Chapter 8: Securities Law Considerations When Obtaining Venture Financing

CHAPTER 8
SECURITIES LAW CONSIDERATIONS WHEN OBTAINING
VENTURE FINANCING
True-False Questi!s
T. 1. The securities Exchange act o 1!"# pro$ides or the regu%ation o securities
exchanges and o$er&the&counter 'ar(ets.
T. ). The *n$est'ent Co'pan+ ,ct o 1!#- deines in$est'ent co'panies and
exc%udes the' ro' using so'e o the registration exe'ptions originating in
the 1!"" ,ct.
F. ". The *n$est'ent ,d$isers ,ct o 1!#- pro$ides a deinition o an in$est'ent
co'pan+.
T. #. The two basic t+pes o exe'ptions ro' ha$ing to register securities with
the SEC are securit+ and transaction exe'ptions.
T. .. SEC /u%e 1#0 pro$ides guidance on the issuer1s di%igent responsibi%ities in
assuring that oerees are in&state and that securities don1t 'o$e across state
%ines.
T. 2. , pri$ate p%ace'ent3 or transactions b+ an issuer not in$o%$ing an+ pub%ic
oering3 is exe'pt ro' registering the securit+.
F. 0. ,ccredited in$estors are those that the Securities ,ct o 1!"" see( to protect
ro' unscrupu%ous indi$idua%s issuing securities.
F. 8. SEC /egu%ation 4 re5uires the registration o securities with the SEC.
T. !. ,n ear%+ stage $enture that is not an in$est'ent co'pan+ and has written
co'pensation agree'ents can structure co'pensation&re%ated securities issues
so the+ are exe'pt ro' SEC registration re5uire'ents.
F. 1-. State %aws designed to protect high net&worth in$estors ro' in$esting in
raudu%ent securit+ oerings is (now as b%ue&s(+ %aws.
T. 11. The Securities ,ct o 1!"" is the 'ain bod+ o edera% %aw go$erning the
creation and sa%e o securities in the 6.S.
F. 1). SEC /egu%ation 4 too( eect in 1!") and pro$ides the basis or 7sae
harbor8 as a pri$ate p%ace'ent.
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Chapter 8: Securities Law Considerations When Obtaining Venture Financing
F. 1". /u%e .-# under /egu%ation 4 has a 9) 'i%%ion inancing %i'it :i.e.3 app%ies
to sa%es o securities not exceeding 9) 'i%%ion;.
T. 1#. , /u%e .-# exe'ption under /egu%ation 4 has no %i'it in ter's o the
nu'ber and 5ua%iications o in$estors.
T. 1.. , /egu%ation 4 /u%e .-. oering cannot exceed 9. 'i%%ion in a twe%$e&
'onth period.
F. 12. , /egu%ation 4 /u%e .-. oering is %i'ited to ". accredited in$estors.
T. 10. , /egu%ation 4 /u%e .-2 oering has no %i'it in ter's o the do%%ar
a'ount o the oering but is %i'ited to ". unaccredited in$estors.
T. 18. /egu%ation ,3 whi%e technica%%+ considered an exe'ption ro'
registration3 is a pub%ic oering rather than a pri$ate p%ace'ent.
T. 1!. /egu%ation , issuers are a%%owed to 7test the waters8 beore preparing the
oering circu%ar :un%i(e a%'ost a%% other securit+ oerings;.
F. )-. /egu%ation , oerings are %i'ited to 91- 'i%%ion but do not ha$e
%i'itations on the nu'ber or sophistication o oerees.
F. )1. The t+pica% business organi<ation or a $enture in its rapid&growth stage is
a partnership or LLC.
T. )). *n$estor %iabi%it+ in a %i'ited %iabi%it+ co'pan+ :LLC; is %i'ited to the
owners1 in$est'ents.
F. )". *n$estor %iabi%it+ in a proprietorship or corporation is un%i'ited.
T. )#. The %ie o a proprietorship is deter'ined b+ the owner.
F. ).. *t is usua%%+ easier to transer ownership in a proprietorship re%ati$e to a
corporation.
F )2. The Securities Exchange ,ct was passed in 1!"" and the Securities ,ct
was passed in 1!"#.
T. )0. Oerings and sa%es o securities are regu%ated under the Securities ,ct o
1!"" and state b%ue&s(+ %aws.
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Chapter 8: Securities Law Considerations When Obtaining Venture Financing
F. )8. The trading o securities is regu%ated under the Securities and Exchange
,ct o 1!.#.
T. )!. /egu%ation o in$est'ent co'panies :inc%uding proessiona% $enture
capita% ir's; is carried out under the *n$est'ent Co'pan+ ,ct o 1!#-.
F. "-. *n SEC v. Ralston Purina :1!.";3 the 6.S. Supre'e Court too( an
i'portant step toward deining a pub%ic oering or the purposes o Section
#:); o the Securities ,ct o 1!"".
Nte" Fll#i!$ are true-%alse &uesti!s relati!$ t 'aterials (rese!te) i!
A((e!)i* B % C+a(ter ,-
T. "1. The deinition o an 7accredited in$estor38 initia%%+ deined in the
Securities ,ct o 1!""3 was expanded in /u%e .-1 o /eg 4.

T. "). One o the 'onetar+ re5uire'ents or indi$idua%s or natura% persons as
accredited in$estors as deined in /egu%ation 4 /u%e .-1 is a net worth greater
than 913---3---.
F. "". One o the 'onetar+ re5uire'ents or indi$idua%s or natura% persons as
accredited in$estors as deined in /egu%ation 4 /u%e .-1 is indi$idua% annua%
inco'e greater than 9.--3---.
T. "#. /egu%ation 4 /u%e .-) ocuses3 in part3 on resa%e restrictions i'posed on
pri$ate%+&p%aced securities.
F. ".. /u%e .-" o /egu%ation 4 states that a For' 4 shou%d be i%ed with the
SEC within six 'onths ater the irst sa%e o securities.
.ulti(le-C+i/e Questi!s
e. 1. Which o the o%%owing is not true regarding the Securities ,ct o 1!""=
a. it was passed in response to abuses thought to ha$e contributed to
the inancia% catastrophes o the >reat 4epression
b. it co$ers securities raud
c. it re5uires securities to be registered or'a%%+ with the edera%
go$ern'ent
d. it set o the nature and authorit+ o the Securities and Exchange
Co''ission
e. it ocuses on those who pro$ide in$est'ent ad$ice
d. ). Which o the o%%owing is not a securit+=
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Chapter 8: Securities Law Considerations When Obtaining Venture Financing
a. treasur+ stoc(
b. debenture
c. put option
d. rea% propert+
e. ca%% option
d. ". Which o the o%%owing is not true about registering securities with the
SEC=
a. it is a ti'e consu'ing process
b. it re5uired the disc%osure o accounting inor'ation
c. it is usua%%+ done with the he%p o an in$est'ent ban(
d. it is an inexpensi$e process
e. it pro$ides inor'ation to prospecti$e in$estors
c. #. ,%% o the o%%owing do not create an+ securities registration responsibi%ities
except=
a. Treasur+ securities
b. ?unicipa% bonds
c. securities issued b+ pub%ic%+ he%d co'panies
d. securities issued b+ ban(s
e. securities issued b+ the go$ern'ent
a. .. *n the @inth Circuit Court o ,ppea%s decision on SEC v. Murphy3 a%% o the
o%%owing were considerations in deter'ining an oering to be a pri$ate
p%ace'ent except=
a. there 'ust be an ar'1s %ength re%ationship between the issuer o the
securit+ and the prospecti$e purchaser
b. the nu'ber o oerees 'ust be %i'ited
c. the si<e and the 'anner o the oering 'ust not indicate
widespread so%icitation
d. the oerees 'ust be sophisticated
e. so'e re%ationship between the oerees and the issuer 'ust be
present
b. 2. Ventures that reach their sur$i$a% stage o their %ie c+c%es and see( irst&
round inancing are t+pica%%+ organi<ed as:
a. proprietorships or partnerships
b. LLCs or corporations
c. corporations
d. partnerships or LLCs
e. proprietorships or corporations
a. 0. *n$estor %iabi%it+ is 7un%i'ited8 under which o the o%%owing t+pes o
business organi<ationa% or's=
a. proprietorship
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Chapter 8: Securities Law Considerations When Obtaining Venture Financing
b. %i'ited %iabi%it+ co'pan+ :LLC;
c. corporation
d. S corporation
e. S %i'ited %iabi%it+ co'pan+ :SLLC;
e. 8. O the o%%owing3 which is not true about /egu%ation ,=
a. it is shorter and si'p%er than the u%% registration
b. it does not ha$e %i'itations on the nu'ber or sophistication o
oerees.
c. it is a pub%ic oering rather than a pri$ate p%ace'ent
d. it can genera%%+ be ree%+ so%d
e. it re5uires no oering state'ent be i%ed with the SEC
c. !. 6nder /egu%ation ,3 which one o the o%%owing is not true=
a. issuers are a%%owed to test the waters prior to preparing the oering
circu%ar
b. ater i%ing a SEC state'ent3 the issuer can co''unicate with
perspecti$e in$estors ora%%+3 in writing3 b+ ad$ertising in newspapers3
radio3 te%e$ision3 or $ia the 'ai% to deter'ine in$estor interest
c. issuers can ta(e co''it'ents or unds
d. there is a or'a% de%a+ o )- ca%endar da+s beore sa%es are 'ade
e. i the interest %e$e% is insuicient3 the issuer can drop /egu%ation ,
i%ing
c. 1-. Which one o the o%%owing is not a re5uire'ent or registration o
securities with the SEC=
a. the na'e under which the issuer is doing business
b. the na'e o the state where the issuer is organi<ed
c. the na'es o a%% products so%d b+ the issuer
d. the na'es and addresses o the directors
e. the na'es o the underwriters
b. 11. The 6.S. edera% %aw that i'pacts the creation and sa%es o securities is:
a. Securities Exchange ,ct o 1!"#
b. Securities ,ct o 1!""
c. *n$est'ent Co'pan+ ,ct o 1!#-
d. *n$est'ent ,d$isers ,ct o 1!#-
d. 1). The returning o a%% unds to e5uit+ in$estors as a co''on 7re'ed+8 or a
7ou%ed up8 securities oering is ca%%ed:
a. Aust action
b. raud
c. second round inancing
d. a rescission
e. 'e<<anine inancing
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Chapter 8: Securities Law Considerations When Obtaining Venture Financing
. 1". *n securities %aw3 which o the o%%owing is :are; true=
a. ignorance is no deense
b. securit+ regu%ators 'a+ a%ter +our in$est'ent agree'ent to the
beneit o the in$estors
c. Securities ,ct o 1!"" gi$es the SEC broad ci$i% procedures to use
in enorce'ent
d. Securities ,ct o 1!"" gi$es the SEC so'e cri'ina% procedures to
use in enorce'ent
e. a3 b3 and c abo$e
. a3 b3 c3 and d abo$e
e. 1#. 7Securit+8 exe'ptions ro' registration with the SEC inc%ude which o
the o%%owing:
a. securities issued b+ ban(s and thrit institutions
b. go$ern'ent securities
c. intrastate oerings
d. securities issued b+ %arge3 high 5ua%it+ corporations
e. a3 b3 and c abo$e
. a3 b3 c3 and d abo$e
e. 1.. The basic t+pes o 7transaction8 exe'ptions or registration with the SEC
are:
a. pri$ate p%ace'ent exe'ption
b. 7too big to ai%8 exe'ption
c. accredited in$estor exe'ption
d. intrastate oering exe'ption
e. a and c abo$e
. b and d abo$e
d. 12. Which SEC /egu%ation too( eect in 1!8) and pro$ides the basis or 7sae
harbor8 as a pri$ate p%ace'ent=
a. /egu%ation ,
b. /egu%ation B
c. /egu%ation C
d. /egu%ation 4
e. /egu%ation E
c. 10. The eorts to regu%ate the trading o securities ta(es p%ace under which o
the o%%owing securities %aws=
a. Securities ,ct o 1!""
b. state 7b%ue&s(+8 %aws
c. Securities and Exchange ,ct o 1!"#
d. *n$est'ent Co'pan+ ,ct o 1!#-
e. *n$est'ent ,d$isers ,ct o 1!#-
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Chapter 8: Securities Law Considerations When Obtaining Venture Financing
. 18. Eorts to regu%ate the oerings and sa%es o securities ta(e p%ace under
which o the o%%owing securities %aws=
a. Securities ,ct o 1!""
b. state 7b%ue&s(+8 %aws
c. Securities and Exchange ,ct o 1!"#
d. *n$est'ent Co'pan+ ,ct o 1!#-
e. *n$est'ent ,d$isers ,ct o 1!#-
. Both a and b
g. Both a and c
e. 1!. Exe'ptions or pri$ate p%ace'ent oerings and sa%es o securities in the
a'ount o 9) 'i%%ion are hand%ed under which one o the o%%ow ru%es under
/egu%ation 4=
a. /u%e .-1
b. /u%e .-)
c. /u%e .-"
d. /u%e .-#
e. /u%e .-.
b. )-. Which one o the o%%owing is not a characteristic o /egu%ation ,=
a. ,n oering is %i'ited to 9. 'i%%ion
b. the nu'ber oerees or in$estors is %i'ited to ".
c. the oering is a pub%ic oering
d. the securities issued can genera%%+ be ree%+ reso%d
c. )1. State securities regu%ations are reerred to as:
a. /egu%ation , %egis%ation
b. 7stor'+ da+8 %aws
c. 7b%ue s(+8 %aws
d. SEC o$ersight %egis%ation
e. )). 6n%ess +our securit+ is exe'pted3 what Section o the Securities ,ct o
1!"" re5uires +ou to i%e a registration state'ent with the SEC=
a. Section 1
b. Section )
c. Section "
d. Section #
e. Section .
b. )". Which one o the o%%owing 7ru%es8 under /egu%ation 4 has a 9. 'i%%ion
inancing %i'it=
a. /u%e .-#
b. /u%e .-.
c. /u%e .-2
d. /u%e .-0
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Chapter 8: Securities Law Considerations When Obtaining Venture Financing
e. /u%e .-8
b. )#. Which one o the o%%owing ,cts dea%s with the 'echanis's and standards
or pub%ic securit+ trading=
a. Securities ,ct o 1!""
b. Securities Exchange ,ct o 1!"#
c. *n$est'ent Co'pan+ ,ct o 1!#-
d. *n$est'ent ,d$isers ,ct o 1!#-
e. ).. Which one o the o%%owing is not an exe'ption 'ethod or 'a(ing an
oering exe'pt ro' SEC registration=
a. #:); pri$ate oering
b. accredited in$estor
c. /egu%ation 4
d. /egu%ation ,
e. /egu%ation C
b. )2. Which one o the o%%owing SEC registration exe'ptions has a inancing
%i'it in a 1)&'onth period and per'its a 'axi'u' o ". unaccredited
in$estors=
a. Section #:);
b. /eg 4: /u%e .-#
c. /eg 4: /u%e .-.
d. /eg 4: /u%e .-2
e. /egu%ation ,
d. )0. /u%e .-2 o /egu%ation 4 is %i'ited in ter's o the nu'ber o
unaccredited in$estors to:
a. )-
b. ).
c. "-
d. ".
e. #-
Nte" Fll#i!$ are 'ulti(le-/+i/e &uesti!s relati!$ t 'aterials (rese!te) i!
A((e!)i* B % C+a(ter ,-
d. )8. /u%e .-1 o /egu%ation 4 expands the categories o accredited in$estors.
Which is not one o the categories=
a. an+ organi<ation or'ed or the speciic purpose o ac5uiring
securities with assets in excess o 9. 'i%%ion
b. an+ director or executi$e oicer o the issuer o securities being
so%d
c. an+ indi$idua% whose net worth exceeds 91 'i%%ion
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Chapter 8: Securities Law Considerations When Obtaining Venture Financing
d. an+ partnership
e. an+ trust with tota% assets greater the 9. 'i%%ion
b. )!. Which o the o%%owing is not a condition o a /egu%ation 4 oering under
/u%e .-)=
a. integration
b. oering
c. inor'ation
d. so%icitation
e. resa%e
c. "-. Which o the o%%owing are re5uire'ents o natura% persons to be
accredited in$estors under /egu%ation 4 /u%e .-1=
a. net worth greater than 9. 'i%%ion
b. tota% assets greater than 91 'i%%ion
c. indi$idua% :sing%e; annua% inco'e greater than 9)--3---
d. stoc( 'ar(et porto%io greater than 9) 'i%%ion
e. a%% o the abo$e
e. "1. /u%e .-) o /egu%ation 4 dea%s with:
a. integration
a. inor'ation
b. so%icitation
c. resa%e
d. a and b abo$e
e. a3 b3 c3 and d abo$e
b. "). /u%e .-" dictates that or a%% /eg 4 exe'ptions3 a For' 4 shou%d be i%ed
within how 'an+ da+s ater the irst sa%e o securities.
a. 1 da+
b. 1. da+s
c. "- da+s
d. six 'onths
e. one +ear
d. "". The pri'ar+ exe'ption ro' the prohibition o resa%e o unregistered
securities :inc%uding3 but not %i'ited to3 securities sae%+ harbored in /u%es .-.
and .-2 oerings; is:
a. /u%e 111
b. /u%e 1))
c. /u%e 1""
d. /u%e 1##
e. /u%e 1#0
2-