BUS LAW CH 42

What do exempt securities include?

- government issued securities - bank + financial institution securities - insurance policies - etc.

What is The Securities Act of 1933?

- governs initial sales of stock by businesses - designed to prohibit various forms of fraud + stabilize the securities industry by requiring that investors receive financial and other significant information concerning the securities being offered for public sale - requires disclosure

What are securities?

- instruments + interests like stocks and bonds - interests that involve the right to purchase a security or group of securities on a national security exchange - notes/evidence of indebtness - any fractional undivided interest in oil/gas/mineral rights - investment contracts

What are the violations of the 1933 Act?

- intentionally defraud investors by misrepresenting or omitting facts in a registration statement or prospectus - negligence used in respect to the preparation of the Registration Statement and Prospectus may result in liability - selling securities before the effective date of the registration statement or under an exemption for which the securities do not qualify may result in liability

What are the criminal penalties from violation of the 1934 section 10b + rule 10b-5?

- person my be fined up to $5 million - imprisoned up to 20 years - or both - a partnership or corporation may be fined up to $25 million

What are short swing profits?

Profits derived from trades within a 6 month period - no scienter required

What are the Resales and Safety Harbor Rules?

Rule 144 and 144A

What is a tippee?

those who receive tips from insiders - includes remote tippees or who tippees of tippees

What are the 3 transactions that are exempt?

- Regulation A Offerings - Small Offerings ~ regulation D - Resales and Safe Harbor Rules

What are the remedies to civil violations of the 1933 Act?

- SEC authorized to imposed civil sanctions against those who willfully violate the act - SEC can request injunction to prevent further sales of the securities involved or ask a court to grant other relief - private parties who suffer harm from the violation may bring a suit in federal court to recover losses and seek damages

What are the requirements under state securities laws?

- apply mainly to intrastate transactions meaning transactions within one state - there are typically disclosure requirements and antifraud provisions - state laws also provide for the registration of securities offered or issued for sale within the state and impose disclosure requirements

What are some material facts which call for disclosure to avoid misrepresentation?

1. fraudulent trading in the company stock by a broker-dealer 2. an up or down dividend change 3. a contract for the sale of corporate assets 4. new discovery, process, or produce 5. a significant change in the firm's financial condition 6. potential litigation against the company ** each of these will be regarded as a material fact only if it is significant enough that it would likely effect an investor's decision as to whether to purchase or sell the company's securities

What are the 5 basic elements of a securities fraud action?

1. material misrepresentation in connection with the purchase or sale of securities 2. scienter -- a wrongful state of mind 3. reliance by the plaintiff on the material misrepresentation 4. an economic loss 5. a causation between the misrepresentation and the loss

What are the 4 contents of the registration statement?

1. securities being offered for sale, including their relationship to the registrants' other securities 2. corporations properties + business 3. management of the corporation, including managerial compensation, stock options, pensions, + other benefits as well as any interests of directors or officers in any material transactions 4. how the corporation intends to use sale proceeds 5. any pending lawsuits or special risk factors

What are the 3 requirements which deem the tippee liable?

1. there is a breach of a duty not to disclose insider info 2 the disclosure is made in exchange for personal benefit 3. the tippee knows or should know of this breach and benefits from it

What are the 3 defenses to violations of the 1933 Act?

A defendant can avoid liability by proving any of these: 1. the statement or omission was not material 2. the plaintiff knew about the misrepresentation at the time stock was purchased 3. defendant exercised due diligence in preparing or reviewing the registration and reasonable believed at the time that the statements were true (available to an underwriter to subsequent seller but not issuer)

What is the registration process?

PREFILING PERIOD: issuer normally cannot sell or offer to sell securities during this time WAITING PERIOD: the securities can be offered for sale but cannot be sold and a preliminary prospectus can be issued without a sale price and a free-writing prospectus can also be distributed POST EFFECTIVE PERIOD: after the approval when the registration is effective and the issuer can offer and sell the securities

What is Rule 504 in Small Offerings - Regulation D?

Rule 504 is an exemption used by many small businesses - provides that non investment company offerings up to $5 million in any 12 month period are exempt

What is Rule 506 in Small Offerings - Regulation D?

Rule 506 exempts private, non-investment company offerings that are not generally solicited or advertised - referred to as the Private Placement Exemption becuase it exempts transactions not involving any public offering

What is Rule 144A?

Securities the at the time of the issue were not of the same class as securities listed on a national securities exchange or quoted in a US automated inter dealer quotation system may be resold only to a qualified institutional buyer under this rule

What is a prospectus?

a disclosure document that describes the security being sold, financial operations of the corporation, and the investment or risk attached to the security - issuing corporations must provide all investors with one of these

What is a well known seasoned investor?

a firm that has issued at least 1 billion dollars in securities in the last 3 years or has outstanding stock valued at $700 million or more in public hands - these have greater flexibility as they are not required to receive review and approval for registration statements

What is a registration statement?

a security that does not qualify for an exemption MUST be registered before it is offered to the public

What is the Sarbanes-Oxley Act?

addresses certain issues relating to corporate governance - act attempts to increase corporate accountability by imposing strict disclosure requirements and harsh penalties fro violations of securities laws - corporate executives can be held responsible - accounting firms can be held responsible - exemptions for smaller companies meaning that public companies with a market capitalization of less than $75 million no longer need to have an auditor report on managements assessment of internal controls

What is the underlying rule to remember from this chapter?

all securities sold to the general public must first be registered with and approved by the Securities Exchange Commission unless it is an exempt security or exempt transaction

What is a free-writing prospectus?

any type of written, electronic, or graphic offer that describes the issuer or its securities - includes a legend indicating the investor may obtain the prospectus

How can scienter be proved?

by showing that the defendant made false statements or wrongfully failed to disclose material fact - can sometimes be proved by showing that the defendant was consciously reckless as to the truth or falsity of their statements

What are the civil sanctions from violation of the 1934 act?

can be as high as triple the profits gained

Who does the Act of 1934 apply to?

companies that have assets in excess of $10 million and 500+ shareholders - these companies are called section 12 companies

State Securities Laws are also known as blue sky laws, what are these?

every state has their own blue sky laws and these regulate the offer and sale of securities within its borders

What is Rule 144?

exempts restricted securities from registration on resale if - there is adequate current public info about the issuer - the person selling the securities has owned them for at least 6 months if the issuer is subject to the reporting requirements of the 1934 fact (if they are not subject they must have owned the securities for at least one year) - the securities are sold in certain limited amounts in unsolicited brokers transactions - the SEC is notified of the sale

What are Ponzi Schemes?

fraudulent and illegal investment operation that promises quick, easy, and significant returns on investments with little or no risk.

What is insider trading?

occurs when persons buy or sell securities on the basis of information that is not available to the public - applies to insiders and outsiders

What is Section 10(b) of the 1934 act?

one of the most important sections of the 1934 act - prohibits the use of any manipulative or deceptive mechanism in violation of SEC rules + regulations

What are investment newsletters?

online newsletters can hero investors gather valuable info, but some e-newletters are used for fraud - basically manipulated newsletters to get people to buy or sell certain stocks

What is one of the major goals of Section 10(b) and SEC Rule 10b-5?

prevent insider trading

What is Rule 10b-5 of the 1934 Act?

prohibits the commission of fraud in connection with the purchase or sale of any security - private parties can sue for securities fraud under this rule - applies to almost all cases concerning the trading of securities - rule covers just about any form of security THE SECURITIES NEED NOT BE REGISTERED UNDER 1933 ACT FOR THE 1934 ACT TO APPLY

What are the remedies to criminal violations of the 1933 act?

prosecuted by the US Department of Justice - violators may be fined up to $10,000 - imprisoned up to 5 years - or both

What is the Private Securities Litigation Reform Act?

provides a safe harbor for publicly held companies that make forward looking statements - those who make such statements are protected against liability for securities fraud if they include meaningful cautionary statements identifying important factors that would cause actual results to differ materially from those in the forward looking statement

What is the Securities Exchange act of 1934?

provides for the regulation nd registration of securities exchanges, brokers, dealers, and national securities associations - provides for continuous periodic disclosures by publicly held corporations to enable the SEC to regulate subsequent trading

What are exempt securities?

securities exempt from registration requirements because they are low risk or regulated by other statutes - remain exempt forever - can be resold without being registered

What are Regulation A Offerings?

securities issued by an issuer that has offered less than $50 million in securities during any 12 month period if the issuer meets these 2 specific requirements Tier 1- for offerings of up to $20 million in a 12 month period Tier 2- For offerings of up to $50 million with additional review requirements in a 12 month period

What is the Howey Test and it's 4 elements?

test that states that an investment contract is any transaction in which a person 1. invests 2 in a common enterprise 3. reasonably expecting profits 4. derived primarily or substantially from others managerial or entrepreneurial efforts

What is the key liability under the tipper/tippee theory?

the inside information must have been obtained as a result of someone's breach of a fiduciary duty to the corporation whose shares were traded

What is corporate governance?

the relationship between a corporation and its shareholders

What are small offerings - regulation D?

these contain several exemptions from registration requirements for offers that either involve a small dollar amount or are made in a limited matter

What is Section 16b?

this section includes the sale by insiders of stock acquired less than six months before the sale - when a person selling securities that they do not yet own at a higher price and is planning purchase them later at a lower price it is called a short sale - it is a violation of this section for insiders involved in short sale to sell the acquired stock less than six months after the sale SCIENTER NOT REQUIRED

What is the misappropriation theory?

this theory holds liable an individual who wrongfully obtains (misappropriates) inside information and trades on it for their personal gain - individual stole info belonging to another

What are exempt transactions?

very broad and can enable an issuer to avoid the high cost and complicated procedures associated with registration

What is the regulation of proxy statements?

whoever solicits a proxy statement must fully and accurately disclose in the proxy statement all of the facts that are pertinent to the matter on which the shareholders are to vote

Does the violation of the 1934 Act lead to both civil and criminal liability?

yes

Is scienter required for sanctions to be imposed on one who violated the 1934 act?

yes, for both criminal + civil sanctions to be imposed scienter must exist