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ch20 - Securities Regulation Chapter 20 Corporate Finance...

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Securities Regulation Chapter 20
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Corporate Finance Securities written document that provides evidence of: debt (corporate note or bond) OR equity (preferred or common stock)
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Debt selling bonds or borrowing money instrument usually specifies: amount of debt length of period repayment method rate of interest charged can usually be traded Equity most often, the sale of company stock a claim to a share of future profits company is not obligated to repay shareholders specific amount can usually be traded
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Securities Regulation States began with blue sky laws to deter fraudulent securities sales Most important federal laws are: Securities Act of 1933 regulates initial public offerings of securities Securities Exchange Act of 1934 regulates securities already issued, disclosure requirements, securities markets and professionals Securities and Exchange Commission agency responsible for enforcement and administration of federal securities laws
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What Is A Security? Merely calling it a security does not make it so Have higher legal protection for securities Four basic elements (Howey test): investment of money in a common enterprise with an expectation of profits generated by efforts of persons other than the investors
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SEC v. W.J. Howey Co . Howey owned citrus groves in Florida, and offered acreage to the public along with a service contract under which Howey would harvest and sell the citrus. The SEC sued, claiming the sale of land and the service contract was a security that should have been registered with the SEC. Lower courts ruled for Howey. SEC appealed to the U.S. Supreme Court The Supreme Court reversed the lower courts The transactions meet the definition of an investment contract: An investment of money, in a common enterprise, with the intent of making profits, that come mostly from the efforts of others.
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Offerings to Investors ‘33 Act requires full disclosure of all material information on security, issuers, and intended use of money before sale to public. Material information is all relevant information an investor would want to know: background executives plan of operation (“Securities Offering on the Web” : Outdated state laws tend to block web offerings, which are becoming more common and are cost-effective .)
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1933 Securities Act Regulates the initial offering of securities.
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Securities Registration Registration Statement must be filed with SEC. Prospectus, a smaller version of the registration statement, must be given to all offerees of the stock, BEFORE the stock is offered for sale.
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Registration Statement Prospectus (SEC Schedule A) Provides material information about: issuer’s finances and business purpose of the offering plans for funds collected risks involved promoter’s managerial experience and financial compensation financial statements certified by independent public accountants
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