Ch 19 Flashcards
Securities and Exchange Commission (SEC)
Independent regulatory agency responsible for interprereting
And investigating securities law violations
Issues new rules, inspects securities firms and brokers
Security
Stock certificate, bond, note, debenture, warrant or
Other record evidencing ownership interest
Or in promise to repay corporation’s debt
Securities act of 1933
Governs initial sales of stock by businesses
Purpose of act is to prohibit fraud, provide transparency/disclosure
Stabilize securities industry making info available to public
Investment contract
In securities law, a transaction where person invests in common
Enterprise w/reasonable expectation that profits will be primarily
From efforts of others
Prospectus
Written document required by securities laws that describes
The security being sold, financial operations of issuing corp.,
Investment risk of security
Designed to provide sufficient info to enable investors to
Evaluate risk involved in purchasing security
EDGAR
Electronic Data Gathering, Analysis and Retrieval
Electronically posted documents filed with the SEC
Red Herring Prospectus
Preliminary prospectus that can be distributed to potential
Investors after the registration statement for securities offering
Has been filed with the SEC
Tombstone Ad
Advertisement historically in format resembling tombstone
Of securities offering
Ad tells potential investors where and how they can obtain
A prospectus
Free writing prospectus
Any type of written, electronic or graphic offer that describes
The issuing corporation or it’s securities
Includes legend indicating that investor can obtain prospectus
At SECs website
Exempt securities
Specific securities that are exempt from registration requirements
of Securities Act 1933
Can generally be resold without being registered
Registration A Offerings
Securities issued by issuer that has offered less than $5 million in securities in 12 month period are exempt from registration
Cheaper way for small companies to raise capital
Investment company
Company that acts on behalf of many smaller shareholders/owners
By buying a large portfolio of securities
and professionally managing that portfolio
Mutual fund
Specific type of investment company that continually buys and
Sells to investors shares of ownership in a portfolio
Small offerings under Regulation D
SECs regulation D contains 4 separate exemptions from
Registration requirements for limited offers in 12 month period
Accredited investor (in context of securities offering)
Sophisticated investor such as bank, insurance company,
An investment company, issuer’s executive officers + directors,
Or person whose net worth exceeds certain limits
Affiliate
One who controls, is controlled by or is in common control
With the issuer
3 basic defenses to violation of the 1933 Act, how defendant can avoid liability
1 statement or omission was not material
2 plaintiff knew about misrepresentation at time of purchasing
The stock
3 defendant exercised due diligence
Due diligence
Required standard of care that certain professionals must meet
To avoid liability for securities violations
Securities Exchange Act of 1934: Section 12 companies
Companies that have assets in excess of $10 million and over
500 shareholders
Required to register their securities under the Section 12 of 1934
Act
SEC Rule 10b-5
Rule of SEC makes it unlawful in connection with purchase or
Sale of security to make untrue statement of material fact
Or omit material fact if omission causes statement to be
misleading
Insider trading
Purchase or sale of securities on basis of info that hasn’t been
Made available to the public
Tippee
Person who receives inside info
Info must be received from someone’s breach of fiduciary duty
When are proxy statements regulated by the SEC?
When section 12 company’s proxy statement has corporate
Official requesting authority to vote on behalf of shareholders
In particular election on issues
Bounty payment
Reward given to person or persons who perform certain service,
Such as informing legal authorities of illegal actions
