Business Law 2- Chapter 41

Insider Trading

- Trading on a security by an insider while in possession of material nonpublic info - Both criminal penalties and private lawsuits available for violation

Intrastate Securities offerings

-Exempt from registering securities -All stock must be sold in the state of incorporation -80% of assets and proceeds from sale of issue must be used in the home state -Home office must be in state of incorporation -No resales outside the home state allowed for 9 months after initial issue.

SEC Regulation D - Rule 505

-Exempt from registering securities -An issuer may sell up to $5mil/12mo to accredited investors and not greater than 35 unaccredited investors

SEC Regulation D - Rule 506

-Exempt from registering the securities -An issuer may sell an unlimited amt. of securities to accredited investors and not greater than 35 unaccredited, sophisticated investors

Blue Sky Laws

-Merit Approach -Missouri Examples -->Registration refused or revoked if it is illegal, info is incomplete, or if any aspect is unfair -->Anti-fraud remedies -->Securities and Broker Registration

SEC Regulation D - Rule 504

-offerings exempt from registration -Non-investment company offerings up to $1 mil/12mo.

Securities Exchange Commission

1. 5 member commission -->no more than 3 from same political party 2. Regulating agency under both '33 and '34 Acts 3. Power to investigate, prosecute, and halt trading

Requirements of a company for reporting under 1934 Act

1. 500+ SH's and > $10 mil in assets 2. Stock traded in national exchange or 3. Any securities covered under 1933 Act

Remedies under the 1934 Act

1. Actual damages, attorneys' fees in suits by investors 2. Civil and criminal penalties to corporate officers --> increased by Sarbox to fines up to $5 mil

Three characteristics of an investment contract

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

Securities Exchange Act of 1934

1. Create the SEC 2. Regulates Secondary Trading 3. Added Reporting Requirements

Four defenses to liability for mistatements in registration under 1933 Act

1. Due Dilligence 2. Reliance on other experts 3. Lack of causation-> stock went down for other reason than mistatement 4. Plaintiffs knew of falsity of statement

Insider Trading Sanctions Act of 1988

1. Forbids purchase/sale of securities by insider while in possession of material nonpublic information 2. Increases the types of people that can be penalized --> those that provide info are now liable

Three types of Securities not regulated

1. Gov't securities 2. Securities of nonprofit oranizations 3. Securities of industries otherswise regulated --> Insurance companies & Banks/Savings/Loans

Insiders

1. Greater than 10% of SH's 2. Officers and directors of issuers 3. Temporary insiders(law firm handling merger, etc.) 4. Tipees: knowledge of misappropriation

Requirements of the 1933 Act

1. Illegal to sell a covered security for the first time without registration and the delivery of a prospectus prior to sale 2. Registration Documents: Prospectus & Tech. Info.

Under 1934 Act plaintiff must prove:

1. Negligence of professionals 2. Loss was caused by the mistatement 3. Plaintiff read and relied on the statement

Differences

1. No reliance necessary under 1933 Act 2. Burden of proof is on defendent in '33 and plaintiff in '34

Fraud remedies from mistatement in registration under 1933 Act

1. Recission or money damages, attorneys fees 2. Criminal penalties: 5 years/ $10,000 fine

Four areas 1934 Act regulates secondary trading:

1. Regisration and reporting 2. Insider Trading 3. Proxy Regulation 4. Tender offers

Registration and Reporting under '34 Act

1. Registration of securities brokers and dealers 2. Quarterly reports of financial info. 3. Strict internal accounting requirements

Liability for Mistatement in Registration under 1933 Act

1. Strict liability of issuer for loss of value if misstatement in registration 2. Liability of signatories, directors, accountants, and underwriters unless they can prove a defense

Pre-filing under 1933 Act

May obtain an underwriter

Two Approaches to Securities Regulation

Merit and Disclosure

Private Placements(securities)

Non-advertised offerings to qualified groups, particularly accredited investors

Why are exemptions from the 1933 Act important

Registration was very expensive -$1 mil under '33 Act and $250k under '34 Act

Post-effective under 1933 Act

Sales allowed if the prospectus delivered first

Waiting Period under 1933 Act

Tombstone ads, red herring prospectus, oral offers to buy or sell allowed