1. Securities Law Historical background –Regulation followed 1929 crash –Little disclosure –Lots of fraud

2. Securities Law SEC –Promulgate regulations –Investigate violations –Regulate brokers and advisors

3. Securities Law Securities defined – investment contract that gives the owner evidence of business participation or indebtedness (Securities Act of 1933) –Notes –Stock –Bonds –Debentures –Warrants –Subscriptions –Voting-trust certificates –Mineral rights –Limited partnerships Commodities covered by Commodity Exchange Act

4. Securities Act of 1933 Howey test –1946 Supreme Court decision –“a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promoter or third party” –Broad interpretation of the law

5. Exemptions Exempt Securities –Government issued securities –Commercial paper –Banks, savings & loans, religious and charitable organizations –Insurance policies –Annuities –Securities regulated by the ICC –Stock dividends and splits

6. Exemptions Exempt transactions –Non-issuers –Intrastate offering – all parties must be in that state –Small-Offerings Simplification Permits sales w/o registration –Corporate reorganization –Private placements

7. Filing Requirements of the 1933 Act Registration Statement & Prospectus Review –Full disclosure standard

8. Registration Process Prefiling period (until registration is filed) –Cannot sell or offer to sell –Cannot “condition the market” – no PR Waiting period (filing until SEC declares it effective) –Conditioning the market is OK Filing Options –Tombstone ads –Red herring prospectus (no price) Posteffective period (registration effective through sale) –Final or statutory prospectus Shelf registrations

9. Violations of the 1933 Act Civil liability for false or incomplete filing or before the effective date $100,000/10 years in prison Injunction Anyone who had any input into the registration (directors & officers - joint & several liability) Defenses –Immateriality –Investor knowledge –Due diligence

10. 1934 Act Created the SEC Regulates securities after issuance –Registration of those securities traded on national stock exchange –Continuous reporting 10-Q 10-K 8-K

11. 1934 Act Antifraud provisions –Everyone should have equal information –Applies to the sales of all securities –“false information” interpreted by SEC & courts –Who Officers, directors, shareholders Insiders & tippees –When public knowledge –What Takeovers Earnings drops Dividends lawsuits

12. 1934 Act Antifraud provisions –Sale or purchase of security in reliance of info –Intent to defraud –$100,000/5 years in prison –Officers: $1 million or treble profits + restitution –Civil liability

13. 1934 Act Insider trading –Insiders Officers, directors, employees Lawyers, accountants, consultants, or other agents Anyone with a fiduciary duty to the company –Per se violation for officers, directors & large shareholders –Assumed they have inside knowledge –Must report holdings –Cannot keep short-swing profits (6 months) –Includes remote tippees if they should have known it was inside info

14. Shareholder Rights Proxy materials filing –Who is sending the proxy statement –How it will be sent –Who pays & how much –Why it is being sent Invalid proxies –Resubmitted –Action following invalid proxy reversed

15. Shareholder Rights Shareholder proposals not opposed by management to be included Up to 200 words of shareholder material if opposed by management may be included Proxy battles –Corporation can reimburse for costs up to limits

16. Shareholder Rights Executive Compensation –Disclosure rules Board Compensation Committee Reports summarizing executive pay

17. Shareholder Rights Williams Act –All offers to buy more than 5% –Details of offer must be published for shareholders Offerer Source of funding Future plans Number of shares currently held –Shareholders have 7 days to decide on offer –Civil and criminal penalties

18. Shareholder Rights Uncontested Takeover - notice within 10 days to shareholders with justification: –Recommendation of acceptance/refection –Neutral position –Inability to take a position

19. Shareholder Rights Hostile Takeover –Convince shareholders not to sell –File antitrust suits –Match the offerer’s price –Find a ‘white knight’

20. Other Securities Laws Securities Enforcement Remedies and Penny Stock Reform Act of 1990 –Authorized cease and desist orders –SEC may seek civil penalties –Enhanced disclosure for penny stocks Market Reform Act of 1990 –SEC sets limits on program trading –SEC can suspend trading if market too volatile

21. Other Securities Laws RICO –Can be applied to securities fraud Private Securities Litigation Reform Act of 1995 –Gives safe harbor for firms making predictions as long as accompanied by cautionary statements

22. State Laws State laws affecting mergers & acquisitions –Supremacy of federal law –Protect shareholders through governance rather than securities issues –Slow pace of takeovers State securities laws –Most states adopted Uniform Securities Act –May need state registration and merit review

23. International Aspects US has most stringent laws Multiple stock exchanges Various accounting rules

24. Strategy Implications Choose state to issue securities Consider timing of issues Training of all employees & agents re insider trading