Management 4540 Chapter 41 - Securities Regulation

Front 1

What are the two approaches to securities regulation?

Back 1

1. Merit: Agency decides fairness (usually includes disclosure as well)
2. Disclosure: Agency requires the giving of information to purchasers

Front 2

Security defined: three characteristics of an investment contract

Back 2

1. An investment of money or property
2. In a common enterprise
3. Where the return largely depends on the efforts of others

Front 3

Requirements of the 1033 act

Back 3

1. Illegal for a company to sell a covered security for the first time without registration and the delivery of a prospectus prior to sale

2. Registration documents
a. Prospectus
b. Technical information

Front 4

The steps to be able to sell securities under the 1933 act:

Back 4

1. Prefiling: May obtain an underwriter
2. Waiting period: Tombstone ads, issue red herring (preliminary prospectus)m oral offers to buy or sell allowed

3. Post effective: Sales allowed if prospectus delivered first

Front 5

What are the three types of securities that are not regulated

Back 5

1. Government issues
2. Securities of non profit entities
3. Exemptions are important because registration typically costs a minimum of $1 million under the 1933 act, plus $250,000 per year under the 1934 act

Front 6

What are the three types of exempt offerings?

Back 6

1. Small offerings
2. Private placements
3. Intrastate offerrings

Front 7

Exempt offerings: Small offerings

Back 7

1. Regulation A of the SEC
a. Up to $5 mil in any 12 month period
b. Limited filing and disclosure through offering circular

2. SEC regulation D-504
a. non-investment company offerings of up to $1 million in any 12 month period

Front 8

Exempt offerings: Private placements

Back 8

Non advertised offerings to qualified groups, particularly accredited investors

1. Accredited investors: Institutional investors, insiders and those worth more than $1 mil
2. Regulation D-505: Issuer may sell up to $5 mil in any 12 mo. period to accredited investors and not greater than 35 unaccredited investors

3. Regulation D-506: Issuer may sell an unlimited amount of securities to accredited investors and not greater than 35 unaccredited, sophisticated investors

Front 9

Exempt offerings: Intrastate offerings

Back 9

All stock sol in state of incorporation

1. Completely intrastate: All stock in the initial issue is sold in the state of incorporation and has:
a. Home office in state of incorp.
b. 80% of its assets in home state
c. 80% of the proceeds from the sale of the issue used in the home state
d. No resales outside the home state allowed for 9 months after the initial issue

Front 10

Liability for misstatement in registration

Back 10

1. Strict liability of the issuer for loss in value if misstatement in registration

2. Liability of signatories, directors, accountants and underwriters unless they can prove a defense: the burden of proving defenses is on the defendant!

Front 11

Four defenses to liability for misstatements

Back 11

1. Due diligence
2. Reliance on other experts
3. Lack o causation - stock went down for another reason
4. Plaintiffs knew of falsity of statement

Front 12

Fraud remedies

Back 12

1. Rescission or money damages, attorney's fees
2. Criminal penalties: 5 years/ $10,000 fine or both

Front 13

Securities exchange commission

Back 13

1. Five member commission, not > 3 from same political party

2. Is the regulating agency under both the '33 and '34 acts

3. Power to investigate, prosecute and halt trading under certain cicumstances

Front 14

What four areas does the SEC regulate secondary trading in?

Back 14

1. Registration and reporting
2. Insider trading
3. Proxy regulation - covered with corps.
4. Tender offers - covered with corps.

Front 15

When do the SEC reporting requirements begin to apply?

Back 15

1. 500 or more SHs and > $10 mil in assets

2. Stock traded in nat'l exchange; or

3. Any securities covered under 1933 act

Front 16

Registration and reporting

Back 16

1. Registration of securities brokers and dealers

2. Quarterly reports of financial information - more often if material change

3. Strict internal accounting requirements

Front 17

Insider defined

Back 17

1. Greater than 10% of shares
2. Officers and directors of issuers
3. Temporary insiders
4. Tippees: misappropriation or breach of fiduciary duty required

Front 18

insider trading

Back 18

1. Trading on a security by an insider while in possession of material non public information

2. Both criminal penalties and lawsuits are available for violations of rule 10 (b)(5) p

Front 19

Insider trading sanctions act of 1988 - the three provisions

Back 19

1. Forbids purchase or sale of securities by an insider while in possession of material non public information

2. Increases the types of people who can be penalized - those who provide info are now also liable

3. Allows the SEC to bring a civil suit against those trading with inside information with a max. civil penalty o 3 times the profit

Front 20

If misstatement in registration or report, the plaintiff must prove:

Back 20

1. Negligence of professionals
2. Loss was cause by misstatement
3. Plaintiff/ investor read and relied on statement

Front 21

Are good faith defenses allowed?

Back 21

yes

Front 22

Remedies under the insider trading sanctions act of 1988

Back 22

1. Actual damages, attorney's fees in suits by investors

2. Civil and criminal penalties to corporate officers who are required to certify financial records - increased by the Sarbanes Oxley to allow fines up to $5 mil

Front 23

What are the three differences between the 1933 and 1934 acts?

Back 23

1. Burden of proof: plaintiff only needs to prove misstatement in the prospectus and loss under 33 act. defendants must disprove the act

2. No reliance needed under 33 act

3. Professionals have burden of proving they were not negligent under the 33 act