Business Law Chapter 17

security

1. An investment instrument, such as a stock certificate; evidence of an obligation to pay money, or of a right to participate in earnings or distribution of corporate, trust, or other property. 2. Something provided as collateral for a loan. 3. An investment contract.

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.

Securities Exchange Act of 1934

A federal law dealing with securities regulation that established the securities and exchange commission to oversee the securities industry

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 and Exchange Commission

A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets.

NASDAQ

A nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically.

misappropriation theory

A person who misappropriates confidential information commits insider trading by trying to personally benefit from that information through a securities transaction.

tippee

A person who receives inside information.

Section 11 of the Securities Act of 1933

A provision of the 1933 Securities Act that imposes civil liability on persons who intentionally defraud investors by making misrepresentations or omissions of material facts in the registration statement or who are negligent for not discovering the fraud.

Section 12 of the Securities Act of 1933

A provision of the Securities Act that imposes civil liability on any person who violates the provisions of Section 5 of the act.

Section 32 of the Securities Exchange Act of 1934

A provision of the Securities Exchange Act of 1934 that imposes criminal liability on any person who willfully violates the 1934 act or the rules and regulations adopted.

Section 24 of the Securities Act of 1933

A provision of the securities act that imposes criminal liability on those who willfully violate the 1933 act of the rules and regulations adopted.

Regulation A

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

Howey Test

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

Rule 10b5-1

An SEC rule that prohibits the trading in the security of an issuer on the basis of material nonpublic information obtained in a breach of duty of trust or confidence owed to the person who is the source of the information.

SEC Rule 506 (private placement exemption)

An exemption from registration that permits an issuer to raise capital from an unlimited number of accredited investors and no more than 35 non-accredited investors without having to register with the SEC.

interstate 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.

short swing profits

Directors, officers and persons owning 10% or more of stock may not make profits or avoid losses by trading within six-month period of time.

Statutory insider

Certain stockholders, executive officers, and directors who must file reports detailing their ownership and trading of the corporation's securities with the SEC.

SEC Rule 504

Covers offerings not exceeding $1 million within a 12-month period; permits issuer to offer/sell securities to an unlimited number of investors without regard to their experience and sophistication.

scienter

Knowledge by the misrepresenting party that material facts have been falsely represented or omitted with an intent to deceive.

insider trading

The purchase or sale of securities on the basis of information that has not been made available to the public and was provided for by an insider such as an officer, employee, accountant, etc.

tipper

a person who discloses material nonpublic information to another person

SEC Rule 10b-5

a rule of the SEC that makes it unlawful, in connection with the purchase or sale of any security, to make any untrue statement of a material fact or to omit a material fact if such omission causes the statement to be misleading.

accredited investor

an organization or individual investor who meets certain criteria established by the SEC and so qualifies to invest in unregistered securities.

Small Company Offering Registration

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

nonissuer exemption

Securities transactions not by an issuer, an underwriter, or a dealer are exempt from SEC registration. This covers normal purchases of securities by investors.

EDGAR

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

Section 501 of the Sarbanes-Oxley Act

This act eliminates conflicts of interest by establishing rules for the separation of the investment banking and securities advice functions of securities firms.

Section 10(b) of the Securities Exchange Act of 1934

This provision of the 1934 act prohibits the use of manipulative and deceptive devices in the purchase or sale of securities in contravention of the rules and regulations prescribed by the SEC.

aiders and abettors

Those who knowingly assist in the commission of securities fraud.

Section 5 of the Securities Act of 1933

prohibits the offer or sale of any security to the public prior to its registration with the securities exchange commission and state securities agencies.

Section 16(b) of the Securities Exchange Act of 1934

requires that any profits made by a statutory insider on transactions involving short swing profits belong to the corporation.