The document discusses SEC reporting requirements for public companies. It provides answers to multiple-choice questions covering topics such as the legal authority of the SEC, securities acts of 1933 and 1934, SEC forms like 10-K and 8-K, registration statements, and the Foreign Corrupt Practices Act. It also includes solutions to cases analyzing objectives of securities acts, roles of the SEC and FASB, information in proxy statements, and required disclosures in Form 10-Ks.

1. Chapter 14 - SEC Reporting
14-1
CHAPTER 14
SEC REPORTING
ANSWERS TO QUESTIONS
Q14-1 The basis of the SEC's legal authority to regulate accounting principles stems
from the Securities Exchange Act of 1934. In the 1934 Act, the SEC was given the
legal responsibility to regulate trades of securities and to determine the types of
financial disclosures that a publicly held company must make.
Q14-2 The Securities Act of 1933 regulates the initial registration of securities. The
Securities Exchange Act of 1934 regulates the periodic reporting of publicly traded
companies.
Q14-3 The Division of Corporation Finance receives the registration statements of
companies wishing to make public offerings of securities. The Division of
Enforcement investigates individuals or firms who may be in violation of a security
act.
Q14-4 The Foreign Corrupt Practice Act of 1977 requires that companies maintain
accurate accounting records and an adequate system of internal control. An
adequate system of internal control should contain the following:
a. Strong budgetary controls
b. An objective internal audit function that helps develop, document, and
then monitor the control system
c. An active audit committee comprised of nonmanagement members from
the company's board of directors
d. A review of the internal control system by the independent auditors
Q14-5 Regulation S-X covers the form and content of financial disclosures;
specifically, this Reg. covers the form and content of financial statements, schedules,
footnotes, reports of accountants, and pro forma disclosures. Items included in
Regulation S-K include a description of business, management's discussion and
analysis, disagreements with accountants, and required information about new stock
issues.
Q14-6 Two types of public offerings of securities are exempted from the
comprehensive registration requirements of the SEC. The first type of offering
exempted from the full registration process is a small offering of less than $1.5 million
of stock sales during any 12-month period. The second type of offering exempted
from the full registration requirements is limited offerings to accredited investors of up
to $5 million in securities within a 12-month period.
Q14-7 A company uses a Form S-1 registration form when the general registration is
for a first-time offering and no other publicly traded stock has been issued by that
company. A company may use a Form S-3 registration form for a new stock issuance
when the registrant is large and established, possessing stock that has been trading
for several years.

2. Chapter 14 - SEC Reporting
14-2
Q14-8 A customary review is a thorough examination by the SEC and may result in
acceptance of the registration or a comment letter from the SEC.
A comment letter is issued by the SEC specifying the deficiencies that must be
corrected before the securities may be offered for sale.
A red herring prospectus is a preliminary prospectus providing information to
investors about an upcoming issue. This type of prospectus has a cover printed in red
ink indicating it is not an offering statement and the securities being discussed are not
yet available for sale.
Shelf registration allows large, established companies with other issues of stock
already actively traded to file a registration statement with the SEC for a stock issue
which may be brought off the shelf and updated within a very short time when the
company wants to actually issue the stock.
Q14-9 Form 10-K is broken into four parts. Parts I, II, and III contain the basic
financial information including the audited financial statements, the management
discussion and analysis, the report by management on internal control, and the
auditor’s opinion. Part IV contains additional schedules and exhibits. For
“accelerated filers” (those companies having at least $75 million in aggregate market
value and been subject to the periodic and annual reporting requirements for at least
one year), the Form 10-K must be filed with the SEC within 60 days after the end of
the company's fiscal year-end. Other companies, such as small businesses, have 90
days in which to file their 10-Ks.
Q14-10 Interim reports submitted to the SEC are not required to be audited. The
public accountant is expected to review, on an ex post basis, the information provided
in the company's Form 10-Qs as part of the annual, year-end audit.
Q14-11 In 2004, the SEC enlarged the list of items that must be reported on the
Form 8-K. The entire list is presented in the chapter. Although the registrant’s
accounting function would be involved with almost of the specific items, those items
for which the particular involvement of the accounting function would be the greatest
are:
1.03. The bankruptcy or receivership of the company
2.01. Completion of the acquisition or disposition of assets
2.02. Public announcement of material financial results
2.03. Creation of a direct financial obligation under an off-balance sheet
arrangement
2.04. An event that accelerates or increases an obligation under an off-
balance
sheet arrangement
2.05. Costs associated with exit or disposal activities
2.06 Material impairments of assets
4.01 Changes in the registrant’s certifying accountant
4.02 Non-reliance on previously issued financial statements or audit report
5.03 Changes in the registrant’s fiscal year
Q14-12 A proxy is a request by the company, or by a stockholder, for a security
holder's vote on a corporate matter. Proxy solicitations must include a full discussion
of the matters to be voted on, and must also include the most recent annual

3. Chapter 14 - SEC Reporting
14-3
shareholders' report if the present management is making the solicitation for a
meeting at which directors will be elected.

4. Chapter 14 - SEC Reporting
14-4
Q14-13 Part I of the Foreign Corrupt Practices Act (FCPA) prohibits individuals
associated with United States companies from giving bribes to foreign governmental
or political officials for the purpose of securing a contract or otherwise increasing the
company's business. Part II of the FCPA requires all public companies, whether
operating internationally or not, to keep detailed records that accurately and fairly
reflect the company's financial transactions, and to develop and maintain an
adequate internal control system. The impact of this act is to require companies to
establish and maintain an adequate internal control system, to require public
accountants to evaluate the company's internal controls, and to communicate any
material weaknesses in those controls to the company's top management and board
of directors.
Q14-14 The MD&A must include a discussion of trends and expected changes on
the company’s financial condition, changes in financial condition, and its results from
operations for the last three-year period. In 2003, the SEC released new rules on the
items management is required to discuss in the MD&A.
a. Liquidity
b. Capital resources
c. Results of operations (a line-item analysis of material changes)
d. Off-balance sheet arrangements
e. Tabular disclosure of contractual obligations
Q14-15 The Sarbanes-Oxley Act of 2002 placed a number of requirements on both
companies and their auditors. A Public Company Accounting Oversight Board
(PCAOB) was created with the authority to regulate registered public accounting firms
and establish standards for audit firm quality controls. A second major requirement
was that the CEO and CFO had to file with the SEC a notarized statement attesting to
the accuracy of their financial filings. After the initial filing, management must
periodically assess and report on the effectiveness of their company’s internal control
over financial reporting structure and processes. A third major requirement is that an
accounting firm can provide a client company with either auditing or consulting
services, but not both! And the auditing firm must rotate the partners who work on
each client at least every five years. A fourth major requirement is the enhanced
responsibilities assigned to a public company’s audit committee of the Board of
Directors. This group of nonmanagement directors is charged with the appointment,
compensation and oversight of the work of the public accounting firm employed by
the company. Furthermore, the audit committee must approve all services provided
by the auditor. And fifth, the criminal penalties for destroying audit records in a federal
or bankruptcy investigation, or committing securities fraud, were increased
substantially.

5. Chapter 14 - SEC Reporting
14-5
SOLUTIONS TO CASES
C14-1 Objectives of Securities Acts [CMA Adapted]
a. Investment practices of the 1920s that contributed to the erosion of the stock
market include the following:
– The prices of securities were manipulated through the use of "wash sales" or
"matched orders." Brokers or dealers engaged in prearranged buy and sell
orders that created the impression of activity and drove up prices. When the
public began buying, driving prices up even higher, the brokers and dealers
would sell, making huge profits before prices fell back to market level.
– False or misleading financial statements were issued to lure unwary investors.
– The excessive use of credit to finance speculative activities served to
undermine the market. There was no limit to the amount of credit or "margin"
that a broker could extend to a customer. As a result, a slight decline in
market prices often caused overextended customers to sell when margins
could not be covered, thus further reducing prices.
– Corporate officials and other "insiders" misused information about corporate
activities to take advantage of fluctuations in stock prices.
b. 1. The objectives of the Securities Act of 1933 are to:
– provide investors with financial and other information concerning the
initial offering of securities for sale, thus ensuring full and fair disclosure.
Companies were required to file a registration statement and
prospectus for review.
– prohibit misrepresentation, deceit, and other fraudulent acts and
practices in the sale of securities.
2. The objectives of the Securities Exchange Act of 1934 are to:
– regulate the trading of securities on secondary markets by requiring the
registration of securities traded on any national exchange.
– create a regulatory agency, the Securities and Exchange Commission,
to administer the requirements of both the 1933 and 1934 acts.
c. The provisions of the Foreign Corrupt Practices Act of 1977 include the
requirement for public companies to devise and maintain a system of internal
accounting controls to provide reasonable assurance that transactions are
properly authorized, recorded, and accounted for.

6. Chapter 14 - SEC Reporting
14-6
C14-2 Roles of SEC and FASB [CMA Adapted]
a. The Securities and Exchange Commission (SEC) was created through the
Securities Exchange Act of 1934. As a result of this Act, the SEC has legal
authority over accounting practices. The U.S. Congress has given the SEC
broad regulatory power to control accounting principles and procedures in order
to fulfil its goal of full and fair disclosure. Specific responsibilities of the SEC
include:
– Regulating the sale of securities on secondary markets
– Regulating the initial offerings and actual sales of stock in interstate
commerce
– Prescribing the forms and reports to be filed and be made publicly available
(Students may include a number of other responsibilities. The important
learning objective is that students understand that the SEC is very important in
the U.S.’s capital formation process.)
b. The SEC was created by Congress, and the FASB was created by the private
sector; therefore, no direct relationship exists. However, the SEC historically has
followed a policy of relying on the private sector to establish financial accounting
and reporting standards. The SEC recognized the FASB as authoritative in one
of its Accounting Series Releases (ASR 150: Dec. 20, 1973). There has been
cooperation between the SEC and FASB, but at times the relations between
these bodies have become strained. In cases of unresolved differences, the SEC
rules take precedence over FASB rules for the companies within SEC
jurisdiction. The Sarbanes-Oxley Act of 2002 gave the PCAOB the responsibility
for establishing auditing standards and also renewed the SEC’s ultimate
responsibility for establishing accounting and financial reporting standards.

7. Chapter 14 - SEC Reporting
14-7
C14-3 Information Content of Proxy
The information presented in the company’s proxy is expected to change from year to year.
Some instructors will select a local company or other one of interest to their students as an
exemplar for their discussions during the semester. There are strong learning advantages to
using one company for applications of the concepts presented in your advanced financial
accounting course. This case can be applied to any publicly traded company.
a. The proxy includes the proposals placed before the shareholders. Common examples of
such proposals include:
1. Election of Directors. The company lists the Directors up for election this year The
Board of Directors normally unanimously recommends a vote “For” the nominees.
2. Ratification of Independent Registered Public Accounting Firm. The Board’s Audit
Committee appoints the independent registered public accounting firm (auditors) for
the year. The Board of Directors normally unanimously recommends a vote “For” this
proposal.
3. Stockholder Proposals. Sometimes groups of stockholders will make proposals they
wish to have placed for vote by the shareholders. These resolutions may include
provisions regarding shareholders’ rights, establishment of specific committees by the
Board of Directors to issue reports on issues of concern to corporate governance by
the management of the company, and proposals to revise specific sections of the
company’s By-Laws. Management typically makes a recommendation either in favor
of, or in opposition to, each of the stockholder proposals.
b. The Board of Directors of most registrants have four standing committees, as follows:
1. Audit Committee. This committee has a number of oversight responsibilities for
financial matters, as defined in the Sarbanes-Oxley Act of 2002. Included is the
responsibility to appoint, retain, compensate, evaluate, and if appropriate, to replace
the auditors. The members of the Audit Committee must be nonmanagement
members of the Board of Directors.
2. Compensation Committee. The Compensation Committee approves and
recommends standards for the company’s compensation program and plans,
including incentive compensation, retirement, and other benefit plans. The
Committee reviews the performance of the Chief Executive Officer and fixes his
compensation. In addition, the Committee reviews the company’s compensation
practices for employees and officer workers, and fixes the salary and other
compensation of all officers of the company.
3. Governance Committee. This committee reviews the company’s Shareholder Rights
Plan, makes recommendations regarding the appropriate size and composition of the
board, recommends a slate of nominees for the board, and makes recommendations
for candidates for election as officers of the company.
4. Public Policy Committee. The Public Policy Committee assists in the board’s
oversight responsibilities for company matters related to public and social policy,
including investor, consumer and community relations issues and employee safety
programs, policies and procedures, and labor relations issues. The committee also
oversees the company’s business conduct code.
c. The total annual compensation received by the chairman and CEO of the company is
presented in the proxy. The compensation typically includes a salary, a bonus, and
selected stock options in addition to other incentive plan payments.

8. Chapter 14 - SEC Reporting
14-8
C14-4 Form 10-K Disclosures
a. The Management’s Discussion and Analysis must contain information on the following
five items: liquidity, capital resources, results of operations, off-balance sheet
arrangements, and a tabular disclosure of contractual obligations. Companies may
present additional analysis, but those five items are required by the SEC. Caterpillar
begins with an overview of the year and presents a discussion at a line-of-business level,
on a comparative basis for a three-year period. Caterpillar’s MD&A is one of the most
extensive of those provided by publicly traded companies and includes comments on a
number of important issues affecting the company.
b. The information presented in the Management’s Report on Internal Control Over
Financial Reporting states that the management of the company is responsible for
establishing and maintaining adequate internal control over financial reporting, that
internal control over financial reporting may not prevent or detect misstatements, that
management has assessed the effectiveness of the company’s internal control over
financial reporting as of the end of the fiscal year and found the internal control system to
be effective, and that management’s assessment of the effectiveness of the company’s
internal control over financial reporting has been audited by the company’s independent
registered public accounting firm. (Note that several of these provisions are requirements
of the Sarbanes-Oxley Act of 2002.)
c. The Report of Independent Registered Public Accounting Firm includes substantial
discussion of their evaluation of management’s assessment of the effectiveness of
internal control over financial reporting, including a description of the criteria and
methodology of that review. The assessment criteria for internal control over financial
reporting are those developed by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
d. The Chief Executive Office (CEO) and the Chief Financial Officer (CFO) must each sign a
Section 302 Certification. The certification states that the two certifying officers are
responsible for establishing and maintaining disclosures controls and procedures and
internal control over financial reporting. The certification describes the purposes of the
controls, that an evaluation was made of the effectiveness of the disclosure controls and
procedures, and that disclosure is made of any changes in the registrant’s internal control
over financial reporting that occurred during the last quarter that has materially affected,
or is reasonably likely to materially effect, the registrant’s internal control over financial
reporting. Finally, the certification includes a statement that the two certifying officers
have disclosed their most recent evaluation of internal control over financial reporting to
the registrant’s auditors and the audit committee of the company’s board of directors (or
equivalent group), and any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal control over
financial reporting.

9. Chapter 14 - SEC Reporting
14-9
C14-5 Registration Process [CMA Adapted]
a. The Securities Act of 1933 requires a filing by any firm that raises capital in the
primary capital market through the initial sale of a new security, whether by a public
offering made directly by the firm or through an underwriter. The registration applies
only to the specific quantity of the specific security being offered.
The Securities Exchange Act of 1934 requires a filing by any firm whose securities
are being traded publicly in the secondary capital market. These securities are
registered as an entire class with no amount specified. A secondary offering of a
firm's securities also requires the filing of a registration statement.
b. An objective of the 1933 Act is to provide investors with material information
concerning the issuing firm, its management, the securities offered for public sale,
and the proposed use of the proceeds from the sale. The SEC does not evaluate the
creditworthiness of the firm or attest to the potential of the security as an investment.
The 1933 Act is an attempt to ensure that investors are given full and fair disclosure
of all pertinent information about the issuing firm, including audited financial
statements.
c. SEC Publication Explanation
Regulation S-X Instructions as to the form and content of the
required financial statements.
Regulation S-K Instructions as to the form and content of
required disclosures other than the required
financial statements (i.e., supplementary financial
information, summary financial data, and non-
financial information).
Financial Reporting Releases Constitute part of Regulation S-X in the
(formerly Accounting Series determination of the form and content of the
Releases) required financial statements.
Staff Accounting Bulletins Interpretations and practices followed by the
Division of Corporation Finance and the Office
of the Chief Accountant in administering the
disclosure requirements of the federal
securities laws.

10. Chapter 14 - SEC Reporting
14-10
C14-6 Change in Auditors and Form 8-K [CMA Adapted]
(Students can access Item 304 of Regulation S-K on the SEC’s Website.)
a. Jerford Company must include the following information in Form 8-K to the SEC
regarding its change in auditors:
1. State if the former accountant resigned, declined to stand for re-election or was
dismissed, and the date thereof.
2. A statement whether the former auditor's report on the financial statements for
either of the previous two years contained an adverse opinion or a disclaimer of
opinion, or was qualified in any way and the nature of each adverse opinion,
disclaimer of opinion, or qualification.
3. A statement as to whether the decision to change accountants was
recommended or approved by the audit or similar committee, or by the board of
directors if the company does not have an audit committee.
4. A statement whether there were any disagreements with the former auditor on
any matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure during the 24 months before the change. Each
disagreement, if any, would have to be fully described whether or not it was
resolved to the satisfaction of the former auditor. In addition, those
disagreements which would have caused the former auditor to make reference
to the subject matter of the disagreement in his report had they not been
resolved would have to be identified.
5. A letter from the former auditor as an exhibit with Form 8-K that states whether
the former auditor agrees or disagrees (including reason for disagreement) with
the facts of the case as presented by the registrant.
b. Using an Internet search engine, students can find a number of companies that
have reported changes in a registrant’s certifying accountant. Alternatively, some
colleges and universities have efficient search engines that can scan through the
Edgar filings of the SEC. The focus of this question is to have students identify and
examine an actual Form 8-K reporting of the change. Class discussion can bring in
many students as you use the white board or other visual display media to categorize
and count each of the reasons for the changes as identified by the students. .

11. Chapter 14 - SEC Reporting
14-11
C14-7 Form 8-K [CMA Adapted]
a. 1. The purpose of Form 8-K, called the Current Report, is to ensure that any
significant event affecting a firm's policies or financial position is
immediately reported to the SEC. Covering the period since the filing of the
latest annual or quarterly report, Form 8-K provides a continuous stream of
material information concerning specified events between filings.
2. Form 8-K must be filed with the SEC within 4 business days after the
occurrence of a reportable event. Violation of the 8-K filing requirement may
jeopardize a registrant's status.
3. Form 8-K is a narrative report with sufficient flexibility to permit
management to describe any significant events. The first page must contain
the standard 8-K heading identifying the reporting company, and the body
of the report details the specified event or events in accordance with the
disclosure requirements outlined in the SEC’s regulations for each event.
The company may include other information, financial or otherwise, it
deems appropriate for a complete description of the event. The report must
be signed by an officer of the corporation.
4. The inclusion of audited and pro forma financial statements is required
when reporting the acquisition of a business. Financial statements may be
included in a Form 8-K in order to clarify the effect of any event on the
corporation. In general practice, financial statements are included if an
event is deemed to have a material financial impact.
b. In 2004, the SEC expanded the list of reportable events to 19 in number, as
discussed and listed in the chapter. Any five of these events may be selected
and discussed, but it may be interesting to see if there is a consensus on the
most often selected by students in their lists of five. Also, the faculty member
might ask students why they chose the five they selected.

12. Chapter 14 - SEC Reporting
14-12
C14-8 Audit Committees [CMA Adapted]
a. The Sarbanes-Oxley Act specifies that audit committees be composed of
nonmangement members of a company’s board of directors. Generally, the chair of
the audit committee has financial experience. The Sarbanes-Oxley Act requires the
auditor to report directly to, and have its work overseen by, the company’s audit
committee, not the company’s management. The audit committee is responsible for
the appointment, compensation and oversight of the work of the public accounting
firm employed by the company. Furthermore, the audit committee must approve all
services provided by the auditor, and the auditor must report the following additional
information to the audit committee: critical accounting policies and practices,
alternative treatments within GAAP that have been discussed with the company’s
management, accounting disagreements between the auditor and management, and
any other important issues arising between the auditor and management.
b. The audit committee should act as an overseer of the company's internal audit
staff. The audit committee would be concerned with such matters as the scope
of internal audits, the completion of assignments, and discussion of the results of
reviews conducted by the internal audit staff.
c. Members appointed to serve on the audit committee should be outside board
members (independent of management) because the Sarbanes-Oxley Act
specifies that members be independent of management. The reasoning behind
this requirement is that outside members would be free from bias or conflicts of
interest, and outside members would be more objective in settling disputes
between management and the external auditor. The Sarbanes-Oxley Act
specifies that at least one person on the audit committee should be a financial
expert.

13. Chapter 14 - SEC Reporting
14-13
C14-9 SEC
a. A listing of recent SABs can be found on the SEC’s web site (www.sec.gov).
Click on Staff Accounting Bulletins under the Staff Interpretations heading. There are
now over 100 of these SABs and it is expected that the staff will continue to publish
new ones in the future. Encourage students to select an interesting SAB that
interests them.
The statements in Staff Accounting Bulletins are not rules or interpretations of the
Commission nor are they published as bearing the Commission's official approval.
Rather they reflect the Commission staff’s views and provide interpretations and
practices followed by the Division of Corporation Finance and the Office of the Chief
Accountant in administering the disclosure requirements of the Federal securities
laws.
The SABs may be very narrowly written to describe the staff view of a particular event
or circumstance. The purpose of the SABs is to disseminate staff views on particular
matters for guidance in other situations where events and transactions have similar
accounting implications.
b. (1) & (2) The SEC’s web site (http://www.sec.gov) brings up a Litigation link.
That link includes information on SEC enforcement actions (including both Federal
Court and Administrative Proceedings), briefs filed by the SEC staff, and notices on
specific cases.
(1) The Division of Enforcement was created in August 1972.
(2) In general, the Commission's enforcement staff conducts investigations into
possible violations of the federal securities laws. The Commission will prosecute
the civil suits in the federal courts or conduct administrative proceedings.
In civil suits, the Commission seeks injunctions (i.e., an order that prohibits future
violations) and will often seek civil money penalties and the return of illegal
profits. In addition, the courts may also bar or suspend individuals from acting as
corporate officers or directors.
The Commission can bring a variety of Administrative Proceedings. These
proceedings are heard by administrative law judges and by the Commission
itself. There are many types of proceedings, a few examples include: a cease
and desist order, an order to the respondent to disgorge ill-gotten funds, and an
order to suspend employment.
(3) A listing of recent Litigation Releases can be found at the SEC’s web site.
Encourage students to select a recent case that looks interesting to them.
(4) A listing of recent administrative proceedings can be found at the SEC’s
web site. Students should be able to see the difference between Litigation in the
Federal Court and Administrative Proceedings.

14. Chapter 14 - SEC Reporting
14-14
C14-10 EDGAR Database
a. Internet URL: http://www.sec.gov/edgarhp.htm/
The above Internet address provides access to the EDGAR database homepage.
From the homepage, the user is able to select “Search for Company Filings,” then
select “Historical EDGAR Archive.” Students may now enter the name of their
selected company. It is easiest to identify a company name prior to performing the
search. Students will quickly see the large number of filings made by publicly held
companies. As for describing the purposes of each of the filings, students could
access the “Descriptions of SEC Forms” link on the opening page of the SEC’s web
site.
C14-11 Discovery Case
The Sarbanes-Oxley Act (SOX) presents a number of major changes in the
auditing/consulting relationship between companies and accounting firms. The Act
was written because of the major accounting and financial mismanagement cases
discovered in 2000 and 2001. These cases resulted in the bankruptcies of very large
companies such as Enron and WorldCom and the demise of Arthur Andersen, LLP,
one of the Big-5 public accounting firms at that time.
The choice of databases will be based on what each college or university has
available. It is expected that the Sarbanes-Oxley Act will continue to have impacts on
accounting firms as the Public Company Accounting Oversight Board develops new
standards for audit firm quality controls. The important aspect of this Discovery Case
is that students search for, and find, contemporary business articles on this very
significant law and its impacts on accounting firms.

15. Chapter 14 - SEC Reporting
14-15
SOLUTIONS TO EXERCISES
E14-1 Organization Structure and Regulatory Authority of the SEC
[CMA Adapted]
1. c
2. b
3. b
4. d
5. d
6. d
E14-2 Registration of New Securities [CMA Adapted]
1. e
2. c
3. b
E14-3 Reporting Requirements of the SEC [CMA Adapted]
1. a
2. c
3. b
4. d
5. e
6. b
7. d
E14-4 Corporate Governance [CMA Adapted]
1. a
2. e
3. b
4. a
5. e

16. Chapter 14 - SEC Reporting
14-16
E14-5 Application of Securities Act of 1933 [CMA Adapted]
The impact of the registration requirements of the Securities Act of 1933 on each of
the proposals is as follows:
1. The offering of the participation units in the citrus groves, although ostensibly the
sale of an interest in land, constitutes an offer to sell, or the sale of, securities within
the meaning of section 2 of the Securities Act of 1933. Although land itself is not a
security, the offering of the land in conjunction with a management contract has been
held to constitute the offering of a security. Since interstate commerce and
communications are to be used and since there is no apparent transactional
exemption available, a registration under the 1933 act is required. Whatever hope
there was of an intrastate offering exclusion is dashed by the fact that the units will be
offered and sold in two states.
2. The short-term borrowings evidenced by the promissory notes of Various
Enterprises are exempt from registration. This exemption from categorization as a
security for purposes of registration under the act applies to commercial paper such
as notes, drafts, checks, and similar paper arising out of a current transaction that
have a maturity not exceeding nine months. In addition, the private placement
exemption is applicable.
3. If Various is deemed to be a controlling person insofar as Resistance is concerned,
it must register the securities in question before it can legally sell them. The Securities
Act of 1933 provides in connection with its definition of the term “underwriter,” that,
“the term ’issuer’ shall include in addition to an issuer, any person directly or indirectly
controlling or controlled by the issuer, or any person under direct or indirect common
control with the issuer.”
Securities Act rule 405(f) further defines the term “control.” It states that “the term
‘control’... means the possession, direct or indirect, of the power to direct or cause the
direction of the policies of a person, whether through the ownership of voting
securities, by contract, or otherwise.” It is obvious that “control” as defined is a
question of fact. In general, a controlling person has the power to influence the
management and policies of the issuer. If any individual is an officer, director, or
member of the executive committee, a low percentage of stock would suffice. Actual
or practical control is sufficient and the power to exercise control will also be sufficient
even if it is not exercised. Stock ownership is looked to and majority ownership
naturally constitutes control. Although ownership of 17 percent of the stock is
certainly not conclusive, it is a substantial block of stock and, if any of the above
factors is also present, it would be most likely that Various would be a controlling
person. Thus, although not the issuer of the stock, it would need to register the
securities. This resembles a secondary offering of a large block by the owners of the
corporation. This sale through the brokers will in no way insulate the transaction from
registration.

17. Chapter 14 - SEC Reporting
14-17
E14-6 Federal Securities Acts [AICPA Adapted]
1. a
2. d
3. b
4. d
5. a
6. c
7. b
8. b