Securities Law Practice Exam Questions

1. 1.Rule 506(b) requirements: No general solicitation, unlimited accredited investors, up to 35 non-accredited investors (who must be sophisticated), and appropriate disclosure to non-accredited investors.
2. 2.The 30 non-accredited investors exceed the 35-person limit only if unsophisticated. 'Sophisticated' means having sufficient knowledge and experience in financial matters to evaluate the merits and risks. The company bears the burden of establishing sophistication.
3. 3.Verification of accredited status: Rule 506(b) does not require verification of accredited status (unlike Rule 506(c)). Self-certification is sufficient. This is not a violation.
4. 4.Resale restrictions: Securities sold under Rule 506 are 'restricted securities' and may not be freely resold. The resale by non-accredited investors into the public market likely violates Section 5 (unregistered offering) and may be considered a distribution. This could also retroactively destroy the original exemption if the investors were statutory underwriters.
5. 5.Integration: If the resales are integrated with the original offering, the entire offering may lose its exemption, making the company liable under Section 12(a)(1) for rescission.

1. 1.CEO's trading -- classic insider trading: The CEO traded on material nonpublic information (MNPI) in breach of his fiduciary duty to the corporation and its shareholders. This violates Rule 10b-5 under the classical theory.
2. 2.Tipper-tippee liability: The CEO (tipper) disclosed MNPI to the golf partner (tippee) in breach of fiduciary duty. Under Dirks v. SEC, the tipper must receive a personal benefit. Friendship/gift theory satisfies the benefit requirement (Salman v. United States). The golf partner is liable if he knew or should have known the information was from a breach.
3. 3.Section 16(b) short-swing profits: If the CEO is an officer of the company, any profit from buying and selling (or selling and buying) within a 6-month period is subject to disgorgement under Section 16(b), regardless of intent.
4. 4.Penalties: Disgorgement of profits, civil penalties up to 3x the profit gained or loss avoided, SEC civil action, and potential criminal prosecution.

Correct Answer: B

Regulation A+ offerings are exempt from full registration but are still subject to Section 12(a)(2) liability for material misstatements or omissions in the offering circular. Section 12(a)(2) does not require proof of scienter (unlike Rule 10b-5) and provides a right of rescission. Section 11 applies to registered offerings, not Regulation A+ offerings.

Correct Answer: B

Under Salman v. United States (clarifying Dirks), a tipper who gives a gift of confidential information to a trading relative or friend receives a personal benefit sufficient to establish liability. The friend disclosed the information to impress the analyst, which constitutes a gift relationship. The analyst, as tippee, is liable if he knew or should have known the information came from an insider breach.

Correct Answer: B

Rule 10b-5 requires scienter -- a mental state embracing intent to deceive, manipulate, or defraud (Ernst & Ernst v. Hochfelder). Most circuits also accept severe recklessness (an extreme departure from the standards of ordinary care). Negligence is insufficient. Under the PSLRA, the complaint must state with particularity facts giving rise to a strong inference of scienter.