Ch 5: Securities Regulation Flashcards Preview

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Flashcards in Ch 5: Securities Regulation Deck (18):

In general, what is the purpose of the Securities Act of 1933?

Regulates the original issurance of securities.

Its goal is to assure that investors have sufficient info on which to make an informed investment decision, but the SEC does not judge the merits of the investment.


Describe the registration statement.

Contains all info that a reasonable investor would consider important in deciding whether to invest.

Part 1: The prospectus

  • a written offer to sell securities
  • summarized important info contained in Part II

Part 2: Audited Financial Information & other material facts requiring disclosure

  • Audited Balance Sheet and Profit and Loss Statement
  • Must be certified by a public accounting firm registered with the PCAOB
  • description of the issuer's business
  • names and addresses of directors, officers, underwriters, and shareholders who own 10% or more of the company's shares
  • amount of stock and debt outstanding
  • the principal purpose for which the offering proceeds will be used
  • anything that might affect that value of the securities being issued


When does the registration statement become effective?

20 days after filing unless the SEC issues a refusal or stop order, or unless it is made effective earlier by an SEC acceleration order.


What activites can take place during the waiting period regardless of whether the company is a seasoned issuer or a well-known seasoned issuer?

  • Oral offers can be made - no written offers
  • Tombstone ads may be placed - identifies the security, price, and who will execute orders
  • Preliminary (red herring) prospectuses may be placed - similar to the statutory prospectus, but contains a stmt in red ink that it is not yet final
  • Summary prospectuses may be distributed


What securities are exempt from registration requirements of the Securities Act of 1933?


  • securities of bank and savings and loans
  • securities of regulated common carriers (including railroads)
  • insurance policies

  • securities of NFP orgs

  • securities issued by a govt for govtal purposes
  • short term commercial paper (maturity in less than 9 months)
  • securities issued under Chapter 11 bankruptcy code
  • securities issued by a church plan or similar entity that is not an investment company


What securities must be registered under the Securities Act of 1933?

  • securities offered in connection with interstate commerce
  • securities offered to the public
  • securities offered by issuer, underwriter, or dealer
  • securities not excluded by statute


What is Regulation D?

Regulation D exempts certain issuances of securities from the registration requirements of the Securities Act of 1933.


Generally, is a general solicitation permitted by Regulation D?

General solicitation (e.g. a newspaper or magazine ad) is prohibited in most cases.


What are the dollar and investor limitations of rules 504, 505, and 506 under Regulation D?



  • Rule 504: $1M/any number of investors
  • Rule 505: $5M//up to 35 unaccredited investors; unlimited accredited investors
  • Rule 506: Amount unlimited/up to 35 sophisticated unaccredited investors; unlimited accredited investors


What must a plaintiff prove in a case brought under Section 11 of the Securities Act of 1933?


  • the plaintiff acquired the stock 
  • a material misstmt of fact was made in the registration stmt signed by the defendant
  • damages (loss)

Note: A plaintiff need not prove fraudulent conduct, negligence, or reliance on the stmt


Does a CPA who signed off on financial info in a registration statement have any defenses to Section 11 liability?

Yes: due diligence.


What companies must register under the Securities Exchange Act of 1934?

Generally, any company:

  1. whose shares are traded on a national exchange, or
  2. which has at least 500 shareholders who are not accredited, or atleast 2,000 shareholders in any outstanding class and more than $10 Million in assets


What securities are exempt from registration under the Securities Exchange Act of 1934?

Securities of:

  • investment companies
  • savings and loans
  • charitable organizations


What persons may be classified as insiders?

  • Directors
  • Officers
  • Shareholders owing more than 10% of an outstanding class of shares
  • Accountants and attorneys of the issuer


Can a defendant be liable for negligently violating Rule 10b-5?

No. Rule 10b-5 requires the plaintiff to prove that the defendant intended to deceive the plaintiff and that the plaintiff relied on the deception and was deceived into buying or selling securities.

Proving reckless disregard for truth might also be sufficient intent.


What is a tender offer?

An offer made to all stockholders to purchase stock for a specified price for a specified period of time. 


What reports must be filed?

  • 10-K, 10-Q, 8-K
  • 5% TIP
    • 5% or more owners
    • Tender Offers
    • Insider Trading
    • Proxy solicitations and statements


To recover damages for violation of rule 10b-5, a plaintiff must prove:


  1. plaintiff acquired and sold securities
  2. suffered a loss
  3. material misrepresentation or material omission of fact
  4. scienter
    • intended to deceive or reckless disregard for the truth
    • negligence is not sufficient to satisfy this element
  5. reliance
  6. interstate commerence was involved