Administrative Procedures Flashcards
Administrators Scope of Authority. What are they responsible for?
Admins are responsible for enforcing state securities laws
Offers and Sales
Offer, or offer to sell, include any attempt or offer to dispose of a security or solicitation of an offer to buy a security or an interest in a security for value
What are the qualifications for a security to be offered or sold?
Must be either exempt, offered through an exempt transaction, or registered in the state prior to the offer
Sale or Sell
Defined as every contract of sale, contract to sell or disposition of a security, or interest in a security, for value
If a security is given as a bonus to the purchase of any security (or anything else), is this considered an offer and sale?
Yes it’s considered a part of a purchase. This means the security that is “given away” with the purchase of a security, or something else, it must be either exempt, offered through an exempt transaction, or registered
Can there be a sale without an offer?
No, there must be an offer for there to be a sale, but not every offer will result in a sale
Warrants, Rights, Options, Convertibles
When an issuer offers or sells these, the offer or sale is considered to include the offer of the underlying security. Therefore, both the company’s common stock and the security being sold would need to be either exempt, offered through an exempt transaction, or registered in the state
Are Gifts an offer or sale?
Generally not, but an assessable security does include an offer and sale
What is an Assessable Security?
When an Issuer may demand an additional payment of capital from the investor.
Ex: Some limited partnerships interest are assessable, meaning the partners might be required to invest additional money if the partnership demands it
Exclusions from Offer or Sale:
- Bona Fide Pledge or loan - A pledge of securities as collateral for a loan from a bank or BD is not considered an offer or sale
- Stock Dividend or Stock Split - Not an offer or sale if the shareholder gives nothing of value aside from choosing to receive stock rather than cash as a dividend
- Exchanges of securities in connection with mergers, reclassifications, or consolidations
- Exchanges of securities in connection with judicially approved reorganizations (bankruptcies)
The Admin has Jurisdiction over a person who offers to sell, or sells a security when
- An offer to sell is made in the state
- An offer to buy is made in the state and accepted in the state
The Admin has jurisdiction over a person who offers to buy, or buys a security when:
- An offer to buy is made in the state
- An offer to sell is made in the state and accepted in the state
The Admin has jurisdiction if either the agent or client resides in that state, or the transaction occurred in the state
Word on the street has it that offers can only be made in writing. Is that true?
Hell no you dumbass. They can made verbally
When is an offer or sell made in a state?
When the offer either originates from the state or is directed and accepted in that state
What is needed for acceptance to be communicated in a state?
The person accepting the offer must reasonably believe the person making the offer is in the state and that the acceptance was received at the place to which it was directed. This applies whether either party is actually present in the state.
Ex: A seller in Iowa calls a potential buyer in Illinois
The offer is made in both Iowa, where it originated, and Illinois, where it was directed
Ex: A seller in Kansas calls a potential buyer that is believed to be living in Missouri to make an offer. Without the sellers knowledge, the calls are being forwarded to potential buyers new residence in Texas.
The offer is made in Kansas, where it originated, but is not made in Texas, even though that’s where it was received
Jurisdiction of a State Admin does not include another state:
- In which payment is received
- The contract was signed
- Contract was sent
- Where the securities were delivered
If an offer is made in any bona fide newspaper or other publication of general, regular, and paid circulation that is:
- Not published in the state
- Published in the state, but has had more than ⅔ of its circulation outside of the state during the past 12 months
Ex: The Fall Avenue Gazette is published in Bone Dry, Nevada
- The paper has a national audience, w/ 95% of its circulation outside of Nevada
- An advertisement placed in the paper regarding securities available for sale is not an offer in Nevada or any other state
- A radio or television broadcast is considered an offer only in the state in which the broadcast originates
Cool Facts: The maximum number of State Admins who can have jurisdiction over an offering is 2. The maximum number of State Admin who can have jurisdiction over a sale is 3
What authorities do Admins have?
To make, amend, or repeal any administrative rules, regulation, or orders regarding registration, reports, and other practices necessary to carry out the provision of the Act, and to preserve and protect the interest of the public. An Admin can conduct investigations, issue subpoenas and cease desist orders, seeking court injunctions and initiating criminal or civil proceedings
Investigations
Can do this inside or outside of their state. May be public or private investigations. Admin may require or permit a person to file a written statement about the facts being investigated and this statement may be made under oath.
During an investigation or proceeding, the Admin, or officer, may:
- Administer oaths and affirmations
- Subpoena witnesses and compel their attendance
- Take Evidence
- Require production of documents
What does an Admin need to do if a subpoena is not obeyed?
They would need to petition to a court to enforce one
Contumacy
Failure to obey the courts order and may be punishable as contempt of court
May an Admin issue and apply a subpoena in another state at the request of another securities Admin?
Yes. If the activities for which the information is sought would be a violation if the activities had occurred in the state.
Cease and Desist Orders
Admin may issue, directing persons engaging in illegal activities to stop any further illegal actions. May be issues with or without a prior hearing. Admin must include a statement notifying the person involved if they intend to seek civil penalties to recover any costs involved in the investigation
Judicial Review of Orders
If subject to an order from the Admin, they may appeal the order to a court within 60 days after the entry of the order . Filing an appeal does not suspend (stay) the order unless the court says so
Injunctions
An Admin may seek injunction, which is a judicial order that stops a current course of action, from the appropriate court to enforce a complaint with the act
In terms of Injunction, what may the Admin grant if they make their case?
- Permanent or temporary injunction
- Restraining Order
- Writ of mandamus (legal order compelling an entity or person to stop doing something or begin doing something that is considered the normal course of business
- Order of Recission, restitution, or disgorgement (the demand that illegally obtained profits be repaid with interest
When any Judicial Orders have been granted, what can a court do?
The court may appoint a receiver or conservator for the defendant’s assets. During these proceeds, the court may NOT require the Admin to post a bond
Criminal Penalties
Involve fraudulent securities transactions that may only be imposed by a court of competent jurisdiction if the state’s attorney general initiates criminal prosecution of the alleged offender
When subject to Criminal Penalties, if guilty, what will a person be subject to?
up to a $5,000 fine, imprisonment for up to 3 years, or both. Guilty persons have committed a felony
What is the Statute of Limitations for criminal actions?
5 years from the date of the offense.it may not be brought under USA if longer than 5 years.
What is the punishment for a person who unknowingly violated the USA?
The maximum fine may be imposed, but not imprisonment
Rights of Recovery for a sale violation
Allows an investor to who buys a security based on an untrue statement of material fact or omission to sue for recovery of the purchase price, plus interest from the date of purchase at the legal rate (published by state), costs and reasonable attorney fees, less any income earned while the security was owned. Other grounds for legal action include acting as an unregistered, non-exempt security, and representing that registration of a security implies approval of the security by the Admin.
Rights of Recovery for Advice Provided in Violation
If an IA acts in a fraudulent manner in providing investment advice, the adviser is liable to the client for the cost of the advice, plus the amount of any loss as a result of the advice, plus interest from the date of purchase, court costs, and attorney fees, less any income earned as a result of the advice
Is a person affiliated with the violator subject to the same liabilities?
Yes you dumb fuck
In terms of a civil suit, what happens if the defendant dies?
It doesn’t cancel the plaintiff’s right to legal action. The lawsuit will continue until it’s resolved and any rewards would be payable to the estate of the descendent
What is the Statute of Limitations for civil liability?
3 years from the date of sale or rendering of investment advice, or 2 years after discovery of the unlawful transaction, whichever comes first
Offers of Recission
If a seller of a security discovers that the transaction was illegal, they may offer to repurchase through this. The seller must provide the buyer with a statement of how the liability happened. Must also give the information to correct the error if there was a misstatement or omission of material fact. The offer is to repurchase the securities for the buyers cost, plus interest, minus any income received
What stops the buyer of a security from suing the seller?
The buyer may not sue the seller if the buyer receives a written offer, while they still own the security and they fail to accept the offer within 30 days. The seller must make this offer, called a written offer of recission prior to a lawsuit being initiated by the buyer
If the buyer no longer owns the security, what does acceptance of the letter of recission do?
Will entitle them to anything they may have lost in the sale. They would be entitled to the original purchase price plus interest if the offer was accepted within 30 days of receipt. Again, if the offer isn’t accepted, or no action is taken within 30 days, the buyer cannot initiate the lawsuit
If the buyer is not satisfied with the offer, what can they do?
They must officially reject the letter of rescission in writing within 30 days and, at this point, may seek remedies through a civil suit
