19

Question 1

LO: 1.What is meant by the term securities?
2.What are the two major statutes regulating the securities industry?
3.What is insider trading? Why is it prohibited?
4.What are some of the features of state securities laws?
5.What certification requirements does the Sarbanes-Oxley Act impose on corporate executives?

Answer 1

1933 and 1934 security acts are the 2 major statutes

Question 2

START OF SECURITIES ACT OF 1933;
What Is a Security? ,Section 2 (1) of the Securities Act:(don’t have to memorize)(5 at least that count as securities)

Answer 2

(the Act of 93 first defined a Security,the great depression made us rethink of free market economies )
(instruments & interests, stocks, bonds ,investments =securities)
•Instruments and interests commonly known as securities, such as preferred and common stocks, treasury stocks, bonds, debentures, and stock warrants(created a system of bandaid so that 1934 would do work after it)
•Interests such as stock options, puts, calls, or other types of privilege on a security or on the right to purchase a security or a group of securities in a national security exchange
•Notes, instruments, or other evidence of indebtedness, including certificates of interest in a profit-sharing agreement and certificates of deposit
•Interest in oil, gas, or other mineral rights
•Investment contracts, which include interests in limited partnerships and other investment schemes

Question 3

The Howey test (who decided it, when does a security exist in transactions)( when isn’t it a security)

Answer 3

•The U.S. Supreme Court held that a security exists in any transaction in which a person: (1) invests (2) in a common enterprise (3) reasonably expecting profits (4) derived primarily from others’ managerial or entrepreneurial efforts
(any type of investment is a security,if it’s investment for your own money it’s not a security )

Question 4

what is the 1933 Act ,what does it deal with

Answer 4

1933 Act is one of the major statutes and deals with registering securities.

Question 5

Registration Statement (what gets registered before the public, who has to file statement and with what , what’s later distributed to investors)

Answer 5

•Unless exempt, an offering must be registered before offered to the public
•Issuing corporation must file a registration statement and prospectus with the SEC(Securities and Exchange Commission)
•Prospectus is later distributed to investors

Question 6

Contents of the registration statement (securities act of 1933)(5)

Answer 6

•The securities being offered for sale, including their relationship to the registrant’s other capital securities

•The corporation’s properties and business (including a financial statement certified by an independent public accounting firm)

•Management of the corporation, including all benefits, and any interests of directors or officers in any material transactions

•How the corporation intends to use proceeds of the sale

•Any pending lawsuits or special risk factors

Question 7

Registration process (securities act of 1933) Prefiling period, Waiting period, Posteffective period(what happens with securities in the 3 scenarios)

Answer 7

•Prefiling period: Before filing the registration statement; securities cannot be offered or sold

•Waiting period: securities can be offered but not sold. All issuers can distribute a preliminary prospectus, and most can distribute a free-writing prospectus

•Posteffective period: Occurs after the registration statement has been approved; securities can now be sold

Question 8

Regulation A offerings (won’t go over exam) (tier 1 v tier 2 offerings)(what do both do)

Answer 8

Tier 1: Up to $20 million in any twelve month period
•Tier 2: Up to $50 million in any twelve month period
•Under either, must file offering statements with the SEC(securities and exchange commission)
•Must give potential buyers documentation (similar to a prospectus)
•Tier 2 must file continuous reports, has limitations on amounts contributed to non-accredited investors, and does not need to qualify offers with state securities regulators

Question 9

Small offerings – Regulation D(rule 504,rule 506b )(don’t have to memorize but know it)what are the limits on how much money issuer can raise

Answer 9

•Rule 504: up to $5 million during 12 months. Most receive restricted securities (cannot be sold for at least 6 months without registering). Must file Form D with SEC (short summary). No general solicitation unless state exemption met.

•Rule 506(b): unlimited if but no general solicitation and notice to SEC. Max of 35 unaccredited investors but all must be “sophisticated.” No need to comply with state securities laws.(no limit on how much money issuer can raise)

Question 10

Resales and safe harbor rules(rule 144,rule 144(a) who are restricted securities able to be sold to )

Answer 10

•Rule 144: can be used when you want to resale restricted securities to the public. Various requirements depending on your relationship to the issuer. Includes holding period.

•Rule 144A: allows sale to a qualified institutional buyer (without holding period)

Question 11

Violations of the 1933 Act(what counts as a violation, defenses)

Answer 11

-Intentional or negligent defrauding by misrepresenting or omitting material information in the registration statement or prospectus(basically lying )

-Criminal penalties and/or civil sanctions

Defenses
-Statement left out was not material; Plaintiff knew about fraud and purchased stock; Registrant believed statements were true

Question 12

SECURITIES EXCHANGE ACT OF 1934(what is it,what does it deal with)

Answer 12

1934 Exchange Act is the second major statute, and deals with fraud and certain types of transactions

Question 13

what do Section 10(b), SEC Rule 10b-5 prohibit? what’s Insider Trading of SECURITIES EXCHANGE ACT OF 1934

Answer 13

Section 10(b) prohibits use of any manipulative or deceptive device or contrivance in securities transactions

•SEC Rule 10b(5) prohibits fraud in connection with the purchase or sale of any security

•Insider trading Is considered one form of fraud, but “normal” fraud is another kind

•Virtually all cases concerning the trading of securities, whether on exchanges, OTC, or private

Question 14

Disclosure under SEC rule 10b-5 (“Normal fraud”) (4 elements of fraud)

Answer 14

•Any material omission or misrepresentation in connection with the sale or purchase of security may violate Section 10(b) or SEC Rule 10b-5
(intentional misrepresentation,knowing of falsehood,damages,reliance)

Question 15

“Am considering taking Tesla private at $420. Funding secured” - Elon Musk, August 7, 2018
•Stock price jumps 12% same day
•August 8 – SEC starts inquiry
•August 9 – Board asks Musk to recuse himself
•August 10 – two lawsuits filed alleging securities fraud

Answer 15

the tweet was considered security fraud

Question 16

Insider trading (considered a type of fraud)(what’s the goal against it,what is it) (SECURITIES EXCHANGE ACT OF 1934)

Answer 16

•Goal is to prevent purchase or sale of securities on basis of information that is not available to the public(insider trading is anytime someone acts based on no public info ,buys or sells securities based on that info,on exception is overhearing smth out of context)

•Applies to anyone who has access to or receives nonpublic information

Question 17

in regards to insider trading;Outsiders and SEC rule 10b-5 (classic theory, Tipper/Tippee theory, Misappropriation theory)

Answer 17

•Classic theory: insider trades on non-public information

•Tipper/Tippee theory: insider’s fiduciary duty is breached

•Misappropriation theory: one wrongfully obtains inside info and trades on it.

Question 18

Insider reporting and trading-Section 16(b) (“Short Swing trading”) (requires, applies, regardless)

Answer 18

•Requires recapture of all short-swing profits (6 months) by insiders & those owning 10% of equities to corporation

•Applies to stocks, warrants, options, and securities

•Regardless of if trades were made based on insider information

*students confuse insider trading with short swing,they’re different things,insider is an officer director or shareholder that owns 10% or more of shares of company

Question 19

What is the subject matter
of the transaction? (who is this in regards to?( SEC Rule vs Section 16(b) )

Answer 19

SEC Rule:
Any security(doesn’t have to be registered)

Section 16(b):

Any security(doesn’t have to be registered)

Question 20

what transactions are covered ( SEC Rule vs Section 16(b) )

Answer 20

SEC Rule : purchase or sale

Section 16(b) : Short-swing purchase and sale or short-swing
sale and purchase

Question 21

who’s subject to liability ( SEC Rule vs Section 16(b) )

Answer 21

SEC Rule :

Almost anyone with inside information under a duty to disclose — including officers, directors,controling shareholders, and tippees.

Section 16(b)

Officers, directors, and certain shareholders who earn 10 percent or more.

Question 22

Is omission or misrepresentation
necessary for liability?( SEC Rule vs Section 16(b) )

Answer 22

SEC Rule: yes

Section 16(b) : no

Question 23

are there any exempt transactions? ( SEC Rule vs Section 16(b) )

Answer 23

SEC Rule : no
Section 16(b) : Yes, there are a number of exemptions.

Question 24

who may bring an action? ( SEC Rule vs Section 16(b) )

Answer 24

SEC Rule : A person transacting with an insider, the SEC, or purchaser or seller damaged by a wrongful act

Section 16(b) : A corporation or a shareholder by derivative action

Question 25

Violations of the 1934 Act (how’s it dif than 1933)

Answer 25

(1934-intent,1933-accident)
•Scienter/intent is required to prove civil or criminal penalties under 10(b) and Rule 10b-5.
-Intent to mislead OR the insider information being the reason for the trade

•Violator must have had intent to defraud (false statements or wrongfully failed to disclose material facts).

•Civil sanctions: Both SEC and private parties can bring actions (only gov’t can go for crimes).

Question 26

START OF STATE SECURITIES LAWS ;
Requirements under State Securities Laws

Answer 26

•Issuers must comply with federal and state securities laws and states do not allow the same exemptions as federal government.
(each state has their own security laws but still comply a with fed)

Question 27

how is it a Concurrent Regulation

Answer 27

•Uniform Securities Act has been adopted in part by many states.(cuz if difficult,lawyers did it,some states took it,not all)

Question 28

START OF CORPORATE GOVERNANCE; what does it want to promote,who does it punish, who does it protect ,who gets evaluated

Answer 28

•Attempts at Aligning the Interests of Officers with Those of Shareholders

•The Goal Is to Promote Accountability(sarbanes oxleygood is to align with officers,promotes accountability requiring reports,protects from whistleblowers)
-The audited reporting of financial conditions to evaluate managers
-Legal protections for shareholders so that violators can be punished and victims can recover losses

Question 29

The Sarbanes-Oxley Act under corporate governance (what does it attempt to do and what does it require (2) what must members of the corporate audit committee be for public companies)

Answer 29

•(aligns interests of shareholders with officers)Attempts to regulate in such a way to promote corporate governance and applies to all publicly held companies:

•Requires independent auditor report except for smaller companies of less than $75 million market capitalization (2010 exemption)
•Requires that officers certify that the information in the corporate financial statements “fairly represents in all material respects, the financial conditions and results of operations of the issuer.”
•All members of the corporate audit committee for public companies must be outside directors(od don’t have financial state with companies)

Question 30

sec rule

Answer 30

The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities.