Ch 28 sec 1-3 law
Defenses
The statement or omission was not material. The plaintiff knew about the misrepresentation at the time the stock was purchased. The defendant exercised due diligence in preparing the registration and reasonably believed at the time that the statements were true.
liabiltities
1. misrepresenting or omitting facts 2. be negligent in not discovering the fraud 3. failing to file a registration statement, claiming an exemption that does not apply, or selling securities prior to registration becoming effective
he basic elements of a securities fraud action
A material misrepresentation (or omission) in connection with the purchase and sale of securities. Scienter (a wrongful state of mind). Reliance by the plaintiff on the material misrepresentation. An economic loss. Causation, meaning that there is a causal connection between the misrepresentation and the loss.
Regulation a 505
An exemption from registration is available for an issuer's offerings that do not exceed $5 million in securities during any twelvemonth period. the issuer must file with the SEC a notice of the issue and an offering circular, which must also be provided to investors before the sale. This process is much less expensive than the procedures associated with full registration.
tippees (those who receive "tips" from insiders) and even remote tippees (tippees of tippees).
Anyone who acquires inside information as a result of a corporate insider's breach of his or her fiduciary duty can be liable under SEC Rule 10b-5. This liability extends to tippees (those who receive "tips" from insiders) and even remote tippees (tippees of tippees).
remedies for 1933 violation act
Criminal violations are prosecuted by the U.S. Department of Justice. Violators may be fined up to $10,000, imprisoned for up to five years, or both. The SEC is authorized to impose civil sanctions against those who willfully violate the 1933 act. It can request an injunction to prevent further sales of the securities involved or ask a court to grant other relief, such as ordering a violator to refund profits. Private parties who purchase securities and suffer harm as a result of false or omitted statements or other violations may bring a suit in a federal court to recover their losses and additional damages.
material facts calling for disclosure under SEC Rule 10b-5:
Fraudulent trading in the company stock by a broker-dealer. A dividend change (whether up or down). A contract for the sale of corporate assets. A new discovery, a new process, or a new product. A significant change in the firm's financial condition. Potential litigation against the company. any one of these facts, by itself, is not automatically considered material. Rather, it will be regarded as a material fact only if it is significant enough that it would likely affect an investor's decision
posteffective period
SEC approves. The issuer can now offer and sell the securities without restrictions.
Securities Exchange Act of 1934
SEC independent regulatory Interprets federal securities laws and investigates securities law violations. Issues new rules and amends existing rules. Oversees the inspection of securities firms, brokers, investment advisers, and ratings agencies. Oversees private regulatory organizations in the securities, accounting, and auditing fields. Coordinates U.S. securities regulation with federal, state, and foreign authorities
after 1929 crash
The result was the Securities Act of 1933Footnote and the Securities Exchange Act of 1934.Footnote Both acts were designed to provide investors with more information to help them make buying and selling decisions about securities and to prohibit deceptive, unfair, and manipulative practices
registration must include
The securities being offered for sale, including their relationship to the registrant's other capital securities. The corporation's properties and business (including a financial statement certified by an independent public accounting firm). The management of the corporation, including managerial compensation, stock options, pensions, and other benefits. Any interests of directors or officers in any material transactions with the corporation must be disclosed. How the corporation intends to use the proceeds of the sale. Any pending lawsuits or special risk factors. All companies, both domestic and foreign, must file their registration statements electronically so that they can be posted on the SEC's EDGAR database (mentioned previously) and investors can access the information via the Internet.
The tippee is liable only if the following requirements are met:
There is a breach of a duty not to disclose inside information. The disclosure is made in exchange for personal benefit. The tippee knows (or should know) of this breach and benefits from it.
Congress enacted the Securities Enforcement Remedies and Penny Stock Reform Act of 1990.Footnote
This act expanded the SEC's enforcement options and allowed SEC administrative law judges to hear cases involving more types of alleged securities law violations, such as fraudulent financial reporting and financial fraud.
misappropriation theory.
This theory holds liable an individual who wrongfully obtains (misappropriates) inside information and trades on it for her or his personal gain because the individual basically stole information rightfully belonging to another. The misappropriation theory has been controversial because it significantly extends the reach of SEC Rule 10b-5 to outsiders who ordinarily would not be deemed fiduciaries of the corporations in whose stock they trade.
type of co under
applies to companies that have assets in excess of $10 million and five hundred or more shareholders. These corporations are referred to as Section 12 companies because they are required to register their securities under Section 12 of the 1934 act. Section 12 companies are required to file reports with the SEC annually and quarterly, and sometimes even monthly if specified events occur (such as a merger).
Section 10(b) of the 1934 act and SEC Rule 10b-5
apply to anyone who has access to or receives information of a nonpublic nature on which trading is based—not just to corporate "insiders."
The Securities Acts Amendments of 1990
authorized the SEC to seek sanctions against those who violate foreign securities laws
Section 5 of the Securities Act of 1933
broadly provides that if a security does not qualify for an exemption, that security must be registered before it is offered to the public.
The SEC's Regulation D
contains several exemptions from registration requirements (Rules 504, 504a, 505, and 506) for offers that either involve a small dollar amount or are made in a limited manner.
The National Securities Markets Improvement Act of 1996
expanded the power of the SEC to exempt persons, securities, and transactions from the requirements of the securities laws.
The Securities Act of 1933
governs initial sales of stock by businesses. The act was designed to prohibit various forms of fraud and to stabilize the securities industry by requiring that investors receive financial and other significant information concerning the securities being offered for public sale. Basically, the purpose of this act is to require disclosure.
Section 10(b) of the 1934 act and SEC Rule 10b-5
has been extended to include certain "outsiders"—those who trade on inside information acquired indirectly. two theories for liability below
investment contract is any transaction in which a person (Howey Test)
invests in a common enterprise reasonably expecting profits derived primarily or substantially from others' managerial or entrepreneurial efforts. guides what kind of contracts can be considered securities Almost any stake in the ownership or debt of a company can be considered a security.
A well-known seasoned issuer (WKSI)
is a firm that has issued at least $1 billion in securities in the last three years or has at least $700 million of value of outstanding stock in the hands of the public. WKSIs can file registration statements the day they announce a new offering and are not required to wait for SEC review and approval. They can also use a free-writing prospectus at any time, even during the prefiling period.
Rule 504
is the exemption used by most small businesses. It provides that noninvestment company offerings up to $1 million in any twelve-month period are exempt.Noninvestment companies are firms that are not engaged primarily in the business of investing or trading in securities. (In contrast, an investment company is a firm that buys a large portfolio of securities and professionally manages it on behalf of many smaller shareholders/owners.
blue sky laws
laws within a state to regulate stock
test the waters
means to determine potential interest without actually selling any securities or requiring any commitment from those who express interest. Small-business issuers can also use an integrated registration and reporting system that requires simpler forms than the full registration system.
Issuing corporations must file a registration statement with the SEC and must provide all investors with a prospectus.
prospectus is a disclosure document that describes the security being sold, the financial operations of the issuing corporation, and the investment or risk attaching to the security. also serves as selling tool for issuing organization
Section 16(b) of the 1934 act
provides for the recapture by the corporation of all profits realized by certain insiders on any purchase and sale or sale and purchase of the corporation's stock within any six-month period. It is irrelevant whether the insider actually uses inside information—all such short-swing profits must be returned to the corporation. insiders means officers, directors, and large stockholders of Section 12 corporations (those owning 10 percent of the class of equity securities registered under Section 12 of the 1934 act)
The Securities Exchange Act of 1934
provides for the regulation and registration of securities exchanges, brokers, dealers, and national securities associations, such as the National Association of Securities Dealers (NASD). Unlike the 1933 act, which is a one-time disclosure law, the 1934 act provides for continuous periodic disclosures by publicly held corporations to enable the SEC to regulate subsequent trading.
Section 14(a) of the Securities Exchange Act of 1934
regulates the solicitation of proxies (authorities that represent someone else) Whoever solicits a proxy 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.
for criminal or civil sanction to be imposed
scienter must exist—that is, the violator must have had an intent to defraud or knowledge of his or her misconduct. Scienter can be proved if it is shown that the defendant made false statements or wrongfully failed to disclose material facts.
the Dodd-Frank Wall Street Reform and Consumer Protection Act
the Securities and Exchange Commission has implemented new regulations since Congress passed
During the prefiling period (before the registration statement is filed),
the issuer normally cannot sell or offer to sell the securities. Once the registration statement has been filed, a waiting period begins while the SEC reviews the registration statement for completeness
During the waiting period,
the securities can be offered for sale but cannot be sold by the issuing corporation. Only certain types of offers are allowed. All issuers can distribute a preliminary prospectus,Footnote which contains most of the information that will be included in the final prospectus but often does not include a price. Most offer free-writing prospectus during this period (although some inexperienced issuers will need to file a preliminary prospectus first). A free-writing prospectus is any 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 Web site.
Section 10(b) is one of the more important sections
which prohibits the commission of fraud in connection with the purchase or sale of any security.