Securities Regulation - Cpa

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SEC powers

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1) Rulemaking - same force and effect as laws enacted by Congress

2) Investigation - subpoena power, secret investigations

3) Civil enforcement - revoking registration of securities

4) Criminal enforcement - fines or jail sentences (through Justice Dept)

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1933 Act: unlawful to

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Use interstate commerce or the mail to:

Sell securities w/o registration statement

Sell securities not accompanied by a prospectus

Make material misstatements surrounding original issue

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Liable parties under 1933 Act

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Underwriters
Issuers
Directors or partners
Experts

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Securities exempt from registration under 1933 Act

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Securities issued by:

Government agency
Banks and S&Ls
Farm co-ops
Charities
Railroads
Bankruptcy trustees

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Regulation A:
Benefit to issuer?
Restrictions on offerings?

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Simplified registration

- Up to $5M in 12-month period
- Must notify SEC
- Must supply purchaser with offering circular

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Casual sales:
Benefit to issuer?
Restriction on offerings?

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Registration not required

-Offering by person other than issuer, underwriter, dealer, controlling person
-Sale of over 50% of a controlling person's shares must be registered

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Regulation D, Rule 504:
Benefit to issuer?
Restriction on offerings?

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Registration not required

-Up to $1M in 12-month period
-Must notify SEC within 15 days of first sale

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Regulation D, Rule 505:
Benefit to issuer?
Restriction on offerings?

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Registration not required

-Up to $5M in 12-month period
-Must notify SEC within 15 days of first sale
-Resale restricted for 2 years
-Must supply audited balance sheets to nonaccredited investors
-No general solicitation permitted

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Regulation D, Rule 506:
Benefit to issuer?
Restriction on offerings?

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Registration not required for private placement

-Up to $5M in 12-month period
-Must notify SEC within 15 days of first sale
-Resale restricted for 2 years
-Must supply audited balance sheets to nonaccredited investors
-No general solicitation permitted
-All unaccredited investors must be "sophisticated"

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Information required in registration statement

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Names of issuers, directors, officers, underwriters, shareholders over 10%

Description of property, business, capitalization

Description of security to be offered

Certified financials: B/S less than 90 days old, P&L statements for past 3 years

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Registration statement:
When does it become effective?
Restrictions on offers before and during waiting period?

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Effective automatically after 20 days if not refused

Before waiting period: offers not allowed

During waiting period: no restrictions no oral offers; written offers must be accompanied by "red herring" prospectus

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Fraud under 1933 Act: plaintiff must prove

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Material
Misstatement
Damages

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Fraud under 1933 Act: Civil liability

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Difference between price paid for securities and market value at time of suit

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1933 Act: Statute of limitations

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1 year after misstatement discovered (or should have been discovered)

Never more than 3 years after public offering

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1933 Act: Due diligence defense

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For experts

Can avoid liability by proving exercise of due care

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1933 Act: When must prospectus be delivered?

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New company: 90 days after initial offering

Existing company: 40 days after initial offering

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1934 Act: Companies required to register

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National securities exchanges

Brokers/dealers working in interstate commerce

Corporations traded on national securities exchange OR with at least $10M in assets and 500 or more equity security holders

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1934 Act: Reporting requirements

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10K annual report
10Q quarterly report
8K report of material changes
Officers/directors must file report of changes in ownership

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2 types of insider trading

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Trading on inside information

Short swing trading

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Trading on inside information is fraud if:

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Insiders or tippees trade

Exception: if information is disclosed to other party

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Short swing trading: profit must be forfeited to corporation if

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Insider profits on trade made within 6-month period

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Insider trading:
Insider =?
Exception?

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Officer
Director
Beneficial owner of over 10% of stock

Exception: transactions under $3K

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1934 Act: conditions for fraud

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Material
Misstatement
Intent (or reckless disregard)
Reliance
Damages

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1934 Act anti-fraud provisions:
What securities are covered?
What traders are covered?

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All securities and traders are covered under 1934 Act

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Foreign Corrupt Practices Act: 3 provisions

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Anti-bribe
Anti-fraud
Accounting requirements

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Foreign Corrupt Practices Act: Anti-bribe provisions apply to?

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All U.S. companies

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Foreign Corrupt Practices Act: Anti-fraud provisions apply to?

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1934 Act companies

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Foreign Corrupt Practices Act: Anti-fraud provisions are?

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Illegal to falsify accounting reports

Illegal to make false representation during audit