Business Law Final

Exemptions from Registration

- Certain Types of Securities - Transactions Exemptions - Private Offerings exemptions

SEC Functions

- Require disclosure of facts concerning offers of securities to the public - regulates the trade in securities on national regional securities exchanges and in over the counter markets - investigates securities fraud - registers and regulates actives of securities brokers, dealers and investment advisor -recommends administration sanctions, injunctions, and criminal prosecution for violations of federal securities laws

Transactions Exemptions

- casual sales - most securities can be resold without registration by sellers who aren't underwriters, issuers or dealers - resale of restricted securities acquired under rule 505 or rule 506 must comply with rule 144 or 144A - basically reselling is ok to not have a registration but if the stock was never registered in the first place, it needs to comply with 144 and 144A - intrastate sales - exemption for securities offered and sold only to residents of issuer's state. Rule 147, no dollar limit, but can't resell to nonresidents for 9 months

Certain Types of Securities (Exempt)

- securities issued or guaranteed by Federal or State Government - Securities issued by a bank or savings institution - Securities issued by charitable organizations (not for profits) - short term commercial paper (notes, bonds) with maturity date of less than 9 months

Registration Process

-1933 act restricts activities until the SEC approves the Registration Statement, which isn't effective until reviewed and approved by the SEC

Part 2 of Registration Statement Content

1.) ANYTHING that may affect the value of the securities being issued, such as pending litigation and other risk factors 2.) Significant characteristics of the offered security 3.) Issuer's properties and business activities including audited financial statements, such as a balance sheet dated not more than 90 days before filing, p&l for preceding 5 years and financial statements certified by a public accounting firm registered with the public company accounting oversight board 4.) principal purposes for which proceeds from sales of securities will be used 5.) Amount of stock and debt issuer has outstanding and names of persons who own more than 10% of the company's shares

Registration Requirements (under the 1934 Act) MUST REGISTER

1.) Companies selling and trading on a national exchange 2.) Companies with more than $10 million in assets and at least 2,000 of any class of shareholders 3.) Companies with more than $10 million in assets and at least 500 shareholders who aren't accredited in any class 4.) National stock exchanges, brokers and dealers

Who must register?

1.) Issuer: The entity whose securities being sold 2.) underwriter: Intermediary who sells an issuer's securities to the general public or dealers 3.) Dealer: one who sells or trades securities full or part time

1934 Act Reporting Requirements

2 categories of companies (reporting companies) must report 1.) any issuer that must register under the 1933 act 2.) Companies required to registrar under the 1934 Act

Special rules for Well Known Seasoned Issuers

A company which has issued over one billion in securities over three years or has $700M or more of value of outstanding stock held by the public

Investment company

A firm that buys a large portfolio of securities and professionally manages it on behalf of many smaller shareholders Private and can comply with 504, 505 and 506

Post Effective Period

After the SEC reviews and approves the registration statement, the issuer and agents may sell securities but must provide purchasers with a final prospectus before or when they purchase

Security

Any note, stock, bond, evidence of indebtedness, Investment contract

Tender Offer

Any party making a tender offer to buy 5% or more of a class of stock registered under the 1934 Act must file a report with the SEC which shows the background of purchaser, source of purchase monies and purpose in buying

Investment Contract

Any transaction in which a person invests in a common enterprise expecting to earn profits mainly from managerial or entrepreneurial efforts of others. Howey case, the test is if an investor relies on the management of others to make money. In essence, any stake in ownership of a company or a debt owed by a company is a security (bond)

Accredited Investors

Banks, Insurance Companies, Investment companies, employee benefit plans, issuer's executive officers and directors

Part 1 of Registration Statement

Called the Statutory Prospectus, written offer to sell securities. The prospectus is the document that must be given before or contemporaneous with the sale to everyone who is offered or who buys the security. Must describe the information about business operations, financial conditions, risk factors and management. Summarizes the information in Part 2

Part 2 of Registration Statement

Contains additional information and exhibits not required to be delivered to investors but which must be filed with the SEC. Information that must be included (next card)

Remedies

Criminal Violations are p

Securities Exchange Act of 1934

Deals with exchanges, sales, purchases and the like of securities after they are issued, brokers and dealers. The 1934 Act's reporting and Registration provisions only apply to certain companies but the Antifraud Provisions apply to all companies. Department of Justice may prosecute for criminal violations

Form 10k

Filed annually with 60-90 days of end of fiscal year. Must contain facts about management or other wise affecting value of company's securities

Registration Statement

Filed electronically

1933 Act's Purpose

Insures investors have sufficient information to allow them to decide whether to purchase a security. Disclosure is key. The goal is achieved by requiring most issuers to register (by filing a registration statement) new issues of securities with the SEC unless an exemption applies (exemptions from the registration requirement include private offerings to a limited number of persons or institutions, offerings of limited size, intrastate offerings and securities of state or federal governments) The SEC requires the information to be accurate but it doesn't guarantee it. The security must be registered before the sale to the public through mail, interstate commerce, and stock exchanges

8k

Must be filed within four days after major change at company, like change of officers or directors

Rule 504

Noninvestment company offerings up to $1million within 12 months, any number or kind of investor is allowed

Regulation A+

Not an exemption, but a simplified form of registration for small companies which has offered less than $4million in securities in any 12 month period. They file an offering statement which consists of a notification and an offering circular. Not all companies can use Regulation A has two offering tiers

Defenses to 1933 Act Liability

Not available for issuers, but other defendants can show they used due diligence. ie - had reasonable grounds to believe facts stated in the registration statement were accurate (complied with GAAS) Also, can defend by proving the misstatement didn't cause the plaintiff's damages. Misstatement immaterial or plaintiff knew of the falsity of the statement

Insiders

Officers, directors, more than 10% of stockholders, CPAs, attorneys must file a report with SEC disclosing their holdings, monthly updates needed. Section 10b and rule 10b-5 seek to prevent insider trading, ie a person buys or sells securities based upon info not available to the public.

Rule 505

Private noninvestment company offerings but cannot exceed $5million within 12 months. May be sold to any number of accredited investors or 35 or fewer unaccredited investors

Rule 506

Private placement exemption basically exempts transactions not involving any public offering (non public and generally not advised) no dollar limit on stock that may be sold. May sell to any number of accredited investors and 35 oor fewer unaccredited but who must be sophisticated investors. If any unaccredited buyers, all investors must be given an annual report with audited financial statements

Registration

Registration Statement filed must show the company's financial structure, nature of business, names and pay of directors and include financial statement audited by a public accounting firm

Post filing period (Waiting)

Registration is effective 20 days after filing unless SEC refuses or issues stop order. Sales generally prohibited during post filing but some sales activities allowed, oral offers to sell Tombstone Ads. Most statements are not approved within 20 days because of changes and corrections to statement requested by SEC

Private Offerings Exemption

Regulation D, Private offering exemptions - For rules 504, 505 and 506 no general advertising and purchasers may not immediately reoffer for sale securities under regulation D, which states that long term investments must be held for 2 years. These securities are restricted unless another exemption applies. SEC must be notified of securities issued under Regulation D within the 15 days of the first sale

1933 Act Liability

Section 11 - Civil Liability for Misstatements in the Registration Statement whether or not intentional Section 12 - Civil Antifraud Section Section 17 - Criminal Antifraud Section, Department of Justice prosecutes Section 11 - cause of action, anyone (CPAs signing audit) signing a registration statement is liable for all damages caused by any misstatement of a material fact. Plaintiff must prove: - plaintiff acquired stock (doesn't need to be the original buyer) -Suffered a loss (damages) Registration statement contained a material misrepresentation or omission, don't need to prove intent to deceive or negligence or reliance on misstatement. Damages are the only remedy not rescission

SEC

Securities and Exchange Commission, an independent Regulatory Agency created by the 1934 Act that administers and interprets the 1933 and 1934 Acts

Rule 144A

Securities that at the time of issue were not of the same class as securities. may only be sold to a qualified institutional buyer, seller must take reasonable steps to ensure that the buyer knows that the seller is relying on the exemption under Rule 144A.

Securities Act of 1933

The Truth in Securities Act, it regulates initial original sales of securities to the public

5% owner

anyone acquiring 5% or more beneficial ownership in any equity security registered under 1934 act must file a report containing the purchasers background, purpose in buying and sources of funds

Pre Filing Period

before filing, no sales activities within 30 days before registration, issuer may negotiate with underwriters.

10Q - Quarterly

contains interim financial information by independent CPAs

Preliminary Prospectus

contains most of the information that will be included in the final prospectus but often does not include a price, necessary to file a free writing prospectus

Prospectus

disclosure document that describes the security being sold, the financial operations of the issuing corporation, and the investment or risk attaching to the security

Rule 144

exempts restricted securities from registration on resale if all of the following conditions are met 1.) There is adequate current public information about the issuer (adequate current public information refers to the reports that certain companies are required to file under the Securities Exchange Act of 1934) 2.)The person selling the securities has owner them for at least six months if the issuer is subject to the reporting requirements of the 1934 act reporting requirements, the seller must have owned the securities for at least one year 3.) The securities are sold in certain limited amounts in unsolicited brokers' transactions 4.) The SEC is notified of the resale

Howey Test

guides the determination of what types of contracts can be considered securities 1.) invests 2.)in a common enterprise 3.) reasonably expecting profits 4.) derived primarily or substantially from others' managerial or entrepreneurial efforts

1933 Act's Purpose

prohibits deceit, misrepresentations and other fraud in the sale of securities

Registration Statement Note

regardless of whether offerings of securities are registered or not, the 1933 act makes it illegal to engage in fraud in the sale of securities

Free writing prospectus

type of written electronic or graphic offer that describes the issuer or its securities and includes a legend indicating that the investor may obtain the prospectus at the SEC's website. During the waiting period

WKSI

well known seasoned issuer - has issued at least $1B in securities in the last three years or has at least $700 million of outstanding stock in the hands of the public. Not required to wait for the SEC approval and can use a free writing prospectus at any time