Flashcards in Federal Securities Regulation Deck (76)
What is a security?
An investment in some enterprise or business that expects profits and can be traded with others
Includes stocks, bonds, notes, etc.
Do partnership interests count as securities?
Limited partnership interests generally do, but not general partnership interests
Basic rule is that interests which involve management rights are not considered securities
What is a securities dealer?
Someone whose principal occupation involves buying or selling securities
Can be as principal, agent, or broker
What is an underwriter?
A person or company that distributes securities for an issuer
What is a controlling person?
Someone who controls (directly or indirectly) an issuer or is under common control with the issuer
Control is not simply a matter of stock ownership, but any influence (e.g. being an officer)
What is a beneficial owner?
Someone who has the benefits of ownership without the title, being able to influence activity regarding it
E.g. if a spouse has title, or if it is held in trust
Who qualifies as an insider?
Any officer or director and any beneficial owner of more than 10% of any class of equity security
What is a prospectus?
A document which makes an offer for a security sale and provides info about that security
What does not count as a prospectus?
A communication given after the registration statement's effective date, if a written prospectus already has been provided
A communication containing insufficient info about purchasing a security
What is a registration statement?
A statement filed with the SEC providing info about a public offering of securities
What is shelf registration?
A practice where issuers register their securities prior to issuing them, up to three years max -- though the statement still needs to be updated
What is the Securities & Exchange Commission (SEC)?
Independent agency created in 1934 to govern all federal securities laws
Made up of five commissioners appointed by a president, and three max can be of a political party
What power does the SEC have to make and enforce laws?
The SEC is authorized by Congress to make rules to enforce the 1933 and 1934 Acts -- these rules must be proposed and comments requested
SEC can also investigate any violations of these rules and suspend violators' registration, or even have criminal proceedings
What is the ISB?
Independence Standards Board -- governed independence of external auditors
ISB no longer exists, though three pronouncements still remain in effect
What are blue sky laws?
Specific state laws for securities transactions that go beyond federal regulations
What is the main purpose of the Securities Act of 1933?
Transparency in the original issuance of securities
What does the Securities Act of 1933 forbid?
(1) selling a security without an effective registration statement; and offering to sell without a filed (i.e. in-process) registration statement
(2) selling a security without a prospectus
(3) engaging in fraud/material misstatement (even for unregistered securities)
What are the liabilities included in the 1933 Act?
Civil liabilities for violating the registration statement or prospectus rules -- applies to anyone involved in preparing or certifying them (underwriters, directors, accountants, etc.)
What does the 1933 Act include to motivate compliance?
Gives the SEC power to seek writs of mandamus for people to comply with the Act
Mandamus = order from a superior court to do something
What are reasons why some securities are exempt from the registration requirements of the 1933 Act?
(1) unnecessary to protect public
(2) securities already regulated by a gov't agency
(3) nature of the security requires exemption
What are the first three (of ten) classes of securities exempt from registration in the 1933 Act?
(1) securities for gov't purposes (doesn't include securities for public utilities)
(2) nonprofit securities
(3) intrastate securities offerings -- if the issuer gets 80% of gross revenue from same state, and 80% of sales proceeds are used for its operations in that state, and securities are offered only to residents of the same state (and resales within nine months must be to residents as well)
What are the second three (of ten) classes of securities exempt from registration in the 1933 Act?
(4) insurance products (e.g. variable annuities)
(5) non-sale stock transactions -- an issuer exchanges securities with existing holders, but without payment (e.g. stock splits)
(6) short-term paper (e.g. negotiable instruments) whose maturity is less than nine months
What are the last four (of ten) classes of securities exempt from registration in the 1933 Act?
(7) small issues (<$5 million) if not necessary for the public good
(8) court-controlled securities (e.g. in bankruptcy)
(9) securities issued under the Small Business Investment (SBI) Act of 1958 -- if not necessary for the public good
(10) securities sold before sixty days after the 1933 Act was passed (May 27, 1933)
Per the 1933 Act, how are small issues regulated?
In accord with SEC Regulation A, which has more lenient regulations for smaller issues -- thus small issues are called "Reg. A issues"
Reg. A requires not a prospectus, but an offering circular
What is the rule permitting securities sold within 60 days of the 1933 Act's passing (and before) to be unregistered?
For the 1933 Act, how do exempt transactions differ from exempt securities?
Exempt securities do not need to be registered for any transactions, but a security in an exempt transaction may be nonexempt in subsequent transactions
What is the broadest class of transactions exempt from registration per the 1933 Act?
Any transactions done by someone besides an issuer, underwriter, or dealer
Per the 1933 Act, what are the three types of exempt transactions under Regulation D?
Those under Rules 504, 505, and 506
For all of these, the SEC still has to be notified of an offering within 15 days of the first sale
Per Regulation D, what transactions are exempt through Rule 504?
Unregistered nonpublic companies (often these are closely held) can have private offerings exempt under certain conditions