Business Law Ch 8

security

(1) An interest or instrument that is common stock, preferred stock, a bond, a debenture, or a warrant; (2) an interest or instrument that is expressly mentioned in securities acts; or (3) an investment contract.

insiders under Section 10(b)

(1) Officers, directors, and employees at all levels of a company; (2) lawyers, accountants, consultants, and agents and representatives who are hired by the company on a temporary and nonemployee basis to provide services or work to the company; and (3) others who owe a fiduciary duty to the company.

Dodd-Frank Wall Street Reform and Consumer Protection Act

A 2010 federal statute that regulates hedge funds and derivatives and provides protection to consumers regarding financial products and services.

registration statement

A document that an issuer of securities files with the SEC that contains required information about the issuer, the securities to be issued, and other relevant information.

Insider Trading Sanctions Act

A federal statute that permits the SEC to obtain a civil penalty of up to three times the illegal benefits received from insider trading.

Securities Act of 1933

A federal statute that primarily regulates the issuance of securities by corporations, limited partnerships, and associations.

Securities Exchange Act of 1934

A federal statute that primarily regulates trading in securities.

investment contract

A flexible standard for defining a security.

Small Company Offering Registration (SCOR)

A method for small companies to sell up to $1 million of securities to the public by using a question-and-answer disclosure form called Form U-7.

tipper

A person who discloses material nonpublic information to another person.

statutory insider

A person who is an executive officer, a director, or a 10-percent shareholder of an equity security of a reporting company.

tippee

A person who receives material nonpublic information from a tipper.

accredited investor

A person, a corporation, a company, an institution, or an organization that meets the net worth, income, asset, position, and other requirements established by the SEC to qualify as an accredited investor.

Regulation A

A regulation that permits an issuer to sell securities pursuant to a simplified registration process.

misappropriation theory

A rule that imposes liability under Section 10(b) and Rule 10b-5 on an outsider who misappropriates information about a company, in violation of his or her fiduciary duty, and then trades in the securities of that company.

Section 501 of the Sarbanes-Oxley Act

A section of a federal statute that eliminates conflicts of interest by establishing rules for the separation of the investment banking and securities advice functions of securities firms.

insider trading

A situation in which an insider makes a profit by personally purchasing shares of the corporation prior to public release of favorable information or by selling shares of the corporation prior to the public disclosure of unfavorable information.

Howey test

A test which states than an arrangement is an investment contract if there is an investment of money by an investor in a common enterprise and the investor expects to make profits based on the sole or substantial efforts of the promoter or others.

prospectus

A written document that must be submitted to the SEC along with the registration statement and given to prospective purchasers of the securities.

SEC Rule 506 (private placement exemption)

An exemption from registration that permits issuers to raise capital from an unlimited number of accredited investors and no more than thirty-five nonaccredited investors without having to register the offering with the SEC.

intrastate offering exemption

An exemption from registration that permits local businesses to raise capital from local investors to be used in the local economy without the need to register with the SEC.

SEC Rule 504 (small offering exemption)

An exemption from registration that permits the sale of securities not exceeding $1 million during a twelve-month period.

nonissuer exemption

An exemption from registration which states that securities transactions not made by an issuer, an underwriter, or a dealer do not have to be registered with the SEC (e.g., normal purchases of securities by investors).

scienter

Intentional conduct. Scienter is required for there to be a violation of Section 10(b) and Rule 10b-5.

aiders and abettors

Parties who knowingly assist principal actors in the commission of securities fraud.

short-swing profits

Profits that are made by statutory insiders on trades involving equity securities of their corporation that occur within six months of each other.

exempt securities

Securities that are exempt from registration with the SEC.

state securities laws ("blue-sky" laws)

State laws that regulate the issuance and trading of securities.

EDGAR

The electronic data and record system of the Securities and Exchange Commission (SEC).

Securities and Exchange Commission (SEC)

The federal administrative agency that is empowered to administer federal securities laws. The SEC can adopt rules and regulations to interpret and implement federal securities laws.

initial public offering (IPO)

The sale of securities by an issuer to the public.