Unformatted text preview: Business Law and the Regulation of Business Regulation
Chapter 40: Securities Regulation Chapter By Richard A. Mann & Barry S. Roberts Topics Covered in this Chapter Topics
I. The Securities Act of 1933
A. B. C. D. E. F. Definition of a Security Registration of Securities Exempt Securities Exempt Transactions for Issuers Exempt Transactions for Non-Issuers Liability II. The Securities Exchange Act of 1934
A. Disclosure B. Liability Securities Act of 1933 Securities
Security - includes any note, stock, bond, preorganization subscription, and investment contract. investment s Investment Contract - any investment of money or property made in expectation of receiving a financial return solely from the efforts of others. return
s Registration of Securities
Disclosure Requirements - disclosure of accurate material information required in all public offerings of nonexempt securities unless offering is an exempt transaction. an s Integrated Disclosure and Shelf Integrated Registrations - permitted for certain Registrations qualified issuers. qualified
s Exempt Securities
Definition - securities not subject to the registration requirements of the 1933 Act. Act. s Types - exempt securities include short-term commercial paper, municipal bonds, and certain insurance policies and annuity contracts. and
s Exempt Transactions for Issuers Issuers
Definition - issuance of securities not subject to the registration requirements of the 1933 Act. of s Types - exempt transactions include limited offers under Regulation D and Section 4(6), Regulation A, and intrastate issues. intrastate
s Exempt Transactions for Issuers Under the 1933 Act Under
Exemption Regulation A Price Limitation $5 million Information Required none material information to unaccredited purchasers material information to unaccredited purchasers none none Limitations on Purchases Resales unrestricted only to residents before 9 months restricted intrastate only unlimited accredited; 35 unaccredited unlimited accredited; 35 unaccredited none only accredited offering circular none Intrastate Rule none 147 Rule 506 none Rule 505 $5 million restricted Rule 504 Section 4(6) $1 million $5 million unrestricted restricted Exempt Transactions for Non-issuers Exempt
Definition - resales by persons other than the issuer that are exempted from the registration requirements of the 1933 Act. 1933 s Types - exempt transactions include Rule 144, Regulation A, and Rule 144A. Rule
s Permissible Sales Activities Permissible
No offers No sales Notice of public offering Certain written offers • tombstone ads • preliminary prospectus No sales Written offers with prospectus Sales Registration Filed Registration Effective Registration and Exemptions Under the 1933 Act Under
Security Exempt security Short-term commercial paper Nonexempt security and transaction Register Regulation A Exempt transaction Other types Intrastate transaction Limited offers Unrestricted resales Unrestricted resales Unrestricted resales * Restricted resales** *Under translate exemption, resales to nonresidents may only be made nine months after the last sale in the initial issuance. **Exempt under Rule 504. Liability
s s Unregistered Sales - Section 12(a)(1) imposes absolute civil liability as there are no defenses. defenses. False Registration Statements - Section 11 False imposes liability on the issuer, all persons who signed the statement, every director or partner, experts who prepared or certified any part of the statement, and all underwriters; defendants other than issuer may assert the defense of due diligence. defense Liability
s s Antifraud Provisions - Section 12(a)(2) imposes liability upon the seller to the immediate purchaser, provided the purchaser did not know of the untruth or omission, but the seller is not liable if he did not know and, in the exercise of reasonable care could not have known, of the untrue statement or omission; Section 17(a)-broadly prohibits fraud in the sale of securities. sale Criminal Sanctions - willful violations are subject to a fine of up to $10,000 and/or imprisonment of not more than five years. imprisonment Registration and Liability Provisions Registration of the 1933 Act of
Yes Yes No Exempt security?
Yes No Yes No registration required Yes Antifraud provision (Sect. 17(a)) applies* Exempt transaction?
No Registration required False registration (Sect. 11) and antifraud provision (Sect. 12(2)) apply Unregistered sales (Sect. 12 (1)) applies Yes Security registered?
No *Section 12(2) may apply to some of these issuance's. Securities Exchange Act of 1934 1934
s Registration and Periodic Reporting Registration Requirements - apply to all regulated Requirements publicly held companies and include one-time registration as well as annual, quarterly, and monthly reports. quarterly, Applicability of the 1934 Act Applicability
Antifraud provision of Rule 10b-5 Antifraud provision for tender offers Antibribery provisions Issuers with assets over $5 million and a class of equity securities with 500 shareholders or more Issuers listed on a national stock exchange “Private” issuers -- all other issuers Registration Periodic reporting Proxy solicitations Tender offers Accounting requirements Short-swing profits Liability for misleading reports Disclosure under the 1934 Act Disclosure
Initial registration Registrant Issuer if regulated, publicly held company Nature of business Financial structure Directors and executive officers Financial statements Periodic Reporting Issuer if regulated, publicly held company Annual, quarterly, or current report updating information in initial registration Insider Reporting Statutory insiders (directors, officers, and principal stockholders) Initial statement of beneficial ownership of equity securities Changes in beneficial ownership Proxy Statement Tender Offer Issuer and other 5 percent persons soliciting stockholder, proxies tender offeror, or issuer Details of solicitation Legal terms of proxy Annual report (if directors to be elected) Identity and background Terms of transaction Source of funds Intentions Information Disclosure under the 1934 Act (cont.) (cont.)
Initial registration Periodic Reporting Insider Reporting Proxy Statement Tender Offer Filing Date Within 120 days after becoming a reporting company Annual: within 90 days after year’s end Quarterly: within 45 days after quarter’s end Current: within 15 days after any material change Within 10 days of (1) becoming a statutory insider or (2) the end of a month in which a change in ownership takes place 10 days before final proxy statement is distributed 5 percent stockholder; within 10 days after acquiring more than 5 percent of a class of registered securities Tender offeror: before tender offer is made Issuer: before offer to repurchase Adequate and accurate disclosure of material facts Opportunity to reach uncoerced decision Purpose of Disclosure Adequate and Update Prevent unfair use accurate information of information disclosure of contained in initial which may have material facts registration been obtained by regarding statutory insider securities listed on a national exchange or traded publicly over the counter Full disclosure of material information Facilitation of shareholder proposals Proxy Solicitations Proxy
Definition of a Proxy - a signed writing by a shareholder authorizing a named person to vote her stock at a specified meeting of shareholders. meeting s Proxy Statements - proxy disclosure statements are required when proxies are solicited or an issuer submits a matter to a shareholder vote. matter
s Tender Offers Tender
A general invitation to shareholders to general purchase their shares at a specified price for a specified time. price s Disclosure Requirements - a statement disclosing specified information must be filed with the SEC and furnished to each offeree. and
s s Misleading Statements in Reports - Section 18 imposes civil liability for any false or misleading statement made in a registration or report filed with the SEC. report Short-Swing Profits - Section 16(b)-imposes liability on certain insiders (directors, officers, and shareholders owning more than 10 percent of the stock of a corporation) for all profits made on sales and purchases within six months of each other, with recovery going to the issuer. the Antifraud Provision Antifraud
s s s Rule 10b–5 makes it unlawful to (1)-employ any Rule device, scheme, or artifice to defraud; (2)-make any untrue statement of a material fact; (3)-omit to state a material fact; or (4)-engage in any act that operates as a fraud that Requisites of Rule 10b–5 - recovery requires (1)-a misstatement or omission, (2)-materiality, (3)-scienter (intentional and knowing conduct), (3)(4)-reliance, and (5)-connection with the purchase or sale of a security. purchase Insider Trading - “insiders” are liable under Rule 10b–5 for failing to disclose material, nonpublic information before trading on the information. information Insider Trading Insider
Express Insider Trading Liability - is imposed on any person who sells or buys a security while in possession of inside information. inside s Civil Penalties for Inside Trading may be imposed on inside traders in an amount up to three times the gains they made or losses they avoided. made
s Parties Forbidden to Trade on Inside Information Inside
(1) Insider has breached fiduciary duty by disclosing information to tippee
Underwriters Accountants Tippees Officers Directors Employees Agents Lawyers Consultants Tippees (2) Tippee knows or should know that there has been such a breach Misleading Statements Misleading
Misleading Proxy Statements - any person who distributes a false or misleading proxy statement is liable to injured investors. injured s Fraudulent Tender Offers - Section 14(e)-imposes civil liability for false and material statements or omissions or fraudulent, deceptive, or manipulative practices in connection with any tender offer. offer.
s Sanctions Sanctions
Antibribery Provision of FCPA prohibited bribery can result in fines and imprisonment. imprisonment. s Criminal Sanctions - individuals who willfully violate the 1934 Act are subject to a fine of not more than $1 million and/or imprisonment of not more than ten years. ten
s Civil Liability under the 1933 and 1934 Acts 1934
Provision Conduct Plaintiffs Defendants Sellers in violation Culpability Standard Reliance Required Type of Liability Express Remedies Rescission Damages Attorney’s fees Damages Attorney’s fees Section 12(1) Unregistered Purchasers 1933 Act sale or sale from a without violator prospectus Section 11 1933 Act Registration Purchasers of statement registered continuing security material misstatement or omission Strict liability No Issuer Strict liability No Directors for issuer Signers Negligence Underwriters for others Experts Negligence No Express Section 12(2) Material Purchasers Sellers in 1933 Act misstatement from violator violation or omission Express Recission Damages Attorney’s fees ...
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This note was uploaded on 10/25/2009 for the course LAW 100 taught by Professor Liu during the Spring '09 term at Zhejiang University.
- Spring '09