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Flashcards in Federal Securities: 1934 Act Deck (9)
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1

Federal Securities:
1934 Act:

- Requires regular disclosure to investors
- Punish Fraud
- Created SEC: requires disclosure and punishes fraud

2

Federal Securities:
1934 Act:
Who are reporting companies?

- traded on national exchange
- shares registered with SEC unless
- 300 shareholders or
- 500 shareholders and less than $10M in total assets for last 3 years
- non-registered companies with more $10M in total assets for last 3 years and 2,000 shareholders
- any company that made a registration during the year
- NASDAQ Bulletin Board companies
**EGC need not do this***

3

Federal Securities:
1934 Act:
What documents do they file?

1. Initial Registration Form: Names of officers & Directors, nature of business, financial structure, bonus and profit sharing Provisions
2. Continuous Disclosure Forms
- 10-K's annual
- 10-Q's quarterly
- 8-k's event
3. Concentrations of shares: 5% class of security must file: purpose of purchase, amount and source of funds, name and background of acquirer. Purpose is to alert shareholders to potential changes in source of funds
4. Tender Offers: both acquirer and target must file
5. Proxy solicitations: in order to meet quorum. material facts about the vote. including proposals for corporate action and 2 years financials
6. Insider Trading: officers, directors, holders of 10% securities

4

Federal Securities:
1934 Act:
Section 10(b) and Rule 10(b)-5

- Apply to all securities, no matter size, or registration status
- standard is scienter
- burden of proof on plaintiff
- SEC civil challenges and injury by plaintiff

5

Federal Securities:
1934 Act:
Section 10(b) and Rule 10(b)-5
What plaintiffs must prove?

- False statement or omission of material fact
- Scienter by defendant
- Reliance by plaintiff
- not in omission case
- must prove reliance in misrepresentation case
- Causation
- transaction causation: cause them to enter into the transaction
- loss causation: show false statements or omissions actually caused loss
- occurred in connection with purchase of securities
- Damages

6

Federal Securities:
1934 Act:
Section 10(b) and Rule 10(b)-5
Defenses

Section 10(b) Defenses
- Statute of Limitations
- within 2 years of when fraud was or should have been discovered
- within 5 years of the fraud
- Fraudulent or reckless conduct by the plaintiff
- Bespeaks Caution doctrine: warning language
- Secondary liability; no aiding and abetting under 10(b)
- Damages
1. Still owns: amount paid minus market value at time of suit
2. Sold shares: amount paid minus sales price
3. Punitive damages: not allowed in any federal securities law case

7

Federal Securities:
1934 Act:
Section 18(a)

- false statements filed in documents
- saw, read, and believed
- 18(a) materially false, shifts burden of proof to defendants
Defenses
- acted in good faith
- statute of limitations: 3 years

8

Federal Securities:
1934 Act:
Private Securities Litigation Reform

- made it harder to bring fraud law cases against accountants

9

Federal Securities:
1934 Act:
New Rules for Auditors

- procedural design to identify illegal acts, material related-party transactions, and ability to continue as a going concern
- when aware of an illegal act, determine whether likely it occurred, and the possible effect on issuer, and as soon as practicable, inform management
- after audit committee informed determine if, it has a material effect on financials, senior management has reacted properly and promptly, if failure of action, resign
- directly report conclusions to board. Board has one day to inform SEC.
- either resign or
- issue own copy of report to the SEC

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