1. Chapter 38 Investor Protection and Online Securities Transactions

2. Securities laws are designed to help prevent a similar crash today.
Federal law did not regulate the securities markets until after the stock market crash of 1929.
Securities laws are designed to help prevent a similar crash today.
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3. The Securities and Exchange Commission (SEC)
Federal administrative agency that is empowered to administer federal securities laws.
The SEC can adopt rules and regulations to interpret and implement federal securities laws.
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4. Definition of a Security
A security must exist before securities laws apply.
Securities are defined as:
An interest or instrument that is common stock, preferred stock, a bond, a debenture, or a warrant
An interest or instrument that is expressly mentioned in securities acts
An investment contract
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5. Landmark Law: The Securities Act of 1933
Primarily regulates the issuance of securities by a corporation, a general or limited partnership, an unincorporated association, or an individual.
Section 5 of the Act requires securities offered to the public through the use of the mails or any facility of interstate commerce to be registered with the SEC.
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6. Registration Statement
A covered issuer of securities must file a written registration statement with the SEC.
It contains required information about the issuer and the securities to be issued.
The SEC does not pass upon the merits of the registered securities.
It decides only whether the issuer has met the disclosure requirements.
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7. Prospectus
A written disclosure document that must be submitted to the SEC along with the registration statement.
It is provided to prospective investors to enable them to evaluate the financial risk of the investment.
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8. Limitations on Activities During the Registration Process
The Prefiling Period
The Waiting Period
The Posteffective Period
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9. Regulation A Offerings
A regulation that permits the issuer to sell securities pursuant to a simplified registration process.
Such offerings may have an unlimited number of purchasers.
They do not have to be sophisticated investors.
There are no resale restrictions on the securities.
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10. Securities Exempt From Registration With the SEC (1 of 2)
1. Securities issued by any government in the U.S.
2. Short-term notes and drafts that have a maturity date that does not exceed nine months
3. Securities issued by nonprofit issuers
4. Securities of financial institutions that are regulated by the appropriate banking authorities
5. Securities issued by common carriers that are regulated by the Interstate Commerce Commission
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11. Securities Exempt From Registration With the SEC (2 of 2)
6.Insurance and annuity contracts issued by insurance companies
7. Stock dividends and stock splits
8. Securities issued in a corporate reorganization where one security is exchanged for another security.
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12. Transactions Exempt from Registration
Certain transactions are exempt from registration.
Exempt transactions are subject to the antifraud provisions of the federal securities laws.
The issuer must provide investors with adequate information.
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13. Transactions Exempt from Registration (continued)
Nonissuer Exemption
Intrastate Offering Exemption
Small Offering Exemption
Private Placement Exemption
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14. Resale Restrictions
Certain resale restrictions are placed on securities issued pursuant to exemptions from registration.
Rule 147
Rule 144
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15. Rule 144A (1990)
Rule adopted by the SEC to increase the liquidity of the registered securities.
The rule permits “qualified institutional investors” to buy unregistered securities without being subject to the holding periods of Rule 144.
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16. Integration of Exempt Offerings
Separate offerings that qualify for individual exemptions from registration will be integrated if they are really part of one large offering.
This larger offering must then be examined to see if it qualifies for an exemption from registration.
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17. Integration of Exempt Offerings (continued)
If offerings are integrated and the combined offering does not qualify for an exemption, the issuer has illegally sold unregistered securities.
This subjects the issuer to certain civil fines and criminal penalties.
Purchasers may rescind their purchases and recover the price they paid.
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18. Liability Provisions of the Securities Act of 1933
Criminal Liability – Section 24 imposes criminal liability on any person who willfully violates the act or the rules or regulations adopted thereunder.
SEC Actions –
Consent order
Injunction
Request ancillary relief from the court
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19. Liability Provisions of the Securities Act of 1933 (continued)
Private Actions – Private parties who have been injured by violations of the act have the following recourse against the violator:
Section 12 – civil liability
Section 11 – civil liability
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20. Landmark Law: The Securities Exchange Act of 1934
Federal statute that primarily regulates the trading in securities.
It provides for the regulation of
Securities exchanges
Brokers
Dealers
Contains provisions that assess civil and criminal liability on violators of the act.
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21. Section 10(b) A provision of the Securities Exchange Act of 1934.
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.
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22. Rule 10b-5
A rule adopted by the SEC to clarify the reach of Section 10(b) against deceptive and fraudulent activities in the purchase and sale of securities.
All transfers of securities are subject to this rule.
i.e., stock exchange, over-the-counter, private sale, merger
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23. Insider Trading
One of the most important purposes of Section 10(b) and Rule 10b-5 is to prevent insider trading.
When an insider makes a profit by personally purchasing shares of the corporation prior to public release of favorable information, or
By selling shares of the corporation prior to the disclosure of unfavorable information
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24. Insiders are defined under Section 10(b) and Rule 10b-5 as:
Officers, directors, and employees at all levels of the company
Lawyers, accountants, consultants, and other agents and representatives who are hired by the company on a temporary and non-employee status to provide services or work to the company
Others who owe a fiduciary duty to the company
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25. Tipper – Tippee Liability
A person who discloses non-public information to another person.
Liable for the profits made by the tippee.
Tippee
The person who receives material non-public information from a tipper.
Liable for acting on material information that he or she knew (or should have known) was not public.
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26. Liability Provisions of the Securities Exchange Act of 1934
Criminal Liability – Section 32 imposes criminal liability on any person who willfully violates the act or regulations adopted thereunder.
SEC Actions –
Consent order
Injunction
Seek court orders
Insider trading sanctions
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27. Liability Provisions of the Securities Exchange Act of 1934 (continued)
Private Actions – The courts have implied private right of action under Section 10(b) and Rule 10b-5.
Generally, a plaintiff may seek rescission of the securities contract or recover damages from a defendant who has engaged in manipulation and deceptive practices that have caused the plaintiff injury.
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28. Short-Swing Profits: Statutory Insiders
Section 16(a) of the 1934 act – defines any person who is an executive officer, a director, or a 10 percent shareholder of an equity security of a reporting company as a statutory insider for Section 16 purposes.
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29. Short-Swing Profits: Section 16(b)
Short-Swing Profits – Profits made by statutory insiders on trades involving equity securities that occur within six months of each other.
Section 16(b) – A provision of the 1934 act that requires that any profits made by a statutory insider on transactions involving short-swing profits belong to the corporation.
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30. Other Federal Securities Laws
Racketeer Influenced and Corrupt Practices Act (RICO)
Federal statute that provides for both criminal and civil penalties for engaging in a pattern or practice of racketeering activities.
Private Securities Litigation Reform Act of 1995
Federal statute that provides a safe harbor from liability for companies that make forward-looking statements that are accompanied by meaningful cautionary statements of risk factors.
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31. State Securities Laws
Most states have enacted securities laws that regulate the issuance and trading of securities.
These acts are often patterned after, and are designed to coordinate with, federal securities laws.
The Uniform Securities Act (a model state statute) has been adopted by many states.
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32. Commodities Regulation
Section 4b of the Commodity Exchange Act – prohibits fraudulent conduct in connection with any order or contract of sale of any commodity for future delivery.
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