Ch 9 Federal Securities Acts Flashcards
Exempt securities under Securities Act of 1933:
- US gov bonds and agencies securities (Fanny, ginnie, freddy)
- Muni bonds
- Securities issued by banks (not loans institutions like USA does)
- Non profit securities
- Commercial paper (maturity 270 or less)
- Small biz issues
- Railroad securities
Securities Act 1933 prospectus requirements
- non-listed IPO = 90 days after issue
- non-listed follow on offering = 40 days after issue
- IPO of a security going to be exchange listed = 25 days after issue
- Exchange listed follow on offer = none
Securities Act 1933 exempt transactions:
Because purchasers are limited, sophisticated and not the general public
- rule 147: intrastate; all investors from same state (still need to register with admin). Company Must have 80% assets, revenue, and proceeds of offering from that state and 100% of buyers live in the state.
- Regulation d rule 506: private placement; can sell as much stock as you want as long as it’s not offered to >35 non-accredited investors (may be required to hire an IA as a purchaser representative) but unlimited accredited investors. Disclose through Offering Memorandum (similar to a prospectus). No state or federal registration.
- Rule 144: restricted securities (unregistered securities typically acquired via private placement) and control securities (registered securities acquired by control/affiliated persons in secondary market). Max # exchange listed company shares in 90 day period is greater of 1% total shares outstanding or avg weekly trading volume for 4 weeks leading up to the filing
- 6 month holding period?
- Regulation A: small issue exemption. Limited to $20M capital raised in 12 months (tier 1) and $75M (tier 2). Issuer must still file an offering circular and statement with SEC. Must still register with state
Notice of sale:
- Under rule 144, seller of restricted or control securities must file Form 144 with SEC at the time the order is placed with the BD
- If the securities haven’t been sold within 90 days, amended notice must be filed
- Not required if sale amount is <5001 shares and value is <$50,001
Securities act 1933 accredited investor:
- institutions, officers, directors of issuer OR
- Net worth $1M or annual income $200K last 2 years ($300K if married)
Securities act of 1933 penalties:
- Criminal: $10K fine and/or 5 years prison
- Civil: cost of security + interest - income received (unlike USA, no attorney fees). Statute of limitations of 3 years from occurrence of 1 year from discovery (USA is 2 years from discovery)
Securities act of 1934:
- secondary market and created SEC
- Gives self-regulatory organizations (SROs) rule making authority (eg FINRA)
- Established statutory disqualification for convictions within 10 years
- Requires reporting companies (aka publicly traded issuers), exchanges and BDs to register with SEC
- Requires owners of >5% of reporting companies equity to file schedule 13D (discloses owners goals). 13G is similar but for institutional investors (mutual funds)
- Require investment managers with discretion )$100M in securities (can be in multiple companies) to file Schedule 13F quarterly; usually hedge funds, mutual funds, and pension fund managers
- SEC can suspend trading of a security for up to 10 days or all trading up to 90 days with notification of US president
SEC reporting: 10K, 10Q, 8K
- 10K: annual financial report, legal proceedings, officers/directors and their comp
- 10Q: quarterly but 3 per year because 10K covers Q4. Filed within 35 days of quarter end. Less detail than 10K but similar
- 8K: filed to report events which may affect the corporation or shareholders (eg merger or bankruptcy) within 4 business days of event. If someone accidentally discloses insider info, must file that info within 24 hours.
Auditor opinions
- unqualified: most common; report is okay
- Qualified: most details are fair with exception of a specific issue
- Adverse: financials don’t represent issuers performance (bad)
Securities exchange act of 1934 Types of insiders:
- Officers, board of directors, owners of >10%
- Must register within 10 biz days (Form 3)
- Reports trades within 2 biz days (Form 4)
- Cannot kept short-swing profits aka profits on stocks held less than 6 months
- No short selling
Insider trading act of 1988:
- Anyone with material, non public info
- Criminal: $5M fine ($25M for corporation) and/or 20 years prison
- Civil: SEC can sue for 3x damages (treble damages)
Clearing firms (market makers)
- They are BDs with exchange access
- who take orders from other BDs (introducing firm)
- Can either send order to exchange directly or buy and sell the shares with the retail investor directly from their own shares (internalizing the order)
- They pay the introducing BDs for the access to be able to do this
- Introducing BDs have to disclose who their clearing firm(s) are and how much they are paid for it
Investment company act of 1940 purpose and rules:
- Created to reduce abuses in sales of investment company securities
- Company with >100 shareholders must register with SEC
- Company with net worth $100K can sell shares publicly
- Majority vote is required to change fund objectives (eg from growth mutual fund to income mutual find)
- Certain communications related to investment company securities (eg mutual funds) may be distributed prior to prospectus (ie summary provided before full prospectus)
Investment company act of 1940 defines types of investment companies:
- face amount certifications
- Unit investment trusts
- Management companies (open ended aka mutual funds and closed ended funds)
Investment company act of 1940 defines affiliated person, company, interested person, promoter and rules:
- affiliated person: officer, director, partner, EE or advisor of 5%+ voting stock
- Affiliated company: company that investment company owns at least 5% voting stock of
- Interested person: affiliated person and immediate family, underwriter, or legal counsel within last 2 years for the investment
- Promoter: initiated or directed the investment company within the last 12 months
- Rules: cannot purchase or borrow from registered investment company unless it’s for securities issued by the investment company. Can apply for a reasonable exemption to this.
