Chapter 18

Insider Trading

*Look at case SEC vs. Ginsburg* Pg. 505 -the buying and selling of stock by persons who have access to information affecting the value of the stock that has not yet been revealed to the public -Rule 10b-5-1, the SEC defines insider training to include training "on the basis of material, non public information, which means, "the person making the purchase or sale was aware of the material, nonpublic information when the person made the purchase or sale -SEC can only prosecute if insiders of they trade in the stock before the public has a chance to act on the information or they pass the information on to others so they can act

Securities Exempt from Regulation

-Debts issued by or guaranteed by a federal, state, or local government -Securities issued by banks, religious, and charitable organizations, insurances policies, and annuity contracts -Exempted security is not subject to the registration requirements of the federal securities statutes -May be subject to anti-fraud provisions

Exemptions from Registration

-Goverment bonds -Only initial sale of securities *Private Placement* -1933 Act provides that registration isn't necessarily for new securities not offered to the public -Sometimes, more money is raised through private placements than through public offerings -Primary users of exemption are those placing large blocks of securities with institutional investors, most often pension funds or insurance companies *Rule 144A* -Private placements are most common for large security issues, usually bonds, sold to *Qualified Institutional Buyers* (QIBs) -Exempts U.S. and foreign security issuers from registration requirements for the sale of bonds and stocks to institutions with a portfolio of at least $100 million in securities -Securities issued to large institutions may be traded among similar institutions without registration or disclosure requirements

Supreme Court's Howey Test

-If investment instrument is a security, it must have comply with the legal requirements imposed on securities issuers -The Supreme Court established a test to determine when an investment is a security for the purposes of federal regulation The *Howey Test* developed by the court is still the critical test. An investment is classified as a security for the purpose of federal regulation if it contains four basic elements: 1) The investment of money (Investor turns over money to someone else for an investment) 2) In a common enterprise (Investment is not the property of an investor, such as a car would be) 3) With an expectation of profits 4) Generated by the efforts of persons other than the investors (Investors do not have direct control over the work that makes the investment a success or a failure; That is, a board of directors controls the future of an organization)

Beginnings of Federal Regulation

-In response to the Great Depression, Congress quickly enacted statutes to regulate security markets. -The securities Act of 1933 regulates the public offerings of securities when they are first sold. Requires that investors be given material information about new securities, and it prevents misrepresentation in the sale of securities. -Securities and Exchange Act of 1934 regulates trading in existing securities and imposes disclosure requirements on corporations that have issued publicly held securities -It and later statutes also regulate securities markets and professionals

Proxies

-Permission given by s shareholder to another party to vote his shares in the manner he instructs -Not practical for stock holders to attend corporate meetings -Provide shareholders with proxy statements containing information about major proposed changes in the business -Solicited in fights for control

Well-Known Seasoned Issuers (WKSI)

-Securities issuers that have offered at least $1 billion in debt securities previously or have public-equity market capitalization of $700 million -Includes most well-known securities firms -File statements on the day they announce a new offering; rather than submitting it beforehand to the SEC -Don't have to wait for SEC staff review -Doesn't make securities exempt, but simplifies registration process -May use a free-writing prospectus -Allows communication with potential buyers at any time -Securities said to be under a *shelf registration* --Once registered, they may be sold at anytime over the next three years

Regulations of Securities Trading

-The 1934 Act imposes disclosure requirements on securities that are publicly traded -Security must be registered under the 1934 Act if it is listed on a securities and exchange document or if it traded *Over the Counter* and the company has $10 million or more in assets and 500 or more in stockholders Any company that issued traded securities is a *public held company* -A company that has fewer then 500 stockholders and does not allow it's securities to openly traded is called *Private Company* -Financial info not available to public -Must file 10-K annual reports (an extensive audited financial statement) -Must file quarterly 10-Q reports with un-audited financial information and 8-K reports whenever significant financial developments occur *The purpose of these reports is to ensure disclosure of financial information to investors* -Must be all posted on company websites or social media