1. Chapter 41 Corporations: Securities and Investor Protection McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Security (Definition): Investment in a common enterprise with the reasonable expectation of profit gained predominantly from others’ efforts 41-2

3. Securities and Exchange Commission (SEC) Created in 1934 to: Enforce securities laws Enforce securities laws Interpret provisions of securities acts Interpret provisions of securities acts Regulate the trade of securities Regulate the trade of securities Regulate the activities of securities brokers, dealers, and advisers Regulate the activities of securities brokers, dealers, and advisers 41-3

4. Expansion of SEC Powers in the 1990s Securities Enforcement Remedies and Penny Stock Reform Act of 1990 Securities Enforcement Remedies and Penny Stock Reform Act of 1990 Market Reform Act of 1990 Market Reform Act of 1990 Securities Acts Amendments of 1990 Securities Acts Amendments of 1990 National Securities Markets Improvement Act of 1996 National Securities Markets Improvement Act of 1996 Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002 41-4

5. The Securities Act of 1933: Terminology, Rules, and Procedures Registration Statement: Document containing Description of securities offered Description of securities offered Explanation of how proceeds from sale will be used Explanation of how proceeds from sale will be used Description of registrant’s business and properties Description of registrant’s business and properties Information about management of company Information about management of company Description of pending lawsuits Description of pending lawsuits Certified financial statements Certified financial statements 41-5

6. The Securities Act of 1933: Terminology, Rules, and Procedures (Continued) Prospectus: Written document similar to registration statement, used as a selling tool to attract potential investors 41-6

7. The Securities Act of 1933: Terminology, Rules, and Procedures (Continued) Periods of the registration statement and prospectus filing process: Pre-filing Period Pre-filing Period Waiting Period Waiting Period Post-effective Period Post-effective Period 41-7

8. The Securities Act of 1933: Terminology, Rules, and Procedures (Continued) Exempt Transactions-Securities exempt from standard SEC registration requirements Limited Offers: Involve small amounts of money, or are offered only to sophisticated investors Limited Offers: Involve small amounts of money, or are offered only to sophisticated investors Private Placement Exemption: Exempts private offerings of securities Private Placement Exemption: Exempts private offerings of securities Rule 505: States that private offerings may not exceed $5 million in a twelve-month period, and firms do not have to believe that investors have a reasonable ability to evaluate risk Rule 505: States that private offerings may not exceed $5 million in a twelve-month period, and firms do not have to believe that investors have a reasonable ability to evaluate risk Rule 504: Exempts non-investment firms that offer no more that $1 million in securities in a twelve-month period Rule 504: Exempts non-investment firms that offer no more that $1 million in securities in a twelve-month period Section 4(6): Exempts securities offered only to accredited investors for amount less than $5 million Section 4(6): Exempts securities offered only to accredited investors for amount less than $5 million Intrastate Issues: Exempt local investors in local businesses Intrastate Issues: Exempt local investors in local businesses Re-sales of Securities: Exempt transactions by any person other than an issuer, underwriter, or dealer Re-sales of Securities: Exempt transactions by any person other than an issuer, underwriter, or dealer 41-8

9. The Securities Act of 1933: Terminology, Rules, and Procedures (Continued) Restricted Securities: Securities acquired under Rule 505, 506, or Section 4(6) that must be registered for resale, unless investor follows Rule 144 or 144(a) Violations may result in: Administrative Action Administrative Action Injunctive Action Injunctive Action Criminal Prosecution Criminal Prosecution 41-9

10. The Securities Exchange Act of 1934: Terminology, Rules, and Procedures Section 10(b): Prohibits use of “manipulative and deceptive devices” to bypass SEC rules Section 10(b): Prohibits use of “manipulative and deceptive devices” to bypass SEC rules Insider Trading: Trading in which company employee or executive uses material inside information to make profit Insider Trading: Trading in which company employee or executive uses material inside information to make profit Misappropriation Theory: Individual who wrongly acquires and uses inside information for profit is liable for insider trading Misappropriation Theory: Individual who wrongly acquires and uses inside information for profit is liable for insider trading 41-10

11. The Securities Exchange Act of 1934: Terminology, Rules, and Procedures (Continued) Tipper/Tippee Theory: Individual who receives material inside information as a result of insider’s breach of duty is guilty of insider trading Tipper/Tippee Theory: Individual who receives material inside information as a result of insider’s breach of duty is guilty of insider trading Statutory Insiders: Certain stockholders, executive officers, and directors who must file reports detailing their ownership and trading of the corporation’s securities Statutory Insiders: Certain stockholders, executive officers, and directors who must file reports detailing their ownership and trading of the corporation’s securities Short-Swing Profits: Profits made from sale of company stock within any 6- month period by statutory insider; per Section 16(b), these profits must be returned to company Short-Swing Profits: Profits made from sale of company stock within any 6- month period by statutory insider; per Section 16(b), these profits must be returned to company 41-11

12. The Securities Exchange Act of 1934: Terminology, Rules, and Procedures (Continued) Proxy: Document that authorizes an individual to vote shareholder’s share of stocks at a shareholder’s meeting Proxy: Document that authorizes an individual to vote shareholder’s share of stocks at a shareholder’s meeting Proxy Solicitation: Process of obtaining authority to vote on behalf of shareholder Proxy Solicitation: Process of obtaining authority to vote on behalf of shareholder Violations of Securities Exchange Act of 1934 may result in: Violations of Securities Exchange Act of 1934 may result in: Criminal penalties Criminal penalties Civil penalties Civil penalties Suits against those involved in insider trading under Insider Trading Sanctions Act of 1984 Suits against those involved in insider trading under Insider Trading Sanctions Act of 1984 41-12

13. State Securities Laws “Blue Sky” Laws: Regulate the offering and sale of securities within the state only 41-13