Ch 19 Flashcards Preview

Legal Business II > Ch 19 > Flashcards

Flashcards in Ch 19 Deck (33):


Stock certificate, bond, note, debenture, warrant or
Other record evidencing ownership interest

Or in promise to repay corporation's debt


Securities and Exchange Commission (SEC)

Independent regulatory agency responsible for interprereting
And investigating securities law violations

Issues new rules, inspects securities firms and brokers


Securities act of 1933

Governs initial sales of stock by businesses

Purpose of act is to prohibit fraud, provide transparency/disclosure
Stabilize securities industry making info available to public


Investment contract

In securities law, a transaction where person invests in common
Enterprise w/reasonable expectation that profits will be primarily
From efforts of others



Written document required by securities laws that describes
The security being sold, financial operations of issuing corp.,
Investment risk of security

Designed to provide sufficient info to enable investors to
Evaluate risk involved in purchasing security



Electronic Data Gathering, Analysis and Retrieval

Electronically posted documents filed with the SEC


Red Herring Prospectus

Preliminary prospectus that can be distributed to potential
Investors after the registration statement for securities offering
Has been filed with the SEC


Tombstone Ad

Advertisement historically in format resembling tombstone
Of securities offering

Ad tells potential investors where and how they can obtain
A prospectus


Free writing prospectus

Any type of written, electronic or graphic offer that describes
The issuing corporation or it's securities

Includes legend indicating that investor can obtain prospectus
At SECs website


Exempt securities

Specific securities that are exempt from registration requirements
of Securities Act 1933

Can generally be resold without being registered


Registration A Offerings

Securities issued by issuer that has offered less than $5 million in securities in 12 month period are exempt from registration

Cheaper way for small companies to raise capital


Investment company

Company that acts on behalf of many smaller shareholders/owners
By buying a large portfolio of securities

and professionally managing that portfolio


Mutual fund

Specific type of investment company that continually buys and
Sells to investors shares of ownership in a portfolio


Small offerings under Regulation D

SECs regulation D contains 4 separate exemptions from
Registration requirements for limited offers in 12 month period


Accredited investor (in context of securities offering)

Sophisticated investor such as bank, insurance company,
An investment company, issuer's executive officers + directors,

Or person whose net worth exceeds certain limits



One who controls, is controlled by or is in common control
With the issuer


3 basic defenses to violation of the 1933 Act, how defendant can avoid liability

1 statement or omission was not material

2 plaintiff knew about misrepresentation at time of purchasing
The stock

3 defendant exercised due diligence


Due diligence

Required standard of care that certain professionals must meet
To avoid liability for securities violations


Securities Exchange Act of 1934: Section 12 companies

Companies that have assets in excess of $10 million and over
500 shareholders

Required to register their securities under the Section 12 of 1934


SEC Rule 10b-5

Rule of SEC makes it unlawful in connection with purchase or
Sale of security to make untrue statement of material fact

Or omit material fact if omission causes statement to be


Insider trading

Purchase or sale of securities on basis of info that hasn't been
Made available to the public



Person who receives inside info

Info must be received from someone's breach of fiduciary duty


When are proxy statements regulated by the SEC?

When section 12 company's proxy statement has corporate
Official requesting authority to vote on behalf of shareholders
In particular election on issues


Bounty payment

Reward given to person or persons who perform certain service,
Such as informing legal authorities of illegal actions


What do federal securities laws not take priority over?

State securities laws


Corporate governance

Set of policies or procedures affecting the way a corporation
Is directed or controlled


Stock option

Agreement that grants the owner the option to buy a given
Number of shares of stock, usually within a set time period


Corporate governance problem: outside directors on board of directors

Independent directors may not be truly independent directors

They may be friends or business associates with leading officers


2 minimum required actions under corporate governance

1 audit to evaluate managers

2 legal protections for shareholders, where violators can be
Punished and shareholders can be compensated for their losses


Role of board of directors?


Directors have responsibility of ensuring that officers are operating
Wisely and in the exclusive interest of the shareholders

In reality the board of directors spend little time monitoring officers


Board committee: Audit committee

Crucial board committee oversees corporation's accounting
And financial reporting processes

Including internal audit, outside audit and internal controls


Internal controls

Measures taken to ensure reporting results are accurate


Board committee: compensation committee

Monitors and determines compensation paid to officers

Responsible for assessing officers' performance and designing
A compensation system to align officers' interests with shareholders