[In Trouble] Isaiah, an Issuer of Stock, May Be in Trouble

question 76

Multiple Choice

[In Trouble] Isaiah, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because he was in financial trouble due to other projects. Isaiah thought that the health club venture would be such a success that he would never get caught. Unfortunately, he was wrong. The health club venture has significant problems, and investors are looking for some way to hold Isaiah responsible. Another problem Isaiah has is that he inflated information regarding the prospects of the health club in the prospectus. Rafal, a new lawyer, told Isaiah that as far as he knew, Isaiah could be fined for violations under the Securities Act of 1933, but he could not be sent to prison. Isaiah told Rafal that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Isaiah says that he plans to rely on the due diligence defense. Isaiah also asks Rafal if he is aware of any other defenses. Isaiah says that once before he was held liable for a violation of the Securities Act of 1933, and he does not want to be in trouble again.
-Which of the following is true regarding Isaiah's sale of securities before the effective date of registration?

• A) He will be able to avoid liability if he can establish the due diligence defense.
• B) He will be able to avoid liability if he can establish that the investors who purchased stock early were aware that the securities were sold before the effective date of registration.
• C) He will be able to avoid liability if he can establish that the sales before the effective date did not directly result in any losses to investors.
• D) It is not a violation of the securities laws.
• E) He will almost certainly be liable because the 1933 act provides no defenses for that violation.

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Definitions:

Subscription Service

A pricing strategy in which consumers are charged periodically to use a product or service continuously.

Sampling Frame

The list or set from which a sample is drawn, representing the population from which researchers intend to collect data.

Population Size

The total number of individuals or units in the group that is the subject of statistical analysis.

Average Age

The mean value of the ages of individuals in a specific group or population, calculated by dividing the sum of all ages by the number of individuals.