Chapter 10 Lesson

Chapter 10 Lesson - Chapter 10 Lesson Chapter 10 Lesson...

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Chapter 10 Lesson Chapter 10 Lesson CHAPTER 10 - Securities Law and Protection of Investors OBJECTIVES: After completing this lesson, the required reading, and the assignments, learners will be able to: 1. Describe a security. 2. Detail the legal consequences of buying and selling securities. 3. Understand the basics of the 1933 Securities Act and the 1934 Securities Exchange Act. 4. Explain insider trading and the consequences of engaging in insider trading. Introduction This chapter deals with two major statutes: the 1933 Securities Act and the 1934 Securities Exchange Act . The Securities and Exchange Commission (SEC) is the federal agency created (by the 1934 Act) to administer and enforce both of these laws. What is a Security? Most of us think of a security as a only stock or bond issued by a corporation. However, while a stock or bond is indeed a security, the definition of a security is broader than this. As your book states, "other financing schemes may also be considered securities . . . if the investor relies on another's efforts to achieve success." Why might it be important to understand specifically what a security is? Let's answer that question by considering the SEC v. Koscot Interplanetary, Inc. , case, in which the 5th Circuit Court of Appeals considered whether a particular investment was a security. (Go read the case in your book if you haven't already.) Koscot Interplanetary, Inc., sounds like a typical pyramid sales scheme (which you'll learn more about in Chap. 18). It looks like investors in the company earned money in a variety of ways, depending on how much their initial investment was. Some "investors" made money simply by selling the product (cosmetics). Others invested money in the company and then earned more each time they brought other investors into the company. One way investors attracted additional investors was to invite them to "opportunity meetings" at which time the prospective investors would hear a sales pitch and hopefully (or not, depending on your perspective) sign up. Koscot did not register this investment with the SEC. The SEC, believing that Koscot was selling securities to these investors, filed an action against Koscot. Was this investment a security? Try answering that question by applying the definition of a security. Did the investors rely only on others' efforts to achieve success? The first full sentence in the second column of the case on p. 290 provides the statement of the law: "The correct test is 'whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.'" In this case, the court noted that Koscot investors only "followed the script" at these opportunity meetings. Once they read their lines, others within the company actually made the sale and ultimately managed the promotional scheme. Although the court
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Chapter 10 Lesson - Chapter 10 Lesson Chapter 10 Lesson...

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