Chapter 17: Financial & Securities Regulations

Waiting period

-After registration statement is filed and lasts 20 days -SEC staff investigates accuracy of the registration statement to determine whether the sale of securities should be permitted -still illegal to sell securities during this time but not illegal to solicit buyer or receive offers

Why was the Securities Act of 1933 created?

-Because of the Great Depression, the Feds stepped in to regulate security

What are the three sanctions for violations of the Securities Act of 1933?

-Criminal punishment -Civil liability (may be imposed in favor of injured parties in certain cases) -Equitable remedy of an injunction

Section 12

-Divided into two parts 1. imposes liability on those who offer or sell securities that are not registered with the SEC 2. imposes liability on sellers who use a prospectus or make communications that contain an untrue statement of material facts required to be stated or necessary to make statements not misleading (can recover for harm done in a prospectus)

What are some of the new admin. agencies authorized by congress to achieve the goals of the Dodd-Frank Act?

-Financial Stability Oversight Council (FSOC) -Federal Insurance Office (FIO) -Office of Housing Counseling (HUD) -Office of Credit Ratings (SEC)

In what ways did the SOX Act revitalize the SEC?

-Increased power over governance issues -Congress empowered the SEC to increase corporate accountability -encourages 'whisleblowers'

What are the parties subject to the 1933 act?

-Issuer -Underwriter -Controlling person -Seller

Section 11

-Liability on every person who signed registration statement + every director, accountant, engineer, underwriter -These people are liable of the reg. statement 1. Contains untrue statements of material facts 2. Omits material facts required by statute or regulation 3. Omits info. that if not given makes the facts stated misleading

Insider

-Owns more than 10% of any security -Is a director or officer of the issuer of security

What are the three time periods involved in the registration process?

-Pre-filing period -Waiting period -Post-effective period

What are the three sections of the Securities Act of 1933 that apply to civil liability of parties involved in issuing securities?

-Section 11: deals with registration statements -Section 12: relates to prospectuses and oral and written communication -Section 17: concerns fraudulent interstate transactions

An issuer of securities who complies with the federal law (disclosure law), must prepare ____________ and _____________.

-a registration statement -a prospectus

Statute of Limitations

-defense for both civil and criminal liability -must wait one year from when the discovery of the untrue statement was made to file suit

Registration statement

-filed with the SEC -includes a detailed disclosure of financial information about the issuer and the controlling individuals involved in the offering of securities for sale to the public

Due diligence

-important defense for experts such as accountants -expert must prove that a reasonable investigation of the financial statements of the issuer and controlling persons was conducted. Must prove that there was no reason to believe any of the information in the registration statement or prospectus was false or misleading

Jumpstart Our Business Startups (JOBS) Act of 2012

-meant to help smaller businesses find necessary capital to grow -ease burdensome federal regulations and allow individuals to invest in start-ups through relaxed rules for some initial public offerings

State Blue Sky Laws

-state regulation regarding securities laws -protects the potential investor from buying worthless or risky securities without financial and other information -applies to securities subject to federal laws and securities exempt from federal statutes

When determining whether a person has purchased as security, what 3 questions do courts seek positive answers from?

1. Is the investment in a common business activity? 2. Is the investment based on a reasonable expectation of profits? 3. Will these profits be earned through the efforts of someone other than the investor?

What are the 3 most important defenses recognized by the Securities Act of 1933 that may be used to avoid civil liability?

1. Materiality 2. The statute of limitations 3. Due diligence

Securities Act of 1933 (Truth and Securities Law)

A disclosure law with respect to the *initial sale of securities* to the public -requires the disclosure of information to the potential investor -info. must not be untrue or misleading

Securities Exchange Act of 1934

Act that created the SEC -Regulates transfers of securities after the initial sale -illegal to sell a security on a national exchange unless a registration is effective for the security -Registration requires filing prescribed forms with stock exchange and SEC

Securities and Exchange Commission (SEC)

An administrative agency created in 1934 that is responsible for administering the federal securities laws -consists of 5 commissioners appointed by president; chair is Michael S. Piwowar -has both quasi-legislative and quasi-judicial powers

Section 17

Concerns fraudulent interstate transactions -prohibits use of interstate communication in offer or sale of securities when result is 1. to defraud 2. to obtain money or property by means of an untrue or misleading statement 3. to engage in a business transaction or practice that may operate to defraud or deceive a purchaser

Posteffective period

Contracts to buy and sell securities are finalized

Sarbanes-Oxley Act of 2002

Created because Enron collapsed (accountants messing with numbers) -applies to all public companies in US and international companies registered with SEC

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Created from 2008 economy collapse due to banks giving out risky loans -addresses many issues of financial reform -Congress authorized creation of many new administrative organizations

Section 10(B)

Creates liability for use of mail or any instrumentality of interstate commerce to defraud any person in connection with the purchase or sale of any security

Pre-filing period

During this period, it's legal for the issuer of a security to engage in preliminary negotiations and agreements with underwriters -illegal to sell, offer to sell, and offer to buy securities during this period

Prospectus

Like the registration statement, it contains financial information related to the issuer and controlling persons -supplies investor with sufficient facts (including financial info) so that they can make an intelligent investment decision

Controlling Person

One who controls or is controlled by the issuer, such as a major stockholder of a corporation

Securities Litigation Uniform Standards Act of 1998 (SLUSA)

Passed by Congress -supported aims of curbing abusive securities fraud litigation by not allowing plaintiffs to file claims in state courts that PSLRA prevented in federal courts

Materiality

Prove that the false or misleading information is not material and should not have had an impact on the purchaser's decision-making process

Uniform Securities Act, 1956

Provides model for state securities laws -registration by coordination

What is one of the most important provisions of the Securities Exchange Act of 1934? What does it concern?

Section 16 -Insider transactions (perceived fraudulent activity on the inside)

Securities come in many different forms, what is an example of this?

The Howey Case: -Howey in the Hills Services Company offered buyers of trees a management service contract where Howey provided care for the trees and harvesting of the fruit. When the investors did not receive the return they expected, Howey was held liable for failing to comply with security laws.

What does Title ll and Title lll of JOBS do?

Title ll: Allows companies to advertise that they are seeking investments Title lll: Allows a company to raise up to $1 million by selling securities

T or F: The 1933 act does not prohibit the sale of worthless securities

True -an investor can foolishly invest in a ridiculous opportunity, the gov. just wants to stop misinformation and fraud

Security

any interest or instrument that offers the right to subscribe to or purchase stock, bond, or any certificate of interest (actual definition is very broad and includes much more corporation stock)

Seller

anyone who contracts with a purchaser or who is a motivating influence that causes the purchase transaction to occur

Underwriter

anyone who participates in the original distribution of securities by selling such securities for the issuer or by guaranteeing their sale -ex: securities brokerage firms or investment bankers

Private Securities and Litigations Reform Act (PSLRA) of 1995

only SEC can pursue claims against third parties not directly responsible for the securities law violation -requires any private plaintiff to allege with specificity the scienter, or intent, of a company when filing a claim under section 10(b) and Rule 10b-5

Issuer

the individual or business organization offering a security for sale to the public