: If a sole proprietorship loses money, the principal may deduct the losses from her own personal tax liability if any
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False (Only one limited partner is required along with one or more general partners)
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T/F: A limited partnership is required to have two or more limited partners
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False (As of 2010, only about 40 states have adopted RUPA)
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T/F: To date, every state in the union has adopted the Revised Uniform Partnership Act except the state of Louisiana
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common law (Should RUPA not have provisions that will apply, RUPA mandates that the common law be looked to for “principles of law and equity to supplement this act.”)
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Frank and Jesse are operating as a general partnership. A question has arisen not covered under their partnership agreement and also not addressed by the Revised Uniform Partnership Act. What will the courts do to resolve the situation? What law will they look to to resolve the situation?
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an information return (A partnership must file an information return providing the government with documentation regarding profits and distribution of the profits)
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With regard to taxation of partnerships: what kind of tax information must a partnership file?
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at least one general and one limited partner (RULPA requires at least one general and one limited partner)
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A limited partnership requires what kind and how many partners?
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Kathy (The principal is solely liable for debts of a sole proprietorship)
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Mike lends money to Kathy as a business loan to Kathy who is capitalizing her start up sole proprietorship named Kathy’s Things. If Mike must sue for repayment, he would sue?
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de facto (A business which is existing and operating but has not necessarily been recognized as formally existing in law, perhaps because of the failure to file a necessary form or certificate, will be considered de facto)
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A business which exists in fact although not formally recognized is referred to as being?
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the Revised Uniform Partnership Act (Courts will defer to RUPA standards when no agreement has been made)
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Lisa and Tara are operating a business as a general partnership without an express partnership agreement. Should a dispute arise, the courts will look to ________ to resolve the issue regarding operation of the partnership.
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a limited partnership (The limited partnership requires a certificate of limited partnership be files while sole proprietorships and general partnerships may be implied from principal’s actions)
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What kind of partnership requires a formal filing to be recognized as a valid business entity?
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Bill may withdraw at any time and the partnership continues (A general partner may withdraw from a partnership at any time if the partnership agreement does not state a termination date or a notice requirement)
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Bill is a general partner in a four member limited partnership with two general and two limited partners. The partnership is silent with regard to the duration of the partnership and Bill wishes to retire, can he retire? Does he have to fill out any specific paperwork or wait a certain amount of time? Will the partnership continue to exist?
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assume management responsibilities (Limited partners may provide certain services for a partnership but may not participate in management)
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Roger is a limited partner in a business. To retain his limited liability protection he must not do what within the business?
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True (The partnership is created when the parties agree to act as a partnership or their actions create a partnership by implication)
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T/F: General partnerships are not created by filing a form with a government agency
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False (Some business entities do not pay taxes, however; the taxes are passed through to the owner or owners)
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T/F: In all forms of business entities, the entity itself pays taxes on money earned by or through the entity
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False (Both general and limited partnerships are pass-through entities for tax purposes)
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T/F: General partnerships are pass-through entities regarding taxation, however; limited partnerships are not pass-through entities for taxes
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False (At minimum, he will also need to fill out and file a D.B.A. certificate naming himself as principal)
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T/F: Wayne Lewis wants to start a sole proprietorship named Lewis Plumbing Services. Because it will be a sole proprietorship, Wayne has no filing requirements other than obtaining the appropriate business license from the local and state government where the business will be located in
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True (Limited partners may act as consultants and may contribute their expertise to the limited partnership but may not manage the enterprise or supervise employees)
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T/F: Under the Revised Uniform Limited Partnership Act, limited partners may act as consultants and may contribute their expertise to the limited partnership
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False (These activities are permitted as long as Mike does not participate in day to day management activities)
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T/F: Mike is a limited partner in Big Blue, LP. The partnership agreement permits him to have a say in the removal of general partners and the blocking of new partners. This agreement will jeopardize his limited partner status
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True (An agreement will control, however; in the absence of an agreement RUPA gap fills directing that profits be shared equally)
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T/F: In the absence of an agreement to the contrary, the Revised Uniform Partnership Act mandates that general partnership profits be split equally amongst the partners
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False (Written agreements are customary, however; in their absence RULPA will apply)
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T/F: The Revised Uniform Limited Partnership Act requires that there be a written partnership agreement regarding limited partnerships
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False (Sole proprietorships may operate in multiple locations)
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T/F: One disadvantage of a sole proprietorship business entity is that it is restricted to a single location and cannot expand
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True (Joint ventures are essentially short term and limited in duration relationships governed by the same legal principles as a general partnership)
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T/F: Joint ventures are governed by the same legal principles as a general partnership
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common law (Should RUPA not have provisions that will apply, RUPA mandates that the common law be looked to for “principles of law and equity to supplement this act.”)
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Frank and Jesse are operating as a general partnership. A question has arisen not covered under their partnership agreement and also not addressed by the Revised Uniform Partnership Act. What will the courts do to resolve the situation? What law will they look to?
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equallly (Profits may be split according to agreement however RUPA requires that losses be allocated equally amongst the principals in a general partnership)
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In a general partnership an unequal split of profits may be agreed to based on the partnership agreement, but losses are split up how?
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an information return (A partnership must file an information return providing the government with documentation regarding profits and distribution of the profits)
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With regard to taxation of partnerships what kind of tax information must they file?
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True (Limited partners may not withdraw early if the agreement sets a time for the partnership to terminate)
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T/F: Regarding limited partners, they may not withdraw before the time that the partners have agree that the partnership will terminate
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winding up (Conclusion of partnership affairs occurs during windup)
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Redrock GP has decided to go out of business. The sale of the partnership assets and the making of payments to creditors will occur during the ________ phase of the closing of a partnership.
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corporations (An advantage of a corporation is that the principals generally have no personal liability for the corporate debts)
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Principals generally have no personal liability for the business entity’s debts regarding which kind of business entity?
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either an oral, written or implied agreement (The intent of the parties, an oral agreement and/or a written agreement can each form a general partnership)
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A general partnership may be formed by what kind of agreement?
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sole proprietorship (Corporations and sole proprietorships require only one principal)
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What kind of business entity does not require two or more principals?
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True (Some states require a written agreement, some require only parts be in writing and others have no written requirement at all)
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T/F: Some states do not require a written management agreement regarding LLCs
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False (Only LLCs have the option to be taxed like a corporation or choose pass-through taxation treatment)
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T/F: LLPs may choose to be taxed like a corporation or choose pass-through taxation treatment
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False (The remaining members may choose to continue the LLC)
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T/F: When a member of an LLC dies, the business entity automatically ceases to exist
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True (The member-managed LLC is similar to a general partnership because every member has a say in management and each may bind the company)
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T/F: The management structure of a member-managed LLC is similar to that of a general partnership
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False (Written partnership agreements for LLPs are not required by every state)
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T/F: All states require LLPs to have a written partnership agreement
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True (The SBDF allows a franchisee to purchase nontrademarked items from nonfranchisor sources to get the lowest price as long as quality is comparable)
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T/F: Requiring a franchisee to purchase all franchise related materials and supplies, trademarked and otherwise, from the franchisor violates the Small Business Franchise Act
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False (The certain procedures for dissolution are governed by the operating agreement and may vary from company to company)
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T/F: Jones LLC and Smith LLC both have ten members and five managing members. Both entities go into dissolution. The procedures for dissolution including preferences of members in terms of who is paid first and so on will be identical for both companies
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True (One component of an operating agreement is to determine how the members will raise capital and the amount that will be raised)
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T/F: The operating agreement of the LLC often controls the amount and methods of capitalizing the business
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True (Financial information provided to a prospective franchisee must be audited to insure the accuracy of the information)
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T/F: Financial information provided to a prospective franchisee must be audited
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True (If a capital call is legitimately made, a partner that cannot raise the call’s required funds may be forced to sell their interest in the company)
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T/F: Trish is a partner in an LLP and the partnership is having a cash flow problem. To alleviate the problem the partnership has initiated a capital call for each partner to contribute an additional $25,000 to the business. If Trish cannot come up with the necessary funds, she may be forced to sell her interest in the partnership
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False (Both LLCs and LLPs are pass-through entities for tax purposes)
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T/F: LLCs are pass-through entities for tax purposes, however; LLPs are taxed at the entity level without tax liability passing to partners other than their personal salary income if any
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True (To protect injured clients and customers, some states require liability insurance so injured individuals may still recover for an LLP partner’s wrongdoing)
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T/F: States may require that LLPs carry liability insurance to protect clients and customers as a condition of LLP formation
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True (The organizers may choose on the certificate of organization whether to disclose information regarding management of the LLC)
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T/F: When completing the certificate of organization, the organizers of an LLC are not required to disclose how the business is to be managed
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True (The trend is to require only basic information needed to identify the principals and business)
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T/F: Many states have eased filing requirements to create an LLC from requiring extensive amounts of information to now requiring minimal information similar to that required in a corporate filing
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True (State laws vary and some states will not recognize partnership taxation)
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T/F: Some states recognize LLCs but do not permit partnership taxation at the state level
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False (An LLC may opt to use a commercial registered office provider for a fee)
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T/F: LLCs are required to name a member as its registered agent and may not use a commercial registered office provider
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the Wyoming legislature (In 1977, the Wyoming legislature created the initial LLC)
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LLCs were originally created by the which legislature?
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a franchise (The FTC requires very extensive and detailed disclosures prior to a franchise agreement being entered into. The other businesses mentioned require the filing of a relatively simple form)
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Which type of business entity requires the most disclosures and is the most lengthy and complex to create?
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full disclosure (FTC regulations focus on disclosure so the franchisee is fully aware of all necessary information to make a proper decision)
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Federal regulations regarding franchises are primarily designed to ensure ______ _______ of all information relating to a franchise company prior to a franchise investment
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corporations (The LLC provides liability protection similar to that offered at a corporate entity level with pass through taxation to the principals)
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An LLC offers principals the same liability coverage as principals in ______ with pass through taxation
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transition from one generation to another (Originally designed for protection of professional firms, the LLP is now frequently used by family business to resolve issues of transition of the business between generations)
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LLPs are often currently used to protect family businesses as a way to resolve issues regarding what?
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LLP’s (An LLP partnership agreement may allow for capital calls requiring individual partners to make additional required capital contributions to the entity)
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Personal financial contributions may be required by previous agreement with regard to what kind of business entity?
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Small Business Franchise Act (The Small Business Franchise Act provided franchisees with various rights and protections but does not waive fiduciary duties)
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What Act provides the following protections to franchisees: a required 30 day period for the franchisee to cure contract defaults; freedom to work outside of the franchise as long as the franchisee does not work in competition with the franchise; the right to purchase materials from vendors cheaper than the franchisor as long as the quality is comparable?
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False (Beneficiaries are issued beneficiary interest certificates to evidence their ownership rights in trust assets)
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T/F: Business trust beneficiaries are issued stock as evidence of their ownership rights in trust assets
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Lieberman had rightfully dissociated from the company but since the operating agreement was silent as to distribution and state LLC law was also silent regarding the issue, Lieberman gets no distribution for dissociation but retains his interest in the company until dissolution occurs (The courts could not step in and force a distribution and would not allow the members to force Lieberman to sell his interests. They recognized his dissociation but left his interest in the company intact)
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In Lieberman v. Wyoming.com, LLC, Lieberman dissociated from the LLC and demanded cash for his share of the company. The remaining members voted to continue the company and the operating agreement discussed distribution in the cases of dissolution but not simple dissociation. The court decided that:
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True (Bonds are secured with collateral while debentures are unsecured promises to repay money)
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T/F: Debentures are unsecured promises to pay back money with interest at a certain date backed by the strength of the general credit of the corporation
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True (A corporation is a fictitious legal entity that exists as an independent person separate from its principals)
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T/F: A corporation exists as an independent person separate from its principals
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False (To qualify for Subchapter S status, the unanimous consent of the shareholders must occur for Subchapter S designation)
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T/F: To qualify for Subchapter S status, a supermajority of the shareholders must consent to the Subchapter S designation
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False (After the articles of incorporation are filed, the state must approve them. After approval the state registers the document and the corporation is considered formed)
answer

T/F: A corporation is considered formed the moment the articles of incorporation are filed by the principals
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True (Subchapter S corporations do not experience double taxation but instead feature flow-through taxation)
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T/F: One benefit of the Subchapter S corporation is that there is no double taxation
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True (Shareholders may remove a director with or without cause unless limited by the articles of incorporation. The courts may order the removal of a director only for cause such as fraud)
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T/F: Unless limited by the articles of incorporation, shareholders may vote to remove a director with or without cause, however; the courts may only remove a board member for cause
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False (The bank may properly ask for both collateral and a personal guarantee)
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T/F: A new startup corporation has gone to a bank for a commercial loan. Recognizing the startup status of the business and the limited assets the corporation currently possesses, the bank, to protect its interests, may require that either collateral be pledged or a personal guarantee be signed by shareholders but may not require both
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False (Courts are generally very reluctant to discard the corporate entity and pierce the corporate veil)
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T/F: Courts are generally inclined to be predisposed to piercing the corporate veil whenever a corporation causes economic harm to others
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False (The inadequate capitalization of the shell company along with Josephine’s negligence will allow the courts to pierce the corporate veil making Josephine and Joe personally liable in order to provide fairness to the injured homeowner)
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T/F: Joe and Josephine have started a plumbing business and have incorporated. They invest nothing into the corporation and the corporation has minimal assets. One day Josephine negligently damages a main pipe in a customer’s home causing the basement to flood and resulting in $20,000 in damages. The homeowner’s only remedy is to sue the corporation and because the corporation has no funding and minimal assets, the homeowner must bear the loss because Joe and Josephine are shielded from liability due to the corporate protections the business entity affords them
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False (Despite being owners, shareholders cannot bind a corporation)
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T/F: Kate owns 1000 shares of stock in a corporation. As an owner of the corporation by virtue of her stock ownership, if she enters into a contract on behalf of the corporation the company will be bound by her actions
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False (The stock certificates and the stock register of a privately held corporation are kept with the corporate records and are not public documents)
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T/F: Eight businesswomen have formed a privately held corporation. Their stock certificates and the stock register of the corporation are public documents
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an alien corporation (A corporation incorporated in a foreign country but doing business in the United States is classified as alien in the state they do business in)
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Le Magasin de VĂȘtements, Inc. is a clothing retailer incorporated in France. If they transact business in New York, Le Magasin de VĂȘtements would be characterized as what type of corporation?
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80% (Subchapter S corporations may not own more than 80% of the stock of a subsidiary corporation)
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An enterprise may not be a Subchapter S corporation if it owns more than ________ of the stock of a subsidiary corporation
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False (Poor management is not generally intentional and will not pierce the corporate veil)
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T/F: Poor Management and decision making performed by inadequately trained or educated managers is a factor used by courts to determine whether to pierce the corporate veil
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Pierce the corporate veil
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These factors: inadequate capitalization; evidence of fraud or willful misconduct; failure to follow necessary corporate formalities – are factors used by the courts to determine whether or not to do what?
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the cost and formalities of setup (Corporations have more initial costs, paperwork and setup requirements than do other forms of business)
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The main disadvantage of choosing a publicly held corporate form to operate a business is?
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a privately held corporation (This is a privately held corporation only as none of the other categories apply to the facts)
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Thirteen sorority sisters decide to start a dog walking business. They incorporate under the name Pro Canine Walkers, Inc. and advertise their services throughout the city in newspapers and with flyers they post. All stock is owned by the thirteen principals and none is offered to anyone outside of the thirteen. This corporation would be classified as what kind of corporation?
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the board ignored direct and indirect signs pointing to the fact that fraudulent practices were occurring and their failure to investigate breached their duty of care (The board’s expertise made their failure to make proper investigations a case of gross negligence so the liability limits in the charter are unenforceable)
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In H. Carl McCall, Trustee of the New York Common Retirement Fund, et al., Derivatively on Behalf of Columbia/HCA Healthcare Corporation v. Scott, suit was brought claiming a breach of their fiduciary duties by the board with regard to alleged fraudulent billing practices. The board defended by citing the corporate charter which limits the liability of directors for breach of duty claims as long as they did not act in bad faith. The court determined that:
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shareholders (Ownership interest in corporations is referred to as shares. Shareholders are the owners of the corporation)
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The owners of a corporation are the?
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False (Venture capital firms generally are short term investors with an exit strategy predetermined at the time they fund the corporation)
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T/F: Venture capital firms are generally long term investors
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venture capital firms (Venture capital firms generally are short term investors with an exit strategy predetermined at the time they fund the corporation)
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The following factors: they generally concentrate on one particular industry; they usually insist on substantial control of the corporation being funded through membership on its board or through appointments to certain officer positions; and they are generally a source of expertise in operations and expansion of the corporation being funded – are factors of what type of business entity?
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Saul will be liable because his inattention will likely be considered negligence on his part (Saul’s inattention will constitute a breach of his fiduciary duties of care likely making him personally liable)
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Saul was elected to the board of trustees of Round Way Corp. four years ago. He makes sure everyone knows he’s a board member and always brings it up at parties. Unfortunately he cares more about the prestige than doing a good job so he hasn’t attended board meetings nor is he attending committee meetings to which he’s been assigned. If the insiders at Round Way enter into a series of bad business deals causing financial loss to the corporation can or will Saul be held liable and why or why not?
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the state accepts the articles of incorporation and issues the charter (Once the state has accepted the articles a charter is issued and the corporation is considered in existence)
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The corporation is considered to come into existence when?
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No (The corporate status will shield Fred and Barney from personal liability for corporate debts under the corporate veil)
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Fred and Barney have incorporated and obtained a $100,000 loan payable with interest over five years in the corporate name. After paying on the loan regularly for two years, the business falters due to the economy and they default on their loan. Their business has no assets, do Fred and Barney have any personal liability for the debt?
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the officers (Officers handle day to day decision making such as hiring of employees)
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Happy Hops Brewery, Inc. has found that there business is expanding very quickly. The decision to fire three new delivery drivers would be made by whom?
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a Subchapter S corporation
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These factors: they may issue only one class of stock; taxation is pass-through similar to partnership taxation; and they many not have more than 100 shareholders – are factors of what type of business entity?
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False (Subchapter S corporations must be domestic and may have no nonresident or alien shareholders)
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T/F: Subchapter S corporations may be domestic or foreign but cannot be alien
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the shareholders
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Who has the power to do each of the following factors: veto a board decision to issue more capital stock; veto a board decision to pursue venture capital financing; approve structural changes in the corporation through the amending of the articles of incorporation; elect and remove directors?
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False (Shareholders may elect and remove directors, not officers)
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T/F: Shareholders generally have the power and right to elect and remove officers
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False (Both sales in public markets and in private placements occur in the primary market)
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T/F: The primary market consists of securities sales in public markets while the secondary market consists of security sales in private placements
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True (In truly egregious cases the SEC may bring criminal charges)
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T/F: The SEC has the power to initiate criminal actions against individuals or companies that violate security laws
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False (The SEC has the legislative authority to pass securities regulations and to interpret federal and state statutes and court decisions)
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T/F: Only the Congress may enact securities regulations and only the courts may interpret securities statutes
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False (Common stock is the most frequently used form of equity instrument)
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T/F: Preferred stock is the most frequently used form of equity instrument
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True (The SEC has the power to suspend or revoke the licenses of brokers and others regulated by security laws for violation of securities laws)
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T/F: The SEC has the power to suspend or revoke the licenses of brokers that violate securities laws
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True (Public corporation disclosures and filings are made available to the general public through access to the EDGAR database on the SEC web page)
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T/F: Public corporation disclosures and filings are made available to the general public
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False (Preferred stock may or may not have voting rights based on the purchase agreement)
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T/F: Preferred stock always has voting rights
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True (Assumption of risk may be a defense if the issuer can evidence that the investor knew of the faulty disclosure and proceeded anyway)
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T/F: Assumption of risk by the investor is a defense available for allegations of ’33 Act violations
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False (A promissory note securing a home mortgage does not constitute a security instrument)
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T/F: The promissory note securing a home mortgage is a security instrument
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False (State security laws are commonly referred to as blue-sky laws)
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T/F: Blue-sky laws refer to federal security laws that preempt state security laws
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False (During the review phase the securities may not be sold but they may be marketed)
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T/F: Securities may not be sold or marketed to the public until the SEC has completed its review phase and the registration becomes effective
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True (Typically, common stock enjoys full voting rights; however, it may be sold without voting rights)
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T/F: Most common stock enjoys voting rights; however, common stock may be sold without voting rights
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True (Most security sales questions and fraud investigations are based on whether proper disclosure was made)
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T/F: The foundation and underlying principle of all securities regulation is disclosure
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False (The prospectus is one of the two parts of the registration statement)
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T/F: The Prospectus is a required preregistration document
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$500,000 to $1,000,000 (Micro bonds feature streamlined paperwork, reduced fees and are for corporations seeking financing in the $500,000 to $1,000,000 range)
answer

Micro bonds appeal to small business ventures who wish to take advantage of bond financing in the ________ range
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the board of directors (The board determines whether a dividend is to be paid based on the financial state of the corporation)
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Whether or not a dividend is paid depends on which body of people within a business agreeing to pay the dividend
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by proving that she exercised due diligence in examining the preregistration and registration documentation and did not discover the fraud (A third party must evidence that they exercised due diligence in examining documentation for veracity and completeness)
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Kate is an underwriter who acted as a third party conducting a sale of securities between Fox Co. and an investor. Subsequent to the sale it is discovered that the disclosures made by Fox Co. were fraudulent. The investor has sued both Fox Co. and Kate. What is Kate’s best defense to avoid liability?
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comfort letters (The corporate counsel’s opinion verifying the business ventures adherence to corporate formalities and compliance and opinion of the corporation’s accounting firm is contained in the preregistration comfort letters)
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The corporate counsel’s opinion verifying the business ventures adherence to corporate formalities and compliance and opinion of the corporation’s accounting firm is contained in the?
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the secondary market (The Securities Act of 1934 regulates the sale of securities by investors after the investor has purchased it from an issuer)
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The Securities Act of 1934 focuses on which market?
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True
answer

T/F: Common stock is an equity instrument
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True
answer

T/F: Debentures, bonds and promissory notes are debt instruments
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the SEC (The president appoints the commissioners that comprise the SEC but the SEC is not directly controlled by the president)
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What is a regulatory agency that is independent and is not under the direct control of the president?
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the SEC may require corporate payouts into a government controlled emergency escrow fund during their investigation and before the SEC has uncovered wrongdoing by the corporation (The SEC may require payment into the fund before wrongdoing is uncovered)
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Under the emergency escrow provisions created under the Sarbanes-Oxley Act the SEC may require what?
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a vertical commonality (When the promoter of a security and the single investor share a common expectation of profit, the transaction is classified as having a vertical commonality)
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Eve is a promoter and has approached Adam with an investment opportunity. Eve anticipates a generous profit and informs Adam that he too can realize a generous profit also. This opportunity is not being offered to others. Assuming all other requirements to classify this as a security are in evidence, the commonality of this transaction would be described as what kind of commonality?
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eleven (Much of the day-to-day work of the SEC is conducted by its eleven regional offices located throughout the United States)
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The SEC maintains ________ regional offices throughout the United States where much of its day-to-day work is done
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private placement exemption (Private placements involve sales to accredited investors only or purely local offerings with residency requirements for purchase and resale)
answer

Sales of securities to accredited investors is one form of what?

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