Federal_Securities_Acts Flashcards
(28 cards)
What are the purpose & key points of the 1933 Securities Act?
- Purpose is to provide potential investor with full and fair disclosure of all material information relating to the issuance of securities, including such information as the principal purpose for which the offering’s proceeds will be used.
- 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 1933 Act; they still must adhere to the anti-fraud provisions of the Act
What **securities & transaction **are exempt from registration under the 1933 Securities Act?
ACID BRAINS
**ACID BRAINS **
►Regulation A
►Commercial Paper (notes, bonds,checks) matures ≤ 9 months and used for commercial purposes
►Intrastate offerings – as long as shares aren’t resold to nonresidents for 9 months
►Regulation D – 504, 505, 506
►Brokerage transactions
►Regulated industries (saving and loan - FDIC)
►Agencies of the Gov. (railroads, municipal bonds)
►Insurance contracts/policies BUT stock issued by insurance companies is not exempt
►Nonprofit organization (church/charity)
►**Stock dividends and Splits **(no commission and same issuer)
What are the key points of the 1933 Securities Act - Regulation A?
- Max amount: Issuer can issue up to $5M of securities
- Period: **12 months **
- Required reporting: an offering circular (not audited)
- Notify the SEC within 15 days of the first sale
- No restriction on resale or type of investors
- Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt
Under the 1933 Securities Act; Regulation D - 504
- Max Amount $1M per year
- Max investors: Unlimited
- No specific disclosure required
- Notify the SEC within 15 days of the sale
**• Resale to Nonaccredited investor permitted **
What are the registration form options under the 1933 Securities Act?
- Form S-1 - Long Form
- Form S-2 and S-3 - Less Detailed and preferred by issuers
Definition of Security & Name the securities registered under the Securities Act of 1933.
- Security is defined as an investment in an enterprise, where the investor intends to make profit through the managerial efforts of others, rather than through his own efforts.
-
Some examples:
- include Prefer & Common Stock, Bonds, Debentures, Warrants, Treasury Stock, Options, Limited Partnership Interests, investment contract
- Do NOT include: General Partnerships intrest, Certificat of deposit
Who can sue under the Securities Act of 1933?
**ANY Purchasers of securities **
Exempt securities: → subject to anti-fraud provision ⇒SEC and person defrauded can challenge the fraud committed in the course of selling the securities
Name the Requirements for Accountant to be liable under Section 11 of the Securities Act of 1933
ONLY Damages & Material Misstatements of facts MILE
- Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered
- Proving negligence is not a requirement
Name the Defenses of an Accountant under the Securities Act of 1933
Accountant used Due Diligence
- Accountant followed GAAP
- Damages weren’t caused by accountant’s work
- Plaintiff knew of the material misstatements
What does the Securities Exchange Act of 1934 govern?
- Encourage disclosure of relevant information so investor can make better decision
- Anti-fraud provision
- The trading/selling of securities after the IPO
What reports must be filed under the Securities Exchange Act of 1934?
►Form 10-K Annual Report - Must be audited
►Form 10-Q Quarterly Report - Must be reviewed But NOT audited -filed 45 days at end of each quarter
►Form 8-K - A notice of a material event (change in officer, director, resignation of directors, and change in control); Must be filed within 4 days of event
►Proxy statement -shareholders may sign proxies authorizing the company to vote their shares, - must be file at least 10 days before sent to shareholders
► unsolicited tender offer to purchase a securities needs to be submitted to the SEC
► trading by insiders must be reported to the SEC
Who can sue under the Securities Exchange Act of 1934?
Potential penalties
**Purchaser **and Seller of Securities
Note potential penalties are extensive and include both civil liability of monetary damages and criminal liability of a fine
Name the** Requirements** for an Accountant to be liable for fraud under rule 10b-5 of the Securities Act of 1934
MILE
- Misstatement or omission of material fact
- Damages/Loss
- Reliance on financial statement/information
- Scienter or reckless disregard for the truth= Error
What procedures must an Accountant have in place under the Securities Act of 1934?
Accountant must have procedures in place to:
- Determine if Going Concern is an issue
- Determine if any material related party transactions occurred
- Determine if material illegal acts occurred
Insider trading rules under the Securities Excahnge Act of 1934 apply to which 4 individuals?
Insiders include
• Officers,
• Directors
• shareholder owing > 10% of outstanding class of shares,
• Accountants and Attorneys of the issuers
What are the Proxy Solicitation Requirements under the Securities Exchange Act of 1934?
- Proxy must give shareholders audited balance sheets from 2 most recent years
- Requirement holds true even if one class of stock
What statement required to be filed with the SEC before initial sale of Securities in intrastate commere under the Securities Act of 1933?
- Prospectus: part 1 a written, TV or radio offer to sell security, summarize the information in part 2: historical company information and risk involved
- Registration statement: part 2 basic information (describes the use of proceeds) and audit financial statements.
- The securities must be register before being offered to sale to the public.
- 20 days waiting period before registration is effective
- After waiting period, securities can be bought & sold
- In addition to Federal registration laws, states require registration under “blue-sky laws”
- Shelf registration used by companies that issue securities on a continuous basis such as mutual funds- must keep the original registration statement updated
Define a “tombstone ad” and “red herring”
- Tombstone ad: AFTER waiting period a tombstone ad informs investor about obtaining prospectus, not consider as an offer to sell
- Red herring: DURING waiting period the company can issue a preliminary prospectus but is missing certain available information
What companies must register under the Securities Exchanges Act of 1934?
- Company whose shares are traded/listed on a national exchange,
OR
- Company which has at **least $10M in assets & ≥500 shareholders **
When does a registration statement and prospectus MUST be filed under Securities Act of 1933?
SPIN
A registration statement and prospectus MUST be filed under Securities Act of 1933 when applicable offerings are based on (SPIN)
►Offer Securities
►Public Issues by issuer, underwriter or dealer
►Interstate commerce
►No other exemptions is available (securities and transaction exemption)
What information are required upon registration under the Securities Exchanges Act of 1934?
- Financial structure & nature of business
- Name of officers & directors
- Disclosures of bonus & profit-sharing arrangements
Name the Defenses for an Accountant to be liable for fraud under rule 10b-5 of the Securities Act of 1934
- Audit was performed in due care NOTE due diligence is a defense for 1933 Act only
- Misstatement was immaterial
- Plaintiff’s knowledge of the error
- Lack of reliance by plaintiff
- Misstatement was not cause of loss
**Sarbanes-Oxley Act of 2002 **
Expands the power of the SEC to regulate financial reporting
• CEO and CFO must certify in writing that financial statement are accurate
• Management is responsible of Internal Control (IC)
• Officer must disclose knowledge of IC deficiencies to auditor and audit committee
• Must also disclose evidence of fraud, even if immaterial, by employees involves in IC
• Prohibits most personal loans by company officers
• Requires insiders to report trades within 2 business days
**The Wall Street Reform and Consumer Protection (Dodd-Frank) Act of 2010 **
Designed to “promote the financial stability of the US by improving accountability and transparency in the financial system”
♦ Created the Financial Stability Oversight Council to identify and react to emerging risks
♦ Increased the types of financial companies that could be seized and liquidated by the FDIC
♦ Created the Federal Insurance Officer to regulated insurance companies
♦ Prohibits any “banking entity” from engaging in proprietary trading
♦ Gives authority to the Commodity Futures Trading Commission and the SEC to regulate the derivatives (swaps) markets
♦ All member of the compensation committee must be independent
