Securities Regulation

Securities Regulation
Chapter 22
Securities and Exchange Commission
(SEC)
 Created in 1934 to regulate the
securities industry.
 What is a security?
Any transaction in which
the buyer invests money in a common
enterprise and expects to earn a profit
predominately from the efforts of others.
 What are common types of securities?

Securities Act of 1933 “1933 Act”
 Requires that before offering or

selling securities, the issuer must
register the securities with the SEC
unless the securities qualify for an
exemption.
 Issuer: A company that sells its own stock
 When an issuer registers securities,
the SEC does not investigate the
quality of the offering.
Securities Act of 1933
 Exemptionsfrom registration – Issuer

must determine whether they are
exempt from the registration under
the 1933 Act.
 Based on two factors:
▪ Type of security
▪ Type of transaction
Exempt Securities
 Government securities
 Bank securities
 Non-profit issues (religious, charitable

organizations)
 Insurance policies and annuity contracts

(governed by insurance laws)
Exempt Transactions
 Section 4(2) of the 1933 Act exempts

from registration transactions by an
issuer not involving any public
offerings.”
 The most popular private placement is
Regulation D. There are three
different types of private offerings
under Reg. D-Rule 504, 505 or 506.
Reg. D. Continued
 Generally speaking, companies can raise

money through Regulation D without a public
offering subject to these limitations:
 1. the offering must be to accredited,
sophisticated investors—institutions or
wealthy individuals who can assess the risks
of the offering.
 2. the securities must be purchased for
investment purposes and cannot be sold for
one year.
Public Offerings
 Initial public offering (IPO): A

company’s first public sale of
securities.
 Secondary offering: Any public sale of
securities by a company after the
initial public offering.
▪ Firm commitment underwriting: The underwriter
(Investment Bank) buys stock from the issuer and sells
it to the public.
▪ Best efforts underwriting: The underwriter does not
buy the stock from the issuer but instead acts as the
issuer’s agent in selling the securities.
Public Offerings
▪ Registration statement: Two purposes
▪ Notify the SEC that a sale of securities is pending
▪ Disclose information to prospective purchasers
▪ Prospectus: what the buyers of securities receive
▪ Sales effort: investment bank can solicit offers
▪ Going effective: once SEC reviews the preliminary

registration statement, the issuer and underwriter agree
on a price of the stock and sale begins.
Registration Statement (form S-1)
 Registration Statement contains the prospectus, which must

be delivered to anyone who buys the securities.
 It also contains the following information:
 Description of company’s business, properties and
competition
 Description of risks of investing
 Discussion and analysis of financial condition
 Identity of officers and directors and compensation
 Description of material transactions involving officers,
directors and shareholders
 Description of material legal proceedings
 Description of plan and use of the proceeds of the offering
Liability Under the 1933 Act
1. Selling securities that are neither

registered nor exempt.
2. Fraud- lying about the securities.
3. 3. Errors in the registration

statement.
Securities Exchange Act of 1934 “the
1934 Act”
 General provisions for the 1934 Act
 Registration requirements – An issuer
must register with the SEC if:
▪ It completes a public offering under the 1933
Act
▪ Its securities are traded on a national exchange
like the NYSE and NASDAQ.
▪ The 1934 Act also mandates periodic
disclosures.
Securities Exchange Act of 1934
 Disclosurerequirements—Section 13
Requires companies to file the
following documents:
 An initial, detailed information statement
when the company first registers: S-1
 Annual reports on Form 10-K
 Quarterly reports on Form 10-Q, which
are less detailed than 10-Ks
 Form 8-K to report any significant
developments
Section 13 Continued:
 This statute requires a company’s

CEO and CFO to certify that:
 1. The information in the quarterly
and annual reports are true;
 2. The company has effective internal
controls; and
 3. The officers have informed the
company’s audit committee and
external auditors about concerns of
internal controls.
Securities Exchange Act of 1934
 Short-swing trading—Section 16 –
 Prevents corporate managers and insiders who own
more than 10% of the company from taking unfair
advantage of privileged information to manipulate
the market:
 Insiders must report their trades within 2 business
days to the SEC and the company.
 Insiders have to return any profits from a
purchase and sale that is in a 6-month period.
Liability Under the 1934 Act
 Section 18 (filings)
 Anyone who makes a false or misleading statement
in a filing under the 1934 Act is liable to buyers
and sellers who:
▪ Acted in reliance on the statement
▪ Can prove that the price at which they bought or sold was
affected by the false filing
 Section 10(b)
 Prohibits fraud in connection with the purchase
and sale of any security whether or not it is
registered under the 1934 Act. It is a catchall
provision.
Violation of Rule 10(b)(5)
A violation of Rule 10(b)(5) requires the following:

 1. Misstatement or omission of a material fact.
 2. Scienter-the intent to deceive.
 3. Purchase or sale.
 4. Reliance.
 5. Loss.
 6. Causation.
In Re HP Securities Litigation
 Facts:
 Issue:
Arguments for Shareholders:
Arguments for Company:

Stoneridge Investment Partners v.
Scientific Atlanta, Inc.
 Facts:
 Issue:
 Decision:
Insider Trading
 Insider Trading
 A crime punishable by fines, imprisonment and
disgorgement of profits.
 Fiduciary Duty
 Any corporate insider who trades while in
possession of nonpublic, material information in
violation of his fiduciary duty to his company is
liable under Rule 10b-5. The fiduciary’s spouse,
child, parent and sibling also have duty not to
trade.
 (strangers usually do not have a fiduciary
duty to a company so they will not be liable)
Insider Trading- Who Is An Insider?
 Corporate insider includes officers,

directors and anyone else who works for
the company. This includes employees
and constructive insiders, such as lawyers
and auditors who have an indirect
employment relationship.
Insider Trading
 Tippers – Anyone who reveals material

nonpublic information in violation of
his fiduciary duty is liable if he:
 Knows the information is confidential
 Expected some personal gain
Insider Trading
 Tippees - Those who receive tips are

liable for trading on inside
information, even if they do not have
a fiduciary relationship to the
company, as long as:
 They know the information is confidential
 They know it came from an insider who
was violating his fiduciary duty
 The insider expected some personal gain
Insider Trading: Misappropriation
 Anyone with 1. material, non-public

information, 2. who breaches a fiduciary duty
to the source of that information, (3) by
revealing or trading on it, is also guilty of
insider trading.
 Examples: lawyers, accountants, family

members.
Salman v. United States
 Facts:
 Issue:
 Decision:
Insider Trading
 Takeovers
 Rule 14e-3 prohibits trading on inside
information during a tender offer if the
trader knows the information was
obtained from either the bidder or the
target company.
 Advanced planning
 Under Rule 10b5-1, an insider can avoid
insider trading charges if she commits in
advance to a plan to sell securities.
Is It Insider Trading?
 You are a taxi driver who overhears a well-dressed passenger,
clearly a corporate big-wig, describe how his employer is about
to receive approval for a new cure for cancer. You tell your
broker to buy 1000 shares of the stock.
 Your broker tells you to sell stock in a company because he just
received a call from that company’s chief executive, who
instructed him to dump all his holdings. You sell the stock.
 A friend tells you that he is depressed because his wife has
learned that she will be laid off from her job as a top executive.
Her company is in deep financial problems that will be disclosed
soon. You immediately call your broker and execute an order to
sell short 5,000 shares of the company’s stock.
Is It Insider Trading?
 At a party, you overhear an executive,
whom you recognize but don’t know, tell
another guest that the company’s
outlook does not look good. You call
your broker and sell your interest in
company.
 You are an attorney working for the law
firm that is doing the legal work for the
merger between Company A and
Company B. You are not assigned to the
deal and so you call your broker and buy
5000 shares in Company B.
“To Catch A Trader”
 What company is at the center of the SEC
investigation?
 Who is Steven Cohen? What did he say at his
deposition that was interesting?
 Who is Raj Rajaratnam? Who was tipping him?
 What are expert networks?
 Who is Mathew Martoma? What did he do?
 Do you think insider trading is unavoidable?
 Do you agree with the SEC’s aggressive
enforcement?

Securities Regulation

Uploaded by

Copyright:

Available Formats

Securities Regulation

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Securities Regulation

Uploaded by

Copyright:

Available Formats

Securities Regulation

 What are common types of securities?

 Requires that before offering or

 Exemptionsfrom registration – Issuer

 Non-profit issues (religious, charitable

 Insurance policies and annuity contracts

 Section 4(2) of the 1933 Act exempts

 Generally speaking, companies can raise

 Initial public offering (IPO): A

▪ Prospectus: what the buyers of securities receive

▪ Sales effort: investment bank can solicit offers

▪ Going effective: once SEC reviews the preliminary

 Registration Statement contains the prospectus, which must

1. Selling securities that are neither

2. Fraud- lying about the securities.

3. 3. Errors in the registration

 This statute requires a company’s

A violation of Rule 10(b)(5) requires the following:

Arguments for Shareholders:

Arguments for Company:

 Corporate insider includes officers,

 Tippers – Anyone who reveals material

 Tippees - Those who receive tips are

 Anyone with 1. material, non-public

 Examples: lawyers, accountants, family

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.