Chapter 15: Securities regulation

Question 1

security

Answer 1

1. debt of certain forms, primarily money borrowed by a corp, usually a note or bond can be traded
2. equity, the most famous being common stocks traded on the NY Stock Exchange and other stock exchanges

Question 2

debt securities

Answer 2

bonds traded on the securities market

Question 3

bond/debt instrument

Answer 3

1. amount of debt
2. length of debt period
3. debt repayment method
4. rate of interest charged to the sum borrowed

Question 4

equity financing

Answer 4

• the raising of funds thru the sale of company stock
• purchaser of shares of stock gains an ownership/equitable interest in the corp
• company has no liability to repay shareholders’ invest

Question 5

blue sky laws

Answer 5

prevent speculative schemes which would have no more basis than so many feet of blue sky

Question 6

Howey test

Answer 6

for an investment to be classified as a security for fed regulation, it must have:

1. investment of $
2. in a common enterprise
3. With an expectation of profits
4. generated by the efforts of persons other than the investors

Question 7

1. investment of $

Answer 7

requires that an investor turn over money to someone else for investment

Question 8

2. in a common enterprise

Answer 8

investment is not the property of an investor.

Question 9

3. With an expectation of profits

4. generated by the efforts of persons other than the investors

Answer 9

investor does not have direct control over the work that makes investment a success or failure

Question 10

material information

Answer 10

relevant information that an investor want to know abt company - background, executives, plans of operation

Question 11

disclosure requirements

Answer 11

are fuffilled by filing a registration statement w SEC

Question 12

Registration statement

Answer 12

1. The prospectus: provides the legal offering of the scale of the security
2. detailed information required by SEC

Question 13

prospectus (Schedule A)

Answer 13

• 1st version not yet approved by SEC called red herring
• Has :
  (1) security issuer’s finances and business
  (2) purpose of the offering
  (3) plans for funds collected
  (4) risks involved in the business venture
  (5) promoter’s managerial experience nd financial compensation
  (6) financial statements certified by independent public accountants

Question 14

regulation S-K

Answer 14

• history on financial background and past experience of issuers is required
• proposed business and the issuers

Question 15

cost of registration

Answer 15

• expensive
• issuer must hire professionals, including a securities attorney, certified public accountant, a printer for the prospectus, underwriter - an investment banker that will market the securities

Question 16

exemptions from registration

Answer 16

• some like gov bonds are exempt from securities laws.
• all other are subject to securities laws but they may qualify for exemption from registration
• only initial sale is exempt from registration
• securities are not exempt from other parts of securities laws

Question 17

private placements

Answer 17

• registration is not necessary for new securities not offered to public

Question 18

rule 144A

Answer 18

• large securities issues - bonds - sold to qualified institutional buyers (QIBs)
• exempt US and foreign security issuers from registration requirements for the sale to institutions w a portfolio of at least $100 mil in securities
• securities can be traded among similar institutions w/o registration or disclosure requirements

Question 19

regulation D

Answer 19

• offers may only be made to accredited investors.

- investors presumed sophisticated and wealthy enough to evaluate investment opportunities w/o SEC-approved prospectus

Question 20

well-known seasoned issuers (WKSIs)

Answer 20

• have at least $1 billion in securities previously
  or
• have a pubic-equity market capitalization of at least $700 million
• may use free-writing prospectus allowing them to update infomation, this may be done on a website

Question 21

shelf registration

Answer 21

once announced and registered, securities may be sold any time over the next 3 years

Question 22

regulation fair disclosure (Reg FD)

Answer 22

• requires public companies to release material information to public
• purpose: restrict traditional practice of firms having executives give private briefings to big investors and favored securities analysts

Question 23

proxy

Answer 23

permission given by shareholder to someone to vote his shares in the manner he instructs

Question 24

tender offer

Answer 24

• when one company attempts to take over another
• stock owners in target company are offered stock in acquiring company or cash in exchange for their stock
• must be registered w SEC

Question 25

misstatements

Answer 25

include misleading statements and material omissions in securities registration material

Question 26

rule 10b-5

Answer 26

it is unlawful to

1. employ any device, scheme, or artifice to defraud
2. to make untrue statement of material fact or omit to state a material fact necessary in order to make statement misleading
3. to engage in any act, practice, course of business which would operate as fraud or deceit

Question 27

safe habor

Answer 27

protect company from liability for predictions about profits and the likely success of its products, so long as forecast are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in forward-looking statement