Federal Securities Law Flashcards
(33 cards)
Issuer
An issuer is a company offering its securities for sale to raise capital.
They make a financial commitment to provide a return in the form of (1) dividends, (2) interest payments, (3) appreciation and/or (4) liquidation rights
Financial Intermediaries
They bring issuers and investors together; they come in various forms:
(1) Dealer (2) Broker (3) Underwriter
Underwriter
They are the firm that helps a company sell securities through an offering registered under the 1933 Act
-Issuer enters into a contract with an underwriter to sell shares to the public –> Underwriter then approaches investors with offers to sell these shares
Primary Market
It’s the sale of securities to investors by issuers seeking to raise capital for their businesses.
-IPO’s = Initial Public Offering: First sale of a corporation’s securities to public investors
Secondary Market
Buy-sell transaction among investors of already-issued securities. Issuer NOT involved
- These sales can be in public markets or private placements in negotiated transactions
- DO NOT raise capital for issuer - This is investors cashing out and liquidating their investments by selling to other investors in privately negotiated transactions or continuous public trading (stock exchange)
Two Examples of Secondary Markets
NYSE and NASDAQ
Function of Securities Markets
(1) capital formation: bringing together investors and businesses through the issuance of equity and debt;
(2) liquidity: the ability to readily sell an investment instrument- providing an exit strategy; and
(3) risk management: permits diversification and hedging of investments
Securities Regulations Purpose
Designed to protect investors through:
(1) mandatory disclosure [Make sure that investors have all the information they need to make informed decisions] and
(2) anti fraud liability will equip securities investors and securities markets with non fraudulent information to move capital to its optimal uses.
What market does the 1933 Act regulate?
Regulates the sale of securities to the public - primary market
-Gist: Unless there is an exemption available for the security itself, or the way you are selling it, you have to register the securities with the SEC if you want to offer it to the public or sell it in interstate or foreign commerce or through the mails.
Selling securities under the securities act of 1933 (Section 5)
§ 5 prohibits the offer and sale of “securities” through the mail or via interstate commerce without filing a disclosure document called a registration statement with the SEC;
§ 5 requires that the securities can’t be sold until the registration statement is declared effective by the SEC; and
§ 5 requires the delivery of a prospectus to everyone who actually buys the securities, as well as to anyone just offered the securities.
What market does the 1934 Act regulate?
Secondary market activity
- Sets up mandatory disclosure system that requires largely publicly traded companies (the companies subject to section 16(b)) (those companies that have more than $10 million in assets and more than 500 SH or those companies that trade on a national exchange - NYSE OR DAQ) to disclose information regularly
- Requires these listed companies to have an audit committee and that that committee is comprised solely of independent directors. At least one member must qualify as a “financial expert”
State Blue Sky Laws
(1) anti-fraud provisions
(2) disclosure provisions
(3) licensing and registration provisions for securities and brokers and dealers of the securities
Definition of Security
Definition of a Security § 2(a)(1): “The term ‘security’ means any note, stock, … bond, debenture, … investment contract … or, in general, any interest or instrument commonly known as a ‘security’.”
What is an investment contract?
SEC v. Howey
A transaction constitutes an investment contract, triggering the federal securities laws if (1) a person invests money; (2) in a common enterprise; (3) with the expectation of profits solely from the efforts of others [promoter or some third party].
Prong 2 of Howey (Common Enterprise): Horizontal Commonality
Look to the relationship between the individual investor and other investors who put money into the scheme
-Requires investors to share the risk of the enterprise, usually through pooling of their funds (shareholders of a corporation)
Prong 3 of Howey: Expectation of profit from the efforts of others
Howey says that the profits must be SOLELY from the efforts of others; lower courts wrestle with whether “solely” means only or predominantly or substantially.
Critical Inquiry: “whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise”
Can the investor exercise “meaningful control” over the investment (Robinson v. Glynn)
Prospectus
The page summarizing the offering
Timeline of Selling Securities
(1) No selling activity
(2) Registration filed with SEC
- Offers permitted but no sales
- SEC review: adequacy of disclosure, not merits
(3) Registration statement effective
- Sales allowed
- Prospective must be delivered
Two ways to avoid the registration process
(1) Exempt securities
(2) Exempt transactions
Burden of proving exemption
is on the person claiming the exemption; if the burden is not met, the exemption is lost, and if they were counting on the exemption, they have probably now violated §5 which requires registration with automatic liability for selling unregistered securities under §12(a)(1).
Exempt Securities
ALWAYS exempt from registration, both when issued and later when traded.
- Remain subject to the anti-fraud provisions
- Just because a security is exempt under FEDERAL registration requirements doesn’t necessarily mean it is exempt from state blue sky registration
Examples: (1) Gov. securities (2) Commercial paper (with a maturity of less than 9 months) (3) Securities issued by banks (4) insurance policies and annuity contracts issued by state regulated insurance companies (5) Securities issued by not for profit issuers
Exempt Transactions
One-time exemptions based on the way you sell the security
Market trading exemption
Exemption for person other than issuer, underwriter, or dealer for ordinary trading transactions like on stock exchanges between investors
Private placement exemption
exempts from registration any offering “by an issuer not involving a public offering” – of course the laws don’t define “public offering.” -The application of this exemption turns on whether the particular class of persons affected needed the protection of the Act
