1. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-1 Chapter 17 Investor Protection and E- Securities Transactions

2. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-2 The Securities and Exchange Commission (SEC) Created by the Securities Exchange Act of 1934 and empowered to administer federal securities laws. Major responsibilities Adopt rules Investigate alleged securities violations and bring enforcement actions Regulate activities of securities brokers and advisors

3. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-3 Definition of a Security A security must exist before securities laws apply. A security is: 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

4. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-4 Investment Contracts An investment contract is a security if: An investor invests money In a common enterprise With the expectation of profit from the significant efforts of others

5. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-5 Going Public: The Securities Act of 1933 A federal statute that primarily regulates the issuance of securities by corporations, partnerships, associations, and individuals

6. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-6 Registration Statement Document that an issuer of securities files with the SEC that contains required information about the issuer, the securities to be issued, and other relevant information

7. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-7 Prospectus Written disclosure document that must be submitted with registration statement. It is provided to prospective investors to enable them to evaluate the financial risk of an investment.

8. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-8 Regulation A Offerings Simplified registration process Issuers may sell up to $5 million of securities to the public during a 12-month period. An offering statement must be filed for any offering over $100,000. There are no restrictions on resale.

9. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-9 Violations of the Securities Act of 1933 Private actions Section 12 imposes civil liability for violations, including making misrepresentations concerning the offer or sale of securities. Section 11 provides for civil liability when a registration statement misstates or omits a material fact. Due diligence defense may be used by all defendants except the issuer.

10. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-10 Violations of the Securities Act of 1933 SEC Actions Consent order – defendant agrees not to violate securities laws in the future but does not admit past violations. Injunction Disgorgement of profits

11. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-11 Violations of the Securities Act of 1933 Criminal liability for willful violation of the act or rules and regulations Violator may be fined up to $10,000 or imprisoned for up to 5 years, or both.

12. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-12 Trading in Securities: The Securities Exchange Act of 1934 A federal statute that primarily regulates the trading of securities

13. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-13 Section 10(b) and Rule 10b-5 Section 10(b) prohibits the use of manipulative and deceptive devices in the purchase or sale of securities. Prohibits insider trading Rule 10b-5 clarifies the scope of Section 10(b) Applies to all transfers of securities Only conduct involving scienter is a violation.

14. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-14 Insider Trading It is illegal for a company insider to use material nonpublic information to make a profit by trading in company securities.

15. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-15 Insider Trading Insiders include: Officers, directors, and employees at all levels of the company Lawyers, accountants, consultants, and other agents and representatives hired by a company on a temporary basis Others who owe a fiduciary duty to the company

16. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-16 Tipper-Tippee Liability Tipper A person who discloses material, nonpublic information to another person Tippee The person who receives material, nonpublic information from a tipper

17. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-17 Violations of the Securities Exchange Act of 1934 Private actions SEC actions Consent order Injunction Disgorgement of profits Criminal liability Sarbanes-Oxley Act – SEC may prevent a person who has committed securities fraud from acting as an officer or director in a public company.

18. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-18 Short-Swing Profits Section 16(a)-16(b) Statutory insider – executive officer, director, or 10% shareholder Short-swing profits from trades of company equity securities by a statutory insider within 6 months of each other belong to the company. Involuntary transfers are not included. There are generally no defenses; no intent needs to be proven.

19. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-19 E-Securities Transactions E-Securities Exchange E-SEC Edgar- the SEC’s electronic data and records system E-Public Offerings (E-IPOs)

20. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-20 State Securities Laws Many states have adopted the Uniform Securities Act, called “blue sky laws.” Blue sky laws require registration of certain securities and provide exemptions from registration.

21. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.17-21