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Flashcards in Federal Securities Regulation Deck (76)
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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?

Grandfather clause


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


What are the rules governing exempt transactions for Rule 504 of Reg. D?

(1) max of $1 million of securities in a twelve-month period
(2) ads/solicitation are allowed in limited circumstances
(3) resale within two years is allowed under certain circumstances