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28 Cards in this Set
- Front
- Back
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What is a security? (3 types)
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1. Traditional Securities (stocks, bonds, warrants, etc.)
2. Other identified instruments (ltd partnerships, stock subscription agreements, mineral rights, etc.) 3. Some investment contracts |
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Howey Test: is this investment contract a security?
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• (1) Investment of money
• (2) Common enterprise • (3) Expect profit • (4) primarily or substantially from others’ efforts o Have to comply with securities laws o Creates both criminal and civil problems |
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1933 Act
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• Initial offerings of securities
o First sale of these particular securities to the public • Covers “public” offerings • Registration Statement, Filed with SEC • Prospectus, filed with SEC |
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Issuer’s sequence of activities
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• File registration statement with SEC
• Waiting period; min 20 days • Once over, can sell; must give prospectus (or access) to buyer |
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Issuer’s sequence of activities- • File registration statement with SEC
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o No conditioning of market, normal news ok
o cannot go out and issue a bunch of press releases to pump company up but normal news such as issuing a patent is allowed |
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Issuer’s sequence of activities- Waiting period; min 20 days
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o Make oral offers to sell; cannot sell
o issue "red herring" prospectus, red herring means preliminary o tombstone ads |
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What does the SEC check for in a Prospectus?
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completeness not accuracy test
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'33 Act- Exempt Securities
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• Short term commercial paper
• Securities of charitable organizations • Securities issued in bankruptcy reorganization • Stock dividends and stock splits • Government securities • Insurance contracts |
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'33 Act- Regulation D Offerings- Unregistered
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504, 504a, 505, 506
(resales usually restricted, 6 mos to 1 year) (if you weren’t limited on resales, seller could go beyond the restrictions • Intrastate offerings exempt. Most business and all buyers in one state. |
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'33 Act- Regulation D Offerings- 504
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$1 million in 12 months
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'33 Act- Regulation D Offerings- 504 a
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: $500k in 12 months by “blank check” companies (no specified business plans)
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'33 Act- Regulation D Offerings- 505
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$5 million in 12 months, 35 max unaccredited investors, unlimited accredited
*• Both 505 and 506 require info to all investors if any are unaccredited |
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'33 Act- Regulation D Offerings- 504 a
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Unlimited $$, 35 max unaccredited investors, unlimited accredited; unaccredited must be “sophisticated.” (“Private placement”)
*• Both 505 and 506 require info to all investors if any are unaccredited |
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What makes an investor "accredited"?
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• Rich and/or smart
o Don’t need as much protection o Wealthy (amts subject to change) • Net worth: $1 million • $200k income last 2 years, expected this o Insiders of issuers (both corporate and individual insiders) o Others….institutions, businesses, etc. • Essentially these people will ask for the information so do not need to require it |
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'33 Act- Criminal Liability
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o Government has the burden to prove beyond a reasonable doubt, innocent until proven guilty
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'33 Act- Civil Liability
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o Section 11 Very Broad
• ***Guilty until proven innocent • liable until you’re proven not liable o Issuer, or anyone associated can be liable o Liable for any material: • Omission • Misstatement o No intent, no negligence needed to be liable |
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'33 Act- Civil Liability, Section 11 Due Diligence Defense
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• Takes away harshness of Section 11
• defendent prove did everything right • usually plaintiff proves did everything right • Shifts burden of proof • In some ways, “guilty till proven innocent” • Significance when evidence is not available • OR Other defenses: Not material, or plaintiff knew of error/omission |
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’34 Securities Exchange Act
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• Subsequent trading
o marketplace, issuer has no control so the idea is that they put the information out there, ongoing process • Reporting requirements o Annual, quarterly, monthly reports • Who has to file? o $10 million in assets and 500+ shareholders or: o Traded on exchange |
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’34 Securities Exchange Act- Section 10 (b), antifraud
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• Parallel to Section 11, but…
• Fraud standard, thus must prove intent (scienter) Fraudulent, Mere negligence is not enough • Why the difference here v. Section 11 of ’33 Act? not sure, ‘33 too much in favor of plaintiffs, ‘34 makes it much more difficult • Can you choose which to sue under? Used to be very restricted to how you bought the stock but yes, now they are more lenient. You can sue under ’33 |
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Insider Trading Definition
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o 1 def: trading by insiders
o 2 def: trading using inside information o in many cases these definitions merge, we use “trading using inside information” |
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Insider Trading- why isn't it allowed?
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o Very difficult to prove- could not prove Martha Stuart was guilty of insider trading but they could prove that she lied while she was under investigation
o Not allowed because it is unfair, distorts the markets |
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Insider Trading- who is considered an insider?
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o Officers etc.
o Lawyers, accountants, etc. o Others with fiduciary duty (important duty, has access to information) |
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Insider Trading- who is liable?
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Tipper- tippee liability
o Anyone who knows or should know that they have inside information (inside information being not public info) |
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Short Swing Profits
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• Statutory insiders liable
• Officer, director or 10 percent s/h • Profits on trans. W/in 6 mos. Go to corp. • Any sale or purchase • 100% dis-incentive for corporate officers to conduct insider trading |
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State Regulation
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o "blue sky laws”
• when you sold fraudulent securities with nothing behind them, it’s like saying, I’m selling you a piece of the sky. - mostly follows federal laws |
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Corporate Governance
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• Goal: ensure officers/directors act in best interest of shareholders
• Stock Options: good in theory, not always in practice • Outside directors • Audit committee of board • Compensation committee |
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SOX
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• Regulates both issuers and accounting firms
o Certification of financial statements b CEOs and CFOS o Whistleblower protection o Blackout periods for certain transactions o Limits on loans to officers/directors • Public Company Accounting Oversight Board • Audit/Nonaudit services limit • Mandated role for audit committee • CPA firm engagement partner rotation • Mandated firm communication to audit committee • Prohibitions on document destruction/falsification |
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Online Securities Issuance
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• Adaptation of existing laws to online environment. Some issues:
o Proof of delivery of prospectus o Hyperlinks in online prospectus to other material (e.g. marketing materials) o Reg D: does online access make it a public offering? • issue is not resolved o Foreign companies’ issuances • Easier (almost zero cost) to get fraudulent materials in hands of potential victims to induce purchasing • Investor forums (chat rooms) and price manipulation • Ponzi Schemes • Hacking |
