1. Essentials of the legal environment today, 5e
roger leroy miller
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2. Investor protection and corporate governance
Chapter 20
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3. Learning Objectives What is meant by the term securities?
What are the two major statutes regulating the securities industry?
What is insider trading? Why is it prohibited?
What are some of the features of state securities laws?
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4. LEARNING OBJECTIVES (CONT’D)
What certification requirements does the Sarbanes-Oxley Act impose on corporate executives?
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5. introduction
Securities are any instruments representing corporate ownership (stock) or debts (bonds).
Sale and transfer of securities are regulated by federal and state statutes and government agencies.
New SEC regulations
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6. Securities act of 1933 What Is a Security?
Section 2(1) of the Securities Act contains broad definition of securities
The Howey test
Many types of securities
Stocks and bonds – most common
Can be interests in whiskey, cosmetics, worms, beavers, boats, etc.
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7. Securities act of 1933 Registration Statement
Section 5 provides a security must be registered
Contents of the registration statement
Securities offered for sale
Corporation’s properties and business
Management of the corporation
How the corporation intends to use proceeds of sale
Any pending lawsuits or special risk factors
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8. Securities act of 1933 Registration process
Prefiling period
Waiting period
Posteffective period
Well-known seasoned issuers (WKSI)
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9. Securities act of 1933 Exempt Securities and Transactions
Certain types of securities are exempt from registration requirements
Regulation A offerings
Testing the waters
Using the Internet
Small offerings—Regulation D
Rule 504 – most small businesses
Rule 505 – private, noninvestment company offerings
Rule 506—private placement exemption
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10. Exhibit 20.1
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11. Securities act of 1933 Violations of the 1933 Act
Resales and safe harbor rules
Most securities can be resold without registration
Rule 144
Rule 144A
Violations of the 1933 Act
Remedies
Prosecuted by Department of Justice
Defenses
Statement or omission was not material
Plaintiff knew about misrepresentation at time of stock purchase
Defendant exercised due diligence in preparing registration
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12. Securities exchange act of 1934
Provides for regulation and registration of securities exchanges, brokers, dealers, and national securities associations
This act provides for continuous periodic disclosures by publicly held corporations to enable the SEC to regulate subsequent trading.
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13. Securities exchange act of 1934
Section 10(b), SEC Rule 10b-5, and Insider Trading
SEC Rule 10b-5 prohibits commission of fraud in connection with purchase or sale of any security.
Insider trading
Purchase or sale of securities on the basis of information that has not been made available to public
Gives trading advantage over general public
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14. Securities exchange act of 1934
Disclosure under SEC Rule 10b-5
Material fact examples calling for disclosure
Fraudulent trading by broker-dealer
Dividend change
Contract for sale of corporate assets
New discovery, new process, new product
Significant change in firm’s financial condition
Potential litigation against the company
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15. Securities exchange act of 1934
Outsiders and SEC Rule 10b-5
Tipper/Tippee Theory
Misappropriation Theory
Insider reporting and trading—Section 16(b)
The Private Securities Litigation Reform Act (PSLRA)
Limitations on class actions
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16. Exhibit 20.2
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17. Securities exchange act of 1934
Regulation of Proxy Statements
Section 14(a) regulates solicitation of proxies from shareholders of Section 12 companies
Violations of the 1934 Act
May be subject to criminal or civil liability
Scienter not required for Section 16(b) violations
Criminal penalties
Civil sanctions
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18. State securities laws
“Blue sky laws” – regulate offer and sale of securities within states
Article 8 of the UCC
Requirements under State Securities Laws
Disclosure requirements and antifraud provisions
Concurrent Regulation
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19. Corporate governance
A set of policies specifying the rights and responsibilities of the various participants in a corporation and spelling out the rules and procedures for making corporate decisions
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20. Corporate governance
Attempts at Aligning the Interests of Officers with Those of Shareholders
Providing officers with stock options
The Goal Is to Promote Accountability
Effective corporate governance standards designed to address problems and motivate officers to make decisions that promote financial interests of shareholders
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21. Corporate governance The company benefits Governance and corporate law
State corporation statutes set up legal framework for corporate governance
The board of directors
The audit committee
The compensation committee
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22. Corporate governance The Sarbanes-Oxley Act
Addresses issues relating to corporate governance
More internal controls and accountability
Exemptions for smaller companies
Certification and monitoring requirements
Section 906 requires CEOs and CFOs certify information in corporate financial statements
Improves directors’ monitoring of officers’ activities
LO-5
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23. Exhibit 20.3
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24. Online securities fraud
Major problem facing SEC
Online Investment Scams and Newsletters
Fraudulent s
Ponzi Schemes
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