BLAW Ch. 42

EDGAR database

-all companies, both domestic and foreign, must file their registration statements electronically so that they can be posted on the SEC's online _____ _____ -includes material on initial public offerings (POs), proxy statements (concerning voting authority), annual reports, registration statements, other docs. that have been filed with the SEC

problems with stock options

-executives in some companies have been tempted to "cook" the company's books in order to keep share prices higher so that they can sell their stock for a profit -executives in other corporations have experienced no losses when share prices dropped b/c their options were "repriced" so that they did not suffer from the price decline

exempt securities

-government-issued securities -bank and financial securities -short-term notes and drafts -securities of nonprofit, educational, and charitable organizations -securities issued by common carriers -insurance policies, endowments, and annuity contracts -securities issued in a corporate reorganization in which one security is exchanged for another or in a bankruptcy proceeding -securities issued in stock dividends and stock splits

financial stake

B/c a stock's market price generally increases as the corporation prospers, the options give the officers a ____ ____ in the corporation's well-being and supposedly encourage them to work hard for the benefit of the shareholders

concurrently, both, are not

Choose the correct blank: -since the adoption of the 1933 and 1934 federal securities acts, the state and federal governments have regulated securities (concurrently/individually) -issuers must comply with (both/either or) federal and state securities laws -exemptions from federal law (are/are not) exemptions from state laws

final prospectus

During the posteffective period, if the company issued a preliminary or free-writing prospectus to investors, it must provide those investors with a ___ ____ either before or at the time they purchase the seucrities

the issuing corporation

During the waiting period, the securities can be offered for sale but cannot be sold by who? (only certain types of offers are allowed at this time)

scienter

For either criminal or civil sanctions to be imposed, this must exist; the violator must have had an intent to defraud or knowledge of his or her misconduct

SEC, prospectus

In compliance with Section 5 of the Securities Act, to register a security a issuing corporation must: -file a registration statement with the _____ -provide all investors with a _____

the posteffective period

Once the SEC has reviewed and approved the registration statement and the waiting period is over, the registration is effective and what period begins?

Section 16(b)

Scienter is not required for what violations?

F: six months

T or F: It is a violation of Section 16(b) for insiders involved in a short sale to sell the acquired stock less than a year after the sale

F: greater flexibility

T or F: WKSIs have less flexibility than other issuers

F: vary among states

T or F: methods of registration, required disclosure, and exemptions from registration are the same across states

T

T or F: most state securities laws regulate securities brokers and dealers

F: outside directors

T or F: to improve directors' monitoring of officers' activities, all members of a publicly traded corporation's audit committee, which oversees the corporation's accounting and financial reporting processes must be inside directors

T

T or F; In addition to reviewing the internal controls, the audit committee also monitors the actions of the outside auditor according to SOX

issuers or underwriters

The Securities Act provides exemptions for resales by most persons other than who? (the investor who sells shares of stock need not file a registration statement with the SEC)

10 million, 500

The Securities Exchange Act of 1934 applies to companies that have: -assets in excess of $____ -____ or more shareholders

unaccredited investor

The qualify for the exemption under Rule 506, the issuer must believe that each _____ ____ has sufficient knowledge or experience in financial matters to be capable of evaluating the investment's merits and risks

1. material 2. misrepresentation 3. due diligence

There are three basic defenses to charges of violations under the 1933 act: 1. the statement or omission was not ____ 2. the plaintiff knew about the ____ at the time the stock was purchased 3. the defendant exercised ____ ____ in preparing or reviewing the registration and reasonably believed at the time that the statements were true (this defense is available to underwriter or subsequent seller but not the issuer)

securities

This generally includes the following: -instruments and interests such as preferred and common stocks, bonds, debentures, and stock warrants -interests such as stock options, puts, and calls, that involve the right to purchase this on a national security exchange -notes, instruments, or other evidence of indebtedness, including certificates of interest in a profit-sharing agreement and certificates of deposit -any fractional undivided interest in oil, gas, or other mineral rights -investment contracts, which include interests in limited partnerships and other investment schemes

SEC

WKSIs are to required to what for who's review and approval when they file registration statements?

free-writing prospectus

WKSIs can use what at any time, even during the prefiling period?

state corporation statutes

What sets up the legal framework for corporate governance?

corporate governance

___ ___ involves, at a minimum: 1. the audited reporting of financial conditions at the corporation so that managers can be evaluated 2. legal protections for shareholders so that violator of the law who attempt to take advantage of shareholders can be punished for misbehavior and victims can recover damages for any associated losses

Article 8

____ ___ of the Uniform Commercial Code, which as been adopted by all states, also imposes various requirements relating to the purchase and sale of securities

stock option

a right to buy a given number of shares of stock at a set price, usually within a specified time period --> when the market price rises above that level, the officers can sell their shares for a profit

corporate governance

a set of policies specifying the rights and responsibilities of the various participants in a corporation and selling out the rules and procedures for making corporate decisions; essential in large corporations b/c corporate ownership (by shareholders) is separated from corporate control (by officers and mangers) and officers/managers may attempt to advance their own interests at the expense of the shareholders

investment newsletters

an investor reading a fraudulent ____ ____ may believe the info is unbiased when in fact the fraudsters will directly pull profit by convincing investors to buy or sell particular stocks

state securities laws

apply mainly to intrastate transactions (within one state), typically have disclosure requirements and antifraud provisions, many of which are patterned after section 10(b) of the securities exchange act of 1934 and sec rule 10b-5, and provide for the registration of securities offered or issued for sale within the state

financial expert

at least one ___ ___ must serve on the audit committee, which must hold executive meetings w/o company officers present according to SOX

Sarbanes-Oxley Act of 2002 (SOX)

attempts to increase corporate accountability by imposing strict disclosure requirements and harsh penalties for violations of securities laws; requires chief corporate executives to take personal responsibility for the accuracy of financial statements and reports that are filed with the SEC; established private civil actions and expanded the SEC's remedies in administrative and civil actions

internal controls

carried out largely by company's internal auditing staff; measures taken to ensure that reported results are accurate

low-risk investments or regulated by other statues

certain types of securities are exempt from the registration requirements of the Securities Act b/c they are either what two things?

Section 12 companies

companies that have assets > 10 million and has 500> shareholders; corporations that are required to register their securities in the 1934 act; must file reports with the SEC annually and quarterly, and sometimes even monthly if specified events occur

Small Offerings - Regulation D

contains several exemptions from registration requirements (Rules 504 and 506) for offers that either involve a small dollar amount or are made in a limited manner

$10,000 5

criminal violations of the 1933 act are prosecuted by the US Dept. of Justice and violators may be fined up to $_____, imprisoned for up to ____ years, or both

compensation committee

determines the compensation of the company's officers; must assess the officers' performance and attempt to design a compensation system that will align the officers' interests with those of the shareholders

preliminary prospectus

during the waiting period, all issuers can distribute this; contains most of the info that will be included in the final prospectus but often does not include a price

free-writing prospectus

during the waiting period, most issuers can distribute this; a written, electronic, or graphic communication associated w/ the offer to sell a security and used during the waiting period to supplement other information about the securit y

noninvestment companies

firms that are not engaged primarily in the business investing or trading in securities

investment scams

internet-related forms of securities fraud include many types of what? (ex. spam, online newsletters, chat rooms, blogs, tweets, etc.; for small cost, fraudsters can even build sophisticated web pages)

SOX

introduced direct federal corporate governance for publicly traded companies; requirements deal with independent monitoring of company officers by both the board of directors and auditors

misrepresenting, omitting

it is a _violation of the 1933 securities act to intentionally defraud investors by _____ or ____ facts in a registration statement or prospectus; liability may be imposed on those who are negligent with respect to the preparation of these publications

The Howey Test

known as the definition of "investment contract"; continues to guide the determination of what types of contracts can be considered securities

exempt securities

maintain this status forever and can be resold without being registered

private parties

may also sue violators of Section 10(b) and rule 10b-5; can obtain rescission of a contract to buy securities or damages to the extent of the violator's illegal profits

registration statement

must be written in plain english and contain the following: -securities being offered for sale -corp.'s properties and business (including fin. stmt. from outside accn. firm) -management of the corp. (mgmt. compensation, stock options, pensions, interests of directors or officers in any material transactions with the corp.) -how corp. intends to use proceeds of the sale -any pending lawsuits or special risk factors

Public Company Accounting Oversight Board (PCAOB)

new entity created by the Sarbanes-Oxley Act of 2002 to regulate oversee public accounting firms

prefiling period

occurs before registration is filed and during this, the issuer normally cannot sell or offer to sell the securities

audit committee

oversees the corporation's accounting and financial reporting processes, including both internal and outside auditors and "internal controls"

securities fraud

private parties can sue for this under Rule 10b-5; basic elements of this action include: -a material misrepresentation in connection w/ purchase and sale of securities -scienter -reliance by the plaintiff on the material misrepresentation -an economic loss -causation

1934 Securities Exchange Act

provides for regulation and registration of securities exchanges, brokers, dealers, and national securities associations

Rule 504

provides that nonivestment companies are firms that are not engaged primarily in the business investing or trading in securities

insider trading

purchase of sale of securities on the basis of information that has not been made available to the public; inside information can affect future market value of the corporate stock and is often possessed by corporate directors, officers, and majority shareholders (if they act on this information, their positions give them a trading advantage over the general public and other shareholders)

registration process

registration statement does not become effective until it has been reviewed and approved by the SEC

Section 14(a) (of the Securities Exchange Act)

regulates the solicitation of proxies from shareholders of Section 12 companies; SEC regulates the content of proxy statements; 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 (remedies for violations range from injunctions to prevent a vote from being taken to monetary damages)

directors

responsible for ensuring that the corporation's officers are operating wisely and in the exclusive interest of the shareholders; receive reports from the officers and give them managerial direction

material fact

significant enough that it would likely affect an investor's decisions as the whether to purchase or sell the company's securities

stock options

some corporations have sought to align the financial interests of their officers with those of the company's shareholders by providing the officers with what?

Uniform Securities Act

the National Conference of Commissioners on Uniform State laws substantially revised the _____ ____ ___ to coordinate state and federal securities regulation and enforcement efforts; nearly half of the states adopted the most recent version of this

exemptions for smaller companies

the SOX act initially required all public companies to have an independent auditor file a report with the SEC on management's assessment of internal controls; in an effort to reduce compliance costs, Congress later enacted an ______ ____ _____ ______ in which public companies with a market capitalization, or public float, of less than $75 million no longer need to have an auditor report on management's assessment of internal controls

disclosure controls and procedures

the system of internal controls established by sections 302 and 404 of SOX must include ____ ___ ___ __ to: -ensure that company financial reports are accurate and timely document financial results prior to reporting

Sections 302 and 404

these sections of SOX require high-level managers (the most senior officers) to establish and maintain an effective system of internal controls; seniors managers must reassess the system's effectiveness annually

section 906

this section of the SOX requires that chief executive officers and chief financial officers certify the accuracy of the info in the corporation financial statements; statements must "fairly represent in all material respects, the financial conditions and results of operations of the issuer"; this requirement makes the officers directly responsible for the accuracy of their financial reporting and precludes and "ignorance defense" if shortcomings are later discovered

large stockholders

those owning 10% of equity securities registered under Section 12 of the 1934 act

outside directors

those with no formal employment affiliation with the company

charter

to improve directors' monitoring of officers' activities, the audit committee must have a written ___ that sets out its duties and provides for performance appraisal

duplicate

today, most of the ______ regulations have been eliminated; the SEC has exclusive power to regulate most national securities activities

corporate

under ___ law, a corporation must have a board of directors

Delaware

under the corporate law of ____, where most major. companies incorporate, all corporations must have certain structures of corporate governance in place

corporation commissioner

unless an exemption from registration is applicable, issuers must register or qualify their stock with the appropriate state official, often called a what

audit committee and compensation committee

what are the two important committees of the board of directors?

board of directors

what is the most important structure for corporate governance under state corporation statutes

outside directors

with stock options generally failing to work as planned, today we see more boards with outside directors b/c theory is they will more closely monitor the actions of corporate officers

False: they do not qualify

T or F: Selling securities before the effective date of the registration statement or under an exemption for which the securities do qualify results in liability

True

T or. F: Most securities can be resold without registration

civil sanctions

What is the SEC authorized to impose against those who willfully violate the 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)

the day of

When can WKSIs file registration statements when a new offering is announced?

accredited investor

sophisticated investors, such as banks, insurance companies, investment companies, the issuer's executive officers and directors, and persons whose income or net worth exceeds certain limits

T

T or F: To discourage insiders from using nonpublic info to their personal benefit in the stock market, the SEC requires them to file reports concerning their ownership and trading of their corporation's securities

F: 1934 act provides continuous disclosures (1933 = one-time disclosure)

T or F: Unlike the 1934 act, which is a one-time disclosure law, the 1933 act provides for continuous periodic disclosures by publicly held corporations to enable the SEC to regulate subsequent trading

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 recover their losses and additional damages

Section 5

____ ____ of the Securities Act broadly provides that if a security does not qualify for an exemption, that security must be registered before it is offered to the public

investment company

a company that acts on the behalf of many smaller shareholders/owners by buying a large portfolio of securities and professionally managing that portfolio

tippeer tippee theory

a person receiving inside info is liable only if the following requirements are met: -there is a breach of duty not to disclose inside info -the disclosure is made in exchange for personal benefit -the person knows (or should know) of this breach and benefits from it

antifraud provisions

a problem that the SEC faces is how to enforce the ____ ____ of the securities law in the online environment

SEC Rule 10b-5

a rule of the SEC that prohibits the commission of fraud in connection with the purchase or sale of any security; applies to almost all cases concerning the trading of securities, whether on organized exchanges, in over-the counter markets, or in private transactions; securities need not be registered under 1933 act for the 1934 act to apply

investment contract

a transaction in which a person invests in a common enterprise reasonably expecting profits that are derived primarily from the efforts of others

mutual fund

a well-known, specific type of investment company that continually buys or sells to investors shares ownership in a portfolio

prospectus

a written document required by securities laws when a security is being sold; describes the security, financial operations of the issuing corporation, and the risk attaching to the security

The PSLRA

affects the level of detail required in securities fraud complaints; plaintiffs must specify each misleading statement and how it led them to a mistaken belief

Securities Act of 1933 & Securities Exchange Act of 1934

after the stock market crash of October 19, 1929, and the ensuing economic depression, Congress enacted what two acts to regulate securities markets; both acts were designed to provide investors w/ more information to help them make buying and selling decisions about securities and prohibit deceptive, unfair, and manipulative practices

security

almost any stake in ownership or debt of a company can be considered a ______; can take many forms including interests in whiskey, cosmetics, worms, boats, vacuum cleaners, and cemetery lots or investment contracts in condominiums, franchises, and limited partnerships in real estate

regulation A offerings

an exemption from registration is available for an issuer's security offerings that do not exceed a specified amount during any twelve-month 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

tippee

anyone who acquires inside information as a result of a corporate insider's breath of his or her fiduciary duty can be liable under SEC rule 10b-5 and this liability extends to ____, or a person who receives inside information

1934 Act

authorizes the SEC to engage in market surveillance to deter undesirable market practices such as: fraud market manipulation, and misrepresentation

posteffective period

during this period, the issuer can offer and sell the securities without restrictions

Insider Trading and Securities Fraud Enforcement Act of 1988

enlarged the class of persons who may be subject to civil liability for insider trading; gave the SEC authority to offer monetary rewards to informants

Intrastate Offerings-Rule 147

exempt offerings involving purely local offerings; exemption applies to most offerings that are restricted to residents of the state in which the issuing company is organized and doing business; for 9 months after the last sale: virtually no resales may be made to nonresidents and precautions must be taken against this possibility

Rule 506

exemption often referred to as the private placement exemption b/c it exempts "transactions not involving any public offering"; no limits on the amounts offered; can be an unlimited number of accredited investors and up to 35 unaccredited investors

Rule 506

exempts private, noninvestment company offerings that are not generally solicited or advertised

well-known seasoned issuer (WKSI)

firm that has either at least $1 billion is securities in the last three years or outstanding stock valued at $700 million or more in the hands in the public

reasonable doubt

for a defendant to be convicted in a criminal prosecution under the securities laws, there can be no ____ ___ that the defendant knew he or she was acting wrongfully (i.e. jury not allowed to speculate that def. may have acted willfully)

triple

for civil sanctions to be imposed, the violation must occur through the use of a national securities exchange or a broker/dealer and a court can assess a penalty amount to as much as ____ the profits gained or the loss avoided by the guilty party

corporation

for violations of section 16(b), what can bring action to recover the short-swing profits

Section 10(b) and Rule 10b-5

for violations of what section and rule may an individual be fined up to $5 million, imprisoned for 20 years, or both and may a partnership/corporation be fined up tp $25 million

ponzi schemes

fraudulent investment operations that pay returns to investors from new capital paid to fraudsters rather than from a legitimate investment; sometimes target US residents and convince them to invest in offshore companies or banks

securities

generally, stocks, bonds, or other items that represent an ownership interest in a corporation or a promise of repayment of debt by a corporation

Securities Act of 1933

governs initial sales of stock by businesses; designed to prohibit various forms of fraud and stabilize the securities industry by requiring that investors receive financial and other significant information concerning the securities being offered for public sale; provides that all securities transactions must be registered with the SEC unless they are specifically exempt from the registration requirements

misappropriation theory

holds liable an individual who wrongfully obtains (misappropriates) inside information and trades on it for her or his personal gain

scienter

in a complaint alleging a violation, the plaintiff must state facts giving rise to an inference of _____

insiders

in the context of section 16(b), what means officers, directors, and larger stockholders of Section 12 companies

prevent insider trading

one of the major goals of Section 10(b) and SEC Rule 10b-5

waiting period

one registration statement has been filed this begins while the SEC review the registration statement for completeness

short-swing profits

profits earned by a purchase, or sale and purchase, of the same security within a six-month period; courts have fashioned complex rules for determining profits

Section 10(b) of the Securities Exchange Act

prohibits the use of any manipulative or deceptive mechanism in violation of SEC rules and regulations

Private Securities Litigation Reform Act

provides a 'safe harbor' for publicly held companies that make forward-looking statements; those who make such statements are protected against liability for securities fraud if they include 'meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements'

1934 act

provides for the SEC's regulation of proxy solicitations for voting

insider reporting and trading-Section 16(b) (of 1934 act)

provides for the recapture by the corporation of all short-swing profits realized by an insider, regardless of whether the insider actually uses inside information

material facts

some examples of ___ ___ calling for disclosure under SEC Rule 10b-5 include: -fraudulent trading in the company stock by a broker-dealer -a dividend change -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

1933 act

the ____ ____ restricts the types of activities that an issuer can engage in at each stage of the registration

financial forecasts

the disclosure requirements of SEC Rule 10b-5 had the unintended effect of deterring the disclosure of forward-looking info, such as what?

Securities and Exchange Commission (SEC)

the main independent regulatory agency that administers the 1933 and 1934 securities acts; plays a key role in interpreting the provisions of these acts (and their amendments) and creating regulations governing the purchase and sale of securities

scienter

this can be proved by showing that the defendant: -made false statements -wrongfully failed to disclose material facts -was conspicuously reckless as to the truth or falsity of his or her statements

outsiders

those who trade on inside information acquired indirectly

blue sky laws

today every state has its own corporate securities laws, or ___ ___ ___, that regulate the offer and sale of securities within its borders

liability

under section 10(b) of the 1934 act and SEC rule 10b-5, what has been extended to include certain 'outsiders'

25

under section 807 of the Sarbanes-Oxley Act, for a willful violation of the 1934 act the violator can be imprisoned up to how many years in addition to being subject to a fine

civil sanctions, strict

violations of section 16(b) are subject to ____ ___ and liability is _____ (neither scienter nor negligence is required)

criminal and civil liability

violations of the securities exchange act and SEC rule 10-b, including insider trading, may lead to what?

tippertippee theory and misappropriation theory

what are the two theories that have been developed under which outsiders may be held liable for insider trading?

short sale

when a person is selling securities that he or she does not yet own at a higher price and is planning to purchase them later at a lower price

SEC

who can bring a civil action against anyone who purchases or sells a security while in possession of material nonpublic info in violation of the 1934. act