Business Law VIII: Federal Securities Regulation Flashcards
Elements of an investment contract
- Investment of money
- In a common enterprise
- With an expectation of profit
- To be earned primarily by the actions of others
Registration Requirements of 1933 Act
- Initial public offering - sell to general investing public for first time
- Seasoned offerings - print/sell new securities to the public
- Secondary offerings - controlling/closely affiliated persons sell their securities under circumstances where it is appropriate to treat transaction as if being made by company
Basic Registration Procedure
- Issuer files registration statement with SEC
- Issuer waits 20 days for SEC approval
- Registration statement deemed “effective” and sales begin
Distribution process for Securities vs Products
- Security = Issuer-Underwriter-Broker-Investor
2. Product = Manufacturer-Wholesaler-Retailer-Customer
Registration Process: Three Periods
- Pre-filing period (before filed with SEC) - company can neither offer to sell nor sell securities
- Waiting period - company can make offers but not sell
- Post-effective period - issuer may both offer and sell securities
Contents of Registration Statements
- Financial statements audited by independent CPA
- Names of issuer, directors, officers, underwriters, etc.
- Risks
- Description of issuer’s business
- Description of Security and Intended use for proceeds
Exempt Transactions and Securities
- Bank/Government Securities
- Short-term notes (commercial, not for investment, maturity less than 9 mos)
- Charitable organization securities
Three types of offerings exempt from registration
- Small Offerings (not a big threat)
- Private placement (specific offerees can protect themselves)
- Intrastate (regulated by that state only)
Regulation D Transaction Exemptions
Rule 504 = small offering - $1M in 12 month period (only useable by small companies)
Rule 505 = small offering - $5M in 12 month period
Rule 506 = private placement - Unlimited amount.
Regulation A
- Can raise $50M in 12-month period, pursuant to Jobs Act of 2012.
- “testing the waters” allows preliminary offering to see if there is interest in purchasing.
- Simplified disclosure - 2 yrs unaudited financial statements
Rule 147, Intrastate Offering
Issuer must be organized/doing business in state where it plans to do offering:
> 80% assets in-state
80% revenue in-state
80% proceeds of offering used in-state
All oferees must also be in-state
Blue Sky Laws
- National Securities Markets Improvements Act (NSMI) preempts state regulation of “covered securities”:
- listed in national exchange
- issued by registered investment companies
- sold to “qualified purchasers”
- sold pursuant to federal exemptions - NSMI ends state merit regulation
- NSMI allows states to continue to enforce antifraud statutes and require “notice filing”
Jumpstart our Business Startups Act (JOBS Act of 2012)
Securities law that amended federal law with hopes of making it easier for small companies to raise capital with hope this would eventually lead to job creation
Emerging Growth Companies (EGCs)
Delay regulatory burdens of going public for 5 years if:
- Less than $1B annual gross revenue
- Publicly traded less than 5 yrs
- Public float of less than $700M
- Not issued $1B in non-convertible debt in prior 3 years
JOBS: Crowdfunding
A process by which entrepreneurs and business owners can use internet to rais capital, typically from large numbers of people who invest small amounts with little federal regulation
JOBS allows up to $1M in 12-month period raised this way
JOBS: General Solicitation
JOBS relaxes restrictions on advertising/general solicitations w/ goal of giving more clarity to rules
- eliminates ban as long as purchaser are “accredited investors”
- requires issuer to take “reasonable steps to confirm accredited investor status
1933 Act - Liability Provisions
Sec. 11 - remedies misleading statements/omissions contained in registration statement as of effective date
Sec. 12 (a)(1) - remedies violations
- offering security before filing registration statement
- selling security before registration statement effective
- selling security without providing prospectus
- providing prospectus that does not comply
Sec. 12 (a)(2) - remedies misstatements/omissions in initial sale that occur outside registration statement
1933 Act - Elements that plaintiffs must prove to win a Sec. 11 claim
- False statement/omission of fact appeared in registration statement - accounting firm only liable for part that it prepared
- Misstatement or omission was material
- Plaintiff bought securities that were issued under the defective registration statement
- Plaintiff suffered damages
1933 Act - Accountant defenses under Sec. 11
- Due Diligence (reasonable investigation, reasonable basis, good faith belief)
- Special burden on accountants who are “experts”
- Issuing company itself has no due diligence defense
- Lack of reliance by plaintiff
- Alternative causation
- Statute of Limitations (1 yr notice deadline, 3 yr offering deadline)
1934 Securities Exchange Act Purposes
- Regular disclosure - by major companies even when not raising capital by filing registration statements
- Punish fraud
- Created SEC
1934 Securities Exchange Act Requirements: Who must file?
- All companies with shares traded on national exchange
- All companies greater than $10M in assets and greater than 2,000 shareholders in single class
- Company that made registered public offering during the year
- NASDAQ “Bulletin Board” companies
1934 Securities Exchange Act Requirements: What must be filed?
Initial Registration Form (Form 10)
- name of officers/directors
- nature of business
- financial structure of firm
- bonus/profit-sharing provisions for officers/directors
Continuous Disclosure Forms
- Annual 10-Ks
- Quarterly 10-Qs
- Interim 8-Ks with interim important info
Other 1934 Act filing requirements
- Concentration of shares - 13D must be filed by anyone acquiring more than 5%
- Tender offers - includes mgmt. opinion as to whether s/h should tender shares or resist takeover
- Proxy solicitations
- Insider trading (officers, directors, owners 10% and greater)
Sec. 10(b) and Rule 10b-5
If false statement in registration statement, plaintiff can sue under ‘34 act 10(b).
Standard of liability is scienter (bad intent)
Burden of proof is on the defendant
What must plaintiffs prove to win a 10b-5 claim?
- False statement/omission of material fact
- Scienter by defendant
- Reliance by plaintiff in omission case - no need to prove reliance
- Reliance by plaintiff in active misrepresentation case - must prove reliance
- Causation - false statements caused plaintiff to enter transaction and in turn caused loss
Section 10(b) Defenses
- Statute of limitations - w/in 2 yrs of when fraud was discovered, w/in 5 yrs of fraud
- Fraudulent/reckless conduct by plaintiff
- Bespeaks Caution Doctrine
- Secondary liability - doesn’t exist
Dodd-Frank Act of 2010
Seeks to strengthen financial market performance by:
- improving financial institutions’ accountability/transparency
- protecting taxpayers from being saddled with future bailouts
- protecting consumers from plethora of abusive practices
