Chapter 8: Securities Law Considerations When Obtaining Venture Financing 52

CHAPTER 8
SECURITIES LAW CONSIDERATIONS WHEN OBTAINING
VENTURE FINANCING
True-False Questions
T.

1. The securities Exchange act of 1934 provides for the regulation of securities
exchanges and over-the-counter markets.

T.

2. The Investment Company Act of 1940 defines investment companies and

excludes them from using some of the registration exemptions originating in
the 1933 Act.

F.

3. The Investment Advisers Act of 1940 provides a definition of an investment

company.

T.

4. According to the Investment Advisers Act of 1940, a bank would not be

classified as an investment advisor.

T.

5. The Securities Act of 1933 is the main body of federal law governing the
creation and sale of securities in the U.S.

6. The Securities Exchange Act was passed in 1933 and the Securities Act was
passed in 1934.

F.

7. The trading of securities is regulated under the Securities and Exchange Act
of 1954.

T.

8. Regulation of investment companies (including professional venture capital

firms) is carried out under the Investment Company Act of 1940.

F.

9. State laws designed to protect high net-worth investors from investing in

fraudulent security offerings are known as blue-sky laws.

T.

10. Offerings and sales of securities are regulated under the Securities Act of
1933 and state blue-sky laws.

F.

11. Blue-sky laws are federal laws designed to protect individuals from
investing in fraudulent security offerings.

F.

12. The typical business organization for a venture in its rapid-growth stage is
a partnership or LLC.

53 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

T.

13. Investor liability in a limited liability company (LLC) is limited to the

owners investments.

F.

14. Investor liability in a proprietorship or corporation is unlimited.

T.

15. The life of a proprietorship is determined by the owner.

F.

16. It is usually easier to transfer ownership in a proprietorship relative to a

corporation.

T.

17. The two basic types of exemptions from having to register securities with
the SEC are security and transaction exemptions.

F.

18. The Securities Act of 1933 provides a very narrow definition as to what
constitutes a security.

T.

19. SEC Rule 147 provides guidance on the issuers diligent responsibilities in
assuring that offerees are in-state and that securities dont move across state
lines.

T.

20. A private placement, or transactions by an issuer not involving any public

offering, is exempt from registering the security.

F.

21. Accredited investors are specifically protected by the Securities Act of

1933 from investing in unregistered securities issues.

F.

22. The typical business organization for a venture in its rapid-growth stage is
a partnership or LLC.

F.

23. In SEC v. Ralston Purina (1953), the U.S. Supreme Court took an
important step toward defining a public offering for the purposes of Section
4(2) of the Securities Act of 1933.

F.

24. SEC Regulation D requires the registration of securities with the SEC.

T.

25. An early stage venture that is not an investment company and has written
compensation agreements can structure compensation-related securities issues
so they are exempt from SEC registration requirements.

F.

26. SEC Regulation D took effect in 1932 and provides the basis for safe
harbor as a private placement.

F.

27. Rule 504 under Regulation D has a $2 million financing limit (i.e., applies
to sales of securities not exceeding $2 million).

Chapter 8: Securities Law Considerations When Obtaining Venture Financing 54

T.

28. A Rule 504 exemption under Regulation D has no limit in terms of the
number and qualifications of investors.

T.

29. A Regulation D Rule 505 offering cannot exceed $5 million in a twelvemonth period.

F.

30. A Regulation D Rule 505 offering is limited to 35 accredited investors.

T.

31. A Regulation D Rule 506 offering has no limit in terms of the dollar
amount of the offering but is limited to 35 unaccredited investors.

T.

32. Regulation A, while technically considered an exemption from

registration, is a public offering rather than a private placement.

F.

33. Regulation A allows for registration exemptions on private security

offerings so long as all investors are considered to be financially sophisticated.

T.

34. Regulation A issuers are allowed to test the waters before preparing the
offering circular (unlike almost all other security offerings).

F.

35. Regulation A offerings are allowed up $10 million and do not have
limitations on the number or sophistication of offerees.

Note: Following are true-false questions relating to materials presented in

Appendix B of Chapter 8.
T.

36. The definition of an accredited investor, initially defined in the

Securities Act of 1933, was expanded in Rule 501 of Reg D.

T.

37. One of the monetary requirements for individuals or natural persons as

accredited investors as defined in Regulation D Rule 501 is a net worth greater
than $1,000,000.

F.

38. One of the monetary requirements for individuals or natural persons as

accredited investors as defined in Regulation D Rule 501 is individual annual
income greater than $500,000.

T.

39. Regulation D Rule 502 focuses, in part, on resale restrictions imposed on

privately-placed securities.

F.

40. Rule 503 of Regulation D states that a Form D should be filed with the
SEC within six months after the first sale of securities.

55 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

Multiple-Choice Questions
e.

1. Which of the following is not true regarding the Securities Act of 1933?
a. it was passed in response to abuses thought to have contributed to
the financial catastrophes of the Great Depression
b. it covers securities fraud
c. it requires securities to be registered formally with the federal
government
d. it set of the nature and authority of the Securities and Exchange
Commission
e. it focuses on those who provide investment advice

b.

2. The U.S. federal law that impacts the creation and sales of securities is:
a. Securities Exchange Act of 1934
b. Securities Act of 1933
c. Investment Company Act of 1940
d. Investment Advisers Act of 1940

c.

3. The efforts to regulate the trading of securities takes place under which of
the following securities laws?
a. Securities Act of 1933
b. state blue-sky laws
c. Securities and Exchange Act of 1934
d. Investment Company Act of 1940
e. Investment Advisers Act of 1940

f.

4. Efforts to regulate the offerings and sales of securities take place under
which of the following securities laws?
a. Securities Act of 1933
b. state blue-sky laws
c. Securities and Exchange Act of 1934
d. Investment Company Act of 1940
e. Investment Advisers Act of 1940
f. Both a and b
g. Both a and c

f.

5. In securities law, which of the following is (are) true?

a. ignorance is no defense
b. security regulators may alter your investment agreement to the
benefit of the investors
c. Securities Act of 1933 gives the SEC broad civil procedures to use
in enforcement
d. Securities Act of 1933 gives the SEC some criminal procedures to
use in enforcement

Chapter 8: Securities Law Considerations When Obtaining Venture Financing 56

e. a, b, and c above
f. a, b, c, and d above
d.

6. Which of the following is not a security?

a. treasury stock
b. debenture
c. put option
d. real property
e. call option

c.

7. State securities regulations are referred to as:

a. Regulation A legislation
b. stormy day laws
c. blue sky laws
d. SEC oversight legislation

d.

8. Which of the following is not true about registering securities with the
SEC?
a. it is a time consuming process
b. it required the disclosure of accounting information
c. it is usually done with the help of an investment bank
d. it is an inexpensive process
e. it provides information to prospective investors

c.

9. All of the following do not create any securities registration responsibilities

except?
a. Treasury securities
b. Municipal bonds
c. securities issued by publicly held companies
d. securities issued by banks
e. securities issued by the government

b.

10. Ventures that reach their survival stage of their life cycles and seek firstround financing are typically organized as:
a. proprietorships or partnerships
b. LLCs or corporations
c. corporations
d. partnerships or LLCs
e. proprietorships or corporations

a.

11. Investor liability is unlimited under which of the following types of

business organizational forms?
a. proprietorship
b. limited liability company (LLC)
c. corporation

57 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

d. S corporation
e. S limited liability company (SLLC)
c.

12. Which one of the following is not a requirement for registration of

securities with the SEC?
a. the name under which the issuer is doing business
b. the name of the state where the issuer is organized
c. the names of all products sold by the issuer
d. the names and addresses of the directors
e. the names of the underwriters

d.

13. The returning of all funds to equity investors as a common remedy for a
fouled up securities offering is called:
a. just action
b. fraud
c. second round financing
d. a rescission
e. mezzanine financing

e.

14. Security exemptions from registration with the SEC include which of
the following:
a. securities issued by banks and thrift institutions
b. government securities
c. intrastate offerings
d. securities issued by large, high quality corporations
e. a, b, and c above
f. a, b, c, and d above

e.

15. The basic types of transaction exemptions for registration with the SEC
are:
a. private placement exemption
b. too big to fail exemption
c. accredited investor exemption
d. intrastate offering exemption
e. a and c above
f. b and d above

a.

16. In the Ninth Circuit Court of Appeals decision on SEC v. Murphy, all of
the following were considerations in determining an offering to be a private
placement except:
a. there must be an arms length relationship between the issuer of the
security and the prospective purchaser
b. the number of offerees must be limited

Chapter 8: Securities Law Considerations When Obtaining Venture Financing 58

c. the size and the manner of the offering must not indicate
widespread solicitation
d. the offerees must be sophisticated
e. some relationship between the offerees and the issuer must be
present
d.

17. Which SEC Regulation took effect in 1982 and provides the basis for safe
harbor as a private placement?
a. Regulation A
b. Regulation B
c. Regulation C
d. Regulation D
e. Regulation E

e.

18. Unless your security is exempted, what Section of the Securities Act of
1933 requires you to file a registration statement with the SEC?
a. Section 1
b. Section 2
c. Section 3
d. Section 4
e. Section 5

e.

19. Which one of the following is not an exemption method for making an
offering exempt from SEC registration?
a. 4(2) private offering
b. accredited investor
c. Regulation D
d. Regulation A
e. Regulation Z

e.

20. Exemptions for private placement offerings and sales of securities in the
amount of $2 million are handled under which one of the follow rules under
Regulation D?
a. Rule 501
b. Rule 502
c. Rule 503
d. Rule 504
e. Rule 505

b.

21. Which one of the following SEC registration exemptions has a financing
limit in a 12-month period and permits a maximum of 35 unaccredited
investors?
a. Section 4(2)
b. Reg D: Rule 504

59 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

c. Reg D: Rule 505

d. Reg D: Rule 506
e. Regulation A
d.

22. Rule 504 of Regulation D limits the total number of investors to:
a. 35
b. 100
c. 35 unaccredited investors and any number of accredited investors
d. there is no limit on the number of accredited or unaccredited
investors

c.

23. Offerings exempted from registration under rule 505 of Regulation D may
raise up to $5 million in a:
a. 6-month period
b. 9-month period
c. 12-month period
d. 18-month period
e. 24-month period

d.

24. Rule 506 of Regulation D is limited in terms of the number of

unaccredited investors to:
a. 20
b. 25
c. 30
d. 35
e. 40

b.

25. Which one of the following rules under Regulation D has a $5 million
financing limit?
a. Rule 504
b. Rule 505
c. Rule 506
d. Rule 507
e. Rule 508

a.

26. While Section 4(2) does not limit the dollar amount of an offering, the
interpretation of the law has stipulated that:
a. the investors must be sophisticated
b the number of investors must be limited to 35
c. the funds must be raised within a 12-month period
d. the offering must be extended to the public, and not only investors
who have a relationship with the issuer

Chapter 8: Securities Law Considerations When Obtaining Venture Financing 60

c.

27. An offering that raises $2,500,000 over a 12-month period, involving 35

unaccredited investors and 5 accredited investors, might be exempt from
registration under:
a. Section 4(6)
b. Regulation D: Rule 504
c. Regulation D: Rule 505
d. none of the above

b.

28. Which one of the following is not a characteristic of Regulation A?

a. An offering is limited to $5 million
b. the number offerees or investors is limited to 35
c. the offering is a public offering
d. the securities issued can generally be freely resold

e.

29. Of the following, which is not true about Regulation A?

a. it is shorter and simpler than the full registration
b. it does not have limitations on the number or sophistication of
offerees.
c. it is a public offering rather than a private placement
d. it can generally be freely sold
e. it requires no offering statement be filed with the SEC

e.

30. Which of the following exemptions involves a public, and not a private,
offering?
a. Section 4(2)
b. Rule 501
c. Rule 505
d. Rule 506
e. Regulation A

c.

31. Under Regulation A, which one of the following is not true?

a. issuers are allowed to test the waters prior to preparing the offering
circular
b. after filing a SEC statement, the issuer can communicate with
perspective investors orally, in writing, by advertising in newspapers,
radio, television, or via the mail to determine investor interest
c. issuers can take commitments or funds
d. there is a formal delay of 20 calendar days before sales are made
e. if the interest level is insufficient, the issuer can drop Regulation A
filing

61 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

Note: Following are multiple-choice questions relating to materials presented in

Appendix B of Chapter 8.
d.

32. Rule 501 of Regulation D expands the categories of accredited investors.

Which is not one of the categories?
a. any organization formed for the specific purpose of acquiring
securities with assets in excess of $5 million
b. any director or executive officer of the issuer of securities being
sold
c. any individual whose net worth exceeds $1 million
d. any partnership
e. any trust with total assets greater the $5 million

b.

33. Which of the following is not a condition of a Regulation D offering under

Rule 502?
a. integration
b. offering
c. information
d. solicitation
e. resale

c.

34. Which of the following are requirements of natural persons to be

accredited investors under Regulation D Rule 501?
a. net worth greater than $5 million
b. total assets greater than $1 million
c. individual (single) annual income greater than $200,000
d. stock market portfolio greater than $2 million
e. all of the above

e.

35. Rule 502 of Regulation D deals with:

a. integration
a. information
b. solicitation
c. resale
d. a and b above
e. a, b, c, and d above

b.

36. Rule 503 dictates that for all Reg D exemptions, a Form D should be filed
within how many days after the first sale of securities?
a. 1 day
b. 15 days
c. 30 days
d. six months

Chapter 8: Securities Law Considerations When Obtaining Venture Financing 62

e. one year
d.

37. The primary exemption from the prohibition of resale of unregistered

securities (including, but not limited to, securities safely harbored in Rules 505
and 506 offerings) is:
a. Rule 111
b. Rule 122
c. Rule 133
d. Rule 144
e. Rule 147