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Flashcards in Federal Securities Acts Deck (33):

Under the 1933 Securities Act; Regulation D; what are Rules 504; 505 and 506?

Rule 504-
1. Max Amount per year: $1M

2. General offering & solicitations ARE permitted - only to accredited investors

3. Restrictions on sale - only to accredited investors

4. Max Investors: Unlimited

5. No disclosure required

Rule 505 -
1. Max Amount per year: $5M

2. No general offering or solicitation permitted (within 12 month period)

3. Restrictions on sale - must hold for long-term investment - NOT resale ( 2 years or more)

4. Max Investors: 35 Unaccredited or Unlimited Accredited

5. Disclosure require: must include AFS if 1 or more Unaccredited investors

Rule 506 -
1. Max Amount per year: Unlimited

2. General advertising and solicitation permitted to accredited investors

3. Same as 505; but Unaccredited investors must be “sophisticated”


What are the key points of the 1933 Securities Act; Regulation A (Small Issuance)?

Issuer can issue $50M (use to be $5M - raised to $50M from JOBS Act) of securities per year and be exempt if they file a notice with the SEC

Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt in a 12-month period


What are the key points of the 1933 Securities Act?

Governs Initial Public Offerings (not subsequent sales). Covers registration statements and accompanying information filed with SEC

Information must include audited financial statements & a prospectus

Note: Even if a company is exempt from registering under the 1934 Act; they still must adhere to the anti-fraud provisions of the Act


What entities are exempt from filing registration statements under the 1933 Securities Act?

Banks; Commercial Paper; Farmers; Co-ops; Charities; Governments

Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can't occur within 9 months to interstate parties.


What are the registration form options under the 1933 Securities Act?

S-1 – Long Form or

S-2 and S-3 – Less Detailed and preferred by issuers


Name the securities registered under the Securities Act of 1933.

Stock Options
Stock Warrants
Limited Partnership Interests - General Partnerships not allowed


Who can sue under the Securities Act of 1933?

Purchasers of securities only


Name the Requirements for Accountant to be liable under the Securities Act of 1933.

o Damages & Material Misstatements Only

o Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered

o Proving negligence is not a requirement


Name the Defenses of an Accountant under the Securities Act of 1933.

o Accountant used Due Diligence

o Accountant followed GAAP

o Damages weren’t caused by accountant’s work

o Plaintiff knew of the material misstatements


What does the Securities Act of 1934 govern?

The trading/selling of securities after the IPO


What reports must be filed under the Securities Act of 1934?

o Form 10-K Annual Report - Must be audited

o Form 10-Q Quarterly Report - Must be reviewed; but not audited

o Form 8-K - A notice of a material event; Must be filed within 4 days of event


Who can sue under the Securities Act of 1934?

Purchases and Sellers of Securities


Name the Requirements for an Accountant to be liable for fraud under the Securities Act of 1934.


Material Misstatements

Reliance on financial statements

Scienter or reckless disregard for the truth


What procedures must an Accountant have in place under the Securities Act of 1934?

Accountant must have procedures in place to:

o Determine if Going Concern is an issue

o Determine if any material related party transactions occurred

o Determine if material illegal acts occurred


Insider trading rules under the Securities Act of 1934 apply to which individuals?

Officers; Directors and 10% Owners


What are the Proxy Solicitation Requirements under the Securities Act of 1934?

o Proxy must give shareholders audited balance sheets from 2 most recent years

o Requirement holds true even if one class of stock


What is the purpose of the Securities Act of 1933?

The purpose of the 1933 Act are to provide potential investors with full and fair disclosure of all material information relating to issuance of securities (such that a prudent decision to invest or refrain from investing can be made) and to prevent fraud or misrepresentation


What are the characteristics of a registration statement?

Registration statement is the statement required to be filed with the SEC before initial sale of securities in interstate commerce:

1. Includes financial statements and other relevant information about registrant's property, business, directors, principal officers, together with the prospectus

2. It's against the law to sell, offer to sell, or offer to purchase securities before filing a registration statement

3. Registration statement & prospectus becomes public upon filing

a. Effective date of registration statement is 20th day after filing

b. It's against the law to sell securities until the effective date, but the issuer may offer securities upon filing registration statement - orally, tombstone ad, or by a "red-herring prospectus", which is a preliminary prospectus


What is a prospectus?

A prospectus is any notice, circular, advertisement, letter, or communication offering any security for sale (or merger):

1. May be written, radio, or television communication - SEC adopted "plain English" rule for important sections of companies' prospectus including risk factor sections

2. After the effective date of the registration statement, communication (written or oral) will not be considered a prospectus if

a. Prior to or at same time a written prospectus was also sent

b. If it only states from whom written prospectus is available, identifies security, states price, and who will execute orders for it (i.e. tombstone ad)


What other exempt transactions or offering exist under the 1933 Act?

Exempt transactions or offerings (still subject, however, to antifraud provisions of the Act and may also be subject to the reporting requirements of the 1934 Act)

1. Sale or offer to sell by any person other than an issuer, underwriter, or dealer:

a. Generally covers sales by individual investors on their own account

b. May be a transaction by broker on customer's order. It does not include solicitation of these orders

c. Exemption does not apply to sales by controlling persons because they are considered an underwriter or issuer


What are the exemptions for the 1933 Act under Regulation D for rule 504?

Rule 504 exempts an issuance of securities up to $1M sold in a 12-month period to any number of investors (also known as seed capital exemption):

1. General offering and solicitations are permitted under Rule 504, as long as they are restricted to "accredited investors" - banks, insurance companies, and high-worth individuals

2. The issuer need not restrict purchasers' right to resell securities

3. No specific disclosure is required

4. The issuer must send notice of offering to SEC within 15 days of first sale of securities


What are the exemptions for the 1933 Act under Regulation D for rule 506?

Rule 506 allows private placement of unlimited amount of securities

1. Note: In general, the same rules apply here as outlined under Rule 505. However, under the provisions of the Jumpstart Our Business Startups (JOBS) Act general solicitation and advertising for Rule 506 offerings is allowed for accredited investors

2. However, an additional requirement is that the unaccredited investors (up to 35) must be sophisticated investors (individuals with knowledge and experience in financial matters) or be represented by individual with such knowledge and experience


What are the exemptions for the 1933 Act under Regulation D for rule 505?

Rule 505 exempts issuances of up to $5M in a 12-month period

1. No general offering or solicitation is permitted within 12-month period

2. Permits sales to 35 unaccredited / non-accredited investors and an unlimited number of accredited investors within 12 months

3. The issuer must restrict the purchasers' right to resell the securities; in general must be held for two years or else exemption is lost

4. These securities typically state that they have not been registered and that they have resale restrictions

5. Unlike under Rule 504, if non-accredited investor purchases these securities, audited balance sheet must be supplied (i.e. disclosure is required) as well as other financial statements or information, if readily available. However, if purchase only by accredited investors, then no disclosure required


What is the purpose of the Securities Act of 1934?

The Securities Act of 1934 generally applies to subsequent trading of securities and must comply separately with the 1933 Act if applicable, that is, initial issuances rather than subsequent trading

Purposes of the Act:

1. To federally regulate securities exchanges and securities traded thereon

2. To require periodic disclosure by issuers of equity securities

3. To require adequate information be provided in various transactions

4. To prevent unfair use of information by insiders

5. To prevent fraud and deceptive practices


What securities must be registered with the SEC under the 1934 Act?

The following securities must be registered with the SEC under the 1934 Act:

1. Over-the-counter and other equity securities traded in interstate commerce where corporation has assets of more than $10M and 500 or more shareholders. Equity securities include stock, rights to subscribe to stock, or securities in convertible

NOTE: There is a provision of the JOBS Act which increases the threshold to 500 unaccredited shareholders or 2,000 total shareholders. It also provides that the threshold will not consider shares obtained by a shareholder as a part of a qualified employee compensation plan

2. Securities that are traded on any national securities exchange must be registered. Securities exempted under the 1933 Act may still be regulated under the 1934 Act

3. Securities offered by issuer who was required to register under the 1933 Act


What are the required disclosures in registration under the 1934 Act?

Required disclosures in registration under the 1934 Act include:

1. Names of officers and directors
2. Nature of business
3. Financial structure of firm
4. Any bonus and profit-sharing provisions


What sanctions are available to the SEC under the 1934 Act?

The sanctions available to the SEC under the 1934 Act are as follows:

1. Revocation or suspension of registration

2. Denial or registration

3. Permanent or temporary suspension of trading of securities (injunction)

4. May order accounting and disgorgement of gains illegally

5. May sanction individuals violating foreign laws

6. May require large traders to identify themselves


What securities are exempt under the 1934 Act?

Exempt securities under the 1934 Act are as follows:

1. Obligations of US government, guaranteed by, or in which US government has interest

2. Obligations of state or political subdivision, or guaranteed thereby

3. Securities of federally chartered bank or savings and loan institution

4. Securities of common carrier regulated by ICC

5. Industrial development bonds


What are the characteristics of Proxy solicitations?

Required filing per the 1934 Act

A Proxy is a grant of authority by shareholders to someone else to vote his/her shares at a meeting

A proxy solicitation provisions apply to solicitation (by any means of interstate commerce or the mails) of holders of securities required to be registered under the 1934 Act - must be reported to the SEC

A proxy statement must be sent with proxy solicitation and must contain disclosure of all material facts concerning matters to be voted upon

1. Either misstatements or omissions of material facts are violations of proxy rules

2. Material means that it would likely affect vote of average shareholder on proposed action

3. The purpose is for fairness in corporate action and election of directors


What are the requirements of the proxy and inclusions in the proxy material?

Required filing per the 1934 Act

The requirements of the proxy itself is:

1. Indicate on whose behalf solicitation is made

2. Identify clearly and impartially each matter to be acted on

The inclusions in the proxy material include:

1. Proposals by shareholders that are a proper subject for shareholders to vote on

2. Financial statements for the last 2 years, certified by independent accountant, if

a. solicitation on behalf of management

b. it is for annual meeting at which directors are to be elected

3. Any person who owns at least 5% or has held stock for 6 months or more has right of access to lists of shareholders for lawful purpose

4. The proxy statement, proxy itself, and any other soliciting material must be filed with SEC

5. Brokers are required to forward proxies for customers' shares held by broker

6. Incumbent management is required to mail proxy materials of insurgents to shareholders if requested and expenses are paid by the insurgents


What is a tender offer?

Required filing per the 1934 Act

A tender offer is invitation by buyer (bidder) to shareholders of targeted company to tender shares they own for sale for price specified over a period of time

Reporting and disclosure requirements apply to tender offers to provide shareholders full disclosure by both the bidder and targeted company


What are short-swing profits?

Short-swing profits include the following;

1. A corporation is entitled to recover profits from any insider who sells stock of company within six months of its purchase

2. Profits that can be recovered are calculated by matching highest sale price with lowest purchase price found within 6 months

3. Losses cannot be used to offset these profits


What is true about the Private Securities Litigation Reform Act?

The Private Securities Litigation Reform Act amended the:

1. Federal Securities Act of 1933
2. Federal Securities Exchange Act of 1934