Ch. 28

Sarbanes Oxley Act of 2002

-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; if knowingly make false statements they can be fined up to $1 million and 10 years in prison or both

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 - issuing corporations must file a registration statement with the SEC - must provide all investors with a prospectus

What is a security? Section 2(1) of the Securities Act of 1933 contains a broad definition of securities, which generally include the following:

1. Instruments commonly known as securities such as preferred and common stocks, treasury stocks, bonds, debentures, and stock warrants. 2. Any interest commonly known as securities, such as stock options, puts, calls, or other types of privilege on a security or on the right to purchase a security or a group of securities in a national security exchange. 3. Notes, instruments, or other evidence of indebtedness, including certificates of interest in a profit sharing agreement and certificates of deposit. 4. Any fractional undivided interest in oils, gas, or other mineral rights. 5. Investment contracts, which include interests in limited partnerships and other investment schemes.

The basic functions of the SEC

1. Interprets federal securities laws and investigates securities law violations. 2. Issues new rules and amends existing rules. 3. Oversees the inspection of securities firm, brokers, investment advisers, and rate agencies 4. Oversees private regulatory organizations in the securities, accounting, and auditing fields 5. Coordinates U.S. securities regulation with federal, state, and foreign authorities.

Which act is a one-time disclosure law>

1933 Act

Which act provides for continuous period disclosures by publicly held corporations to enable the SEC to regulate subsequent trading?

1934 Act

Who regulates insider trading?

1934 Act in Section 10(b)

Example of The Howey Test

Alpha Telcom sold, installed, and maintained payphone systems. The company guaranteed buyers of the system a 14% annual return. Alpha was operating at a new loss, however, and continually borrowed funds to pay investors the fixed rate of return it had promised. Eventually, the company filed for bankruptcy, and the SEC brought an action alleging that Alpha had violated the Securities Act of 1933. A federal court concluded that the payphone program was a security because it involved an investment contract.

Explain Regulation A Offerings

An issuer's offering of up to $5 million in securities in any 12-month period is exempt from registration - provides a simplified process for registration in this situation designed for issues of securities by small businesses of less than $25 million in annual revenues. The issuer files a notice of the issue and an offering circular with SEC and issues same to the investors before the sale.

The Securities Act of 1933

- governs initial sales of stock by businesses - designed to prohibit fraud - stabilize the securities industry by requiring that investors receive financial and other significant information concerning securities (being offered for public sale) Basically, the purpose is to require disclosure

Testing the waters

Companies are allowed to, for potential interest before preparing the offering circular. -Meaning: to determine potential interest w/o actually selling any securities or requiring any commitment for those who express interest. (Small business issuers can also use an integrated registration and reporting system that requires simpler form than the full registration system)

Who does the Securities Exchange Act of 1934 apply to?

Companies that have assets in excess of f$10 million and 500+ shareholders. These corporations ar referred to a 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 w/the SEC annually and quarterly, and sometimes even monthly if specified events occur (such as a merger).

What does the Act of 1933 provide that all securities transactions must do?

Must be registered with SEC before offering the security to the public - file a registration statement with the SEC - VERY expensive and burdensome process (paying attorneys, brokers, underwriters

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) -Statute requires continuous periodic disclosures by publicly held corporations, so SEC can regulate subsequent trading

Exempt Security

Regulation A offering

What else is the investment contract referred as?

The Howey Test

What is an Investment contract?

The Howey test is the definition of what types of contracts are securities any transaction in which a person - invests -in a common enterprise - reasonable expecting profits -derived primary or substantially from others' managerial or entrepreneurial efforts

What does the SEC administer?

The Securities Act of 1933 and the 1934 Act

Example of Regulation A

In 1996, the Spring Street Brewery company became the first company to sell securities via an online IPO (Initial public offering). Spring Street raised about $1.6 million w/o having to pay any commissions to brokers or underwriters or time-consuming filings required for a traditional IPO under federal and state laws.

What does the SEC play a key role in?

In interpreting the provisions of these act (1933 and 1934 Act, and their amendments) and in creating regulations governing the purchase and sale of securities.

When is liability present in Insider Trading?

When the insider takes advantage of such information in their personal transactions when they now that the information is unavailable to those with whom they are dealing. - Liability and penalties under the statute extend to anyone who has access to or receives info of a nonpublic nature on which trading is based.

What is a Prospectus?

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 a selling tool for the issuing corporation

Define Insider Trading

anytime a person buys or sells securities on the basis of information that is not available to the public. - This information gives the insider a trading advantage over the general public, if acted on.

What did the Securities Exchange Act of 1934 create?

Securities and Exchange Commission (SEC) as an independent regulatory agency.

Why are companies referred to as the Section 12 companies?

They are required to register their securities under Section 12 of the 1934 act. - File periodically

Examples of securities

stocks, bonds issued by corporations, interests in whiskey, cosmetics, worms, beavers, boats, vacuum cleaners, muskrats, cemetery plots, almost any stake in ownership or debt of a company, investment contracts in condominiums, franchises, limited partnerships in real estate, oil/gas, mineral rights