Chapter 1- Federal Securities Regulations-5 Questions Flashcards
(77 cards)
Securities Act of 1933 (Paper Act, Truth in securities act, and prospectus act)
Regulates IPOs and Subsequent Offerings (SPOs)
Full disclosure of information to the SEC in a registration statement and prospectus
Both Civil and Criminal penalties for rule violators
Definitions Begin
1. Security
2. Issuer
3 Underwriter
1. Howey Case defined an investment contract a security if it met 4 conditions: Investment of money Common enterprise of assets Expectation of profit Results solely from efforts of others
Does not include annuities, life insurance, real estate direct ownership or commodities
- Any person who issues or proposes to issue a security
- Underwriter- purchased from an issuer with view of selling, not including a brokerage firm earning a commission on a retail sale
- Person
- Prospectus
- Sale
- An individual, corporation partnership, association, joint stock company, trust, unincorporated organization, or a gov/political subdivision
- Notice, circular, letter or communication that offers sale or confirms sale of a security. Does not include oral communications or tombstone advertisements
- Contract for sale or disposition of a security, does not include gifts or negotiations
Examples of securities
Stock Bond Debenture Right/warrant Note Put, call or other option LP Certificate of interests in profit sharing
SEC Review
SEC attempts to make certain all pertinent information is present and disclosed by requiring:
The issuer file a registration statement
A prospectus be provided to those interested
Penalties be imposed
Exempt securities from the 1933 act
Any security guarenteed by the US government, state, or political sub
Commercial paper issued with less than 270 days to maturity used to increase working capital
Orgs run exclusively for religion, education, benevolent, fraternal or charitable purposes
Any interest in a railroad equipment trust
Any fed/state bank or loan association except bank holding companies
Rule 147 and the 80-80-80 rule
Exempt from the 1933 act but will have to be registered under uniform Securities act
Rule 147 securities are issued/sold in a single territory or state
The buyer must live in the state and have primary residence there
If any sale to a non resident occurs, exemption is eliminated
9 months after last sale by issuer, purchasers can begin selling shares
80% of gross revenue, 80% of proceeds and 80% of issuers assets must be in state in order to claim the exemption
No waivers may be accepted by the buyer as substitute
Exempt transaction of the 1933
Transactions by any person other than the underwriter, issued, or dealer
Transactions by an issuer that do not involve public offering like Reg D
Requirements of Securities Act of 1933
Registration of new issues distributed interstate
Full and fair disclosure about itself and offering
Issuer disclose all information necessary for issuer to judge merit
Regulation of primary and secondary issues
Criminal penalties for fraud
Registration Statement
Signed by principal executive office CEO, principal financial officer CFO, majority of board of directors
Penalties for willful omissions or misstatement of material facts
Info required: Purpose of issue POP Underwriter commission or discount Promotion expense Expected use of proceeds Balance sheet Earnings statement for past 3 years Names, addresses, bios of officers, directors, underwriters and owners (10%+) Copy of underwriting agreement Copy of article of incorp
Cooling off period
At least 20 calendar day period where SEC reviews registration statement
Deficiency letter sent back if information is misstated or missing
Stop Order may be issued if SEC suspects fraud, which requires all underwriting activity to stop
SEC may subpoena issuing corps records to determine if stop order is necessary
Red herring
Must be made available to prospective buyers who express interest from filing date to the effective date
Cannot be used as a confirmation of sale, in place of a registration statement or to declare final public offering price
Bona fide price range must be included and amount of shares
May solicit a non binding indication of interest but no orders prior to effective date
In red ink on the front page of a red herring, a company makes note that the SEC is reviewing the material, no sales can be made, and info is subject to change
Preliminary prospectus missing info
Public offering price and the effective date
Prospectus
Required to be made as a supplemental easier read in comparison to the registration statement
Must be given to Investor even if the investor has no intention to read it
Distributed no later than confirmation of sale
Rule 482 (Omitting) Prospectus (Mutual Fund ads)
Must meet following conditions:
1. Any information in the advertisement must be taken from regular prospectus
- Must state from whom a prospectus may be obtained
- Must urge reading of the prospectus before investing
- Any yield or return figures must be accompanied by disclaimer/disclosures of load
- Cannot be used to make purchases of shares
Process after effective date
Final prospectus must be delivered with trade confirmation if not before
No markings allowed
Securities are neither approved or disapproved by SEC (SEC disclaimer)
Any Ad payments must be disclosed
Sueable parties if misinformation is used in the prospectus under 1933 act
Every person who signed registration All directors of issuer Attorneys Accountants Appraisers Underwriters and Parent companies
Person is exempt if they can prove accuracy
1 year after discovery or 3 years after date of action
statute of limitations is 2 years after discovery for USA
SEC powers
The sec may:
Make, amend and rescind rules
Administer oaths
Subpoena witnesses
Seek injunctions
Turn over evidence to attorney general
Uniform Securities Act
State security law act
During the cooling off period, underwriters may take:
Indications of interest
Distribute preliminary prospectuses or
Publish tombstone advertisements to provide info about potential availability of the securities
Regulation D (Private Placement Exemption) Rule 506
Regulation D placements are exempt from registration with the SEC and state
SEC Rule 506b- May sell securities to an unlimited amount of accredited investors, up to 35 non accredited. No advetising.
506c- Advertising allowed as long as issuer reasonably believes all purchasers are accredited and takes reasonable steps to verify (tax statement, credit reports)
JOBs Act also has a bad boy provision that disallows reg d for certain issuers
Sec rule 501
Only need reasonable grounds of belief to determine an accredited investor
Accredited investors include:
1. A bank, insurance company or registered investment company
- Employee benefit plan if a bank, insurance company or registered investment adviser makes investment decisions, or if plan exceeds 5MM
- Charitable organization, corporation, or a partnership with assets exceeding 5mm in assets
- Directors, executive officers and general partners of issuer
- $1 million net worth, excluding net equity in home
- 200k or more income in past two years or 300k joint income and reasonable expectation of matching
- Entities made up of accredited investors
Dodd-Frank excluded home equity
Net worth may include a non spouse but only up to percentage ownership
Counting of non accredited investors under 506(b)
Single purchaser for any relative, spouse or relative of the spouse of a purchaser
Corporations, partnerships and other entities are one purchaser
If organized specifically for purchase then all are counted
Rule 503 regulation D
Must be filed with SEC no later than 15 days after the first sale of securities relation to a regulation D offering
Requires basic info, amount sold to date, use of proceeds, names of any persons receiving commission
