2. Chapter 19-Securities

3. Securities Regulation Public Offerings of New Securities. zWhen “going public” there are many different types of securities that can be offered. However, only certain forms of business can go public. z The Securities Act of 1933’s & 1934’s primary objective is disclosing pertinent information to the investor. However, these laws do not guarantee that the investor will make money.

4. “Security” is broadly defined. Courts look to see if there is a scheme involving an investment of money in a common enterprise with profits to come solely from efforts of others. Government issued securities are exempt from the securities laws. Other exemptions include private placements, intrastate offerings, simplified registration procedure. Securities exempt from federal regulation may still have to be compliant with “Blue Sky” laws. Do you own any stocks/securities?

5. JUDGE JUDY READY TO RULE---- Case: SEC v. Howey--- Orange grove owner sells off numerous deeds to large orange grove. The new owners agree to allow him to continue picking oranges and return profits to new owners for their individual trees Seller of parcels says this is not a security but SEC say this is and must be regulated….…... Trying to put a “squeeze” on the SEC ---- Orange grove transaction is a “security” no matter how you slice it!

6. The SEC (Securities and Exchange Commission) is the Federal administrative agency that regulates publicly traded Companies and requires a whole host of formalities including a Perspectus, annual reports and quarterly filings. The SEC Has an active website where one can learn about companies (www.sec.gov)www.sec.gov

7. As stated in Chapter 11, it is Illegal to buy or trade Or assist one in doing so Based on non-public information. Insider Information

8. Short Swing Profits zFederal law prohibits officers, directors and 10% owners of a corporation from receiving “short swing profits” (profits made on stock held less than 6 months). The rule is absolute and any profits made within the 6 month period must be returned to the corporation.

9. Sarbanes-Oxley Act of 2002 zIn the wake of the 2001-2002 exposed corruption and to prevent further deteriation of investor confidence, a new federal law was created to expose and punish corporate corruption. zCommonly known as the “Public Company Accounting Reform & Investor Protection Act of 2002”

10. Sarbanes-Oxley Act (7/30/02) Basic Provisions: Accounting Reforms: The accounting industries self-regulation system has been replaced with a federal agency called the PCAOB, which will regulate and discipline accounting firms that do public accounting for public companies. This is in the wake of the Arthur Anderson destruction of documents. Auditors must be rotated on a 5 year basis. Requires mandatory document retention for certain years. Financial Reporting: New provisions that require the CFO and CEO to certify to the best of their knowledge the SEC filings are accurate. Violations could result in criminal prosecution. Much more disclosure of corporate activities required.

11. Sarbanes-Oxley Act (7/30/02) Basic Provisions: The SEC Reforms: The SEC budget and powers were increased such as the ability to the SEC to “ban” any officer or director from participating in public companies and also to “freeze” accounts. Corporate Governance Reforms: Prior to the Enron mess, corporate governance was left up to the industry or state governments. Now, the law requires each public company to have an audit committee completely comprised of independent directors and containing at least one financial expert..

12. Sarbanes-Oxley Act (7/30/02) Basic Provisions: Increased Criminal Liability: Creates new criminal laws that outlaw the “conspiracy” to commit fraud and increases jail time, fines, statute of limitations for civil actions for securities fraud and makes fines/judgments attained against officers/directors “non-dischargable” in bankruptcy proceedings. Encourages Whistleblowing: Requires internal policies of companies to encourage whistleblowing and also creates a separate civil cause of action by the whistleblower if they are retaliated for reporting corruption. Increased Jurisdiction of SEC: Over attorneys who work for public companies and also international companies traded in the US

13. Non-competition Clause