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Chapter 23 - Government Regulations: Securities & Antitrust Flashcards

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1
Q

What is a Security?

A

Any transaction in which the buyer

  • invests money in a common enterprise and
  • expects to earn a profit predominantly from the efforts of others.

! This can include things other than just stocks, bonds, and notes.

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2
Q

What is an Issuer?

A

A company that sells its own stock.

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3
Q

What is Material?

A

Important enough to affect an investor’s decision.

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4
Q

What as an Initial Public Offering?

A

A company’s first public sale of securities.

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5
Q

What is a Secondary Offering?

A

Any public sale of securities by a company after the initial public offering.

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6
Q

What are the two major laws that regulate securities?

A

The Securities Act of 1933 (the 1933 Act) and

The Securities Exchange Act of 1934 (the 1934 Act).

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7
Q

What does the 1933 Act require regarding IPOs?

A

That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.

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8
Q

What does the SEC not do when an issuer register securities?

A

Investigate the quality of the offering. It does not assess the value or merit of the investment.

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9
Q

What does the SEC’s approval of a security mean?

A

On the surface, the company has provided all required information about itself and its major products.

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10
Q

Under the 1933 Act, what is the seller of a security liable for?

A

Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.

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11
Q

What is the liability for the issuers of a a fraudulent security? Who can sue?

A
  • Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute.
  • The SEC and any purchasers
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12
Q

What is an Accredited Investors?

A

Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)

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13
Q

What must a company file with the SEC to make a public offering?

A

A registration statement.

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14
Q

What are the two purposes of a registration statement?

A

1) To notify the SEC that the sale of securities is pending and
2) To disclose information of interest to prospective purchasers.

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15
Q

What must a registration statement include? 5

A
  • Detailed information about the issuer
  • Detailed information about their business
  • A description of the stock
  • The proposed use of the proceeds from the offering
  • Two years of audited balance sheets and income statements.

(The prospectus is part of the registration statement)

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16
Q

What kind of information might a prospectus have compared to a registration statement?

A

The prospectus includes all of the important disclosures about the company
The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.

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17
Q

What must all investors receive before purchasing stock?

A

A copy of the prospectus

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18
Q

When does the sales effort for a security begin?

A

Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.

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19
Q

Who makes the sales effort for a security?

A

The investment bank representing the issuer.

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20
Q

Why doe the SEC closely regulate the sales effort of a security?

A

To ensure that the stock is not hyped by making public statements about the company before the stock is sold.

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21
Q

What does the issuer get from the SEC after its review of the registration statement? What does it do?

A

A commitment letter.
Lists required changes to the registration statement.
Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.

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22
Q

What happens after the SEC has approved the final registration statement?

A

The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.

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23
Q

How else does the 1933 Act permit issuers to sell stock? What is a benefit?

A
  • In a private offering

- It is much simpler and cheaper than an IPO

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24
Q

What is the registration requirement for securities sold in a private offering?

A

They are not required to register the securities.

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25
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
26
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
27
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
28
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
29
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
30
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
31
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
32
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
33
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
34
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
35
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
36
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
37
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
38
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
39
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
40
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
41
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
42
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
43
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
44
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
45
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
46
What does the SEC's approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
47
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
48
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute. - The SEC and any purchasers
49
What must a company file with the SEC to make a public offering?
A registration statement.
50
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and 2) To disclose information of interest to prospective purchasers.
51
What must a registration statement include? 5
- Detailed information about the issuer - Detailed information about their business - A description of the stock - The proposed use of the proceeds from the offering - Two years of audited balance sheets and income statements. (The prospectus is part of the registration statement)
52
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
53
What must all investors receive before purchasing stock?
A copy of the prospectus
54
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
55
Who makes the sales effort for a security?
The investment bank representing the issuer.
56
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
57
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter. Lists required changes to the registration statement. Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
58
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
59
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering | - It is much simpler and cheaper than an IPO
60
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
61
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
62
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
63
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
64
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
65
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
66
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
67
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
68
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
69
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
70
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
71
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
72
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so - Willfully - Knowingly, or - Recklessly
73
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
74
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days - Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
75
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
76
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
77
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
78
What are the rules on insider trading? 6
- Fiduciary - Temporary Insiders - Possession vs. use of information - Tippers - Tippees - Misappropriation
79
What is the 'fiduciary' rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
80
What is the 'temporary insider' rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
81
What is the 'possession v. use of information' rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities. If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
82
What is the 'tippers' rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they: 1) Know the information is confidential 2) Expect some personal gain (gifts to friends count as personal gain)
83
What is the 'tippees' rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as: 1) They knew the information was confidential 2) They know it came from an insider who was violating his fiduciary duty, and 3) the insider expected some personal gain
84
What is the 'misappropriation' rule on insider trading?
A person is liable if he trades securities 1) for personal profit, 2) using confidential information, and 3) In breach of a fiduciary duty to the Source of Information. This is the same thing as embezzlement
85
Why is insider trading illegal? 3
- It offends our sense of fairness. - Investors will lose confidence in the market if they feel that insiders have an unfair advantage - Investments banks typically 'make a market' in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
86
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a "piece of the great blue sky")
87
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. To be found guilty an activity must not only be anticompetive, but also lack any redeeming virtue. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
88
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
89
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
90
What are the two categories of antitrust legislation?
- Per Se | - Rule of Reason
91
Who has authority to enforce the antitrust laws?
- Justice Department | - Federal Trade Commission
92
Who has the right to sue over antitrust violations? What can they collect?
- Government - Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
93
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
94
What does the SEC's approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
95
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
96
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute. - The SEC and any purchasers
97
What must a company file with the SEC to make a public offering?
A registration statement.
98
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and 2) To disclose information of interest to prospective purchasers.
99
What must a registration statement include? 5
- Detailed information about the issuer - Detailed information about their business - A description of the stock - The proposed use of the proceeds from the offering - Two years of audited balance sheets and income statements. (The prospectus is part of the registration statement)
100
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
101
What must all investors receive before purchasing stock?
A copy of the prospectus
102
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
103
Who makes the sales effort for a security?
The investment bank representing the issuer.
104
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
105
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter. Lists required changes to the registration statement. Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
106
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
107
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering | - It is much simpler and cheaper than an IPO
108
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
109
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
110
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
111
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
112
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
113
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
114
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
115
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
116
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
117
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so - Willfully - Knowingly, or - Recklessly
118
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
119
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days - Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
120
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
121
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
122
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
123
What are the rules on insider trading? 6
- Fiduciary - Temporary Insiders - Possession vs. use of information - Tippers - Tippees - Misappropriation
124
What is the 'fiduciary' rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
125
What is the 'temporary insider' rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
126
What is the 'possession v. use of information' rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities. If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
127
What is the 'tippers' rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they: 1) Know the information is confidential 2) Expect some personal gain (gifts to friends count as personal gain)
128
What is the 'tippees' rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as: 1) They knew the information was confidential 2) They know it came from an insider who was violating his fiduciary duty, and 3) the insider expected some personal gain
129
What is the 'misappropriation' rule on insider trading?
A person is liable if he trades securities 1) for personal profit, 2) using confidential information, and 3) In breach of a fiduciary duty to the Source of Information. This is the same thing as embezzlement
130
Why is insider trading illegal? 3
- It offends our sense of fairness. - Investors will lose confidence in the market if they feel that insiders have an unfair advantage - Investments banks typically 'make a market' in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
131
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a "piece of the great blue sky")
132
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
133
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
134
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
135
What are the two categories of antitrust legislation?
- Per Se | - Rule of Reason
136
Who has authority to enforce the antitrust laws?
- Justice Department | - Federal Trade Commission
137
Who has the right to sue over antitrust violations? What can they collect?
- Government - Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
138
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
139
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
140
What does the SEC's approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
141
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
142
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute. - The SEC and any purchasers
143
What is an Accredited Investors?
Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)
144
What must a company file with the SEC to make a public offering?
A registration statement.
145
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and 2) To disclose information of interest to prospective purchasers.
146
What must a registration statement include? 5
- Detailed information about the issuer - Detailed information about their business - A description of the stock - The proposed use of the proceeds from the offering - Two years of audited balance sheets and income statements. (The prospectus is part of the registration statement)
147
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
148
What must all investors receive before purchasing stock?
A copy of the prospectus
149
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
150
Who makes the sales effort for a security?
The investment bank representing the issuer.
151
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
152
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter. Lists required changes to the registration statement. Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
153
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
154
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering | - It is much simpler and cheaper than an IPO
155
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
156
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
157
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
158
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
159
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
160
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
161
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
162
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
163
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
164
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
165
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
166
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
167
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so - Willfully - Knowingly, or - Recklessly
168
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
169
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days - Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
170
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
171
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
172
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
173
What are the rules on insider trading? 6
- Fiduciary - Temporary Insiders - Possession vs. use of information - Tippers - Tippees - Misappropriation
174
What is the 'fiduciary' rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
175
What is the 'temporary insider' rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
176
What is the 'possession v. use of information' rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities. If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
177
What is the 'tippers' rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they: 1) Know the information is confidential 2) Expect some personal gain (gifts to friends count as personal gain)
178
What is the 'tippees' rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as: 1) They knew the information was confidential 2) They know it came from an insider who was violating his fiduciary duty, and 3) the insider expected some personal gain
179
What is the 'misappropriation' rule on insider trading?
A person is liable if he trades securities 1) for personal profit, 2) using confidential information, and 3) In breach of a fiduciary duty to the Source of Information. This is the same thing as embezzlement
180
Why is insider trading illegal? 3
- It offends our sense of fairness. - Investors will lose confidence in the market if they feel that insiders have an unfair advantage - Investments banks typically 'make a market' in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
181
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a "piece of the great blue sky")
182
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
183
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
184
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
185
What are the two categories of antitrust legislation?
- Per Se | - Rule of Reason
186
Who has authority to enforce the antitrust laws?
- Justice Department | - Federal Trade Commission
187
Who has the right to sue over antitrust violations? What can they collect?
- Government - Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
188
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
189
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
190
What does the SEC's approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
191
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
192
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute. - The SEC and any purchasers
193
What is an Accredited Investors?
Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)
194
What must a company file with the SEC to make a public offering?
A registration statement.
195
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and 2) To disclose information of interest to prospective purchasers.
196
What must a registration statement include? 5
- Detailed information about the issuer - Detailed information about their business - A description of the stock - The proposed use of the proceeds from the offering - Two years of audited balance sheets and income statements. (The prospectus is part of the registration statement)
197
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
198
What must all investors receive before purchasing stock?
A copy of the prospectus
199
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
200
Who makes the sales effort for a security?
The investment bank representing the issuer.
201
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
202
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter. Lists required changes to the registration statement. Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
203
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
204
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering | - It is much simpler and cheaper than an IPO
205
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
206
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
207
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
208
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
209
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
210
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
211
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
212
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
213
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
214
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
215
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
216
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
217
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so - Willfully - Knowingly, or - Recklessly
218
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
219
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days - Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
220
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
221
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
222
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
223
What are the rules on insider trading? 6
- Fiduciary - Temporary Insiders - Possession vs. use of information - Tippers - Tippees - Misappropriation
224
What is the 'fiduciary' rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
225
What is the 'temporary insider' rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
226
What is the 'possession v. use of information' rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities. If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
227
What is the 'tippers' rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they: 1) Know the information is confidential 2) Expect some personal gain (gifts to friends count as personal gain)
228
What is the 'tippees' rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as: 1) They knew the information was confidential 2) They know it came from an insider who was violating his fiduciary duty, and 3) the insider expected some personal gain
229
What is the 'misappropriation' rule on insider trading?
A person is liable if he trades securities 1) for personal profit, 2) using confidential information, and 3) In breach of a fiduciary duty to the Source of Information. This is the same thing as embezzlement
230
Why is insider trading illegal? 3
- It offends our sense of fairness. - Investors will lose confidence in the market if they feel that insiders have an unfair advantage - Investments banks typically 'make a market' in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
231
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a "piece of the great blue sky")
232
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
233
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
234
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
235
What are the two categories of antitrust legislation?
- Per Se | - Rule of Reason
236
Who has authority to enforce the antitrust laws?
- Justice Department | - Federal Trade Commission
237
Who has the right to sue over antitrust violations? What can they collect?
- Government - Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
238
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
239
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
240
What does the SEC's approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
241
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
242
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute. - The SEC and any purchasers
243
What is an Accredited Investors?
Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)
244
What must a company file with the SEC to make a public offering?
A registration statement.
245
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and 2) To disclose information of interest to prospective purchasers.
246
What must a registration statement include? 5
- Detailed information about the issuer - Detailed information about their business - A description of the stock - The proposed use of the proceeds from the offering - Two years of audited balance sheets and income statements. (The prospectus is part of the registration statement)
247
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
248
What must all investors receive before purchasing stock?
A copy of the prospectus
249
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
250
Who makes the sales effort for a security?
The investment bank representing the issuer.
251
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
252
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter. Lists required changes to the registration statement. Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
253
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
254
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering | - It is much simpler and cheaper than an IPO
255
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
256
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
257
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
258
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
259
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
260
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
261
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
262
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
263
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
264
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
265
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
266
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
267
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so - Willfully - Knowingly, or - Recklessly
268
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
269
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days - Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
270
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
271
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
272
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
273
What are the rules on insider trading? 6
- Fiduciary - Temporary Insiders - Possession vs. use of information - Tippers - Tippees - Misappropriation
274
What is the 'fiduciary' rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
275
What is the 'temporary insider' rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
276
What is the 'possession v. use of information' rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities. If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
277
What is the 'tippers' rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they: 1) Know the information is confidential 2) Expect some personal gain (gifts to friends count as personal gain)
278
What is the 'tippees' rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as: 1) They knew the information was confidential 2) They know it came from an insider who was violating his fiduciary duty, and 3) the insider expected some personal gain
279
What is the 'misappropriation' rule on insider trading?
A person is liable if he trades securities 1) for personal profit, 2) using confidential information, and 3) In breach of a fiduciary duty to the Source of Information. This is the same thing as embezzlement
280
Why is insider trading illegal? 3
- It offends our sense of fairness. - Investors will lose confidence in the market if they feel that insiders have an unfair advantage - Investments banks typically 'make a market' in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
281
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a "piece of the great blue sky")
282
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
283
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
284
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
285
What are the two categories of antitrust legislation?
- Per Se | - Rule of Reason
286
Who has authority to enforce the antitrust laws?
- Justice Department | - Federal Trade Commission
287
Who has the right to sue over antitrust violations? What can they collect?
- Government - Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
288
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
289
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
290
What does the SEC's approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
291
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
292
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute. - The SEC and any purchasers
293
What is an Accredited Investors?
Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)
294
What must a company file with the SEC to make a public offering?
A registration statement.
295
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and 2) To disclose information of interest to prospective purchasers.
296
What must a registration statement include? 5
- Detailed information about the issuer - Detailed information about their business - A description of the stock - The proposed use of the proceeds from the offering - Two years of audited balance sheets and income statements. (The prospectus is part of the registration statement)
297
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
298
What must all investors receive before purchasing stock?
A copy of the prospectus
299
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
300
Who makes the sales effort for a security?
The investment bank representing the issuer.
301
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
302
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter. Lists required changes to the registration statement. Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
303
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
304
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering | - It is much simpler and cheaper than an IPO
305
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
306
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
307
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
308
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
309
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
310
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
311
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
312
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
313
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
314
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
315
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
316
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
317
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so - Willfully - Knowingly, or - Recklessly
318
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
319
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days - Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
320
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
321
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
322
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
323
What are the rules on insider trading? 6
- Fiduciary - Temporary Insiders - Possession vs. use of information - Tippers - Tippees - Misappropriation
324
What is the 'fiduciary' rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
325
What is the 'temporary insider' rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
326
What is the 'possession v. use of information' rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities. If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
327
What is the 'tippers' rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they: 1) Know the information is confidential 2) Expect some personal gain (gifts to friends count as personal gain)
328
What is the 'tippees' rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as: 1) They knew the information was confidential 2) They know it came from an insider who was violating his fiduciary duty, and 3) the insider expected some personal gain
329
What is the 'misappropriation' rule on insider trading?
A person is liable if he trades securities 1) for personal profit, 2) using confidential information, and 3) In breach of a fiduciary duty to the Source of Information. This is the same thing as embezzlement
330
Why is insider trading illegal? 3
- It offends our sense of fairness. - Investors will lose confidence in the market if they feel that insiders have an unfair advantage - Investments banks typically 'make a market' in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
331
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a "piece of the great blue sky")
332
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
333
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
334
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
335
What are the two categories of antitrust legislation?
- Per Se | - Rule of Reason
336
Who has authority to enforce the antitrust laws?
- Justice Department | - Federal Trade Commission
337
Who has the right to sue over antitrust violations? What can they collect?
- Government - Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
338
What is a Security?
Any transaction in which the buyer - invests money in a common enterprise and - expects to earn a profit predominantly from the efforts of others. ! This can include things other than just stocks, bonds, and notes.
339
What is an Issuer?
A company that sells its own stock.
340
What is Material?
Important enough to affect an investor's decision.
341
What as an Initial Public Offering?
A company's first public sale of securities.
342
What is a Secondary Offering?
Any public sale of securities by a company after the initial public offering.
343
What are the two major laws that regulate securities?
The Securities Act of 1933 (the 1933 Act) and | The Securities Exchange Act of 1934 (the 1934 Act).
344
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
345
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
346
What does the SEC's approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
347
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
348
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute. - The SEC and any purchasers
349
What is an Accredited Investors?
Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)
350
What must a company file with the SEC to make a public offering?
A registration statement.
351
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and 2) To disclose information of interest to prospective purchasers.
352
What must a registration statement include? 5
- Detailed information about the issuer - Detailed information about their business - A description of the stock - The proposed use of the proceeds from the offering - Two years of audited balance sheets and income statements. (The prospectus is part of the registration statement)
353
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
354
What must all investors receive before purchasing stock?
A copy of the prospectus
355
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
356
Who makes the sales effort for a security?
The investment bank representing the issuer.
357
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
358
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter. Lists required changes to the registration statement. Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
359
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
360
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering | - It is much simpler and cheaper than an IPO
361
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
362
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
363
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
364
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
365
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
366
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
367
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
368
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
369
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
370
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
371
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
372
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
373
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so - Willfully - Knowingly, or - Recklessly
374
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
375
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days - Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
376
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
377
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
378
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
379
What are the rules on insider trading? 6
- Fiduciary - Temporary Insiders - Possession vs. use of information - Tippers - Tippees - Misappropriation
380
What is the 'fiduciary' rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
381
What is the 'temporary insider' rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
382
What is the 'possession v. use of information' rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities. If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
383
What is the 'tippers' rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they: 1) Know the information is confidential 2) Expect some personal gain (gifts to friends count as personal gain)
384
What is the 'tippees' rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as: 1) They knew the information was confidential 2) They know it came from an insider who was violating his fiduciary duty, and 3) the insider expected some personal gain
385
What is the 'misappropriation' rule on insider trading?
A person is liable if he trades securities 1) for personal profit, 2) using confidential information, and 3) In breach of a fiduciary duty to the Source of Information. This is the same thing as embezzlement
386
Why is insider trading illegal? 3
- It offends our sense of fairness. - Investors will lose confidence in the market if they feel that insiders have an unfair advantage - Investments banks typically 'make a market' in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
387
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a "piece of the great blue sky")
388
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
389
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
390
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
391
What are the two categories of antitrust legislation?
- Per Se | - Rule of Reason
392
Who has authority to enforce the antitrust laws?
- Justice Department | - Federal Trade Commission
393
Who has the right to sue over antitrust violations? What can they collect?
- Government - Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.
394
What is a Security?
Any transaction in which the buyer - invests money in a common enterprise and - expects to earn a profit predominantly from the efforts of others. ! This can include things other than just stocks, bonds, and notes.
395
What is an Issuer?
A company that sells its own stock.
396
What is Material?
Important enough to affect an investor's decision.
397
What as an Initial Public Offering?
A company's first public sale of securities.
398
What is a Secondary Offering?
Any public sale of securities by a company after the initial public offering.
399
What are the two major laws that regulate securities?
The Securities Act of 1933 (the 1933 Act) and | The Securities Exchange Act of 1934 (the 1934 Act).
400
What does the 1933 Act require regarding IPOs?
That before offering or selling the securities in a PUBLIC offering, the issuer must register the securities with the Securities and Exchange Commission.
401
What does the SEC not do when an issuer register securities?
Investigate the quality of the offering. It does not assess the value or merit of the investment.
402
What does the SEC's approval of a security mean?
On the surface, the company has provided all required information about itself and its major products.
403
Under the 1933 Act, what is the seller of a security liable for?
Making any material misstatement or omission, either oral or written, in connection with the offer of sale of a security.
404
What is the liability for the issuers of a a fraudulent security? Who can sue?
- Anyone who issues fraudulent securities is in violation of the 1933 Act, whether or not the securities are registered. The Justice Department can bring criminal charges against anyone who willfully violates this statute. - The SEC and any purchasers
405
What is an Accredited Investors?
Are institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)
406
What must a company file with the SEC to make a public offering?
A registration statement.
407
What are the two purposes of a registration statement?
1) To notify the SEC that the sale of securities is pending and 2) To disclose information of interest to prospective purchasers.
408
What must a registration statement include? 5
- Detailed information about the issuer - Detailed information about their business - A description of the stock - The proposed use of the proceeds from the offering - Two years of audited balance sheets and income statements. (The prospectus is part of the registration statement)
409
What kind of information might a prospectus have compared to a registration statement?
The prospectus includes all of the important disclosures about the company The registration statement includes additional information that is of interest to the SEC but not to the typical investor, such as the names and addresses of the lawyers for the issuer and underwriter.
410
What must all investors receive before purchasing stock?
A copy of the prospectus
411
When does the sales effort for a security begin?
Before the final registration statement and prospectus are completed. It cannot actually make sales during this period, but it can solicit offers.
412
Who makes the sales effort for a security?
The investment bank representing the issuer.
413
Why doe the SEC closely regulate the sales effort of a security?
To ensure that the stock is not hyped by making public statements about the company before the stock is sold.
414
What does the issuer get from the SEC after its review of the registration statement? What does it do?
A commitment letter. Lists required changes to the registration statement. Its role is ensure that the company has disclosed enough information to enable investors to make an informed decision.
415
What happens after the SEC has approved the final registration statement?
The issuer and underwriter agree on a price for the stock and the date to GO EFFECTIVE, that is, to begin its sale.
416
How else does the 1933 Act permit issuers to sell stock? What is a benefit?
- In a private offering | - It is much simpler and cheaper than an IPO
417
What is the registration requirement for securities sold in a private offering?
They are not required to register the securities.
418
What rule is the most common and important type of private offering under?
Regulation D (Reg D)
419
What does Rule 505 under Reg D permit?
A company to sell up to $5 million of stock during each 12-month period, subject to restrictions.
420
What are the restrictions under Rule 505 to a company selling stock privately? 3
- The issuers can sell to an unlimited amount of accredited investors, but only to 35 unaccredited investors. - The company may not advertise the stock publicly. - The company need not to provide information to accredited investors but must make some disclosure to unaccredited investors
421
What is the purpose of the Securities Exchange Act of 1934?
Because most investors don't purchase securities from the issuer in an IPA, the act provides investors with ongoing information about public companies.
422
When must an issuer register with the SEC?
If they: - Complete a public offering under the 1933 Act, or - It has at least 500 shareholders AND total assets that exceed $10 million.
423
What documents does the 1934 Act require public companies to file?
- Annual Reports - Quarterly Reports - Form 8-K
424
What is an Annual Report?
Annual reports on Form 10-K, containing -audited financial statements, -a detailed analysis of the company's performance, -and information about officers and directors. A public company must deliver its annual report to shareholders.
425
What is a Quarterly Report?
Quarterly reports, on form 10-Q, which are less detailed than 10-Ks and contain unaudited financials.
426
What is Form 8-K?
Reports any significant developments, such as change in control, the registration of a director over a policy dispute, or a change in auditing firms.
427
Under the Sarbanes-Oxley Act of 2002, what must each company's CEO and CFO certify?
That: - The information in the quarterly and annual reports is true - The company has effective internal controls, and - The officers have informed the company's audit committee and its auditors of any concerns that they have about the internal control systems.
428
What does Section 10(b)(and rule 10b-5) of the 1934 Act prohibit?
Fraud in connection with the purchase and sale (or auditing) of any security, whether or not the security is registered under the 1934 Act.
429
When would an issuer who fails to disclose material information or make incomplete or inaccurate disclosures be liable?
If they did so - Willfully - Knowingly, or - Recklessly
430
What is the purpose of Section 16 of the 1934 Act?
To prevent corporate insiders-officers, directors, and shareholders who own more than 10% of the company-from taking unfair advantage of privileged information to manipulate the market.
431
What is the two prong approach that Section 16 of the 1934 Act takes to prevent trading abuse?
- First, insiders must REPORT their trades within two business days - Second, insiders must TURN OVER TO THE CORPORATION any profits they make from the purchase and sale or sale and purchase of company securities in a six-month period. Section 16 is a strict liability provision. It applies even if the insider did not actually take advantage of secret information or try to manipulate the market; if she bought and sold or sold and bought stock in a six-month period, she is liable for any profits she earned.
432
How is insider trading punishable?
By fines and imprisonment. The guilty party may also be forced to turn over to the SEC three times the profit made.
433
What landmark case established one of the most important rules regarding insider trading?
Chiarella v. United States. - A an employee of a printer that printed documents used to announce corporate take over bids that used that information to make a profit. Was found not guilty of insider trading.
434
When is insider trading illegal?
Only if the person with secret information has a duty to disclose to those with whom he trades.
435
What are the rules on insider trading? 6
- Fiduciary - Temporary Insiders - Possession vs. use of information - Tippers - Tippees - Misappropriation
436
What is the 'fiduciary' rule on insider trading?
Someone who trades on insider information is only liable if he breaches a fiduciary duty.
437
What is the 'temporary insider' rule on insider trading?
Even outsiders who work for a company temporarily are considered to be fiduciaries.
438
What is the 'possession v. use of information' rule on insider trading?
An insider may trade while in possession of material, nonpublic information, if she has committed in advance to a plan to sell those securities. If a person knows in advance they want to sell, they have to establish a sales plan, and despite any change in circumstances, must sell according to that plan.
439
What is the 'tippers' rule on insider trading?
Insiders who pass on important, secret information are liable, even if they do not trade themselves, so long as they: 1) Know the information is confidential 2) Expect some personal gain (gifts to friends count as personal gain)
440
What is the 'tippees' rule on insider trading?
Those who receive tips are liable for trading on insider information even if they do not have a fiduciary relationship to the company, so long as: 1) They knew the information was confidential 2) They know it came from an insider who was violating his fiduciary duty, and 3) the insider expected some personal gain
441
What is the 'misappropriation' rule on insider trading?
A person is liable if he trades securities 1) for personal profit, 2) using confidential information, and 3) In breach of a fiduciary duty to the Source of Information. This is the same thing as embezzlement
442
Why is insider trading illegal? 3
- It offends our sense of fairness. - Investors will lose confidence in the market if they feel that insiders have an unfair advantage - Investments banks typically 'make a market' in stocks, meaning that they hold extra shares so that orders can be filled smoothly. These marketmakers expect to earn a certain profit, but insider traders skim some of it off. So marketmakers simply raise the commission they charge. As a result, everyone who buys and sells the stock pays a slightly higher price.
443
What are the laws that all states and DC have that also regulate the sale of securities called?
Blue Sky Laws (because crooks were willing to sell naive investors a "piece of the great blue sky")
444
What is a Per Se Violation? What can defendants charged with this do?
An automatic breach of antitrust laws. Defendants charged with this type of violation cannot defend themselves. The court will not listen to excuses and violators may be sent to prison.
445
What is a Rule of Reason Violation?
An action that breaches antitrust laws only if it has an anti-competitive impact. Those who commit this violation are not sent to prison.
446
Why did congress pass the Sherman Act of 1890?
To prevent extreme concentrations of economic power. It was aimed at the Standard Oil Trust so it was termed Antitrust legislation.
447
What are the two categories of antitrust legislation?
- Per Se | - Rule of Reason
448
Who has authority to enforce the antitrust laws?
- Justice Department | - Federal Trade Commission
449
Who has the right to sue over antitrust violations? What can they collect?
- Government - Anyone injured by an antitrust violation. A successful plaintiff can recover treble (triple) damages from the defendant.

Legal & Regulatory Aspects of FP (26 decks)

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